AICPA: Make Tax Penalties More Fitting to Conduct, Less Punitive

An AICPA report criticized the U. S. Treasury and Internal Revenue Service for overly broad and disproportionate penalties. Among criticisms: recently enacted penalities do not necessarily encourage voluntary compliance, poorly defined tax terms (examples: tax shelter and significant purpose), failure to distinguish between willful misconduct and negligent noncompliance regarding severity of penalties, an overemphasis on strict liability vs. taxpayer/preparer judgment, a bias favoring charging penalties in borderline cases and erosion of due process.
Finally, the report called for better oversight of penalty administration and for Congress and the IRS to get greater input from practitioners and professional organizations on penalty reform.

In many ways, the AICPA report is consistent with those who have criticised the government, both in the present and previous administration, of being too willing to flex state power at the risk of stifling speech and other civil liberties. I believe that most of the AICPA complaints are reasonable; hopefully, Congressional committees will take the report to heart and avoid the need for Taxpayer Bill of Rights III.

The Awful Truth: Michael Moore (No, not THAT one) Slammed for Super Sloppy Audit

The Securities and Exchange Commission has hit Las Vegas accountant Michael Moore with over $300,000 in fines and interest and suspension of practice rights before the SEC after Mr. Moore hired two high school students to work on an audit. The over 300 audited companies were highly speculative ventures, many of which were classified as "penny stocks." The students indicated that they received very little on-the-job training to go with their highly insufficient formal education.

We have a homework item in my auditing class which involves an auditor who fails to meet any of the 10 generally accepted auditing standards (GAAS) including hiring community college students. Never did I dream that I would be able to match the homework item with something from real life.

The Sun Rises in the East: Rangel Takes Six Years to Come Clean

House Ways and Means Chairman Charles Rangel effectively acknowledged underreporting taxes on two New Jersey properties by filing six years of revised financial disclosure forms. The revised disclosures apparently doubled previously reported personal wealth and indicated concealed income of about $40,000-$110,000 in 2007. The unpaid taxes on the New Jersey properties was less than $200 so far this year but appears to have several unpaid years.

In an earlier post I asserted that Rangel should resign as House Ways and Means Chairman; this does nothing to change that belief. I cannot imagine that the House Ethics Committee will sanction Rangel since he revised disclosure forms before the Committee took action; one can hope that appropriate tax agencies will pursue back taxes and hope (but not expect) pursuit of penalties as well.

End of the Partie?

Our golden retriever, Partie, took ill Thursday and while still breathing and somewhat responsive, she is clearly in bad shape today. My wife has been out of town attempting to sell some merchandise; we probably will be taking her to the vet (hopefully not for the dreaded one-way trip) shortly after noon when she expects to return. While hoping for good news, the possibility of a third dog death in four years is very ominous.

Monday update: While Partie is still in danger, she has improved since her "mom" came home yesterday at noon.

Thursday update: I'm afraid that Partie's rally ended Monday night and she took her last breath Wednesday morning. She was an excellent dog and will be missed.

The Glory of Green: Environmentally-Friendly Energy Production Can Bring Cash or Tax Credits

A joint announcement from the Energy and Treasury Departments promises over $2 billion in investment tax credits (up to 30% of cost) to businesses manufacturing equipment which helps produce "green" energy. Qualifying purchases will be used to produce solar, wind or geothermal energy, electric cars, electric conservation activities or equipment which captures and removes excess carbon dioxide (wonder is ozone control equipment would also count). Up to $2.3 billion is aware for these credits are available from the "stimulus" bill passed earlier this year (companies can apply starting this October); additionally, payments in lieu of tax credits totalling up to $3 billion is available for facilities which produce renewable energy.

A starting point toward significant environmental improvement or pork to businesses which would have sought alternative energy production anyway?--you make the call. Probably the best selling point for this program was not even mentioned--the chance to reduce dependence on foreign petroleum.

Leaks: Not Just a Problem for Your Car

Michael Cohn of WebCPA points out that the recent theft of over 130 million credit and debit card numbers should make accountants aware that identity theft not only involving themselves but clients as well is a very legitimate concern. Some of the techniques used to make computer use more convenient and less location-specific, such as wire transfers and "cloud-based" computin, unfortunately produces a concurrent increase in computer fraud risk. The Federal Trade Commission has deferred a "Red Flags Rule" requiring that businesses (including CPA firms) implement a written plan to protect computerized identity information, but this deferral is about to come to an end. While the AICPA is requesting another deferral, the legal ramifications of shoddy computer security should be enough to motivate businesses to ramp up computer security measures.

Clearly, expectations of customers regarding computer security have grown to the point where businesses with even limited levels of e-commerce are now expected to take identity protection very seriously. Regarding the "how-tos," I defer to more computer and fraud-savvy bloggers such as Tracy Coenen, Greg LaFollette and Brian Tankersley.

Tax Breaks from the "Stimulus": Are Taxpayers Taking Advantage?

The Economic Recovery and Rehabilitation Act of 2009 (popularly called the "Stimulus"--and even the "Porkulus" by sardonic Republicans) included a number of temporary tax incentives. The incentives include a first-time homebuyer credit (through the end of November) of up to $8,000; a deduction for certain state taxes (usually sales; itemizing not required) on the first $49,500 on a new car purchase; a 65% savings on COBRA insurance (businesses get a corresponding credit) for employees laid off during the 16 months starting September 1, 2008; one-time payments of $250 to Social Security recipients and certain other taxpayers; a $2,400 income exclusion of unemployment benefits received in 2009; the Making Work Pay credit against Social Security during 2009 and 2010 and a tax amnesty for foreign bank accounts available for about six more weeks. The future appears less tax-friendly, especially for high-income taxpayers with new higher tax brackets, adjustments in taxation of international income and a potential surtax to help pay for costs associated with health care reform proposals presenting being debated in Congress.

Specific steps to take: make sure that your tax preparer is aware of any new car purchases made this year (or home purchase if this is your first), contact your tax preparer if you or a family member is laid off and reduce tax exemptions on your W-2if you earn significant amounts in more than one job. High-income self-employed taxpayers may want to take income this year in view of potentially higher tax rates next year. Also, remember that next year (2010) is the final year for a number of provisions from tax cuts earlier this decade and it is likely that many such provisions will NOT be renewed after next year.

53!

My mom brought me into the world on August 13, 1956. Back then, autos costed about $3000; gasoline about $0.30 per gallon, milk about $0.35 per half gallon and postage was about 3-4 cents per first class letter (of course, Dad as a white collar U.S. Government employee made less than $10,000 per year--and the annual federal budget was under $100 billion). Bomb shelters and emergency broadcast tests were very present and children sang Christian hymns as part of music classes in public schools. The Boston Celtic dynasty in the NBA was just taking shape and New York (Dodgers, Giants and Yankees) dominated Major League Baseball with just over half today's number of teams and which went no farther south or west than St. Louis. Formal segregation in the South wsa finally beginning to end and Elvis and Jerry Lee were just starting to make rock music with its African-American roots appealing to white audiences. Some of the products you could buy then: 20 Mule Team Borax, Burma Shave, Hills Brothers coffee, Rambler automobiles, Burger Chef hamburgers, Gulf gasoline. Computers filled up basements of buildings and required Hollerith punch-cards; four-lane highways were limited to major roads or the vicinity of large cities and color televisions were just starting to reach the market.

"IFRS for Small Biz--Should We or Shouldn't We?"

The Private Company Financial Reporting Committee (PCFRC), a joint venture of the FASB and AICPA, scruntized the proposed financial standards for small business ("IFRS for SMEs") of the International Financial Standards Board (IASB) this past week. PCFRC chair Judy O'Dell played close to the vest, saying that the only decision made is that FASB should consider whether or not to adopt IFRS for smaller businesses in the future. The discontinuance of LIFO was given as a disadvantage of IFRS for SMEs, while the amortization of goodwill (vs. impairment evaluations) was cited as a potential benefit of IFRS for SMEs.

Though I can see some benefit to the goodwill amortization approach (which could be done as a separate pronouncement since it was GAAP less than 10 years ago), in general I see even less use for international financial accounting standards for small businesses (UNLESS they are heavily import-export oriented) than for large multinationals. An appropriate approach: permit explicit cost-benefit decisions in applying specialized pronouncements to smaller businesses; consider allowing amortization of goodwill for smaller businesses and finally, permit smaller businesses to choose IFRS but do not require IFRS for smaller businesses until there is information on the impact of IFRS on voluntary adopters.

Cooking Books, Government Style (Emeril Would be Envious)

The Rockfeller Institute of Government came to the conclusion that state tax collections had the largest drop in over 45 years in first calendar quarter of 2009 (1CQ09) and that 2CQ09 looked to be even rougher for states. This has created a cumulative deficit of over $142 billion in 48 states (if memory is correct; your state is in deficit unless winter temperatures commonly hit -40 (either C or F)--think Alaska and North Dakota). Nor are all cold-weather states spared--Connecticut, New Jersey, New York and Vermont join Arizona, California, Florida, Louisiana and Nevada has having deficits in excess of 20%. California is only the most famous of states practicing tax gimmickery (hope Moody's and S&P are taking note)--including asset leasing, IOUs, tax amnesties and expanding service and Internet taxation. Increased tax penalties and stricter rules on tax deductibility are also used in some states.

In my previous post, I pointed out that increasing taxes has not been a winning strategy at the national level. Though my paycheck comes from a state government, I believe that it is in my best long-term interest to have a tax strategy that has long-term viability and respect from the taxpaying public rather than gimmicks and tax increases that give tea party participants easy targets for criticism.

Where, O Where Did "Our" Money Go?

NOTE: Parts of this post may be impacted by ideological bias.

2009 receipts are headed toward an 18% drop in collections compared to 2008--this would be the biggest annual percentage drop in tax collections since the Great Depression. Additionally, even before potential health care remolding, the FY 2009 deficit looks to be the largest in U. S. history at between 1.5 and 2 TRILLION dollars. All forms of tax receipts are down with corporate receipts running less than half the 2008 level and Medicare facing only its third decrease ever. Highway projects are being deferred even though Congress is supplementing the federal highway fund through emergency appropriations. Senator Herb Kohl (D-WI) states that the shaky economy means that a deal to stabilize Social Security is particularly important with some projections now showing the fund going broke as early as 2027 and the U. S. Chamber of Commerce actually is supporting an increase in the federal gasoline tax.

What caused the financial debacle of the past year? A lot of theories, including poor financial regulation, overly liberal mortgage lending policies by both private and governmental lending bodies and the spike in petroleum prices (and perhaps overly strict environmental policies which may have aggrevated the price spike) have surfaced; perhaps all play at least a part in the problem. More relevantly, however--how do we fix the mess? The present attempt to spend the economy out of recession at very best is only starting to succeed and very well may be laying the groundwork for significant dollar inflation in the next year or two with little structural improvement to any part of the economy except government. Recent trial balloons regarding tax increases ignore recent trends (Bush Sr. 1990, Democratic Congress 1994) where the only result of tax increases were losses in the following national elections. In my opinion, President Obama should ratchet down his frentic efforts to reshape America and concentrate on strengthening the ability of private enterprise to more successfully compete in the international arena while assuring that investors are receiving full discloure from corporate reports. In the short-term, the second goal should defer movement to IFRS until more is known about the impact of such changes and new types of financial instruments may need an FDA-style review and approval process, combined with strict disclosure requirements, before they can be issued in U. S. capital markets.

Labor Lawyer: EXPAND Legal Liability of Accountants

A variety of experts on corporate governance testified before the Senate Banking Subcommittee on reasons behind the global recession. Labor pension specialist Richard Ferlauto sent a sizable portion of the blame toward the accounting community and and argued that accountants which knowingly participate in fraudulent acts should be seriously punished. Ferlauto asserted that court cases have effectively shielded accountants from civil liability and watered down the "aiding and abetting" doctrine. Ferlauto also criticized IFRS, claiming that the international standards would decrease disclosure to investors and would effectively "deregulate" corporate financials.

Certainly David Albreghts from "The Summa" could not have asked for better testimony opposing the IFRS. I am of mixed position on Ferlauto's other issue--he absolutely is correct that true misbehavior by accountants should be punished--whether intentional or recklessly sloppy. On the other hand, the legal community absolutely has used lawsuits as a means to browbeat other professionals.

I'm Still Alive (Unfortunately, Not True for an ex-Roomie)

Sorry for the long period between posts, I am in the middle of a very busy Summer teaching experience covering a 3 hour course plus 3 independent study students during a five-week period.

Sad news to report. Lindy Heath, an ex-roommate and arguably the godliest man I ever met, died of cancer last night at age 60. My sympathy to his wife and children. Not sure if I will be able to attend next weekend's funeral in West Lafayette, IN or not.