New Rules for Tax Exemptions

In July, the Internal Revenue Service introduced the new Form 1023-EZ. The new form streamlines the application for recognition of tax exemptions. This redesign has caused some criticism from many large charity groups, while other groups have commended the agency for introducing the program. The IRS agency hopes that the new process and smaller application will reduce the backlog on applications.

Every year the IRS receives around 60,000 applications for tax-exemptions status. In the old form, agencies had to fill out nine pages that consisted of many schedules and they had to provide three or four years worth of financial data. The new form only consists of three pages. It can be used by most organizations applying for tax-exempt status with $50,000 in annual gross receipts or less, and assets of $250,000 or less.

The concern surrounding the new form comes from the National Council of Nonprofits. They claim that tax-exempt status should not be granted lightly. The new form lacks details. It asks for no financial data, in the documents.

The IRS claims that the change to the paperwork allows charities to speed up the applications process and get back to work that is more important. The process helps cut back the process time for many smaller nonprofits. Larger, more complicated nonprofits will still be required to fill out the longer Form 1023. Currently the wait time for nonprofit status is nine to fifteen months.

The IRS is not taking the granting of tax-exempt status lightly. They are still processing applications. The additional resources that are freed up to process the more complicated applications.

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Audit Quality

Audits are an important part of any business. How can you tell if the audit quality is good? This question has plagued professionals. Does the quality relate to the person performing the audit, by their ability to discover misstatements, or their ability to meet legal and professional requirements?

In the past, audit quality has been assessed after the audit is finished. It is determined by if the company’s financial statements require restatement, or if a business fails. Recently the quality has been determines by the number and nature of the findings identified during PCAOB inspections. Congress has even tried to regulate auditors and audits with the Sarbanes-Oxley and Dodd-Frank Acts. However, these efforts have done little to reduce the number of restatements or deficiencies reported during PCAOB inspections.

With the inconsistencies in determining a quality audit, the PCAOB and two other organizations have made it their priority to define what constitutes a quality audit. In an effort to create a guide to quality audits, the AQI has three indicators: better informed regulators about audit quality; aid the decision making of audit committees, investors, and managers; positively influence the practices of auditing firms.

Much of what the organizations are pushing is more transparency of audit firm discoursers. This requires publicly releasing information that in the past has remained confidential. Other information would include the number and nature of deficiencies found, the number and size of auditors that resigned, frequency and impact of financial statement restatements, etc.

While there seems to be no answers yet, they are working towards a common goal. Care should be taken when setting regulations so they do not put any undue stress on smaller auditing firms by creating competitive disadvantage that could put the smaller firms out of business. There will be more debates on what is expected, but the results should be beneficial to everyone involved.

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New List of Tax Scams

Every year there is a new fraud that is out to take people’s hard-earned money. People who want to make free money develop these schemes. They have various ways to contact individuals and solicit money from them. The IRS has created a list of twelve frauds that target people especially during tax time.

The list is:

  • Identity theft
  • Phishing
  • False Promises of Free Money from Inflated Refunds
  • Tax Return Preparer Fraud
  • Hiding Income Offshore
  • Charitable Organization Impersonation
  • False Income, Expenses, or Exemptions
  • Frivolous Argument
  • Falsely Claiming Zero Wage or Using a False Form 1099
  • Abusive Tax Structure
  • Misuse of Trusts

Each year, victims are scammed because the they ignore the warning signs. With the newest type of fraud that made the list is pervasive telephone scams. Many times the scams look or sound official, but remember that if the IRS is contacting you they will not ask for any part of your social security number, or even give you the last four digits.

The number one threat to taxpayers is identity theft. The fraudsters are not just trying to get your money, they want to use your information to steal from others. Many of the new scams are focusing their efforts on immigrants. They have threatened to arrest or deport the individual in they do not pay promptly.

Of you feel that you are a victim of a fraud contact the Service at 800-829-1040, the Treasury Inspector General for Tax Administration at 800-366-4484, and the Federal Trade Commission using the FTC Complaint Assistant at FTC.gov.

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New AICPA framework Unveiled

The American Institute of CPAs announced, in June, a new framework the will provide a new accounting option to help small- and medium-sized businesses provide financial reports for specific entities. These new options are not currently required by the US Generally Accepted Accounting Principles (GAAP), but they will help to streamline financial information reports for privately held, owner-managed businesses.

The new framework was developed by a group of CPA professionals with vast knowledge and understanding of the needs of private companies’ financial statements. While there has been some scrutiny over the new framework, it was designed to make it easier for small- and medium-sized businesses to produce accurate, reliable financial statements. These statements show the business’s profitability, cash availability, assets to cover expenses and concise disclosures. The framework makes it easier to the businesses to create reports for lenders, insurers, and other people who require financial statements.

To help create these reports, the framework uses a blend of traditional accounting and accrual income tax methods. By using the historical cost and target disclosure requirements, the report provides options for presenting the information to various entities. It reduces book-to-tax differences while expanding options for CPAs and other companies to provide consistent, cost-beneficial statements.

After a survey of 200 CPA firms, many of them were familiar with the new framework and half of them expected their clients would use the framework. With the option of the new framework, many companies will use it to help them have less complexity in their daily business. As the framework is used more, time will tell if it will be the best for the companies that use the new framework.

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Targeting Fraud through New Task Forces

In an effort to detect and analyze fraud, the SEC announced recently that is has established three new task forces within the Division of Enforcement to aid in investigations. The new task forces will each have specialized jobs that relate to different aspects of financial fraud.

Center of Risk and Quantitative Analytics (CRQA)

The CRQA is the data and analysis center of the Division of Enforcement. The main focus of the division is to identify risks that could harm investors, and monitor for financial transgressions.  The Division of Enforcement uses the CRQA as a resource that supports investigations through data analysis and risk assessment.

Financial Reporting and Audit Task Force

The Financial and Audit Task Force will help in the detection and prosecution of fraudulent financial reporting. The effort to expand enforcement, the task force will work to detect fraudulent financial statements, issuer reports, and audit failures. Enforcement lawyers and accountants will work to find and identify, through ongoing reviews and performance trends, areas susceptible to fraud.

The Microcap Fraud Task Force

The Microcap Fraud Task Force will focus on microcap securities. The SEC says that microcap securities are most often connected with fraudulent and manipulative strategies to accumulate gains. These small companies do not always report financials to the public and so the SEC wants to concentrate on them to help keep fraud from happening.  This task force will work with the Microcap Fraud Group that formed in 2010, but will not replace them.

Each task force will work to prevent fraud and audit misconduct while working on strategies to improve systems for identifying fraud and improving how audits are conducted.

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How to Prepare for an Audit

This is the time of year that the IRS conducts tax audits. While it can be scary, there are ways to prepare before the audit. If you are meeting the auditor in person there are a few things you should prepare ahead of time.

Before the Audit

Whether you are meeting an auditor by yourself or with a professional, it is important to be prepared. Find all records that relate to and back up your tax return. The IRS has the right to look any records used to prepare your tax return, so to make it easy. Organize the records use to prepare your tax return. This will also help refresh your memory before the audit meeting.

Remember that neatness counts. The more receipts the auditor goes through, the more chances they will find something else. Auditors tend to reward good recordkeeping and give the benefit of doubt if any problem arises. Pinpoint potential problems and be able to show why your right to take a deduction. Do some research, if necessary.

What to Bring to the Audit

A successful audit is backing up your tax return with documentation. Proof should be in writing, even though auditors are allowed to accept oral explanations. You should bring bank statements, canceled checks, and receipts. Also electronic records, ledgers, journals, and printout of any computer data will also make it easier to show proof. Do not make the IRS guess because they will assume guilt. Anything that will help give proof should be available for the auditor to review.

It is important to stay calm and be prepared to answer any questions the auditor would ask. The success of the audit depends on proving the return is correct.

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Capitol Loss Deduction: Should it Reflect Inflation?

Over the years, the Internal Revenue Code has adjusted for inflation of many different tax incentives to help individuals cope with the negative effects of inflation. Congress selects these provisions and the annual change is driven by the consumer price index. One provision that has not changed is the capital loss deduction.

The capital loss deduction was established in 1976 and allows for a maximum of $3,000 in capital loss deduction each year, and has not changed since it was introduced. There are numerous reasons to explain why there is a cap on the amount of deductions, but it comes down to taxpayers being able to write off all losses, retaining the gain assets and defer taxation by selling them later. It would dramatically decrease the amount in federal tax revenue.

By using the consumer price index inflation calculator, in 2002, the maximum deduction would be around $9,500. Today the deduction maximum would be around $12,000, and if it was tied to inflation the maximum would continue to rise. This would eventually open up the opportunity for people to deduct all losses, or even sell at a loss and retain gained assets, which would defer taxation. This would greatly reduce the amount of federal tax revenue.

So what does this mean for taxpayers? Well, it means at this time, that the highest amount able to be deducted is $3,000. Anything over $3,000 that does not offset capital gains or deducted can be carried over to the next year. Many people argue that this system is has eroded the value of the deduction. However, the real question is can there be a regulation that would increase the amount deducted without undermining the amount of federal tax revenue?

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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Looking Out for Property Tax

With any state, the majority of revenue comes from both personal and real property tax. Combined with the erosion of local tax base, many home and business owners may face higher assessed values then in past years. Some tax assessors may be too aggressive with their assessments so they can maintain the tax revenue, but it is important to keep on top of your assessed property value to make sure that you are not paying too much in property tax.

The object of property assessment is to provide fair and equitable value for each property. Most properties are assessed using fair market value. Fair market value is “the price in a competitive market a purchaser, willing but not obligated to buy, would pay an owner, willing but not obligated to sell, taking into consideration all the legal uses to which the property can be adapted and might reasonably be applied.” The property assessment is either full market value or a percentage of the market value. States then take the assessed amount and multiply it by the millage to get the amount owed in real estate taxes. This process can take place yearly, or over a mandated time, usually 3-6 years.

Determining the assessment of residential home tends to be more straightforward then the process of industrial or commercials properties. Houses are compared to other homes in comparable neighborhoods that have recently sold to determine the assessed value. Commercial and industrial properties have more variables to consider before an appropriate assessment is generated. Since there are so many variables, the chance of an assessment error is there, giving the business owner a chance for an appeal of the assessment.

Timely tracking of personal property assessment is essential to guarantee deadlines are not missed. Many only offer a brief deadline for appeal, usually 15-45 days from the assessment date. Once the business owner determines if there is a tax assessment that warrants an appeal, the appeal is filed. There are three levels to the appeals depending on the severity of the assessment. Each needs proper detailed documentation. If you think that there is a problem with your assessment then it would be beneficial to consult with a CPA firm for assistance.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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A Resurgence of Outsourcing

The word “outsourcing”, in some instances, has a bad connotation, but for many it means being able to compete with other companies worldwide. The most basic method of outsourcing is using an external service provider to perform functions that the company does not want to perform itself. There are many ways that this can be done and not all of them mean sending business overseas.

There are two different types of outsourcing: onshore and offshore. When Company A has Company B, which is in their same country, complete the service, which is onshore outsourcing. Offshore outsourcing has two types, nearshoring and farshoring. For any company that is outsourcing to a company that is geographically close to them, but not in their country, they are nearshoring. Farshoring would be using a company that is not geographically close to them.

A company of any size can outsource. There are two sides to outsourcing—a service provider and a service buyer. To help companies find other companies for outsourcing the International Association of Outsourcing Professionals (IAOP) generates a list of the best services providers.

There is not an ideal way of outsourcing for any company. By looking at all the possibilities, finding the right solution for their company is possible, but first we need to know why a company outsources. The main reason is to reduce operating cost, but other reasons include assess to new skills or technology, and to make global operations more effective.

Companies that choose to outsource services are typically outsourcing IT, human resources, finance and accounting, procurements and facilities management. The biggest of those services outsources is IT. Many times the company providing the IT services has technologies that midsize to smaller companies do not have the money to invest in, and it make more economical sense to outsource it to a company that has the technology already.

Outsourcing in some aspect will continue into the future. There have been predictions that offshoring will continue to increase. With the increase of unemployment, many companies are looking at different cities in the US for outsourcing, but with wages still cheaper in other countries, outsourcing will be here to stay.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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Wealth Management Trends for 2013

With 2013 barely underway, trends for wealth management are undergoing a transition characterized by uncertainty and change. The change will affect everything from business models to how technology influences client relationships. Over the next few months, the changes develop how wealth management services are provided to clients.

A lot of the reevaluation will focus around operating and growth strategies, should companies acquire other companies or partners. The largest wealth management firms will continue to grow through acquisitions and internal building. Whereas the smaller to midsize companies may choose to grow through partners that provide resources that will help them remain current and competitive.  Wealth management firms will become smarter about running their business and become open to working with other companies that has the expertise help them deliver their services.

Along with growth, many advisors will begin to find a successor and groom them to take over their practice. It is important to ensure the longevity of their practice. Finding their ideal successor and connecting them with their clients’ children safeguards their practice from declining after they retire. By bringing in a younger successor, they will be able to establish their own client list, and prove to your established clients that they will be taken care of when you retire.

Wealth management services will also progress through the uses of technology. Larger firms will have an advantage of the newest technology and all that it can provide. Smaller firms that outsource to other companies for some technology needs are currently less efficient. However, there will be a move to efficiency. Many firms will be investing in technology to maintain or create effective ways of working for and with clients. Many firms will find themselves working from the cloud and have an “always on” connectivity through online access.

Overall, there are many transitions to come this year. Be proactive in how the year progresses and grow your business accordingly. Take the change as a positive and the uncertainty as a chance to find your way.

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.

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