Tax Avoidance vs. Tax Evasion

In addition to preparing tax returns, practitioners may provide additional related services, such as tax planning. Practitioners who engage in tax planning and provide tax advice must keep these rules in mind.

Tax Planning - Tax planning to reduce tax liability is a legitimate goal. However, if the planning includes an element of fraud, deceit, or concealment, it becomes tax evasion. Practitioners who engage in tax planning should keep the following references in mind.

• IRC §7201 relating to tax evasion
• IRC §7206 relating to false returns, concealment, and other prohibited conduct
• Requirements for written advice under Circular 230, §10.37

Tax Evasion - IRC §7201 states that any person who willfully attempts to evade any tax imposed by the Code (including evasion of tax payments assessed under the Code) is subject to felony conviction. Upon conviction, IRC §7201 provides a fine of up to $100,000 ($500,000 for a corporation), or five years’ imprisonment, or both (along with the costs of prosecution). Moreover, under the same Code section, a fine of up to $250,000 may be imposed for tax evasion.

Read more (including some specific examples of tax avoidance vs tax evasion).

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Recent Tax Bills Passed in the House

Since January 2015, several bills have been passed by the House, including ones to make permanent a few of the 50-plus provisions that expired at the end of 2014. Described below is a sampling.

Permanent, higher Sec. 179 expensing: America’s Small Business Tax Relief Act of 2015, H.R. 636, passed on Feb. 13. This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. Software and qualified real property, as well as air conditioners and heaters, would now be Sec. 179 property, and taxpayers can revoke a Sec. 179 election without IRS consent.

Permanent sales tax deduction: State and Local Sales Tax Deduction Fairness Act of 2015, H.R. 622, passed on April 16 (272–152). This bill makes permanent the option to claim an itemized deduction for sales tax rather than state income tax, which has existed in temporary form since 2004.

Permanent research tax credit: American Research and Competitiveness Act of 2015, H.R. 880, passed on May 20 (274–145). H.R. 880 makes the credit permanent and increases the rate for the simplified credit from 14% to 20%. The traditional credit with the 1984–1988 base years would be terminated. This bill also allows small businesses (gross receipts of $50 million or less on average over a three-year period) to use the credit against either regular tax or alternative minimum tax.

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Social Security Maximization versus Optimization

It is important for CPAs and advisors to recognize the difference between Social Security maximization and optimization. The Social Security maximization decision is based on math to target the highest lifetime dollar amount of Social Security income that the government will pay you. This is essentially a calculation that is done in a vacuum. This maximization calculation does not consider other aspects of the client’s bigger picture financial situation, such as income taxes and how other assets or income streams impact the taxation of the Social Security income stream. On the other hand, Social Security income optimization considers the Social Security income election technique and timing and includes other aspects of retirement financial and tax planning to work with the client towards harvesting the client’s maximum net after tax (i.e. post Uncle Sam!) lifetime income.

Some Social Security claimants think their Social Security income is, or will be, tax-free. For many, this may not be the case. Up to 85% of Social Security income may be taxable due to what is called provisional income. Provisional income, according to Kevin McCormally of Kiplinger, is “… basically your adjusted gross income plus any tax-exempt interest, plus 50% of your Social Security benefits.” In the media and amongst professionals this is often referred to as the stealth tax, because the taxation of the Social Security income benefit tends to “sneak up” on both consumers and tax professionals.

Several sources of income can contribute toward triggering the provisional income taxation thresholds for a client. These income sources may impact the taxation of their Social Security income benefit. These income sources include, but are not limited to, distributions from your 401k or IRA account(s), wages, pension income, CD and bond interest, and stock/mutual fund dividends.

Of course, clients ought to be mindful and attempt to minimize taxation of the Social Security income benefit if possible, and this often requires advanced planning. Therefore, it is important to investigate and determine in which sequence clients might draw upon their retirement income stream and/or retirement asset account buckets. When and how clients take their Social Security income can significantly enhance or reduce the longevity of their retirement assets and income stream.

Questions clients ought to be asking their advisor(s) might include:

• Should I take Social Security early or later?

• Which Social Security income election strategy will give me the most lifetime net after tax income?

• Does it make sense for me to first draw upon my 401K and/or IRA account(s) and then claim Social Security later?

• Does it make sense to re-distribute some of my assets into other investment vehicles that minimize, or altogether possibly eliminate, the taxation of my Social Security benefit?

The timing and election of the Social Security benefit in conjunction with investment and taxation management can lead to potentially higher standards of living in retirement for our clients.

Read more on considerations for adding Social  Security planning to your practice.

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Estate and Succession Planning: More Important Than Ever

After enactment of the American Taxpayer Relief Act of 2012, many clients and their advisors quickly concluded that “estate planning” was no longer important. This was primarily due to the effectively permanent large Federal estate and gift tax exemption level of $5 million-plus per person. This exemption, which is adjusted for inflation annually, this year is at $5.43 million – effectively eliminating Federal estate tax concern for over 99% of U.S. families! Yet estate and succession planning is more important than ever – for both tax and non-tax reasons.

First of all, 19 States still have an estate or inheritance tax of some type, and some of these jurisdictions have much lower exemption levels than does the Federal estate tax. So tax practitioners must know their State law for clients before eliminating estate tax from the planning agenda. In addition, many Wills and trusts are quite out-of-date, especially if not updated the past few years, and the changes in family situations, increase or decrease in net worth and other factors call for updating of the estate and succession plan.

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Top Three Accounting & Auditing Issues: Peeling the Onion

Recent surveys have shown that the top three issues for professional CPAs are:

1. Keeping Up with the Effects of new Federal and State Regulations

  • Keeping up with new accounting and auditing pronouncements
  • Information technologies
  • Health Care and Related Issues
  • Consumer Issues

2. Keeping Up with the Complexities of Tax Laws

3. Finding Qualified Staff/Employees

These issues all have sub issues that are important. When we drill down into the issues we come across the top three accounting and auditing issues just below the surface. This is similar to “peeling an onion” to get to the heart of the issues. Other issues also arise such as:

  • Succession Planning
  • Seasonal workload compression

Nevertheless, the top three A & A issues always come back to changes in generally accepted accounting standards (GAAP), changes to generally accepted auditing standards (GAAS), and changes to compilation and review standards (SSARS). Some have said the overarching theme to all this is “standards overload.” Whether one is employed in public practice, industry, government, or education, the same “standards overload” concerns always seem to surface. “Standards overload” is said to be one of the primary reasons for the rise of the concept of “other comprehensive basis of accounting” (OCBOA).

There is growing appeal in the accounting profession to find an alternative for small businesses to some of the measurement and disclosure requirements of GAAP. We see this in the Private Company Council (PCC) with the FASB. Mr. Russell G. Golden’s, Chairman of the FASB, goals include simplicity and clarification of GAAP.

One solution often mentioned is the use of OCBOA financial statements. In 1981, the AICPA’s Special Committee on Accounting Standards Overload was formed to consider alternative means of providing relief from accounting standards that are not cost-effective, particularly for small, closely held businesses.

So the nature of the problem in finding the top three issues seems to be in finding which of the exact standards of GAAP, GAAS, or SSARS are the top three issues.

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Fundamentals of Construction Accounting

While most believe the construction process begins on the left at the Estimating stage, the process truly begins at the Accounting stage. Accountants must provide estimators with the right internal information before the estimator can begin. The estimator is then able to draft blueprints and enter information for job costs. Once construction begins, information is delivered to Accounting and completes the circle as the job finishes.

Since the construction process begins with the Accounting stage, common issues will naturally occur. One main issue is the accumulation of contract costs. This error is a result of the cash method used to accumulate costs resulting in unrecorded liabilities that affect cost records for contracts in progress. The correct accounting fix to this issue is to use accrual accounting as costs should be allocated to the appropriate individual contract records.

Why is being aware of your costs the most important aspect of construction accounting? It helps you:

  • In the bidding process
  • To determine problem jobs and people
  • In the claims process
  • To make better business decisions
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Lost Revenue from Corporate Fraud

ACFE 2014 Report to the Nations states that organizations typically lose 5% of their revenue to fraud each year.

Most of the time, fraud takes place below the radar, and upon discovering it, companies tend to want to move forward as quickly as possible without notifying the public of the fraudulent activity.

The smallest organizations tend to suffer the largest median loss as these organizations typically employ fewer anti-fraud controls than their larger counterparts. It is not unusual for small business to lose a significant amount to fraud and end up closing their doors for good.

Read more

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Marijuana’s Tax Paradox

These days, over half the country (32 states + DC) has some level of pot legalization, whether for medical or recreational use or both. Despite the way our founding fathers established states’ rights, when the federal government’s laws conflict with state laws – the Internal Revenue Code will follow federal law for U.S. income tax purposes.

The good news is, buried in the spending bill last December (Public Law No: 113-235), Congress included a provision to end federal drug enforcement raids on medical marijuana establishments. In effect, it legalized medical marijuana on a federal level.

This is an interesting opportunity for accountants and tax professionals to cater to a readily-identifiable niche market that can afford our fees…

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Maximize the Social Security Income Election for your Clients

The clients of Accountants, Tax Professionals, and Financial Advisors increasingly ask for guidance on how to best take their Social Security income election. This issue has become very important to baby boomers for many reasons. Pre-retirees and early retirees are now living longer than previous generations. Also, there has been a shift away from defined benefit plans (i.e. pension plans) to self-retirement funding. Financial market forces, such as low interest bearing accounts, real estate devaluation, and a flat stock market for the past 10 years, also make the Social Security income election much more important.

The Social Security income election decision may be one of the most important financial decisions your clients make in their lifetime. Singles, and especially couples, can miss opportunities to collect hundreds of thousands of dollars of additional income over their lifetimes when they make poor Social Security income election decisions. By applying little-known, yet creative claiming strategies, your clients may be rewarded with significant additional lifetime retirement income.

Read more for three important strategies

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The Long Winding Road of Professional A & A Standards

Are you current on the fast developing standards and issues from new FASB Pronouncements for 2014 and 2015?  According to CPE Link instructor Pat Patterson more changes will come from from the FASB and the Private Companies Council as well. Revenue Recognition (ASU 2014-9) is currently being considered for a delayed effective date; however, early implementation may be allowed. Are you ready? Leases and Financial Instruments are on the verge of being issued which will have an instant impact. Revenue Recognition, Leases, and Financial Instruments will change the way every professional has to handle the related issues.

The AICPA’s Clarity Project is essentially complete and has totally revised all AICPA Auditing Standards. Some have very little change, but there are many new requirements that include:

  • A new audit report
  • Issues with legal and regulatory agencies
  • Communicating Internal Control Related Matters Identified in an Audit
  • Forming an Opinion and Reporting on Financial Statements
  • Modifications to the Opinion in the Independent Auditor’s Report
  • Emphasis of Matter Paragraphs and Other matter Paragraphs in the Independent Auditor’s Report
  • Special Considerations-Audits of Group Financial Statements
  • Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
  • Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards
  • Terms of Engagement
  • Quality Control for an Engagement Conducted
  • Opening Balances-Initial Audit Engagements, Including Re-audit Engagements
  • Written Representations
  • Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement

But whether there is some, little, or even no change, you still need to go through all of the new clarified AU-C sections because with clarity . . .You may find that you need to change or tweak how you do things!

For Compilation and Review Engagements, professionals are entering into new territory with Section 70 of SSARS 21, Preparation of Financial Statements. This new standard will change the way many professionals look at a set of financials. There are new standards for the engagement letters and signatures, the reporting (or no reporting), legends on financial statements, and the new Compilation report. Additionally, there are some changes to the documentation issues with Compilation and Review engagements.

Are you familiar with the “RED Zone” for Comp and Review? In this case, RED stands for Reporting, Engagement Letters, and Documentation. While standards in SSARS 19 are still in play until periods ending after December 15, 2015, the provisions of SSARS 21 may be early implemented; and even both standards may be used until December 15, 2015.

Other matters that involve professional standards also are affected by the new FASB, Clarified Auditing Standards, and revisions to Preparation, Compilation, and Review engagements. These include:

  • Personal Financial Statements
  • Special Purpose Formats
  • Disclosures like “going concern”
  • Quality Control
  • International Standards from the IASB

Want to know more? Check out a live webcast or on-demand self-study course from award-winning, nationally recognized author and discussion leader, Pat Patterson.

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