Accounting News

Tuesday, September 27, 2011
Audit Costs Portend Financial Results

Jonathan D. Stanley of Auburn University had a great theory. Is the cost of a financial audit for a public company related to its financial performance? To test it out he did a study of the audit fees paid by public companies and then tracked their financial performance. The results are in the current issue Auditing: A Journal of Practice & Theory.

The answer to his question was yes. His study showed that as audit fees rose the performance of the company declined. It could be seen up to five years out. The other interesting aspect is rising fees were a stronger indicator of poor performance than falling fees portended rising performance.

While checking auditing fees against similar companies is not the only thing an investor should check it is another tool they can use.

Accounting News

Monday, September 26, 2011
Problems with Volunteer Tax Preparation

The IRS sponsors volunteer programs for helping low income families prepare their taxes. The program is called Volunteer Income Tax Assistance (VITA). the program is run through 179 organizations and receives $12 million in federal grants.

A noble idea but how well do the volunteers do? According to the Treasury Inspector General for Tax Administration (TIGTA); they leave a great deal to be desired. The TIGTA performed an audit on 36 tax returns that the volunteers prepared in 2010. The report showed only 14 were done correctly, that equates to 39%. The TIGTA has recommended implementing a review process to ensure higher quality work by volunteer preparers.


Accounting News

Thursday, September 22, 2011
House Debates SOX Exception

Representative Stephen Fincher of Tennessee has introduced a bill to permanently exempt corporations with less than $500 million in outstanding company shares from some sections of Sarbanes-Oxley. The biggest on of note being the 404(b) rule that requires and outside auditor to review the company's internal controls. Currently company's with less that $75 million in outstanding shares are exempted from the rule.

Sarbanes-Oxley (SOX) was enacted in 2002 in response the accounting scandal at Enron and WorldCom. It was supposed to provide better auditing and transparency with accounting practices.

There is partisan divide over the changes to the law. It is unclear if it has the support to pass the Senate.

Accounting News

Monday, September 19, 2011
Red Flags for IRS Audits

The IRS estimates that they fail to collect $350 billion in taxes every year. They are actively working to cut that number down. And as you might expect they are going to where the money is -- the richest tax payers. The audit rate for filers earning more than $10 million a year has expanded from 10.6% to 18.4%. Compare this to 8.4% for filers over $1 million and 1.1% overall. So if you are if you make more than $10 million then here are some red flags that will increase the chances of an audit.

Credit-card records. If you report a modest income but spend like a king you increase your chances for an audit. The IRS is doing credit card checks to make sure spending is at a reasonable level to income.

Business losses. The IRS is cracking down on losses reported as active investments. This requires the person to spend at least 500 hours doing work for the business. Losses for passive investments can only be used to offset passive investment gains.

Home interest. Another red flag is interest income on a home beyond what is expected. You are only allowed to deduct the interest on a first and second home. You can also deduct the interest on a home equity loan up to 10%.

Make sure you use a tax accountant who specializes in high wealth individuals to avoid any problems with the IRS.

Accounting News

Thursday, September 15, 2011
Tax Changes for the 401k?

The Senate Finance Committee is investigating changes to the 401k system. As the government looks to increase their revenues for the current deficits and struggle to shore up social security for the wave of baby boomers they are looking at how the 401k is operated. Many argue that the current system isn't very fair. High income wage earners get a much bigger tax break for putting money into a 401k savings plan. With the savings gap hitting lower wage earners the question is how to encourage them to save. 

One plan would have a government match instead of a tax break. For example, consider putting $100 in your 401k. If your are in a 35% tax bracket, you get a $35 tax break for a cost of $65. If you are in a 15% tax bracket you get a $15 tax break for a cost of $85. If it was $30 match on $100 it would cost all brackets the same. This would be a tax increase so it is unclear if such a plan could garner a majority to get anywhere in the house.

Accounting News

Wednesday, September 14, 2011
Estate Tax Deadline Extended

If you are an executor of an estate; the IRS has issued an automatic extension to file estate taxes until March 19, 2012. The tax return and tax payments are now due on the new date. The extension cover estates of people who died in 2010. The change was make to allow large estates to comply with the tax law changes that came out late in 2010.

Accounting News

Friday, September 9, 2011
No Tax Strategy Patents

In a rare showing of bipartisan support the Senate passed H.R. 1249, the America Invents Act. The final vote was an overwhelming 89-9.

The bill includes a ban on patenting tax strategies. In 1998 the courts foolishly decided that a business method may be patent-able. This has led to an abuse of the system for many thing including software. Several people have sought patents for tax strategies. The patent office still requires major reform but this is a step in the right direction.

Without this bill then patents could be issued to individuals or firms on tax avoidance strategies.To employ them would require a royalty fee to the patent holder.

The bill is now off to the president for the final signature. It was pushed Senate Finance Committee Chairman Max Baucus of Montana and Chuck Grassley of Iowa. Support for the measure also came from the AICPA. The question is who were the 9 that voted no and what special interest were they representing?

Accounting News

Wednesday, September 7, 2011

The IRS has issued the specifications for the 2011 tax preparer exams. To become a registered tax preparer you will need to pass the test, a background check, and 15 hours of continuing education.

If you need a registered tax preparer in your area visit the Accounting Aisle.

Accounting News

Tuesday, September 6, 2011
Patents on the Balance Sheet

The latest trend in the tech industry is buying patents. The biggest example is the sale of Motorola Mobility Holdings Inc and its 24,500 patents to Google Inc for $12.5 billion. The patents are used as to sue competitors or as a defense against being sued. The problems with software patents have been covered very well by NPR so I won't go into that here. The interesting thing for the accounting world is how they should be handled on the balance sheet.

Now a global group is looking into how this should be shown on balance sheets. In the United States if a patent is developed in-house is considered an expense. However, if they are purchased from another company they are shown as an asset at fair value. The same patent goes from worthless at one company to millions at the next. This makes it difficult for the consumers of balance sheets to compare companies.

Intangible assets like patents are becoming a larger part of many companies balance sheets. They have grown from 32% in 1985 to 68% in 2010. No matter what the solution it is obvious that changes need to be made.