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Accounting Fees

April 17, 2014

…Actually, any type of professional fees.  Accountants, lawyers, physicians and even plumbers’ fees – many clients complain they are too high.

Surprise!  They are not too high.  If they were, then many would retire much earlier than they do, take more vacations or have bigger houses and more expensive cars.  Professionals usually earn good livings, but that is what they are – a living.  Would you trust your work to a professional that did not earn a decent living?  I think not!

The problem with fees is that they are for services, not for tangible products that many times can be compared to similar products widely sold in many places.

What is a service worth?  I also know that it is difficult is compare two professional’s fees for the same deliverable.  Let’s take a lawyer’s one-hour consultation.  One charges $200 and the other charges $600.  Would the advice be the same making the service a commodity thereby making the attorney with the $200 fee the better value?  Well, suppose the lawyer charging $200 has very little experience in the issues discussed while the lawyer charging $600 is a recognized national expert.  Wouldn’t you think the attorney with the higher fee would provide better guidance than the lawyer with the lower price?  Suppose the consultation was for a life altering strategy; wouldn’t you want to meet with the most experienced attorney rather than the least expensive?

With respect to tax returns, two accountants can deliver the exact same return, while one charges $800 and the other $1200.  Might you think the accountant charging the $1200 was priced too high?  However, suppose I tell you that the lower-priced return was prepared after the information was mailed in with a brief call by the accountant, while the higher-priced return included a meeting with a CPA that resulted in suggestions to change the client’s investment configuration to make it more tax efficient, some tips to give charity in a more efficient manner, advice to open a one-person 401k to shelter consulting income in the current year, and a heads up to sign up for their employer’s cafeteria health plan for the next year.  The return is the same.  The advice is not!  You evaluate the fee based on value received.  Perhaps the fee for the $800 return should have been lower, while the advice provided should have been priced higher.  Either way, professional services and fees are not necessarily subject to comparison.

I suggest that every bill you receive be considered a value bill.  Consider the value received and either shop around for a new professional or be glad you had access to a great professional at a bargain price.

Tax Season is Over

April 15, 2014

Tonight, accountants all over the country are collectively sighing with relief.  Tax season is over.

For us at WithumSmith+Brown, we had a good season – all returns were completed where we had the information; our clients that wanted to, filed on time; the higher tax paid by many clients because of the new ObamaCare tax was not much of a surprise because of the projections we did in November and December.  they weren’t thrilled, but at least they weren’t surprised.  The IRS, once they got revved up, handled the volume well.

Our staff did a great job with many young staff as knowledgeable with the new laws as the more experienced staff members since they saw the effects most directly when they prepared returns.  Because of the changes, we added training courses at the beginning of tax season, so our staff were right on top of the tax laws and fresh and eager to work on the returns. This also resulted in reduced review time.  Technology played an important role.  We used smart scanners and cloud based and data population software making our processes effective and efficient and with less tedious date entry work.  Almost all of our clients e-filed reducing handling and delivery time and costs.  Tax season started later than usual and because of this our clients were able to provide more of their information the first time they submitted it to us reducing handling, touches, calls and waiting.  All around, everything worked smoothly.

We had a good tax season, and so did our clients. Our offices are closed tomorrow for a well-earned day of rest.

Thank you to our clients and staff.

What Keeps Businesspeople Up At Night

April 10, 2014

I have gone on many leads for new clients where I was told they are switching accountants because they believe they are paying “too much tax.”  However, at most of these meetings we usually spend a few minutes on taxes and then most of the time on them wondering whether their controls are good enough!

My conclusion from this, as well as from many conversations with clients, is that potential loose controls are a major cause of keeping someone awake at night.  No one stays awake at night wondering if they are paying too much tax – a pending tax audit might, but not paying too much tax.

There are certainly many other reasons, but I want to address controls here.

Businesses are organic and need minding.  Part of this is to have adequate controls that do not tempt personnel to steal and:

  • provide methodology to get things done the right way at the right time by the right people,
  • customer orders do not get mislaid,
  • customer backlogs are managed and are for the right reasons,
  • inventory doesn’t accumulate unwisely or unnecessarily,
  • orders to suppliers are for the right things in the right quantities,
  • operational data is provided timely,
  • overhead is properly allocated and not excessive in space and cost,
  • that the cash flows in the right direction.

Being a businessperson is very difficult.  Aside from knowing how to make the product, manage the process and personnel and control the cash flow, they need to know how to lead and run a business.  Each separate function is essential for a successful business, but many times how well the overall business is managed is the determining factor of its continued existence.  Yet, many owners do not do this claiming they are “too busy.”  The old cliché is true – you need to work on your business, not in it!  Benjamin Franklin said that the eye of the master earns more than both of his hands.

If you don’t want to stay wake at night, have procedures established that watch over and control each of the items in the bulleted points above.  It all has to do with controls.  Each of the items mentioned can be controlled and transparently quantified with information provided regularly and timely so that it can be acted on as soon as a problem is detected.  That is control and this will 1) enable you to sleep better and 2} provide time and comfort for you to work on your business!

Controls work, but only if you work on getting the right controls and then using them.

Internal Controls Explained

April 8, 2014

What are internal controls?  Auditors widely use this term.  It also appears multiple times in engagement letters for audits of businesses and not-for-profits but I do not believe many outside of the accounting profession really know or understand what internal controls are.  I will try to explain it here.

Internal controls refer to an organization’s system of deterrence, oversight, checks and balances.  An illustration is where someone in a business writes and mails the checks to pay a bill.  If this same person then receives the bank statement and performs the reconciliation of that account, there would not be any control or oversight on that person and whether the payment was proper and not misdirected.  They are checking their own work.  This is how many frauds occur.

Another illustration is where merchandise is ordered by a person who also receives it, places it in inventory and authorizes the payment.  There is no oversight of the products received, that they were actually placed in inventory or that the right material was ordered, or even received.  Adding a different person to the process anywhere along the way can provide a control to thwart any theft.

Employee theft can occur at any point if temptation is blatantly put in front of otherwise honest people.  Not always, but occasionally.  Petty thefts of packages of coffee and office supplies, up to scrap metal, to inventory items like parts and finished products and be easily taken without adequate controls.  It is hard to secure coffee and office supplies but parts and inventory can be controlled with a protected location and perhaps a video camera recording activity in and out of the area.

Salespeople can pad their expense accounts and time workers can find ways to punch in earlier than when they show up or later than when they quit for the day.  Simple controls can impede many of these stealth frauds such as with periodic but regular spot checks.

It is incumbent upon every manager of a business or not-for-profit organization to assure that the controls are adequate and appropriate for the organization.  There is also an easy way to approach this.  If you have an independent auditor, ask them to review with you every item on the internal control evaluation checklist they completed for their last review or audit of your system.   If you do not have an independent auditor, email me and I’ll send you a standard internal control evaluation checklist you can start with.

More Than Just an Identity Theft Alert

April 3, 2014

Last week, I met with a client that had money stolen from his business account.  He caught it right away and because his banker was very helpful, he did not lose anything.  He could have lost a substantial amount along with much time trying to recover his losses from the bank.

Here is what happened:  A check was drawn on his business checking account for a seemingly usual transaction amount of just over $20,000.  The check looked exactly like his checks and the signature looked just like his signature.  The check number was about 500 numbers higher than his current check numbers.  The check was not drawn by him and it was to a payee he had never heard of.

This client routinely checks his bank account online every morning, so he noticed this unusual transaction right away.  He spoke to his partner who also did not know anything about it.  His call to the bank was transferred to the right person that could handle it.  He was told that this happens occasionally; that he would be immediately credited in full; that all his accounts with the bank would be closed and new accounts opened; and that he would have no additional inconvenience, unless he notices similar activity in the future, which he should not, based on what the bank was doing.  He was told that he might receive a call from the bank confirming if an outstanding check on the closed account looked unusual; otherwise all his outstanding checks would be diverted to the new account.

The bank handled this excellently and his regard for the bank increased.  He was glad that he checks the balances each day, and knows now that it isn’t just his compulsiveness, but that there is real value to it.

Neither he, his partner or the banker had any idea how this happened.

Takeaway:  This can happen to you.  Check your balances.  Be alert to unusual activities.  And watch your money!

U.S. Government Establishes Social Security Retirement Age at 78!

April 1, 2014

Effective October 1, Congress set the Social Security retirement age at 78.  This is the first major age increase since the system started.

By way of background, the retirement age was not a carefully calculated number.  65 was originally determined by German Chancellor, Otto Von Bismarck, in 1889 as a reward for “old” people being old.  His system was a simple one with those working slightly taxed to provide for the retired.  In those days very few made it to age 65, so coverage was minimal.

Social Security was enacted in 1935 using Bismarck’s age, model and reasoning.  At that time there were about 80 workers for every person who would receive Social Security benefits so the tax burden was negligible.  Today, there are a little more than three workers per retiree with the benefit age starting at about age 66 (and at age 62 in some cases).  With people living much longer, the burden on those working grows greater each day.  It is estimated that 20 years from now there will be less than two workers per recipient.  There are also payments for widows and widowers with young children, payments to the permanently disabled and a small burial benefit, but these benefits do not seem to be heavily burdensome.  Today, the average life expectancy is age 80, with more than 3% exceeding age 90.

When Social Security started, a 1% “tax” was placed on all wages up to $3,000 with a matching amount from the employer.  This amounted to a $60.00 maximum contribution.  Benefit payments for the first 30 to 35 years were to people that had not contributed sufficiently to the system with funds coming from the tax on those working.  By 1960, the wage base rose to $4,800 with a 3% tax each for employee and employer – a $288.00 total contribution.  By 1980, the covered wage base rose to $25,900 with a 10.16% tax – a $2,631.44 total contribution.  Today, the wage base is $117,000 with a 12.4% tax on the employee and employer amounting to a combined contribution of $14,508.  The self-employed pay both portions themselves.  There is also a partial recoupment by the government since the once non-taxable benefits are now 85% taxable for many recipients.

It is estimated that the current unfunded Social Security liability covering payments over the next 75 years is about $10 trillion.  Unfunded Medicare liability is additional but is not covered here.

It seems one of the big issues of the day should be what to do about this unfunded liability. Right now our Congress people do not appear to be addressing this.  In the 2000 Presidential campaign both candidates offered possible solutions – none good, but they were talking about it.  Not since and up to today, nothing new is being offered at all.   This is a critical area that must be addressed and dealt with before it reaches the crises level.

Increasing the retirement age to 78 might be an exaggeration, but if you read this far, we know it got your attention.  Write to your Congress people imploring them to seriously address Social Security solvency.  Today is “April Fool’s Day.”  It seems we are the “fools” because we elected flaccid leaders that are only adapt at pushing important issues to the sidelines.

15 Reasons for Obtaining Extensions

March 27, 2014

Those that know me know that I do not like extensions.  However, there are valid reasons for extensions and here are fifteen of them:

  1. You did not receive some K-1s or 1099s or other documents with information that you need to report
  2. You did not receive letters confirming charitable contributions that are required to be in your possession by the due date of your tax return
  3. There is pending litigation or a tax audit and reporting certain transactions might prejudice your position or you are awaiting resolution which might affect an item on this year’s return
  4. You might want to reverse a 2013 IRA conversion to a Roth IRA and would rather not file by April 15 so an amended return would not be necessary if you decide to reverse the conversion by October 15, 2014
  5. Circumstances may have prohibited you from assembling all your information properly.  This might also include searching for tax basis of securities or assets that have been sold
  6. You have a complicated situation and you feel it is best to have an extension so the preparer would have more, and less-rushed time to devote to your return
  7. You might want to open and/or fund a SEP pension plan.  By extending, you will have until October 15 to make your decision.  If you have a Keogh, 401k or SIMPLE plan, the contribution for last year can be made by the extended due date, but the Keogh and 401k must have been established by the previous December 31 and the SIMPLE by September 30, 2013 (crazy and inconsistent rules for basically the same type of deductions)
  8. You did not file last year’s return and feel that filing this year’s return before the prior year will cause extra IRS attention to you.  However, irrespective of what you did not file, you should file this year’s return on time which would be the extended due date.  Note: I wrote about how to handle missed tax filings on Feb 20, 2012 and you can retrieve this in this blog’s archives
  9. Those with a 2013 installment sale might want to wait as long as possible in 2014 to consider electing out of the installment sale if your 2013 taxable income is expected to be substantially lower than 2014
  10. People with net operating or other losses that can be carried back might want to delay filing to determine if they should elect to forego that and carry it forward
  11. The extension can delay elections that are made on the first-filed tax return reporting certain new transactions
  12. The extension is for a gift tax return where not all the issues are clear including generation skipping elections and spousal consents, or where basis information is not readily available or discount valuations are not completed.
  13. There is a high risk of audit – filing an extension might reduce the chance of an audit.  Note that it will not lower the chance of a computer generated notice questioning an item or picking up income that was not reported
  14. If the tax preparer is unable to devote the necessary time to get the return ready to file on time
  15. An error is discovered on a prior year return and additional time is needed to research and correct it, and the current year’s return might be affected by the change

Comment: The extension is to delay the filing, not the payment.  Payments must be timely made.  A tip for those filing extensions that also have to pay estimated tax is to include the first quarter estimated payment with the extension payment.  In the case where you underestimated your 2013 tax for the extension, the added first quarter payment would reduce that penalty which is greater than the penalty for the underestimated 2014 tax.

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