This is a follow up to an article that I wrote in March of this year concerning captive insurance companies. I simply write this as a warning or caution to emphasize that the IRS is aggressively reviewing these companies, even more so when they are used as investment plans.
The IRS is aware that captive insurance companies have been used improperly. They believe captive insurance companies are being used as fraudulent tax shelters. While many of these captive insurance companies serve legitimate purposes, some do not. The IRS has assessed additional taxes, penalties and/or interest on thousands of taxpayers. The IRS rules require filing Form 8866 for these investments so please see a knowledgeable CPA about these matters. The penalties for failing to file Form 8866 can be $200,000 for a business and $100,000 for an individual.
If you are starting a captive insurance company or considering investing in one make sure you get a good legal opinion that there exists a legitimate purpose for the entity. If you are selling shares in a captive insurance company as an investment or tax shelter to your clients, another opinion as to the legitimacy of the business purpose is warranted.
Also, if you received a notice from the IRS, simply stopping additional funding into the captive insurance company or investment plan in the captive insurance company does not solve the problem. This is because you are continuing to receive a tax shelter for the money already invested. An IRS notice is definitely cause to seek counsel and an experienced CPA.
If you have any questions about captive insurance companies please contact me at firstname.lastname@example.org
If you Google him, you will find that Hank Kuehne is “an American former U.S. Amateur champion and professional golfer who enjoyed some success on the PGA Tour.” If you scroll down you will even see that he was, until recently, engaged to Venus Williams. Page down far enough and you will see that he apparently dated Paula Abdul before Venus. Seems great so far . . . golf and women, two wonderful things. Well . . . you have to page down pretty far, and it is well hidden but, if you persevere, you will find an example of what not to do as a financial advisor, tax preparer, and CPA. This is exactly how you make a mountain out of a molehill.
It seems that Hank Keuhne has sued his accountant[i]
in the Federal District Court for the Southern District of Florida. This case appears to be a classic example of what not to do and why not to cover it up. According to the Pleadings in the case, the accountant, Thomas J. Bertsch, held himself out as an expert in local, state and federal taxes and agreed to prepare Mr. Kuehne’s tax returns and provide him with financial advice. However, despite inquiring as to the status of his taxes, it was not until Mr. Kuehne fired Mr. Bertsch in 2011 that he learned for the first time that he owed tax liabilities and penalties to the IRS for the years 2006 and 2007.[ii]
It was also at that time that Mr. Kuehne learned that Mr. Bertsch had made an offer in compromise to the IRS to settle these debts for $90,000. However, the IRS countered with a demand in settlement for $342,715. This reduced demand lapsed because Mr. Bertsch failed to respond to the IRS.
This is a classic example of a simple, albeit large, tax error that was compounded by the failure to promptly reveal and resolve the matter. If this matter was properly handled in conjunction with his attorney and the insurance company, the result would have been much different. However, I suspect that since Mr. Bertsch failed to advise his client, he also failed to advise his employer, his attorney, or his insurance company.
Now instead of simply being potentially responsible for the interest and penalties Mr. Bertsch is faced with a lawsuit in which he is facing fraud for his improperly claimed expertise, fraud for the cover up, and punitive damages, in addition to the now increased interest and penalties. Further, there is a possibility that the insurance company might deny coverage in light of the cover up and delayed reporting. In addition to all that he now has an ethics violation and licensing violation that may cost him whatever licenses he might hold.
I will assume that his supervisors and the owners of the company did not know what was happening. Perhaps there should have been greater controls. Who opens the mail? Perhaps IRS notices should be reported to the responsible accountant and the supervisor or some other owner. In any event, they must be concerned about the suit and coverage issues as the firm is a named defendant to several of the counts in the Complaint.
When faced with this situation you should contact your attorney immediately. Your attorney can assist you in navigating your ethic and legal duties regarding reporting both to your insurance carrier as well as your client. When handled properly from the beginning you can prevent the molehill from ever becoming a mountain!
If you have any questions or I can be of any assistance, please contact me at email@example.com
Mr Bertsch does not appear to be or have been a CPA, but I have been unable to verify this. [ii]
There is also an allegation that Mr. Kuehne owes California state taxes over some gambling income.
Licensed professionals need to give serious consideration as to whether they shall enter a Nolo Contendere
Plea. There are serious implications on ones ability to continue to practice their profession. Most if not all of the licensing statutes allow the Licensing Board to revoke, suspend, limit, or otherwise restrict a license.[i]
The Latin phrase Nolo Contendere
means “I will not contest it.” The idea behind a plea of Nolo Contendere
is that the criminal defendant will accept in the criminal court the charges as presented and subject themselves to the appropriate punishment as determined by the court. However, it is also supposed to only have that effect in the criminal court. The Nolo Contendere
plea is not supposed to have any impact or relevance outside of the criminal court, particularly in civil actions.
The Pennsylvania courts have determined that the professional licensing boards are “watchdogs” of the professions and therefore are empowered to maintain the high standards, which the people of this Commonwealth have a right to expect from their professionals, and therefore, the courts have held that the Boards have the ability to admit a certified copy of the docket entry of a plea of Nolo Contendere
at an administrative hearing, and that a Nolo Contendere
plea is evidence of an admission of guilt of a crime.
It should be noted that there are lots of reasons why an individual might plead Nolo Contendere in the criminal setting, including the high cost to defend the criminal case, the emotional toll of a criminal trial, and the risk of a guilty verdict and the attendant jail time that would ensue being some of the most common.
While the courts have held that the Nolo Contendere
plea is admissible in the administrative hearing, they have also held essentially that this Nolo Contendere
plea is simply a presumption of guilt and leaves the door open for the professional to submit evidence that they are not guilty. Obviously, having a rebuttable presumption is better than facing the licensing board with a guilty plea or criminal conviction, but the burden of establishing innocence may be difficult indeed. Remember that your audience will ultimately be a licensing board and will initially be the prosecutor and possibly hearing officer, all of whom are likely to have never faced criminal charges and who might find it difficult to believe that a person would plead Nolo Contendere
or, in their minds, essentially a guilty plea, if they were not guilty. The reality of the situation will be that it is most likely that even an innocent person who pleads no contest, will have some disciplinary action taken upon their license.
It is important for any professional faced with a criminal charge to consider the effect of a Nolo Contendere
plea. Obviously, the primary focus when facing criminal charges is going to be to maintain one’s freedom and avoid jail time. However, as a professional, you must keep in mind the effect the criminal charges will have on your ability to practice your chosen profession. Also, please keep in mind that most criminal defence attorneys will not understand the implications of a Nolo Contendere plea upon a professional license. The reality is that most criminal defense attorneys do not handle professional licensing matters.
Ultimately, my advice is to weigh all your options and understand the potential implications of a Nolo Contendere
plea before you enter it. It may very well be the right decision to make, but understand the impact it could have upon your professional license. [i]
For example, see the Pennsylvania Accountancy Law, Section 9.1 (5), which states that a CPA can be disciplined for entering a plea of Nolo Contendere
for a felony under any federal or state law or the laws of any foreign jurisdiction.
The Pennsylvania CPA Journal - link to article - http://goo.gl/Y3FKu
link to video - http://t.co/g1AYoHRXCc
Comfort letters – the fight continues. . . CPAs beware. . .
Unfortunately, the federal Consumer Financial Protection Bureau has muddied the waters while implementing the Truth in Lending Act. Although not even in effect, lenders are already pointing to the new regulations as justification for the need for a comfort letter. Are you prepared to respond?
C & W Website - link to article - http://goo.gl/dDQkw Two CPA firms “not guilty” of practicing without a license
The Pennsylvania Board of Accountancy has dismissed prosecutions against two of my clients for practicing without a license. In both instances, the prosecutor was seeking substantial fines of $5,000 or more. However, the CPAs had done what they thought was required and the Board appropriately dismissed each case.
Captive insurance companies are becoming more widespread in business today. We see captives being used to save businesses money by reducing premiums, they have been used in asset protection plans, and they have been used as tax shelters. Just what is a captive insurance company?
In its essence and simplest form, a captive insurance company is a wholly owned subsidiary of a parent company. The parent company pays premium to the captive that would otherwise have been paid to an outside insurance company. The captive then covers the claims made against the parent company. This is the self-insured use of the captive that large companies have used for many years. Most major companies and universities have formed their own captive. Today, captives can be much more diverse and do not have to be owned by one parent company.
When used as insurance, the idea is that the parent company benefits from the good performance of the company rather than the outside insurance company. If the premium is $10,000, for example, and there is $5,000 in claims in a given year, the company will have a $5,000 surplus. If, on the other hand, there is $15,000 in claims paid on that same premium there would be a $5,000 loss. For this reason, most captives will purchase reinsurance or excess insurance to cover claims in excess of a certain amount. Alternatively, some captives have reserves that have grown large enough over the years that they can absorb such losses.
In 2002, the IRS issued guidance on how to establish a captive in compliance with the tax code. This allowed many smaller companies to save money by establishing captives. For instance many companies have formed captives to administer their health insurance. This has also opened the door for other legitimate uses by smaller companies. In addition, several companies and/or individuals can get together and form a captive of their own.
When marketed as an investment vehicle or asset protection device, the fact that a captive can potentially reduce income taxes and be transferred estate tax free to heirs are strong selling points. However, the idea behind the captive is not to use it solely as an investment or asset protection vehicle. My firm can assist you to form a captives for companies to insure against potential risks. The IRS does look for abuses such as a captive that insures for a risk that the parent company does not have.
If you are considering a captive you will want to consider how it will be established and run. You should have an attorney, CPA, and actuary who are familiar with the process during the formation. There are companies that, for a fee, will administer the insurance program for you. You must be prepared to handle claims and comply with insurance regulations, so having an experienced administrator is important. There are also companies that will adjust your claims and handle the entire claims process. No company should do this on their own.
Additionally, when considering a captive you need to determine which risks you wish to insure. You may only want to cover health insurance or maybe worker’s compensation. Also, a benefit of a captive is that you may be able to insure more than traditional insurance would insure if you choose to do so. Many traditional insurance policies have exclusions that prevent a recovery and you do not have to write those into your own policy. Waiting periods and caps can be changed to suit your preference and potentially cover your true business loss.
There is a strong potential for abuse through misuse of a captive. They are subject to audit but the IRS does not audit a large percentage of the captives that currently exist. However, that may change as the IRS continues to look closer at captives. Therefore, it is important that the company be set up and administered properly.
If you have any questions about captives please contact me at firstname.lastname@example.org.
The noisy withdrawal has long been a tool for attorneys in balancing their legal and ethical responsibilities with their
knowledge of a client’s improper activity. It has also become a common issue for CPAs. The basic concept is that the professional having become aware of a client’s improper activity (such as employee theft) withdraws from the representation and notifies the proper authority of their withdrawal. The withdrawal is done in such a way that the authorities are alerted to the fact that there may be a problem. If the client has caused the professional to give their professional opinion on some false information or pretenses the withdrawal will often be accompanied by a withdrawal of the opinion.
This is most often noticed in large public company settings because of the public scrutiny that can essentially arise in almost any situation. Further, the Securities Exchange Commission (“SEC”), particularly through the Sarbanes-Oxley Act of 2002 [“SOX”],has requirements, in certain circumstances, for a noisy withdraw. The SEC even has an Office of the Whistleblower. http://www.sec.gov/whistleblower
SOX requires that attorneys report “evidence of a material violation of securities law or breach of fiduciary duty” to the chief legal counsel or chief executive officer of the company. If there is no appropriate response then report to the board of directors or appropriate committee of the board of directors. This is referred to as “up the ladder”reporting. In addition, it is both a good practice and requirement to attempt to resolve the issues with the client before making a noisy withdrawal.
SOX requires a noisy withdrawal by an outside attorney if the company has not responded appropriately, the violation is ongoing or about to occur, and the likely result will be substantial injury to the investors. In this situation, the attorney has one day to withdraw, indicating that the withdrawal was “based on professional considerations,” and must disaffirm any statements the attorney has made to the SEC which may be false or misleading. In house attorneys must disaffirm but are not required to resign their employment.
An issue arises as to how one disaffirms a statement and what confidential client information may be disclosed. The SEC permits the disclosure of confidential information without the client’s consent. However, this rule is in conflict with various state rules. The important thing is to make the withdrawal and any disaffirmance while revealing as little confidential information as possible. It is quite possible that the intent can be accomplished without revealing any confidential information.
The SEC has expanded the requirement for noisy withdrawal to CPAs in certain circumstances as well. Without getting into all the details, investment advisors, who are qualified custodians, must have an audit. The auditor is required to notify the SEC within one business day of any material discrepancies and make a noisy withdrawal.
There are other circumstances in which a noisy withdrawal would likely be appropriate for both attorneys and accountants, and following the SEC rules would go a long way to demonstrate that an accountant or attorney handled the matter properly. The law in this area is still developing so if you find yourself in this situation, handle it very carefully.
I can be contacted at email@example.com
The United States Court of Appeals for the District of Columbia Circuit in the case of Noel Canning v. National Labor Relations Board (“NLRB”) threw the area of employment law into a state of turmoil. On January 25, 2013, the Court ruled that three of President Obama’s appointments to the NLRB were invalid. If this decision is not overturned it means that more than 200 decisions by the NLRB may no longer be valid and may have to be revisited. Included in the decisions are a number of rulings dealing with employers’ attempts to restrict employees’ use of social media.
The most controversial decisions by the NLRB during this time were the rulings that employees can use social media to complain about or comment on management, without retribution. As an example, see the Costco case decided on September 7, 2012. These were also other decisions concerning employers’ social media policies and what restrictions were overly broad. These cases are likely to be appealed and the state of the law will be in some state of turmoil until these issues are resolved.
Sharon Block, Richard Griffin and Terence Flynn’s appointments were all ruled invalid. They were all appointed prior to January 4, 2012. There are only five members on the NLRB. These three members were part of the quorum necessary for the NLRB to decide cases since January 4, 2012. Without them the NLRB did not have a proper quorum and thus each of its decisions would be in question.
The NLRB continues to stand by its rulings, and therefore, it appears that this case is headed for the Supreme Court to ultimately decide this issue. There have been contrary decisions by other appeals courts. This split in decisions and the importance of the issue presented make it likely that the Supreme Court will take the case and make a decision on the matter. One of the issues will be: if this decision is upheld, there have been a large number of other appointments and actions that could also be found to be unconstitutional. Also, it appears that Presidents going back to James Madison and certainly all the recent Presidents have made the same type of appointments, which would now be considered unconstitutional.
We’ll just have to wait and see what the NLRB and the Supreme Court do.
Okay. You have received a letter from the PICPA Committee on Professional Ethics ("the Committee") indicating that it has received information that "you may have violated the PICPA Code of Professional Conduct
." What do you do? Stop. Breathe. Remember it is not the end of your world. The Committee’s role is remedial not to punish. If you are doing something wrong the goal is to help you learn and improve and thus protect the public and provide a better service.
For clarification purposes, if you have committed a felony and in some other egregious situations, you will be expelled. However, in these situations you generally have a lot more to worry about than your PICPA membership.
The Committee commonly refers to this letter as the "Opening Letter." The last thing you want to do is ignore this letter. Do not bury your head in the sand and hope this will go away. It will not. Keep in mind that as a member of the PICPA you have agreed to abide by the Code of Professional Conduct
and a part of the Code is that you will cooperate with an ethics investigation. Failure to cooperate is grounds for termination of your membership in the PICPA. Not responding to the committee when it asks for a response and/or further information is failing to cooperate and may lead to expulsion from the PICPA. The good news is that if you do not respond to the first letter there will be a follow-up about 30 days letter giving you another opportunity to respond. The reality is that you will have to ignore numerous opportunities to respond before you will be expelled for non-cooperation.
You generally have thirty days to respond to the Opening Letter. Appropriate responses to this letter include just about anything that demonstrates that you will cooperate. You can ask for more time, you can provide the requested information, and you can ask for a deferral because the underlying matter is in dispute in any court of law and/or if there is an ongoing investigation by another regulatory body (i.e. the SEC). Deferrals are routinely granted and are preferred by the Committee because a member should not have to fight a battle concerning their actions on two fronts at the same time and because any investigation or findings by the Committee should not be used as leverage in any other proceeding. You will eventually have to provide the requested information, even if it is years later after the matter has been deferred during that time (i.e. while you defend yourself from a civil lawsuit). Should you request additional time to respond to the Opening Letter, the Committee will generally work with you, if demonstrate you need extra time.
Once the Committee has the information requested it will review all the information and ask for more information if necessary. It will ultimately decide whether there has been any violation of the Code. The best outcome is a letter from the Committee that based upon the response received that the Committee "has concluded not to pursue the matter at this time." The worst case is expulsion from the PICPA but this does not directly affect your license to practice accounting. Typically, the Committee will recommend CPE’s that will help you learn and understand how to do a better job the next time you under take a similar engagement. Other remedial measures include pre or post issuance reviews, an accelerated PEER Review and restrictions on performing PEER Reviews. Short of expulsion, the Committee also has the authority to suspend a member up to two years and to publicly admonish the member.
Before the Committee will decide anything other than an outright dismissal based upon your initial response you will be offered an interview where you will be given an opportunity to answer questions and present your side of the issues. There are a number of procedural and due process protections. Additionally, members can agree to settle cases rather than undergo a full investigation. Where no settlement agreement is reached the case is heard by the AICPA Joint Trial Board for a decision.
Please let me know if you have any general questions about this topic but if you have a specific matter before the Ethics Committee I cannot address those issues because I represent and advise the Committee on legal issues including due process issues as they may arise. firstname.lastname@example.org
On Friday January 18, 2013, the IRS’ attempt to regulate non-CPAs, non-enrolled agents, and non-attorneys were put to an end by a decision of the United States District Court for the District of Columbus. The IRS believes that it has the authority to regulate “representatives” who “practice” before it. However, three independent tax-preparers brought the suit objecting to the IRS’ efforts and the Court agreed.
U.S. District Court Judge James E. Boasberg ruled against the IRS and enjoined the agency from enforcing its Registered Tax Return Preparer requirements. The Court held that the IRS’ regulatory scheme was impermissible and entered a permanent injunction. The judge ruled that IRS does not have the statutory authority to regulate tax preparers. If no further action is taken, tax preparers will not have to comply with the recently enacted regulations.
At this point it remains to be seen what the IRS will do next. Their first option is to appeal to the Circuit Court in an effort to have the decision overturned. If an appeal is not successful, the IRS will have to turn to the Legislature for the authority to regulate tax preparers. The IRS would like to require an exam, a fee, and required continuing education courses for all non-CPA, non-enrolled agent, and non-attorney tax preparers.
Below is a link to my article on the Cipriani & Werner website about cyber risk from a professionalviewpoint.