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By Laura Davison, Bloomberg News (TNS)
Wealthy Americans dodged getting hit by tax increases in the Democrats’ economic package, but they likely will face a much better-funded Internal Revenue Service equipped with new auditors and technology to uncover tax avoidance.
Top-earning Americans should be prepared for audit levels they haven’t seen in decades as the agency prepares to train an expanded workforce that specializes in complex financial dealings, including cryptocurrencies and offshore investments.
The tax and climate bill that the Senate passed this weekend includes $80 billion for the IRS over the next decade, a massive influx of cash for the agency that has faced budget cuts and declines in customer service and audit levels over the past decade. Democrats supporting the bill hope the bill will reverse those slides.
The non-partisan Congressional Budget Office projects that the $80 billion investment will yield an additional $204 billion in tax collection over the next decade. But other estimates, including some internal Treasury figures, suggest it could be much higher.
Treasury has projected that the additional IRS enforcement could be almost twice what CBO predicts — about $400 billion over 10 years. Academic research has also found that higher audit rates increase tax revenue in two ways, directly from the money collected from tax return examinations, as well as higher voluntarily compliance after a taxpayer is audited and from others who fear higher risk of IRS scrutiny.
Lawrence Summers, who served as Treasury Secretary under former President Bill Clinton, said the CBO’s figures are too conservative and that the IRS could collect far more from high-earning Americans and corporations.
“If this program is really implemented, instead of the $200 billion that the CBO estimates, I think the benefit could be $500 billion or even possibly, if they do a great job, $1 trillion,” he said in a interview with Bloomberg Television last week. “So I’m pretty optimistic about the fiscal potential here if the administration really steps up.”
The IRS has a lot of ground to make up on audits. The agency scaled back audits of all taxpayers between 2010 and 2019, with the total audit rate falling to 0.25% from 0.9%. The largest drop has been among those reporting $5 million or more, who have a 2.35% chance of being audited, down from more than 16% a decade ago, according to a May watchdog report from the Government Accountability Office.
“The IRS has proven time and time again that it can step up to some of these measures or goals,” said Eric Hylton, a former IRS official in the agency’s small business division who now is the director of compliance at alliantgroup. “If they’re saying $204 billion, I do think the IRS will be able to exceed that with the IT modernization, and the appropriate personnel and funding.”
More than half of the $80 billion, which is slated to be given to the IRS in chunks over the next decade, in the bill is designated for enforcement, including hiring and training new auditors, about one-third is for operations support, and the remaining money is to upgrade computer systems and improve taxpayer services.
It may take several years before the IRS starts to see results from the additional money. The CBO estimates that only $3 billion of the $204 billion will be collected next year, compared to more than 10 times that at the end of the decade. That’s largely because it can take years to train auditors, select cases and resolve audits.
IRS Commissioner Chuck Rettig said in a letter to Congress on Thursday that the agency has fewer auditors in the field at any time since World War II, underscoring the need for the additional money. Rettig told a House panel earlier this year that his agency is “outgunned” in examinations of large companies that have teams of corporate accountants and lawyers.
The IRS funding has faced loud criticism from Republicans in Congress who say pumping more funds into the agency will do harm to taxpayers. Republicans say the additional money will harass taxpayers who haven’t knowingly done anything wrong, despite assurances to the contrary from Rettig.
Senator Rob Portman, an Ohio Republican, told reporters Wednesday that he believes the IRS needs more money, but that the money should be directed to taxpayers services and technology not to bring greater scrutiny to taxpayers.
The House still needs to approve the bill before it can go to President Joe Biden’s desk to become law.
The “carried interest” loophole seems to have survived longer than the proverbial cat with nine lives.
New legislation just passed by the Senate—the Inflation Reduction Act—initially cracked down on the loophole once and for all. This tax break has been in the crosshairs of Congress for years. But the provision was removed from the bill due to objections from Sen. Kyrsten Sinema (D-AZ). The latest version is expected to sail through the House before it recesses and be signed by the president.
To make up for the lost revenue, the Act imposes a 1% excise tax on corporate stock buybacks.
Under the current rules for carried interest, compensation paid to managers of certain investment entities is taxed at favorable long-term capital gain rates instead of high-taxed ordinary income rates, after a three-year holding period is met. Generally, the new law would have required managers to meet a five-year holding period to qualify for long-term capital gain.
The maximum tax rate for long-term capital gain is only 20% (15% for certain low-to-moderate income taxpayers). In comparison, the top tax rate on ordinary income is 37% or almost twice as much.
The carried interest rules have long been criticized as providing an unfair tax advantage to a select group of wealthy individuals. In fact, opposition has come from both sides of the aisle. It’s been a frequent target of lawmakers in other proposed legislation. The three-year holding period requirement was added in 2017, but other efforts to curb this tax break have gone by the wayside.
Notably, both President Biden and President Trump supported closing the carried interest loophole during their respective campaigns.
Sinema, who has received substantial backing from wealthy financiers, proved to be the main obstacle this time around. The bill would not have passed without the removal of the provision. However, even those in favor of closing the loophole acknowledge that the projected revenue loss is relatively small.
The new law does contain other tax provisions: creating a new corporate minimum tax, extending and expanding tax credits for energy-saving improvements and electric cars, and increasing IRS enforcement activities, plus the new stock buyback tax. Finally, it’s likely that the carried interest loophole will remain a hot potato in our nation’s capital. Don’t be surprised if some members of Congress take another shot at closing it soon.
By Laura Davison, Erik Wasson and Ari Natter, Bloomberg News(TNS)
President Joe Biden and Senate Majority Leader Chuck Schumer are the biggest winners now that a huge piece of Democrats’ economic agenda is hurtling toward enactment.
The tax and energy bill passed Sunday after a year and half of rocky negotiations that divided the party. It gives Democrats tangible progress on key issues to show voters in the midterm elections this November.
Biden’s popularity nose-dived a year ago in the wake of the haphazard Afghanistan pullout and rising inflation—and a year of infighting among Democrats over the domestic agenda. That squabbling is in the past and Biden can say a cornerstone of his agenda will become law.
Schumer was slammed last year for failing to unite his caucus behind Biden’s “Build Back Better” plan. He managed to revive a slimmed version of the deal, navigate last-minute holdups and blindside Republicans hours after they gave up leverage by allowing a bipartisan semiconductor bill to pass.
Here’s who else comes out on top and who takes a hit from the landmark bill:
— The wealthy
None of the billions of dollars in tax increases Democrats floated a year ago on high-earning Americans made it into the final version of the bill, including proposals to double the capital gains rate, increase taxes on inheritances and levy a surcharge on millionaires. Despite rhetoric from Democrats that they wanted the richest Americans to pay much more, there wasn’t consensus within the party to pass a bill that raises levies on the 1%.
— Private equity
Private equity fund managers were able to dodge a tax increase that Sen. Joe Manchin wanted, but fellow moderate Democrat Sen. Kyrsten Sinema insisted be taken out of the bill. Manchin had wanted to narrow a tax break known as carried interest, that allows fund managers to pay lower capital gains rates on their earnings. The private equity industry was able to gain an additional win shortly before the final passage of the bill when a handful of Democrats broke with their party to vote on a Republican amendment that created a carveout for private equity-owned companies in the corporate minimum tax.
— Manchin, Sinema
The entire contents of the bill were essentially cherry-picked by Manchin and then tweaked to fit Sinema’s preferences. The two moderates amassed huge leverage with their willingness to accept no bill at all — and attacks from progressives — rather than a bill with provisions they opposed. The pair were also able to score some direct benefits for their states as part of the negotiations: Manchin secured and agreement to permit the completion of the Equitrans Midstream Corp.’s Mountain Valley Pipeline, and Sinema was able to get $4 billion for drought relief in Western states.
— Electric carmakers
The deal extends a popular $7,500 per vehicle consumer tax credit for the purchase of electric vehicles, a win for EV makers like General Motors Co., Tesla Inc. and Toyota Motor Co. But to win the backing of Manchin, companies will have to comply with tough new battery and critical minerals sourcing requirements that could render the credits useless for years for many manufacturers. Not all manufacturers stand to benefit from the credit. New cars that cost more than $55,000 and $80,000 for pickups and SUVs won’t qualify for the credits.
— Renewable energy
Solar company Sunrun Inc., energy storage and software provider Stem Inc., and hydrogen and fuel cell company Plug Power Inc. stand to benefit from generous tax credits in the bill. Nuclear reactor operators such as Southern Co., Constellation Energy Corp., Public Service Enterprise Group Inc. and Energy Harbor Corp. also could see a boon from a $30 billion production tax credit for nuclear power providers.
— Oil companies
Oil and gas got a boost alongside newer energy sources. The bill, which could mandate more federal oil and gas lease sales and boosts an existing tax credit for carbon capture, won praise from companies such as Exxon Mobil Corp. and Occidental Petroleum Corp. The legislation creates a new 10-year product tax credit for hydrogen production that rises to as much as $3 per kilogram depending on carbon intensity.
— Medicare, Obamacare enrollees
The final bill caps out-of-pocket costs for seniors’ prescription drugs at $2,000 a year and allows Medicare to negotiate the prices on 10 medications four years from now. The bill avoids a large January increase in Obamacare premiums for many middle income people by extending subsidies for three years.
— Deficit hawks
Manchin negotiated $300 billion in deficit reduction into the bill, the first major effort by Congress in 11 years to reduce the difference between how much the country spends versus how much tax revenue it takes in. The deficit cuts are minor compared to the $24 trillion national debt but hawks say it’s a start.
— The IRS
The Internal Revenue Service will get an influx of $80 billion over the next decade to expand its audit capability and upgrade technology systems after years of being underfunded.
The GOP was confident they had beaten back Biden’s tax and climate agenda and were stunned in late July when Schumer and Manchin announced a deal. While still the favorites to gain seats in the midterm elections, passage of the bill is a major setback for the GOP’s policy aims. It does, however, give them a new issue to campaign on in the fall campaigns.
— Pharmaceutical companies
The bill allows Medicare for the first time to negotiate with pharmaceutical companies on drug prices, a change that Congress has been discussing for decades with limited success, in part because of the drug lobby’s power. The pharmaceutical industry was able to score a partial victory after the Senate parliamentarian blocked a portion of the bill that would have capped price increases for drugs in the commercial market. Drug-makers will likely offset some of their reduced revenue from Medicare negotiations with higher prices for patients with private insurance.
— Tech companies
Technology companies are set to bear the brunt of the two major tax increases in the proposal — a 15% minimum tax on financial statement profits and a new levy on stock buybacks. Corporations like Alphabet Inc.’s Google and Meta Inc.’s Facebook have both been able to deftly use the tax code to cut down on the taxes they owe, while still being profitable. The minimum tax is designed to increase levies on companies that report large profits to shareholders, but can claim many deductions and credits to cut their IRS bills.
— The SALT caucus
The legislation does not include an expansion of the $10,000 cap on the state and local tax deduction, or SALT. The omission is a blow to residents of high-tax states in the Northeast and West Coast, and Reps. Josh Gottheimer of New Jersey and Tom Suozzi of New York, who led the effort to increase the size of the write-off.
— Bernie Sanders
The $437 billion in spending is a far cry from the $6 trillion that progressives, led by Sen. Bernie Sanders, envisioned at the start of Biden’s presidency. The bill excludes all proposals for new social programs, including child care, tuition-free college, housing spending and an expanded-child monthly child tax credit.
Senate Democrats on Sunday passed a sweeping health care, tax and climate change bill that will allow Medicare to negotiate prescription drug costs—a significant political win as the party tries to send a message before the midterm election that it is delivering on its promises.
The drug price plan is the centerpiece of the Democrats’ bill, the Inflation Reduction Act of 2022. The measure would also establish incentives to combat the climate crisis, impose new taxes on corporations and provide $4 billion for the Bureau of Reclamation to combat drought in the West—a last-minute addition.
The bill, approved via a fast-track legislative procedure that didn’t allow for a Republican filibuster, passed on a 50-50 vote, with Vice President Kamala Harris breaking the tie.
No Republicans supported the bill. It will now go before the House, where a vote is expected Friday.
Before passage, senators slogged through dozens of unsuccessful votes on amendments put forward mainly by Republicans to try to stop the bill or at least make it politically difficult for Democrats.
Republicans succeeded in killing one provision that violated Senate budget rules. It would have capped the price of insulin at $35 a month in the private insurance market.
President Joe Biden and congressional Democrats sorely need the legislative victory as they head toward the midterm elections, which traditionally favor the party out of power.
The package comes at the end of a remarkably productive sprint for the closely divided Senate. In recent weeks, the chamber has voted for a bipartisan gun bill, a boost for semiconductor manufacturing and aid for veterans exposed to toxic burn pits.
The Medicare drug negotiation policy—which Democrats have been pushing for nearly two decades—would mark a significant accomplishment that is likely to be popular with voters who are eager to go after drugmakers.
It amounts to the most substantial change in health care policy since the Affordable Care Act was passed in 2010. But it will initially have a limited impact on the pocketbooks of the nearly 64 million seniors in Medicare.
Negotiations between Medicare and drugmakers wouldn’t start until 2026, and would at first be limited to 10 drugs, adding more over time.
Sen. Bernie Sanders, I-Vt., a longtime proponent of Medicare price negotiations, called that portion of the bill “pretty weak.”
But Democrats rejected his amendment Sunday to strengthen the Medicare provisions.
Under the plan, Medicare will be able to negotiate over some of the most expensive drugs on the market, saving the federal government an estimated $288 billion over a decade, according to the nonpartisan Congressional Budget Office.
Likely targets for negotiations include Eliquis, an atrial fibrillation medication used by well over 2 million Medicare beneficiaries; the diabetes drug Januvia, the prostate cancer drug Xtandi; and the rheumatoid arthritis drug Orencia, according to industry players who are tracking the legislation. That list could change if pricier drugs enter the market in the next four years.
Chris Condeluci, founder of CC Law & Policy and a former staff member for Senate Finance Committee Republicans, predicted negotiations would not have a significant impact on the vast majority of Medicare beneficiaries, because most don’t use the most expensive drugs and are therefore unlikely to see direct savings.
“Unless your premiums go down, it doesn’t matter if Medicare is spending less” overall, he said.
But the bill would also cap Medicare beneficiaries’ out-of-pocket drug expenses at $2,000 per year, a policy that could help the approximately 1.4 million enrollees who hit that amount each year, according to the Kaiser Family Foundation.
Drugmakers generally like the out-of-pocket cap because the federal government will pick up the tab after patients spend the maximum.
The measure would also impose a cap on drugmakers’ price increases, though Democrats had to scale back the inflationary cap on Saturday when the nonpartisan Senate parliamentarian ruled that it didn’t adhere to Senate rules.
The inflationary cap isn’t a huge hit for the pharmaceutical industry because “companies have been self-policing,” said Ipsita Smolinski, a health policy adviser and managing director of Capitol Street, a research and consulting firm.
“They know they’d be on the front page of The Wall Street Journal or The New York Times if they obnoxiously price hike their products,” she said.
But drug manufacturers have strongly fought negotiating their prices with Medicare. Drugmakers and Republicans warn that allowing negotiations would stifle innovation of new drugs that pharmaceutical companies suspect would be affected. They also say the prospect of negotiations could prompt drugmakers to charge more when drugs first come on the market.
Medicare was barred from negotiating drug prices in 2003, with the establishment of the Medicare Part D drug program. The ban essentially allows pharmaceutical companies to set their own costs for Medicare, even though other government programs, such as Veterans Affairs, may negotiate for lower prices.
Drugmakers once had one of the most powerful lobbying groups in Washington, and still lead the pack in terms of spending to influence lawmakers. But their political power has waned in recent years amid high-profile price hikes, such as former Turing Pharmaceuticals Chief Executive Martin Shkreli’s decision to raise the price of one older drug by 5000%.
The legislation is a fraction of what Democrats had originally hoped to enact—a $3.5 trillion proposal that would have rewritten much of the nation’s social safety net, including home health care, child care and universal pre-K programs. That effort ended when Sen. Joe Manchin III, D-W.Va., said in December he would not go along with such an ambitious plan.
But after secret negotiations between Manchin and Senate Majority Leader Charles E. Schumer, D-N.Y., they resurrected portions of the bill last month.
The bill also seeks to address climate change. In an attempt to reduce emissions, it offers incentives for consumers to buy energy-efficient appliances and cars, and for manufacturers to make such products. According to Democrats, the climate policies would reduce emissions by roughly 40% by 2030.
About $9 billion would go to consumer home energy rebate programs. Lower- and middle-income people would be eligible for a $4,000 tax credit for buying a used clean car and up to $7,500 for buying a new one. Billions more would be spent to accelerate U.S. manufacturing of solar panels, electric vehicles and other clean products.
Finally, the bill would impose new taxes on wealthy corporations and their stock buyback programs—and would send new funding to the Internal Revenue Service, which the agency says it will use to crack down on wealthy tax cheats.
Avalara Inc., a leading provider of tax compliance automation for businesses of all sizes, today announced it has entered into a definitive agreement to be acquired by Vista Equity Partners, a leading global investment firm focused exclusively on enterprise software, data, and technology-enabled businesses, in partnership with institutional co-investors.
Under the terms of the agreement, Vista will acquire all outstanding shares of Avalara common stock for $93.50 per share in an all-cash transaction valued at $8.4 billion, inclusive of Avalara’s net debt. The per share purchase price represents a premium of 27 percent over the Company’s closing share price as of July 6, 2022, the last trading day prior to media reports regarding a potential transaction.
Founded in 2004, Avalara’s success is built up on an extensive partner network; large tax content data and repository to help customers stay up to date on dynamic tax rules and regulations; and its cloud-native, end-to-end multi-product tax compliance portfolio. In partnering with Vista, Avalara will look to build on its successful platform by refining its go-to-market strategy, expanding its international workforce, streamlining its systems architecture, and continuing to pursue value-accretive M&A opportunities.
“For nearly two decades, Avalara has ambitiously pursued its vision to automate global compliance, making tax less taxing for businesses and governments around the world. As a leader in this category, we believe our continued investment in innovation and experience is exciting for our customers, partners, and employees. We are pleased to partner with Vista and will benefit from their expertise in enterprise software as we build and improve upon our cloud compliance platform,” said Scott McFarlane, co-founder and CEO of Avalara.
“Vista has built a reputation as a preferred partner for founder-led, next-generation software companies,” said Monti Saroya, co-head of Vista’s Flagship Fund and senior managing director. “We look forward to working with Scott and the entire Avalara team to advance their vision and continue delivering innovative solutions to customers.”
“Avalara is a mission-critical platform serving customers in a variety of end-markets, including retail, manufacturing, hospitality, and software,” said Adrian Alonso, managing director at Vista. “Avalara’s solutions, its commitment to product innovation, and its network of extensive partner integrations, resellers, and accountants make it a true leader in the space.”
The transaction, which was unanimously approved by the Avalara Board of Directors, is expected to close in the second half of 2022, subject to customary closing conditions, including approval by Avalara shareholders and receipt of regulatory approval. Closing of the transaction is not subject to a financing condition.
Upon completion of the transaction, Avalara’s shares will no longer trade on the New York Stock Exchange, and Avalara will become a private company. The company will continue to operate under the Avalara name and brand.
Goldman Sachs & Co. LLC is serving as exclusive financial advisor to Avalara, and Simpson Thacher & Bartlett LLP and Perkins Coie LLP are acting as legal counsel.
Kirkland & Ellis LLP is acting as legal counsel for Vista.
By Katharine Gemmell, Bloomberg News (TNS)
PricewaterhouseCoopers LLP was fined £1.75 million ($2.1 million) by the UK’s audit watchdog over failings in a 2017 audit of BT Group Plc, which was hit by a massive fraud at its Italian unit.
The Financial Reporting Council also handed partner Richard Hughes a £42,000 penalty for his role on the audit. The fines were reduced by the regulator after admissions and “early disposal.”
Both PwC and Hughes admitted the breaches which were “made following the identification of a fraud in its Italian operations in 2016,” the FRC said in a statement Monday.
The scale of the BT Italy scandal was such that in its 2017 financial statements BT disclosed adjustments of approximately £513 million. The company said at the time it was duped by a sophisticated deception orchestrated by a few employees and missed by its long-time accountant PricewaterhouseCoopers.
The sanctions in the case “will serve as a timely reminder to the profession,” Claudia Mortimore, deputy executive counsel at the FRC, said.
“We are sorry that aspects of this audit were not of the required standard,” a spokesperson from PwC said. “The FRC’s finding relates to a narrow element of the audit.”
PwC was also fined almost £5 million pounds in June for a series of poor audits of two UK construction companies, as the regulator continues to crack down on audit failings by the Big Four.
The UK is bringing in sweeping audit reforms aimed at reining in the dominance of the largest accountancy firms and cleaning up the industry following a string of high-profile scandals.
There’s one type of tax-qualified retirement plan designed especially for self-employed individuals. The Keogh plan—named for the Congressman who spearheaded the legislation approving the plan—isn’t the hot commodity it was back in the day. But this is still a viable option for sole proprietors to consider.
Compare the benefits of a Keogh plan to other alternatives like SIMPLEs, SEPs and solo 401(k) plans.
Background: You can adopt either a defined contribution Keogh plan or a defined benefit Keogh plan. As you might expect, the rules for these variations generally mirror those of traditional defined contribution and defined benefit plans, including annual limits on contributions. Let’s take a closer look.
Defined contribution Keogh: You have plenty of leeway. The maximum contribution for 2022 is equal to the lesser of $61,000 or 20% of earned income (more on this later).
Defined benefit Keogh: The plan may provide an annual retirement benefit, based on actuarial computations, up to the lesser of 100% of earned income for the three highest-paid years or a specific dollar amount adjusted for inflation. The dollar limit for 2022 is $245,000.
However, watch out for a couple of tax twists. When you compute “earned income” for this purpose, your earnings from self-employment must be reduced by your contributions and one-half of the self- employment tax paid. In addition, the maximum amount of compensation taken into account can’t exceed an indexed annual amount. It’s $305,000 in 2022.
That’s the hard part. Otherwise, most of the other rules for qualified retirement plans are extended to Keogh plans. For example, early withdrawals made prior to age 59½ are hit with a 10% tax penalty on top of regular income tax, unless one of several special exceptions applies. Similarly, you must begin taking required minimum distributions (RMDs) in the year after the year in which you attain age 72 (recently increased from age 70½).
Suppose you have other employees on your staff. In that case, you’re required to cover them under the Keogh plan in the same percentage proportion as you do for yourself. Accordingly, the actual dollars allocated to yourself can exceed the amounts contributed for other staff members. This may appeal to you as opposed to some other qualified plans like a SIMPLE or a SEP.
Also, if a Keogh plan is found to be “top-heavy,” certain minimum contributions must be made for employees. A plan is considered top-heavy if more than 60% of contributions or benefits go to key employees. These rules are complex, so consult your professional tax advisors for more details.
Last point: The deadline for contributions to a Keogh plan for 2022 is your tax return due date, plus extensions, as long as the plan is set up before January 1, 2023. This provides a unique year planning opportunity for self-employed individuals. Do your due diligence if a Keogh makes sense for you.
A Top Technology Initiative Article.
As discussed in last month’s column, the opportunity to connect with many of you at live conferences this year was valuable and insightful. It made me think about your firm’s strategy and technology stacks. While I could have done without the gift of COVID (the gift that keeps on giving), the downtime was valuable.
I could reflect on your sincere questions that were looking for independent guidance. Your questions have reminded me that many of the problems you are trying to solve now are like the problems of the past. And one of the most significant issues is that you can’t find vendors or products that meet your expectations or your fundamental needs. One of my favorite clients is looking for a stack of solutions that will meet the needs of a tax and accounting practice.
Another is looking for solutions for a tax and advisory practice. A new client wanted to discuss the needs of a tax and growing CAS (Client Accounting Services) practice. Consulting engagements have been in larger firms that needed guidance on Tax, Audit, and growing CAS practices. When economic pressures mount, businesses, including CPA firms, look for a better, more profitable, and more efficient & effective way to deliver products and services.
My latest wake-up call hit during the Independence Day weekend. After setting up to play in our town’s parade with the Hutchinson Municipal Band, we were sitting in the sun waiting for the parade to start, and I watched families and groups of all kinds organize at the start of the parade. While we rehearsed our patriotic numbers to play in the parade, I had enjoyed playing traditional favorites.
Then, I started thinking about other favorite songs. Oddly, a 1983 song from the Eurythmics became an earworm. “Sweet dreams are made of this, Who am I to disagree? I travel the world And the seven seas, Everybody’s looking for something.” And then I realized that each of you is looking for your “something.” Some of you have found it, but many have not. Some of us have become very professional at helping clients and managing our practices, and some have not.
A few of you have focused on the client experience, and most have not. Some of you have learned how to manage a practice effectively, enjoy business development, understand business operations management, or manage personnel well, but many have not. We have been watching the fundamentals of business being lost by your clients. Have you lost sight of the fundamentals, too?
What are Fundamentals?
What do I mean by the fundamentals? Try a few of these on for size. For example, hiring and terminating the right people, truly providing excellent client service, managing day-to-day costs for profitability, getting processes (workflow) right to optimize operations, spending the time on personal relationships inside your firm and with your clients, staying informed on regulatory & technical changes, and innovating your delivery models to minimize wasted effort.
It is easy to get caught up doing things the same way, but life and business are changing all around us. So while we can continue doing the same thing, and you’ll likely get better at it, your comfort level will eventually lull you into performing below your optimum level.
A few famous sports stars understood the value of fundamentals. For example, Larry Bird of basketball fame said, “I wasn’t real quick, and I wasn’t real strong. Some guys will just take off, and it’s like, whoa. So I beat them with my mind and my fundamentals.” Michael Jordon said, “Get the fundamentals down, and the level of everything you do will rise.” Vince Lombardi noted, “Excellence is achieved by the mastery of the fundamentals.”
Earl Weaver, coach of the Baltimore Orioles, stated that “the key to winning baseball games is pitching, fundamentals, and three run homers.” Certainly, skill combined with luck doesn’t hurt, but do you note how many successful athletes understand the importance of fundamentals? Fundamentals help us plan our next move. Two of my favorite golf quotes are from Arnold Palmer “Golf is a game of inches. The most important are the six inches between your ears,” and from Ben Hogan, “the most important shot in golf is the next one.” What is your next shot?
Do you have your firm fundamentals right?
It has become apparent (again) to me that you must think about the fundamentals you want for your clients, your team, and your firm in every functional area, from tax to audit to practice management to Client Accounting Services (CAS) to Advisory.
What does it take to prepare and deliver tax returns effectively?
What should the end-to-end experience be for your clients and your firm? Can you describe it?
Have you got a workflow diagram that shows the process?
Have you reviewed your tools and technology stack?
Are there better options in the market?
Where are you wasting time?
What are the bottlenecks when you are in the thick of tax season?
What are recurring issues that you can address?
This year I’ve had many discussions about end-to-end tax workflow. Automating and enabling business development, engagement letters, PBC requests, organizer completion, business trial balances, 1040 workpapers, tax preparation software, review, assembly, delivery, and payment (plus more like extensions and estimates) are steps that all tax practices take. How can you make the steps easier and faster while maintaining quality and accuracy? Are there processes and tools that can help? Yes!
Likewise, for practice management, there are steps that firms have in common. Typical issues include engagement/project progress, due date monitoring, scheduling, time tracking for cost or billing purposes, reporting, profitability, expense management, workflow, document management, eSignature, portals, business development, CPE Tracking, and many more issues are everyday needs. Are there processes and tools that can help? Yes!
By the way, we’ve seen the same thing in audit, CAS, Advisory, wealth management, litigation support, and every other niche offering we have reviewed. Are there processes and tools that can help? Yes!
We’ve found in each practice area that we have reviewed that there are similar needs among firms with no solution able to satisfy everyone’s needs. And what continues to happen is that you are looking for solutions, perhaps an ideal solution, and there is so much inaccurate market noise that it is hard to pick a viable, long-term solution. There is no “silver bullet” to solve the problems, but you can improve the situation.
Brian Tankersley and I are pleased to produce our weekly podcast, The Technology Lab, to cover the numerous available tools. But point solutions, sometimes called best-of-breed, must be integrated into a larger framework or technology stack. It also became obvious (again) this past month that it was time to revise our stack recommendations. While Brian and I have helped many organizations develop their stack offerings, it has become clear that several approaches offered by organizations and consultants are long in the tooth. While they were fine in 2000 or 2010, they don’t fit the 2020s very well. And this realization was a great reminder that innovation must continue, but we must get the fundamentals right.
So, What Do I Do Now?
As I’ve pointed out in prior articles, the teams at Liscio and Suralink have repeatedly taught me about this client experience thinking. Your technology stack (= choices of tools) PLUS workflow procedures make all the difference in everyone’s experience. And as I noted in last month’s column and above, there does not seem to be a magic solution that works for every firm. While there are many good products in the market, you must look for tools and products that fit your firm’s fundamental needs. You don’t want to overbuy or underbuy the capabilities needed.
We will continue to share our evolving understanding of solutions, stacks, and best practices for CPA firms in this column, in our podcasts, and at every CPE event where we speak. Striving for the best client experience, team experience, and firm experience with quality is a fundamental we always try to get right.
The summer is an excellent time to reflect on Ecclesiastes 3:1-8 “For everything there is a season, and a time for every purpose under heaven…” The season is right to return to the fundamentals. Now is “a time to seek, and a time to lose; a time to keep, and a time to cast away.” What is best to keep in your practice, and what needs to go away? For many firms, getting the fundamentals right will help you pick the right platforms, products, and tools to serve your clients best.
Randy Johnston and Brian Tankersley, CPA.CITP, CGMA review OnceAccounting a single hub for accounting firms to manage all of their clients’ books, even on different systems.
By now, your firm is likely feeling the effects of the Great Resignation (or the Great Reshuffle). Many baby boomers are retiring, and millennials and Gen Zers are looking for jobs with more flexibility and work/life balance. While every industry is being impacted, the accounting profession faces a dire talent shortage when the need for solid talent is steadily increasing.
Increasing compensation, focusing on employee well-being, and filling gaps with outsourcing and automation are strategies for overcoming the talent shortage. But have you considered how inefficient processes are impacting your talent?
Let’s look at nine wasteful activities your firm needs to address to improve your odds of attracting and retaining top talent.
Defects include mistakes like transposing numbers, entering incorrect information or not following procedures and quality guidelines. When people enter the wrong information and get the wrong product back, it takes a morale toll.
Using technology to auto-populate trial balances, financial statements, tax returns and other elements of client engagements reduces such errors.
Overproduction happens when people do more work than necessary. Examples include spending significant time on tax returns that will be extended anyway or prioritizing the wrong projects.
Overproduction usually leads to people picking up and putting down work repeatedly, duplication of efforts and frustration.
Waiting is any non-value-added time during which your team members aren’t performing value-added productive work. This could involve waiting on client information or waiting on reviewers.
When people must stop work to wait on a client or things sent to reviewers take forever to come back, people have to waste time relearning or researching where they were when they last worked on the project.
This might take a tiny amount of time on an individual project level, but it wastes a lot of time collectively.
Not utilizing people’s talents
We waste resources when higher-skilled people perform lower-skilled work. This might happen due to poor training, hoarding work or not leveraging technology.
Whatever the root causes, you’ll struggle to retain talent when people want to grow but are forced to do the same low-level tasks repeatedly.
Transporting is waste from passing around paper files and information from person to person instead of utilizing technology to automate workflows and share information.
It’s 2022—new college graduates don’t want to step back in time 20 years to deal with piles of paperwork when they start a new job. That misalignment with everyday life will send them to competitors who invest in modern tech.
Inventory sounds like terminology for the retail industry, but it also applies to a firm’s client engagements. Work-in-process and backlogs in email inboxes create bottlenecks and make it tough to get client engagements across the finish line.
Being pulled in a dozen different directions and dealing with competing priorities due to misalignment at the partner and manager level on what needs to be done and when creates stale inventory. This also negatively impacts the firm because that’s how we get paid.
Motion is the result of going on scavenger hunts for information. People waste time and effort searching through poorly named digital files or digging through poorly organized or overfilled physical files.
All of this leads to wasted time people could spend doing the work instead of searching.
Excess processing is doing more work than the client values or is willing to pay for. Examples include over-auditing or navigating multiple personal preferences of partners.
Spending time managing how people do the work takes a toll because it puts undue pressure on team members to keep it straight and compounds waste.
Negative attitudes, poor morale and refusal to follow firm processes impede progress. If the prevailing mindset across the firm, especially amongst leadership, is “this is how we’ve always done it,” you won’t be able to keep people.
People aren’t interested in being in a firm where they aren’t growing, so you need to cultivate a growth mindset.
Do any of these wasteful activities sound familiar? If so, they’re a big part of why your firm is having trouble attracting and retaining talent. Each of these wasteful activities has a people impact, so solve your process issues and you’ll be well on the way to solving your people issues.
Is your firm ready to stop wasting time on inconsistent and bloated processes?
One doesn’t have to be the loneliest number anymore. For years, sole proprietors weren’t able to choose from as wide a range of retirement plan options as bigger operations could. Or, in the case of a 401(k) plan, the administrative costs would outweigh the potential benefits in the business owner’s eyes.
But the landscape has changed dramatically over time. Currently, you have a myriad of choices at your disposal, including setting up and maintaining a “solo 401(k)” for you—and just you alone—at a reasonable cost.
Basic premise: A solo 401(k) plan works pretty much like a traditional 401(k). For starters, you can elect to defer part of your salary to your account within generous annual limits. For 2022, the maximum deferral is generally $20,500, plus you can tack on a catch-up contribution of up to $6,500 if you’re age 50 or over, for a grand total of $27,000.
This money contributed to the plan is then invested and can grow and compound within your account on a tax-deferred basis.
But there’s more: A business owner may add matching contributions as the employer up to the current tax law limits for defined contribution plans. The total deductible contributions for 2022 can’t exceed the lesser of 25% of compensation or $61,000, increased to $67,500 if you’re age 50 or over. The maximum compensation taken into account for these purposes in 2022 is $305,000.
This unique combination enables you build up a nest egg retirement even if you are getting a late start.
Note that a self-employed individual must make a special computation to find the maximum amount of elective deferrals and nonelective contributions. In figuring the contribution, your compensation is your “earned income.” This is defined as net earnings from self-employment after deducting one-half of your self-employment tax and contributions for yourself. Rely on your professional advisors for guidance.
Of course, strict testing requirements can be a headache for traditional 401(k) plans, but it is usually less of a hassle for solo plans. Notably, a business owner with no other employees doesn’t need to perform any nondiscrimination testing for the plan. Reason: There are no employees who might be receiving disproportionately high benefits.
Typically, a solo 401(k) plan may offer other advantages, such as the ability to borrow from your account or to take hardship withdrawals under extenuating circumstances. If you’ve worked somewhere else and built up savings in a 401(k) or other qualified retirement plan, you can generally roll over those funds tax-free into your solo 401(k). And contributions to the plan are discretionary, so you have more leeway in a year in which the business is struggling.
Finally, be aware you can use a Roth version of a solo 401(k). With this setup, you contribute after-tax proceeds to your account but you’ve secured the ability to take tax-free payouts in the future. Otherwise, distributions from a solo 401(k) plan are subject to ordinary income and the 10% penalty for early withdrawals, the same as a regular 401(k).
The choice is yours: Consider all the possibilities.
LendingClub Corp. released findings from the 12th edition of the Reality Check: Paycheck-To-Paycheck research series, conducted in partnership with PYMNTS.com, on Aug. 1. The Consumer Savings Edition examines the financial lifestyle of U.S. consumers who live paycheck to paycheck, the factors that cause financial distress, and the impact of financial stressors on their ability to manage expenses and put aside savings.
In June 2022, 61% of Americans were living paycheck to paycheck, up from a low of 52% in April 2021 and 55% in June 2021.
Average savings dropped $517 from $11,724 in May 2022 to $10,757 in June 2022.
The biggest rise in paycheck-to-paycheck consumers was in consumers earning between $100,000 and $150,000, up 11 percentage points from May 2022 to 52% in June 2022.
The average consumer stores 11% of their savings in either stocks or bonds, yet half of all stockholders reported that their portfolios recently lost value in the last three months.
An estimated 33.5 million—or 13%—of U.S. consumers spent more than they earned in the past six months.
“What a difference a year makes. Last summer we were all worried about how quickly the economy would recover. Now, as inflation continues its upwards swing, consumers are finding it more difficult to manage spending and are eating into their savings as financial pressures mount,” said Anuj Nayar, LendingClub’s financial health officer. “That said, consumers are not yet slowing down their spending habits, despite the rise in the cost of living. Not only is it going to be difficult for them to handle future emergency expenses, but even foreseen payments like education, student loans, or housing expenses may be harder to balance for the everyday American consumer.”
Today’s Paycheck-To-Paycheck Landscape
Living paycheck to paycheck is the most common financial lifestyle in the U.S., with increasing numbers of high-income consumers now living paycheck to paycheck. In June 2022, 61% of Americans were living paycheck to paycheck, up from a low of 52% in April 2021 and 55% in June 2021.
The highest income brackets have experienced significant upswings in the share living paycheck to paycheck from May to June 2022. The biggest rise in paycheck-to-paycheck consumers was for those earning between $100,000 and $150,000, up 11 percentage points since May 2022 to 52%. Forty-one percent of those earning between $150,000 and $200,000 annually lived paycheck to paycheck in June 2022, up six percentage points from 35% in May. Furthermore, the share of consumers earning more than $200,000 who lived paycheck to paycheck rose 6 percentage points from 30% in May to 36% in June 2022.
How Inflationary Pressures Impact Savings
An estimated 33.5 million—or 13%—of U.S. consumers spent more than they earned in the past six months. Among all U.S. consumers, average savings dropped from $11,274 in May to $10,757 in June, an indication that inflation has had an impact on all consumers’ ability to save.
Paycheck-to-paycheck consumers are more likely to prioritize easy access to funds when choosing where to hold their savings, keeping an average of 70% of their money in banks, digital wallets, or cash. Preference for more diversified portfolios increases significantly among high-income consumers.
When choosing how to save, the average consumer has half of their available savings stored in a bank or digital wallet such as PayPal or Venmo. The average consumer also keeps 11% of their savings in either stocks or bonds, and 20% in education or retirement accounts. Meanwhile, consumers in the highest income bracket allocate an average of 58% of their savings to assets other than cash or funds in a financial institution. Consumers earning more than $200,000 per year invested 28% of their available savings in stocks and bonds, while consumers earning between $100,000 and $200,000 invested 14% of their available savings in stocks and bonds.
The most cited factor influencing how consumers store their savings is ease of access to their money, cited by 46% of consumers who have savings. While quick access is the dominant factor influencing savings preferences among paycheck-to-paycheck consumers and lower income consumers, the preference for diversified portfolios increases significantly among high-income consumers: 31% of consumers earning more than $200,000 annually said having a diversified portfolio is the most important reason for choosing how they store their savings, compared to just 8.7% of those earning less than $50,000 per year.
Recent stock market volatility and inflation have made ease of access to funds more of a priority for financially struggling consumers than for those with higher incomes who may be more able to have a longer-term horizon on their savings portfolios.
New Reality Check: The Paycheck-To-Paycheck Report: The Consumer Savings Edition is based on a census-balanced survey of 3,583 U.S. consumers conducted from June 8 to June 27. The Paycheck-To-Paycheck series expands on existing data published by government agencies such as the Federal Reserve System and the Bureau of Labor Statistics to provide a deep look into the elements that lie at the backbone of the American consumer’s financial wellness: income, savings, debt and spending choices. Our sample was balanced to match the U.S. adult population in a set of key demographic variables: 51% of respondents identified as female, 31% were college-educated and 35% declared incomes of over $100,000 per year.
Financial advisors are starting to be big fans of artificial intelligence (AI)—not only because it can automate administrative tasks like data entry but also because it is starting to have a significant impact on the client-advisor relationship.
“Against increasingly challenging market conditions, AI has the potential to help wealth managers sustain and drive new growth, create operating efficiencies, and transform the customer experience through more hyper-personalized insights and products,” said Scott Reddel, who leads the North American wealth management practice at consulting firm Accenture. “Now isn’t the time to take your foot off the pedal. Firms can overcome adoption speedbumps with continued commitment from management, focused applications that deliver business value, and—perhaps most critically—collaboration across business lines.”
Accenture recently released new research, “AI in Wealth Management: A Financial Advisor Study,” after surveying 500 licensed financial advisors in the United States and Canada earlier this year who work at major wealth managers, banks, insurers, and independent wealth firms.
It revealed that 98 percent of respondents believe that AI is transforming how advice is created for, delivered to, and consumed by clients, and 97 percent believe that AI can help grow their book of business organically by more than 20 percent.
In addition, 83 percent of advisors believe AI will have a direct, measurable, and consistent impact on the client-advisor relationship by early 2024, and that same percentage believe that within the next 18 months, “AI can achieve a level of sophisticated advice and planning that will ultimately leave financial advisors competing with an algorithm for clients,” the study said.
“Ensuring that financial advisors are onboard with using AI-driven insights is a critical ingredient for wealth managers as they explore using AI to transform the client experience,” Keri Smith, who leads Accenture’s Applied Intelligence practice for the U.S. Northeast, said recently in a post on LinkedIn.
Other key findings of the study include:
87 percent of financial advisors would use more AI tools day-to-day and are willing to spend time to learn an AI-based process and tool if there is a clear benefit to them.
More than eight out of 10 advisors believe AI-powered notifications of client life events in real-time would be one of its clearest and measurable benefits; prefer to use AI tools to automate time-consuming and manual tasks; and say AI’s greatest benefit is translating clients’ data into actionable insight for their benefit.
One in five advisors believe AI can help to segment clients to further understand acquisition, growth, and retention goals. They also believe AI can help identify proactive cross-selling opportunities.
But there are some wealth management firms that have not fully jumped on the AI bandwagon.
“Financial advisors are reliant on their firms for technology that allows them to best serve their clients wherever they may physically be and whatever market conditions are like that day,” said Michael Alexander, president of wealth management at global fintech company Broadridge Financial Solutions. “In the fallout from the pandemic, wealth firms are going to face increased pressures to invest in modernizing their advisor technology or risk losing their advisors to firms that already have next-generation wealth platforms.”
A June 2020 survey of 254 financial advisors and planners from the U.S. and Canada found that 51 percent of respondents often think of leaving their current firm for one with better technology tools, according to fintech solution provider Broadridge. In addition, 74 percent of financial advisors wish their firm had access to better technology tools, and 82 percent admit that paperwork detracts them from time spent working with clients.
But even those firms that have taken some steps to act on their AI strategies—from proof of concepts to deploying AI within targeted business units to even scaling it across the entire organization—have encountered challenges, according to the Accenture study.
“For example, half (50 percent) said that their wealth management firms are challenged to act on their AI vision, 55 percent said that their firms’ AI tools and insights are too complicated to use, and more than six in 10 (64 percent) said their firm is taking on too many AI pilots (work-in-progress initiatives) at once in its push to adopt the technology,” Accenture said. “Aim for an approach driven by a clearly defined business strategy, not by the technology. Too many pilots or work-in-progress initiatives could cause financial advisors confusion and frustration. Undertake a single-use case or program to demonstrate the value that could be built to a point of providing real value to the advisor.”
The pace of an AI roll-out should be done in lockstep with a firm’s business goals and with buy-in from their financial advisors, the consulting firm added.
“We recommend multidisciplinary teams to be created and assigned to coordinating the roll-out for their particular work area to seek best results,” Accenture said in the study. “Wealth management firms need a ‘smart deployment’ model so there is alignment between the firm’s pace of innovation using AI in relation to the rate of adoption, use, and value they aim to realize across their business operations. Multidisciplinary, in-house teams are likely to be more familiar with these specifics and, therefore, best suited to manage this work.”
You’ve been looking at your firm’s website for years. You’re tired of it. But do you simply redesign it to a more current look and feel, or do you rebuild it? Here are the pros and cons of each. Plus, a series of questions you can use to determine which strategy you should undertake.
Website Redesign Pros and Cons
A website redesign keeps the site’s fundamental elements in place and simply changes the look and feel. You may choose to do this when you’ve undergone a brand change. Or it may require a more current look and feel to avoid looking dated when compared to competitors.
Communicates your firm’s brand, values, and mission clearly
Uses current design trends, demonstrating attention to target-market requirements
Increases usability for visitors
Showcases new products, services, and industries in a new way
Upgrades tech to increase site ranking
Improves site reach to new visitors
Costs less than and requires a shorter timeframe than a rebuild
Poor content structure and organization will still exist
SEO performance may not increase
Another redesign needed again in a year or two
Doesn’t improve functionality, but may enhance the user experience
Limited project scope
Website Rebuild Pros and Cons
When rebuilding a site, you’re not confined to look and feel. It often requires a review of existing technology, databases, code, and user experience. If you were to redraw your website’s marketing strategy, would it look different than the one you have today? If so, a redesign is in your near future.
Paul Cookson’s quote summarizes it, “Great web design without functionality is like a sports car with no engine.”
Remedies poor site structure
Boosts SEO performance and overall site ranking
Improves user experience
Applies current technology integration
Reduces the need for a redesign for a few years
Enhances technology to meet client and industry needs
Limitless project scope
Takes longer than a redesign
Costs more than a redesign
Increases the chance for scope creep and a delayed launch
How to choose?
Consider these items to help you determine if you need a website redesign or a rebuild. You can download the chart for future reference.
Content conversion rates are dropping.
Reduces sales and leads.
Mobile visitors leave the site quickly.
Google ranking has gone down, consistently.
Adding new site content is cumbersome.
In the past, the site was attracting visitors, but not as much today.
The last website design update was over two years ago.
We have a limited budget.
You haven’t’ updated the site in more than a year.
Search engine optimization (SEO) needs have changed.
Undergoing a branding change.
Competitors’ sites are more attractive, drawing in more clients.
There are technical issues such as 404, 500, or 300 errors.
Information architecture (organization of navigation and pages) is outdated.
The business has outgrown the site’s current capabilities.
Website bounce rate and analytics are subpar.
You consistently get negative reviews about the site.
The marketing channels you’re using are incompatible.
Web server overload causes crashes, turning visitors away.
The site no longer supports the marketing and sales strategy.
The site doesn’t support current CMS and HTML5 integration.
Your site host is no longer able to support the site.
The current site no longer supports technology you want to integrate, i.e., Zapier, CMS, SalesForce, Portals, etc.
Remember to work with an experienced accounting website designer before making a move in either direction. Not all designers understand the nuances of accounting websites, nor their unique SEO and user needs. The Association for Accounting Marketing has several consultant members that specialize in this area.
Randy Johnston and Brian Tankersley, CPA.CITP, CGMA review Guilded, a platform to unify crypto financial operations.
The job market will remain strong for the latter part of 2022, research from talent solutions and business consulting firm Robert Half shows.
According to the company’s “State of U.S. Hiring Survey” of more than 1,500 managers, 46% of respondents anticipate adding new permanent positions during the second half of the year; another 46% expect to fill vacated positions and only 8% foresee hiring freezes or layoffs.
Increased Demand for Contract and Early-Career Talent
Forty-five percent of managers across practice areas plan to bring in more contract professionals by year-end—especially in technology (60%) and finance and accounting (54%). In addition, 72% of employers intend to hire more entry-level or early-career professionals.
“Despite talk of an economic slowdown, many companies remain in hiring mode—and professionals with in-demand skills continue to have options,” said Paul McDonald, senior executive director at Robert Half. “In addition to staffing critical functions, employers are increasingly turning to contract talent to stay nimble while keeping projects moving forward and productivity high.”
Top Hiring Challenges and Strategies
According to the research, 88% of managers said it’s challenging to find skilled professionals, primarily due to a lack of qualified talent (38%) and candidates’ salary expectations being higher than what their company is willing to offer (22%).
In turn, employers who have the resources are using a range of recruiting tactics to win over skilled workers:
46% are increasing starting salaries.
34% are providing signing bonuses.
33% are offering remote options.
31% are evaluating candidates outside of their company’s geography and allowing new hires to live anywhere.
28% are loosening education, skills, or experience requirements.
Employers Brace for More Quits
More than half of managers (51%) reported an increase in voluntary turnover within their department in the last year. And nearly eight in 10 (78%) are concerned about more employees quitting. Those in marketing and creative (84%) and finance and accounting (79%) are most likely to worry about resignations from their team.
McDonald noted, “As long as the job market favors workers, staff retention will continue to be a big concern for businesses. Doubling down on employee wellbeing, empowerment and development initiatives can go a long way toward building staff satisfaction and loyalty as the market fluctuates.”
The online survey was developed by Robert Half and conducted by an independent research firm from June 17 to July 14, 2022. It includes responses from more than 1,500 managers with hiring responsibilities in finance and accounting, technology, marketing and creative, legal, administrative and customer support, and human resources at companies with 20 or more employees in the U.S.