Wednesday, September 20, 2017

How to prevent a client’s life insurance policy from expiring prematurely

I recently met a senior partner at a small CPA firm who was adamant about letting me know he never gets involved with a client’s life insurance, almost as if it were taboo to do so. I say to him and to others of a similar mindset: Since you are your client’s most trusted advisor and meet with your client at least once a year, you are in the best position to alert your client to the actions they need to take to prevent their life insurance from expiring years earlier than anticipated.
For those who purchased a life insurance policy between 1983 and 2003, there’s a 45 percent chance they purchased a “flexible premium/universal life” policy. Unlike its more expensive predecessor, “whole life insurance,” flexible premium life insurance was not guaranteed to last for the rest of one’s life.
Today approximately 23 percent of these policies are expiring prematurely due to reduced, sustained interest rates and neglect on the part of the amateur trustee. Usually a client’s eldest son or daughter who wasn’t aware that life insurance needed to be actively managed just like any other stock, bond or real estate portfolio. The American Bar Association referenced this situation in a Flagship book it published earlier this year, “The Life Insurance Policy Crisis.”
A recent Harris poll found that 65 percent of the insurance-buying population mistakenly thought the price initially established with an insurer for a universal life policy was set in stone and would last for the insured’s entire life. However, 70 percent of this group hasn’t reviewed the performance of their life insurance portfolio, including their expiring term policies, for more than 12 years. Lastly, over 90 percent of the trustees of all irrevocable life insurance trusts and special needs trusts are managed by the insured’s eldest son or daughter acting as the “amateur trustee,” often to avoid paying a fee to an institutional trustee. While these amateur trustees may be well intentioned, they rarely if ever have the skills or knowledge to do what’s in their beneficiary’s best interest, primarily because no one is advising them what needs to be done.
To make matters worse, many insurers are now exercising their contractual right to increase the internal cost of insurance, or COI, further exacerbating an already deteriorating situation for many insureds and their beneficiaries.
Why haven’t CPAs focused on this insidious growing problem that can so adversely affect the families and businesses they’ve been protecting for years? Why do many choose to draw the line at providing guidance concerning a client’s life insurance portfolio, when their values exceed upwards of 40 to 50+ percent of a client’s net worth?
There are many reasons why accountants have decided against including the subject of life insurance when counseling their clients about various financial matters.
Perhaps it’s the complexities and unique workings of a product many CPAs may not fully understand nor have the resources in place to refer a client to. Perhaps many accountants are under the misimpression that the agent or broker who sold their client a life insurance policy, or the insurance company itself, was monitoring the policy to make certain it would remain in force. However, that’s not the case. The agent is contracted with and obligated to the insurance company, not the insured. It’s the agent’s or broker’s job to merely market and deliver the insurance policy to customers. It’s the insurance company’s responsibility to merely provide coverage and an annual statement, not to manage the policy. Putting that aside, the insurer benefits significantly when a policy lapses, as it can keep the premiums and never have to pay a death claim.
It’s the responsibility of the insured, owner or trustee to manage the performance of their life insurance policy, but most aren’t aware there is an underfunding problem or an expiring term life insurance policy that requires attention. That’s where a client’s CPA can advise that the sooner a problem is discovered and addressed, the more options the client will have available, and the less costly it will be to fix the problem.
The accountant should first determine if the client’s policy is a non-guaranteed flexible premium universal policy, and if so suggest the client retain a trusted independent insurance consultant or their former agent or broker to order and review the policy’s “historic projection” to determine how much longer the current contract will remain in force based on the current and past premiums paid. They can then determine how much in additional premiums will be necessary to keep the policy in force for the duration desired.
There are three variables attributable to any universal policy: death benefit, premium and duration. Below are several alternatives to obtain the desired effect using a combination of options:
1. Clients can pay a higher premium to keep the same death benefit in force for a longer duration.
2. Clients can reduce the death benefit to maintain the same premium to keep the coverage in force to a specified time period.
3. Depending on the clients’ health, they can purchase a new policy, with various updated benefits as well as the ability to extend their guarantees until a later date.
4. If over age 70, they may be able to sell their life insurance policy as a life settlement in which case they may receive more than if the policy was merely surrendered for its cash value
5. An arbitrage strategy, where all or part of an existing life policy is sold in conjunction with the purchase of an additional life policy, at a reduced cost.
For more information, see this article in the August 2017 New York State Society of CPAs’ Tax Stringer publication.

Tuesday, September 19, 2017

IRS criminal investigators hurt by budget and staff cuts

The decreasing budget and staffing of the Internal Revenue Service’s Criminal Investigation unit are leading to a decline in the number of cases that special agents are able to handle, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, pointed out that since FY 2011, reductions in staffing and funding for Criminal Investigation activities contributed to a decrease in the number and size of CI field offices throughout the country. For fiscal year 2016, the unit’s budget was approximately $576 million, down from $586 million in fiscal years 2015 and 2014, and $593 million in fiscal years 2012. Since FY 2012, the attrition of field special agents has also led to a decline in the number of cases initiated and completed by CI. In FY 2016, the unit initiated 3,395 cases, an overall decrease of 34 percent compared to the 5,125 cases initiated in fiscal 2012.
The percentage of cases initiated from functions within the IRS has decreased 5 percent from fiscal year 2012 to FY 2016. On the other hand, the percentage of cases initiated from the U.S. Attorney’s Offices and other government agency sources rose, representing 64 percent of the 3,395 cases initiated.
Overall, field special agents have consistently needed to maintain an average of 5.30 cases apiece, including international cases. In FY 2016, international cases that resulted in sentencing improved approximately 33 percent from FY 2012.
TIGTA identified a trend of special agents taking longer to turnover cases because of the extra time it takes for special agents to determine whether a case has prosecution potential. In FY 2016, it took an average of 540 days (or 1.5 years) to determine there was no prosecution potential, while it took an average of 422 days in FY 2012.
The head of CI contended the unit is using its resources wisely. “CI has pursued strategies to maximize the impact of our resources through conduct of investigations and support of the resulting DOJ prosecutions,” wrote IRS Criminal Investigation chief Don Fort in response to the report.
He noted that the unit has ensured that 70 percent of its direct investigative time is spent on tax-related charges. “CI’s 90 percent or higher prosecution referral and conviction rates, among the highest in federal law enforcement, further maximizes the impact of CI resources to help ensure the integrity and fairness of the U.S. tax system.”

Monday, September 18, 2017

Increasing the CPA pipeline through early-stage accounting education

Developing a pipeline of CPA candidates is critical, now more than ever. In July, the American Institute of CPAs responded to this need by announcing the acquisition of the Accounting Pilot and Bridge Project (APBP), a training program developed by Dr. Dan Deines of Kansas State to bring higher-quality accounting curriculum to high school educators across the country. The overall goal is to expand the number of state societies educating high school teachers so that they can begin teaching early-stage accounting fundamentals in the classroom.
Still, despite all-time highs in college-level accounting program enrollment, the number of candidates taking the CPA Exam has remained flat over the past five years. And even though last year’s exam numbers showed signs of life — participation was up 9 percent, according to NASBA’s 2016 Candidate Performance on the Uniform CPA Examination – Jurisdiction Edition — these numbers should be taken with a grain of salt, due to the significant exam changes that went into effect in April.
How can the industry increase the number of CPA Exam candidates on a year-over-year basis? The answer is simple: Broach the topic early and often while candidates are still learning the ropes.
Considering the amount of time it takes to study for all four parts of the CPA Exam — on average, 300-400 hours — early awareness can only benefit candidates and, ultimately, the profession. If a college freshman or sophomore accounting student hears about the laborious process of earning a CPA credential after graduation, they would likely understand the importance of adopting exam-specific concepts sooner rather than later. Most students know whether accounting is their calling during their first few college years — based on family background or a specific interest in numbers — so being able to hear about the required steps and what it will take to succeed on the CPA Exam is to their advantage.
Furthermore, accounting professors are active participants in the community, and often, their work sparks students’ passions for careers in accounting, making professors best equipped to prepare the next generation of accountants for what lies ahead. If accounting professors incorporated a handful of exam questions — or expanded course curriculum to include exam specifics — during each required course after the intermediate level, student confidence in their ability to complete the exam changes drastically.
How can professors help change the narrative? Here are a few high-level ideas to incorporate into classroom dialogue:
  • Make it personal. Share real life stories with students that showcase positive experiences (achievements/victories) about the education to profession transition, not just war stories of the exam.
  • Gold-standard license. Explain the strength of the CPA credential and why it’s been the “gold standard” for decades.
  • Now or later: Discuss the short- and long-term rewards of completing the exam and being able to fully focus on their career as close to graduation as possible.
There are a number of accounting programs — St. John’s University and the University of California at Berkeley, to name a few — out in front of the CPA candidate pipeline issue that are already incorporating concepts at a baseline level. The starting pointing is easy: Speak up! Mentioning “The CPA Exam requires X, Y and Z and you will see 1, 2 and 3” is the most important step in the process. Planting the seed and managing expectations up front will not only allow professors to add to their expertise, but also increase their level of interaction with students.
There are a couple of easy ways that professors can add to existing accounting courses. Students in intermediate courses learn about a variety of topics they will also encounter on the CPA Exam and throughout their career — for example, the statement of cash flows. Based on the difficulty of the subject matter, students often welcome additional resources, such as video lessons and memory aids. By pairing these resources with exposure to CPA Exam questions, students are introduced to a difficult concept early on, helping expand their abilities to succeed on the exam.
In addition, the CPA Exam went through drastic changes in April, with the primary goal of ensuring that the exam better reflects the skills required of a newly licensed CPA. A great example of immediate application in the classroom has been in auditing courses and the new “Document Review Simulations.” Professors are now able to present the new question types to students, while also building bridges to the topics taught to the CPA Exam.
The reality is that the CPA community hasn’t seen a flat CPA pipeline like this before. There may not be a direct solution to the problem because there will always be changes that ultimately impact any industry. That said, there is a clear opportunity to bridge the concepts of the exam with the standard accounting curriculum. Encouraging early knowledge of the CPA Exam will provide students with a deeper understanding of the higher-level skills needed to make the transition from academia into the accounting business world as a CPA. After all, if students are already required to take a number of accounting course credits, why not integrate the concepts and questions that they’re more likely to be asked during the early stages of their career?
Increasing the CPA pipeline through early-stage accounting education

Friday, September 15, 2017

FASB sets up web page for implementing new standards

Courtesy of GASB
The Financial Accounting Standards Board has created a new web page to help companies implement its new standards.

FASB has been rolling out a series of important new accounting standards in recent years, including revenue recognition, leasing, credit losses and hedging, and they are set to take effect over the next few years. Companies have been getting ready to implement them, starting with the revenue recognition standard, which goes into effect next year for public companies. The new web page, Implementing New Standards, includes links to educational materials and implementation guidance for FASB’s major standards about the new standards.
The web page also deals with how FASB handles outreach and implementation assistance. The web page includes links on FASB’s outreach to stakeholders,transition resource groups, and technical inquiry servicefor implementation questions.
FASB has also produced a short video offering a brief overview of FASB’s implementation assistance efforts.

Thursday, September 14, 2017

Talk Accounting rolls out debit cards

Talk Accounting now offers debit cards that connect directly to its accounting app, recording each transaction as it’s swiped. The cards can be white-labeled for firms so accountants can offer the cards to their clients.

Talk Accounting’s app allows users to verbally speak their transactions into their smart phone’s microphone, recording the transaction and inputting it into either QuickBooks or an Excel spreadsheet.
The new cards will be issued by Mastercard, and are electronically connected to the user’s Talk app, recording each transaction as it’s completed.
Rollout of cards for a firm will take about 90 days, Travis Beaulieu, co-founder of Talk Accounting, told Accounting Today at this week’s Accountex conference in Boston, where the company announced the news.

Wednesday, September 13, 2017

Together or alone? Preparing returns in front of clients

A tax preparer advising a client.
Bloomberg News
Is it better or worse to prepare returns in front of clients? Tax pros differ over whether it’s better to have the client present so they can answer questions, or to prepare the return distraction and check their work before sharing it with the client.
“I prepare returns in front of clients most of the time and have for about 50 years,” said Marilyn Meredith, of Michigan-based Meredith Tax Service. “This is the most efficient and most thorough way of preparing returns.”
“We prepare as many tax returns with the client present as possible,” said Enrolled Agent Debra James at Genesis Accounting & Management Services, in Lorain, Ohio. “It enables us to do a higher volume of work, ask questions while we work and get to know our clients better not just on a business level but a personal level – which I believe helps retain clients.”
“My goal is to complete the return with the client during our scheduled appointment,” added Marilyn Heller Ayers, a CPA in Brick, N.J. “During our conversation, I usually learn important facts that affect the return or will affect it in the following year.”
“My preference is to prepare returns as part of a face-to-face interview,” said Jeff Gentner, an EA in Amherst, N.Y. “I feel most confident when I sit with the taxpayers and do a thorough interview while entering data. I also know that my clients want to leave with results, as well as knowing that it is complete.”
“Having my clients sitting at my desk from start to finish is my preferred method of preparation,” said Kathy Hallford, an EA at Kathy’s Tax Service in Gilbertown, Ala. “Time is saved when questions can be asked, answered and documented all at the same setting.”

Time to double-check work figures is top of mind for preparers who don’t prepare returns in front of clients. “I’ll give an estimate of refund or amount due in most circumstances, but as a rule I take the return and process it in a few days and get it back to the client,” said Joel Grandon, an EA in Marion, Iowa. “It gives me a chance to review the final product and I find I make fewer errors when I’m not trying to carry on a conversation and enter data at the same time.”
Said Nicole Green, an EA at NGG Tax Group in Easton, Mass., “I prepare less than 1 percent of my returns face to face. As a solo practitioner, I want to be able to prepare the return, put it down and then review at a later time for possible errors.”
CPA Brian Stoner, in Burbank, Calif., will sometimes prep in front of clients “if the client is rushed and needs to file that day or has a pressing issue, but I prefer to not handle the returns that way,” he said. “If I do prepare the returns that way, I’ll review the returns then and discuss with the client before we sign the e-file forms.”
A recent practitioners’ survey by the National Society of Accountants revealed that slightly fewer than half of respondents (45.7 percent) collect client data in person to prepare a return. The survey didn’t specify actually preparing the return in front of the client.
“Not my style,” said Morris Armstrong, an EA and registered investment advisor with Armstrong Financial Strategies in Cheshire, Conn. “I interview a client, collect documentation and an organizer, review it and make notes and then do the return in private.”
Said Chris Hardy, an EA in Suwanee, Ga., “Most times clients don’t have all the necessary items ready to complete a return even if they complete the organizer.”
“I used to do it all the time. I was doing a quick and dirty calculation before they left anyway, to give them an idea of what they would owe or get back,” recalled EA Terri Ryman, of Southwest Tax & Accounting in Elkhart, Kan., whose husband asked why she didn’t just finish the return in front of the client and probably get paid faster. “Very seldom would it be incorrect when I reviewed it later that day before transmitting,” Ryman said.

EA William Keats of Keats Tax & Financial Service in North Merrick, N.Y., prepares about three-quarters of personal returns in front of clients. “Estate returns and corporation returns, as well as payroll and sales tax returns, are usually dropped off or mailed in to me,” he said.
With complex returns such as those corporations or partnerships, EA Laura Strombom at All About Numbers in Stockton, Calif., gets the information for the entity or complex portion of the return on a 1040 either through her bookkeeper or from the client, “and then we review their books and ask questions before going with the books on a return,” she said. “I then prepare the return outside of the client appointment … and then present the return to them in the appointment.”
Those trained in some chains were used to the face-to-face. “Ninety-five percent of the returns I prepare are done in front of my clients,” said Frederick Reynolds, an EA in Utica, N.Y. “I work for H&R Block, and that’s just the nature of the beast.”
“The first year that I did taxes was at H&R Block, in 2000,” Armstrong recalled. “We did do most returns with the client sitting there – and they’d interrupt all the time and ask, ‘What are you doing?’ One person wanted to watch everything and have everything explained to him so that he could do the returns for his friends … .”
“A key motivation is that by reviewing a return as a whole, without the pressure of the client, there’s a better chance of spotting something else in the big picture that would be beneficial, said EA Richard Ogg at The Master’s Tax & Financial Services in Santa Rosa, Calif. “Another downside is if you are too quick, some clients may wonder why they’re paying the fee that we charge.”
“Preparing returns in front of clients could have a downward pressure effect on fees for preparers,” added Stephen Mead, an EA in Bradenton, Fla. “Time trumps knowledge in [clients’] value equation.”
“I do 80 percent of my clients’ returns in my office while they wait,” said Patrick O’Hara, an EA in Poughkeepsie, N.Y. “These are clients that we can prepare, print and review returns within an hour or less. Many of my peers disapprove of this model,” he added, “but I believe it’s a more efficient use of my time and I’m able to get paid on the spot. It’s also a good opportunity to reinforce relationships and ask for referrals or a review of our service.”
“I do prepare returns in front of clients, generally speaking. But I do give them an option to … send it via mail, fax it, scan and e-mail it or we can even do a Skype meeting,” said Theodore Prioleau, an EA at Hunt Valley, Md.-based Teddy The Tax Man and Hunt Valley Retirements. “I find that the more flexible I am, the more options they have, the more they love it.”

Tuesday, September 12, 2017

Why your child won’t be an accountant

Seriously. Your child won’t be an accountant.
Not because your child wants to go into some other profession.
Even if your child loves what you do as an accountant today, is inspired by you and wants to follow your footsteps in the accounting profession, your child won’t be an accountant.
According to “The Future of Employment: How susceptible are jobs to computerisation?” research report from the Oxford Martin School (a research and policy unit of the world-renowned University of Oxford), technology will create the danger of replacing:
  • 94 percent of accountants and auditors;
  • 97 percent of payroll and timekeeping clerks;
  • 98 percent of bookkeepers/bookkeeping, accounting, and auditing clerks; and,
  • 99 percent of tax preparers.
That is scary!
Let us dive a bit deeper into what exactly is in the danger of being replaced by technology. It is not that technology will replace “accountants and auditors.” It is what they do as work that is being examined for possibilities of replacement by technology.
And therein lies the good news.
Interestingly, the American Institute of CPAs has focused its descriptions more on the “impacts” that accountants’ work has on their clients’ lives and businesses. For example, the institute says, “Accounting deals with interpreting and communicating information, which, as interpreted by CPAs, allows executives to make informed business decisions-decisions that help those companies become more successful. ….Accounting links the past with the future. …. A CPA is a trusted financial advisor who helps individuals, businesses, and other organizations plan and reach their financial goals.”
But it appears that the replacement potentials are based not on the AICPA’s description but on some other definitions of the occupations of “Accountants and Auditors” that need serious updating.
Here is how narrowly these accounting profession-related occupations are defined (mainly because accounting professionals were indeed performing the activities and tasks mentioned in these definitions).
According to the U.S. Bureau of Labor Statistics:
  • 13-2011 Accountants and Auditors. Examine, analyze, and interpret accounting records to prepare financial statements, give advice, or audit and evaluate statements prepared by others. Install or advise on systems of recording costs or other financial and budgetary data.
  • 43-3031 Bookkeeping, Accounting, and Auditing Clerks. Compute, classify, and record numerical data to keep financial records complete. Perform any combination of routine calculating, posting, and verifying duties to obtain primary financial data for use in maintaining accounting records. May also check the accuracy of figures, calculations, and postings pertaining to business transactions recorded by other workers.
  • 13-2082 Tax Preparers. Prepare tax returns for individuals or small businesses.
  • 43-3051 Payroll and Timekeeping Clerks. Compile and record employee time and payroll data. May compute employees’ time worked, production, and commission. May compute and post wages and deductions, or prepare paychecks.
Fortunately, there is a key flaw in the calculation of replacement potential projections. The replacement potential percentages mentioned above are based on these narrow (and seemingly somewhat outdated) definitions of what these professionals (are assumed to) do. The AICPA’s “impact-driven” descriptions do not seem to have been fully considered in these projections. This flaw has skewed the replacement potential percentages way beyond realistic estimates, which, fortunately, is a good news!
In my experience of working with accounting professionals day in and day out, they do far more than what is mentioned in these definitions. Their roles are evolving. The positive impacts they deliver on the lives of their clients are also evolving. These definitions/descriptions do not truly capture the new and evolved functions accounting professionals perform.
Hence, the good news is that these high-percentage, grim-looking projections of replacement potential are not truly reflective of the replacement of accounting professionals. At best, these percentages may, somewhat, reflect the replacement potential of what accounting professionals do as described in these definitions. In other words, there are no predictive models to show what future accountants will do that capture the essence of the evolving roles and responsibilities of accountants.
I mentioned that accounting professionals were indeed performing the activities and tasks. They are, increasingly, not performing these activities and tasks, as technology has evolved to do some of them. But, for whatever reasons, the definitions to describe these occupations have not evolved, at least at the same pace as technology has evolved to make a serious dent in what humans did in these professions.
Let's distill what accountants, auditors, bookkeepers, payroll processors and tax preparers did as work: examine, analyze, interpret, prepare, give advice, audit, evaluate, install or advise on systems, compute, classify, record, keep records complete, calculate, post, verify, obtain primary financial data, maintain accounting records, check the accuracy, prepare tax returns, compile and record time and payroll data, compute time worked, compute production, and commission, compute and post wages and deductions, or prepare paychecks.
Now, think how many of these things the software you use at your firm do right now. Take a look at how Blockchain can impact several of these tasks.
Next, think of how many of the tasks you and your people do that are not currently included in the above list.
You now know that all these “definitions and descriptions” do need serious change – like seriously quickly. Do you agree?
Honestly, if your children – mostly Gen Y and Gen Z - are reading the current definitions of these jobs, not only are they getting perplexed (“Why aren’t these tasks being done by technology?”) but they are also getting disillusioned about what you – their parents – are doing as accounting professionals. Your child would not want to do those things that define these occupations. The perceptions of what accountants do are far from reality. And perceptions will drive away new talent from the profession.
It is year 2017. The time has come to more accurately define what accountants, auditors, bookkeepers and tax preparers do. Otherwise, the perceptions caused by these current definitions are extremely potent in their ability to scare the future generations away from the accounting profession. The very same perceptions will make future clients wonder why should they go to accountants if technology ends up doing everything that clients perceive accountants are doing. According to the AICPA’s PCPS Top Issues Survey 2017, “finding qualified staff (at all levels) and retaining qualified staff” are among the top five issues for firms of all sizes. Perception about the accounting profession is surely one of the key causes that have accentuated this talent issue.
Your child won’t be an accountant – certainly not as per the current definitions and descriptions of what “accountants” do.
What should be the new definitions and descriptions?