NAPLIA CPA Alerts
The NAPLIA CPA Alert is published regularly to provide our CPA, Accounting, and Bookkeeping clients with up to date information on topics that may directly impact their business. North American Professional Liability Insurance Agency, LLC makes no warranty to the validity of any third party information provided and/or hyperlinked to from this page.
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NAPLIA in the Boston Business Journal: Cybercrime | As online thievery spreads, so too does demand for insurance
Many business owners...assume they don’t need cyber insurance because they mistakenly think they’re covered under other insurance products. And many don’t understand their risks and what kind of losses they could face. - NAPLIA CEO Gary Sutherland.
SEC more aggressive in seeking hard drives
Document retention and destruction policies, coupled with policies regarding what should and should not be stored on laptops, cell phones, and flash drives are important best practices in minimizing damages in claims faced by CPAs. Computer forensics has elevated to unprecedented levels and is being used by regulators, standard setters, and plaintiffs as a means to demonstrate negligence on the part of the CPA and nonconformity with professional standards. CPAs need to be mindful of these attempts and train their employees on the proper maintenance of records and their related destruction.
Find sample engagement letters at NAPLIA's newly relaunched website
NAPLIA has partnered with leading legal professionals for the development of sample engagement letters that are essential to your practice. As well as, articles and resources for your company's risk management.
Intangibles Targeted in Tax Audits
Many professional liability claims faced by CPAs result from income tax examination changes. Transfer pricing strategies apparently are no exception to the rule. CPAs should strongly consider specific engagement letter language to manage this exposure. In addition, an advanced transfer pricing agreement should be jointly considered by the CPA and the client.
Guidance on adequate disclosure of return positions
The I.R.S is continuing their attack on the adequate disclosing of tax positions on income tax returns. The recent update is important to understand as the 2012 tax filing season is only months away. Penalties assessed against clients resulting from tax filings are one of the more common tax claims faced by CPAs. CPA firms should enforce this understanding on all staff that have tax return preparation responsibilities. A strong tax quality control program has historically proved to be effective in tax claim mitigation. Both the understatement of tax penalty and the tax return preparer penalty may be eliminated or reduced by adhering to the recent update.
First-time penalty abatement - often-overlooked IRS waiver to help your clients
Many professional liability claims faced by CPAs have their origin in tax penalties and related assessments. Numerous programs exist at both the federal and state level to have these penalties abated. CPAs need to be aware of all the programs that may allow for abatement including but not limited to, amnesty programs, voluntary disclosures, and reasonable cause assertions. The link below describes a program in which many CPAs may have little familiarity. This program instituted in 2001may provide much needed relief for many taxpayers.
Active Response to Cyber Attacks Has High Risk
With an increase in Cyber exposures and cyber claims against CPA firms, CPAs need to be aware of the strategies to minimize these risks and ensure that the strategies are legal. There are both national and international laws governing the ways in which firms combat cyber exposures. The article below explains the added exposures that may result from not knowing the laws.
Mitigating CPA Malpractice
Professional liability claims faced by CPAs will never be eradicated, but they can be reduced if solid risk management and constant adherence to professional standards are followed. Follow these techniques to help lessen exposure in the increasingly litigious environment in which CPAs practice.
Password Protection is Essential to Best Practices
Maintaining the privacy and confidentiality of client records is a requirement for CPAs and is enunciated thought out the various codes of conducts governing the profession. Password protection has been a best practice in many firms, but seemingly may not be enough. Common passwords may be a sign of falling below the level care that the public would expect of their CPA. The link below discusses the importance of sophisticated passwords and an increased best practice in elevating damages that can plague a firm caused by privacy and confidentiality breaches.
New financial reporting proposal for going concern gaining steam
Many professional liability claims arise from CPAs not following the standards regarding the proper accounting and disclosure treatment of “ Going Concerns”. The FASB has adopted new requirements which CPAs who are involved in accounting and auditing standards need to be mindful of. While the new requirements are still being finalized and an exposure draft is still forthcoming, the prudent practioner is advised to be proactive and to become familiar early in the process.
Hurricane Sandy relief through retirement plan hardship distributions and loans
Much has been written regarding the exception from the hardship distributions rules resulting from retirement plan distributions and loans that have resulted from Hurricane Sandy. IRS announcement 2012-44 fully addresses the rules governing these hardship distributions and loans. CPAs need to make their clients aware of this relief , but equally as important make them aware of the misconceptions ,and the tax impact of such a distribution. Many professional liability claims originate from the failure to clearly explain and document to clients the projected tax effect of retirement plan distributions.
The article below addresses the IRS announcement and several misconceptions associated with the announcement.
Massachusetts Supreme Court holds that limitation periods may be shortened by contract
Creative Playthings Franchising, Corp v. James A. Reiser, Jr., 463 Mass. 758 (2012)
The Supreme Judicial Court, Suffolk County, Duffly, J., held that limitations period in a contract shortening the time within which claims must be brought was valid and enforceable under Massachusetts law, under certain conditions. A limitations period in a contract shortening the time within which claims must be brought is valid and enforceable under Massachusetts law, if the claim arises under the contract, and the agreed-upon limitations period is subject to negotiation by the parties, is not otherwise limited by controlling statute, is reasonable, is not a statute of repose, and is not contrary to public policy. Nancy Reimer, attorney for LeClairRyan of Boston, stresses the relevance of this ruling for CPA's.
Attorney Reimer suggests Accounts include a provision in their engagement letters limiting the time in which a claim can be brought to 2 years, or less depending on the circumstances of the engagement. Reimer stated, "We typically include clauses like this in letters we draft and have not had any issues with them, but now we have a definitive ruling from the SJC as to their validity." Reimer further clarified that contract limitations are determined on a state by state basis. Although this ruling is great for Massachusetts, not all states concur. Florida, for example, has a statute stating a party cannot limit the SOL period.
IRS Announces 2013 Pension Plan Limitations
The aging population and expanse of retirement plan options now available has resulted in more CPA’s pursuing the specialty areas of retirement planning. The claim exposures of this specialty are both significant and frequent according to major malpractice carriers for accounting firms. At a minimum, CPA’s need to be familiar with the types of plans available and the plan contribution limits. The following link will provide plan limitations for the 2013 year.
Certifying Acceptance Agents - Sample Engagement Letter
An Acceptance Agent is a person or an entity (business or organization) who, pursuant to a written agreement with the IRS, is authorized to assist individuals and other foreign persons who do not qualify for a Social Security Number but who still need a Taxpayer Identification Number (TIN) to process a Form 1040 and other tax schedules.
NAPLIA had developed current resources around the IRS Interim Rules, and Sample Engagement Letter wording essential to this service.
CPA Mobility Law - practicing across State lines
CPA’s need to pay close attention to state registrations for firms, and staff, with professional licenses. Historically, plaintiff attorneys will use the failure to register as an indication of negligence on the part of the defendant CPA. In addition, breach of contract claims can develop if the CPA has implied or affirmed that they were in fact properly licensed. Out of state licensing causes additional dire consequences if there is a failure to become licenses. Many states have or will adopt the provisions of the Uniform Accountancy Act (UAA) which will elevate some of the issues discussed above. The latest state to adopt the UAA is California.
Severance Pay FICA Tax Refunds - back on table
CPA's must constantly stay abreast of court decisions that can impact their clients. A recent Federal court appeals decision, U.S. VS. Quality Foods Inc., allows a recovery of the FICA tax paid on supplemental unemployment benefits. The recent recession caused many employers to pay such benefits and the resulting tax refunds can be significant. Read below to determine if your clients may benefit from this decision.
Lender Comfort Letters - not going away
A continuing source of claims and practice management guidance arises from lender requests from CPA’s. While NAPLIA has developed guidance and sample language to advise policyholders, the A.I.C.P.A has issued guidance in technical question and answer ( TPA ) 9110.19. The guidance is available only to A.I.C.P.A members and can be accessed thru the following:
http://www.aicpa.org/InterestAreas/FRC/Pages/RecentlyIssuedTechnicalQuestionsandAnswers.aspx - TIS Section 9110.19, "Lender Comfort Letters" (Issue Date: July 2012)
CPA’s need to be mindful of the privity laws in their respective states and that third party claim are common. Apparently, these lender requests are not going away and can very well be elevated during recessionary times.
Government Accounting Standards Board - updates
Recent changes have taken place to the reporting standards impacting unfunded pension liabilities for state and local governments. Professional liability claims against CPA’S have historically focused on adherence to professional standards and the fair presentation of unfunded pension liabilities. GASB approved statement # 67 and # 68 are the newest standards with respect to this crucial reporting issue.
Exception to IRA Early Distribution Penalties
IRA distributions, and the exceptions to early withdrawal penalties, are potential claim issues for CPA’s providing relevant advice to their clients. The standard of care, in which CPA ‘s will be measured ,will include the exceptions to early withdrawals from IRA’s. CPA’s need to clearly and timely document their advice to clients regarding these exceptions. The engagement letter for tax preparation should disclaim advice with respect to IRA withdrawals , but include language which indicates that this type of advice can be provide under the terms of a separate engagement letter for tax planning and retirement planning. The link below outlines several of the exceptions to penalties on early IRA withdrawals.
Converting C Corporation to S Corporation or LLC
The decision to convert from a C Corporation to an S Corporation is one that should be exercised with great care. As with all services, the key to risk mitigation is in careful documentation of all discussions, information and services provided. With tax rates in 2012 potentially being lower than they will in future years, careful planning and documenting this advice is critical. The BIG tax may be avoided with careful planning and it can all be minimized. This article offers recommendations for addressing this challenging issue.
U.S. Court test of tax credits
The failure to recommend tax credits or the denial of the credit by the taxing authorities has historically been a frequent professional liability claim against CPA’S. CPA’S as their clients trusted advisor must be diligent in reviewing all tax court decisions which focus on the denial of credits and advise their clients accordingly. Arguably, the standard of care imposed on CPA’S would require an in-depth knowledge of existing credits, expiring credits, and as the article addresses below- denial of credits.
Avoiding Liability when dealing with IRA minimum distribution
Professional Liability claims faced by accounting firms occur in almost every scope of service. IRA distribution planning is no exception.
The IRS regulations are complicated and detailed. Planning should be adhered to in an effort to hold off claims. The death of the IRA owner only further complicates the challenges and also brings in potential third party litigants in the form of beneficiaries. The terms of an engagement letter are between the client and the CPA, not the third party. Care should be exercised in any engagement involving IRA distributions.
Planning Strategies in Wake of the New 3.8% Medicare Surtax
Tax year 2013 is the first year which will provide for a potential income tax surcharge of 3.8% for certain tax payers who have investment income and overall income that exceeds a certain threshold. It is critical from a liability standpoint that CPA’S plan with their clients in advance who may be subject to the additional tax. Both the projected 2013 tax liability should be reviewed and any estimated taxes payments that may be affected.
Self-employed can deduct Medicare premiums, IRS Chief Counsel advises
The IRS has issued Chief Council Advice ( CCA) # 201228037 which clarifies an IRS position that ha previously caused confusion amongst tax professionals. Not only does the CCA present a future planning opportunity, but is also provides an opportunity to amend certain years that are still open by statue.
The failure to advise clients of the need to amend returns still open by statue is a common claim faced by CPA’S. Read this CCA and advise your clients accordingly.
No Escaping Cyber Risk, Companies Warned
According to experts in the field of cyber security , all types and sizes of organizations are prone to cyber exposures and resulting damages. CPA’S may very well be in the mix if they fail to advise their clients of the potential risks and fail to document their conversations of the advice provided. CPA’S need not be the expert in this area, but their clients have different expectations and feel the CPA has a responsibility to inform. While these exposures grow , CPA’S should be proactive by clearly and timely making their clients aware of the potential for a cyber-exposures.
Recently Issued Technical Questions and Answers
The AICPA has issued a technical inquiry and reply ( TPA 9150-30 ) which addresses the report language to be used in a compilation report where in prior period(s) these existed an impairment of independence and in a subsequent period it has been cured ( independence is no longer impaired ). This is an important position since many liability claims against CPA’s will allege violations of independence and now the CPA has an option on providing a description of how the impairment was cured.
“click-through nexus” law held unconstitutional
The nexus rules for sales and use tax imposition are difficult at best to address for companies who use the internet to generate sales. Further, companies with offices in multiple states present even greater challenges. CPA’S routinely are caught in the cross fire and many times are the target of professional liability law suits alleging a failure to advise the client as to the nexus rules in a particular state. The Illinois decision below is a start in reducing these exposures.
Mergers & Acquisitions result in an increasing number of lawsuits.
With CPA and Accounting firm mergers on the up rise, coupled with the pressures to close such transaction, CPA’S must be aware of the threat of legal liability. In addition, firms that advise clients on M&A transactions need to be aware of the recent legislation in such transactions. These transactions tend to be material in dollar amount and often involve employee rights and benefits. The article below illustrates the recent trends.
Social Media for Professionals – understanding the liability
Despite the many advantages of social media, professionals need to be mindful of the many regulatory bodies who have strict rules on client confidentiality . Revealing such confidential information, even if it was not deliberate, will expose your firm to unwanted liability and ethical violations. It’s critical in the firms employee handbook to spell out what is an what is not allowable social media usage.
See NAPLIA’s resources on Social Media, including essential updates to your employee handbook, http://www.naplia.com/social_media/index.shtml
Expanding reach of E-discovery
A recent decision in the area of e-discovery signals an important issue regarding software applications and beats home the point that no technology is risk-free. CPA’s should be mindful of the developments in e-discovery and realize that the playing field is forever changing. In addition, the relationships with software manufactures Needs to be explored thoroughly.
Financial Elder Abuse is Rampant
With the U.S. population aging and the golden years expanding, CPA’s find themselves servicing more and more senior citizens. Unfortunately, there is a risk inherent in this work which results from laws protecting senior citizens from financial elder-abuse. Spouses, children and grand children can very well assert alleged financial abuse by either the CPA or jointly between the CPA and the financial planner. CPA’s should exercise extreme caution in referring financial planners and be diligent in their client selection process regarding senior citizen clients as a result of this growing epidemic referred to as financial elder-abuse.
Regulatory Alert: SEC Independence Requirements Apply to Auditors of Non-issuer Broker-Dealers and Investment Advisers
Auditors of non-issuer broker-dealers and investment advisers continue to be subject to certain Securities and Exchange Commission (SEC) independence requirements, including restrictions on financial and employment relationships, contingent fees and non-audit services. Accordingly, such auditors should not perform bookkeeping services for these audit clients, including maintaining or preparing the client’s accounting records and financial statements unless it is reasonable to conclude that the results of the bookkeeping services will not be subject to audit procedures during the audit.
For more information, refer to the AICPA Audit and Accounting Guide Brokers and Dealers in Securities and the AICPA, SEC and Public Company Accounting Oversight Board websites.
How to Protect Employees' Mobile Devices From Cyber Attacks
The importance of training staff who utilize mobile devices cannot be underestimated. More and more employees are storing sensitive and confidential client data on these devices which can jeopardize the privacy and confidentiality of the data. Firms need to have formal documents in place describe the limitations on storing such data on these devices and be diligent in their training. Major professional liability carriers are reporting an increase in incidents impacting the safety. In addition, the inclusion of cyber policies as part of the repeater of coverage’s is highly recommended.
Evolving Legislation may impact how you handle client data
Malpractice carriers are reporting increased claim activity in the area of cyber threats and breaches of client confidential information. CPA’s are governed by strict confidentiality regulations instituted by state boards of accountancy, the AICPA, state societies, and the internal revenue service to name a few. CPA’s need to be aware of the legislation in place, and new legislation that will affect how they service their clientele. In addition, CPA’s should consult with their malpractice agents and brokers to ensure appropriate coverage is in place in the event of a privacy breach. The link below explains recent legislation impacting the practice of public accounting.
The Evolution of Sales Tax Nexus Expansion Laws
Historically, professional liability claims against CPA’s have increased as a result of taxing authority examinations and investigations. A growing area of interest for state and local taxing authorities has been in the area of nexus rules for both business taxes and sales and use tax. Once the taxing authorities leach on and assert and prove the existence of nexus ( generally either a physical presence by the taxpayer or economic nexus ) the client will seek to be made whole as a result of additional taxes being assessed by the taxing authorities and the CPA may become a target. CPA’s should become aware of the intricate rulings , which vary with each state and consider the following engagement letter caveat as added protection in these types of claims.
Our services are not designed to determine if your organization are subject to filing requirements in other taxing jurisdictions. In addition, as indicated above, we are only responsible to complete the tax returns mutually agreed upon. Our firm is available under the terms of a separate engagement letter to provide services which will determine if such filing requirements exist.
A Cautionary Tale on 529 Tax Rules
529 Plans have been around for some time; however the consequential distribution and rollover rules are becoming more apparent as children of parents who established these funds are beginning to enter colleges and universities. A recent U.S. tax court case illustrates the importance of understanding the rules governing these plans. Albeit, this case involved the programs administrator, the CPA could have easily been part of the confusion and the finger could have easily been pointed at the CPA. CPA‘s should remind their clients not to rely solely on the advice of program administrators when it comes to 529 plan distributions, rollover of these funds, and possible changes in beneficiaries. Whenever additional tax is due or as in this case there are penalties assessed by the taxing authorities, clients will seek to be made whole and involve the CPA in the process. Tax organizers, engagement letters, and communicating with clients throughout the year will generally head off these types of claims and client scope expectations.
The full text of the case is available by clicking on the link below.
Electronic Discovery Impact on Record Retention Policies
Historically, malpractice insurers have stressed the importance of record retention policies for CPA, and other professional, firms and the need to consistently apply those policies. The advent of Electronic Discovery ( e –discovery ) has clearly muddied the waters. Just the financial costs alone, arguably, will cause plaintiffs to settle early in litigation. The Pippins v.KPMG LLP case is a grim reminder of the need to have consistent, written record retention policies that are clearly articulated to clients , preferably in engagement letters or stand-alone letters. CPA’S should review state boards of accountancy rules and regulations, the AICPA rules, taxing authority rues, and other regulatory bodies such as the SEC and GAO.
Growing exposure of tax claims
Tax claims have historically been the most frequent claim facing CPA firms and most major malpractice insurance companies have confirmed tax claims to be the most frequent reportable claim. The I.R.S has developed a team of sophisticated auditors to identify abuses in this highly technical area of taxation. Clearly examinations of these types of returns will be on the increase and historically tax claims will increase as a result of added taxing authority oversight. As a result, the fundamentals of risk management need to be employed: sound client selection (does the engagement fall into your area of expertise?), documentation of advice to clients (consider an advance transfer price ruling), engagement letters caveats (what are the fees if the client is selected for examination?) are just a few. The link below will lead you to the recent I.R.S movement in this area.
Client Confidentiality Interpretation
Although this court order was delivered in October of 2011, it has liability ramifications for firms of all sizes.
What CPA’S might have construed to be protected by confidentiality and client privileged rules, was subject to much different interpretation by the Department of Justice in October of 2011. Consideration should be given to be hired by attorneys in certain engagements and care in maintaining and documentation in client quick book back up files. The ruling below should be carefully reviewed by CPA firms of all sizes.
Congress Extends Payroll- Tax Cut
Congress passes payroll tax cut extension that will extend the reduced 4.2% social security tax rate through December 31st 2012. Ensure that all your closely held clients who process payroll in-house are utilizing the reduced rate. In addition, for those personal tax clients who had or will have excess F.I.CA. Withholding, the estimated tax payments made for the 2012 should be carefully reviewed as a result of the reduced rate. Historically, under payment penalties assessed by the taxing authorities have been common claims faced by CPA’S.
SEC alters Net Worth Calculations
Performance fees charged by investment advisors modified to exclude the value of a home used to determine net worth. Familiarize your clients who are being charged performance fees, by their investment advisors, about this significant exclusion. In addition, acquaint them with the definition of a primary residence. As their trusted advisor and having access to their broker statements, the perception will be made that you are the responsible professional to make them aware of this exclusion.
IRS issues rules for providing K-1’s electronically
Revenue Procedure 2012-1t issue by the I.R.S to allow K-1’s to be distributed electronically. While this is a convenience for many tax practioners, consent is still required before the K-1 can be transmitted to a partner, shareholder, or beneficiary electronically. Professional liability carriers have reported an increase in the number of claims resulting from the internet and the failure to obtain consent.
Mobile Devices and Security Concerns
A report issued by Price Waterhouse Coopers indicates an increase in cyber risk which will impact organizations worldwide.
Death of Spouse Planning
After the loss of a spouse practioners should be mindful of the following five pointers
Power of Attorney Changes
Effective March 1st 2012, Couples who file jointly are now required to file separate power-of-attorney forms.
Taxability of frequent-flier miles
The I.R.S. is moving towards taxing the value of frequent- flier miles.