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Searching for Better Tax Savings

  • Written by Jasmine Temares


istock_000014816381mediumTax research is fun, intriguing and enables tax professionals to think creatively. Tax research allows tax professionals to take a proactive approach in helping their clients maximize their tax deferrals and tax savings. Tax researchers use a variety of resources to find the most relevant and persuasive tax findings for each of their client’s unique circumstances.

According to our three tax researchers in this issue, having the appropriate software solution can save the most time and money, while allowing researchers to work efficiently.

As tax law continuously changes along with the enconomy, Richard Jackson, CPA, partner at Jackson Coles, PLLC in Boise, ID; Barbara Rosenbaum, CPA, senior tax shareholder and Jill Massey, CPA, senior tax manager at Gumbiner Savett, Inc. in Santa Monica, CA; and David M. Schneyman, CPA, a principal at Friedman LLP in New York, NY, offer their best advice and strategies for making the most out of tax research.

CPA Magazine: How did you get involved
in tax research?

Jackson: When first entering the profession, you quickly learned that the answers were not straightforward. At my first employment, we had one person to perform research. As I first started to research, I learned to go to the code, then regulations, then court cases and finally, new matters. You become fascinated by the search for the answer.

Massey: Starting with my first year in public accounting, I learned to rely on the Master Tax Guide and tax form instructions to assist me in the preparation of tax returns.  These tools referenced the Internal Revenue Code, Regulations, Revenue Procedures, etc.  I remember trying to complete a Form 3115, Application for Change in Accounting Method, and was forced to do additional research to get to the right answer. That’s when I knew that tax research is an integral part of advising clients – whether it’s proactive – analyzing and structuring a transaction before it takes place – or reactive – applying the current tax law to a transaction that has already occurred.  Tax research is a necessary skill for every tax practitioner

Schneyman: I became involved in tax research through my tax compliance work. I noticed that sometimes the results found in software appeared to be incorrect, which required me to ask more questions and investigate further. Now, as I do planning for clients, I’ve found that it’s beneficial to do extensive research before transactions are finalized to maximize tax deferrals.

CPA Magazine: What do you like most about tax research?

Jackson: I like the search for the right key words, the right fact pattern, the development of tax law, then to hone in on that specific combination that fits the fact pattern and the case or issue you are working on. Will it stand scrutiny? Will it develop your issue and provide guidance?

Rosenbaum: Tax research allows me to think creatively, to bring all of my experience to bare and to extrapolate my knowledge of the relevant tax authority across a client’s specific situation. The fun places are where there is no bright line, no black or white, no clarity. Those are often the places where there is an opportunity for the tax practitioner to add value.

Schneyman: I like that each research project is different. Even if a project seems similar to something else I’ve done before, there’s always a small detail that yields completely different results. I also like that tax research gives me a way to take a proactive approach to my engagements, which can lead to better tax savings and deferrals for my clients.

CPA Magazine: What tools do you need to be proficient in tax research?

Jackson: Yesterday, we had the current tax service, the code, the forms and instructions and the court cases and revenue rulings. Today, to be timely and proficient, you need to have the research available as a software product that is current, and has powerful search engines. Beyond that, we receive the tax alerts and notices from the IRS, our home state and other states where we have clients residing or having activity within. We review several periodicals online, so we are exposed to the law. I participate in our tax committee for our state society and the IRS liaison sessions. In addition, we key our continuing professional education for tax law as it progresses and changes. Tax law is like a kaleidoscope; it is constantly moving and changing as our economic society evolves. It is constantly being formed by the legislative process, the compliance, and the review of the judicial process. If we desire to be proficient, we must use every tool available to us.

Rosenbaum & Massey: A good tax researcher must be familiar with the sources of tax authority, such as the Internal Revenue Code and other statutory provisions, tax treaties, proposed, temporary and final regulations, revenue rulings, court cases, and secondary sources, e.g., annotated services provided by CCH, BNA and RIA, tax journals, etc., just to name a few. One has to be familiar with these sources and then assess the weight of an authority as well as its relevance and persuasiveness before coming to any sound conclusion. The research process requires mechanical skills and critical thinking. The mechanical skills can be gained with experience; critical thinking, on the other hand …

Schneyman: It’s essential to have an easy-to-use, intuitive tax research system that has strong editorial content with good examples that are easy to follow. You also need to have strong analytical skills and be able to determine how tax law applies to your clients’ facts and circumstances.

CPA Magazine: Which Web sites do you find helpful?

Jackson: We have found that the IRS, most state tax commissions or tax authorities have Web sites. In addition, we use GSA and other government sites for specific needs within research or a quick up-to-date answer. The search engines open up the world and expand into new Web sites that can help with particular niches of tax law and knowledge.

Schneyman: I always look to the individual state tax authority Web sites first, but I have also found value in some of the paid tax research vendors out there. I don’t use the third-party free sites, because they tend to lack credibility and reliability.

CPA Magazine: How do you plan a tax research engagement?

Jackson: First, define the issue or issues. Is it a new issue, or has the law changed? Develop the case and research both supporting and opposing cases and regulations. Continue the research until you can support or defend your conclusion. In some cases you get the desired results; yet you may find that the position does not work. If it does not; can the basic premise be developed or changed so you can match a defendable, supportable position?

Rosenbaum & Massey: You learn to use your experience, to weigh the issue and get a sense of where to look and of the amount of material that must be researched. You think about the professionals in your office and their respective fields of expertise. Is there someone who can help you think more broadly or deeply or help you focus on the best place to start? Timing can be critical. The client wants to know the tax ramifications as soon as possible before making a move, so tax research can hardly be something calendared for a later date.

Schneyman: First, I query the client about the facts and use that information to do my initial research of the topic. As additional questions inevitably come up in my research, I get more specific details from the client. One small change or addition to the facts can significantly influence the results, so it’s important to have detailed information and an honest communication with the client.

CPA Magazine: How do you help clients with tax research beyond their tax returns?

Jackson: The actions of our clients are always changing, so we constantly encourage our clients to review the transaction before proceeding. Tax planning and research and being proactive are far more efficient than recording historical facts that are flawed by steps and facts. If we see a change in law or an activity, we alert the client to the issues. Encourage the clients to ask you!

Rosenbaum & Massey: Often, the most value can be added with proactive planning. Any transaction, such as starting or expanding a business, wealth transfer, refinancing, sale of a business or other assets, can benefit from some forethought. The rules are complex.

And, with global commerce, international issues are becoming more and more common.

Schneyman: Many of our more sophisticated clients get us involved with structuring transactions proactively to maximize the long-term tax benefits. Sometimes, this structuring takes years to show the benefits, but ultimately, it provides a meaningful value to our clients beyond their tax returns.

CPA Magazine: How do you charge for and deliver tax research engagement?

Jackson: The fee is a combination of time expended and the value to the client. Routine research may be just some time; a complex research project usually has high value, and you analyze the value to the client.

Rosenbaum & Massey: Generally, tax research is valued by the amount of time required to come to a sound conclusion. The product can be a phone call or a more formal memorandum and/or letter to the client summarizing the facts, the issues addressed, the applicable authority and recommendations. We track and retain documentation of the work done.

Schneyman: Our billing structure for tax research is typically based on an hourly rate, with an initial estimate given, which may be adjusted as the project progresses. The research is typically delivered through a detailed tax memo that is specifically tailored to the recipient. The memo usually starts with an executive summary that gives an overview of our research results, and then continues with technical details of that particular case. We make sure that the client has everything he or she needs in the document, but we’re always available if there are follow-up questions.

CPA Magazine: Have you ever had to defend a researched tax position before the IRS? What helps in that situation?

Jackson: Every audit is defending the positions within the tax return or tax document. If you have a more complex position; you have to anticipate that you may have to defend that position.

Rosenbaum: Representing a client in front of a tax authority often requires telling that client’s story (not a fable!). By providing history and background direction you are giving the agent, the context in which to evaluate the tax return, supporting documentation and research. As an example, I have a client who develops technical devices who received an audit notice. I immediately called the IRS agent assigned and invited them to visit the taxpayer, knowing it was a required step in a large corporate audit. I had the client set up a number of prototypes and devote time to showing the agent how their device had evolved due to Research and Development (R&D). The audit of the R&D tax credits, an IRS area of focus, was easy, as our work supported what the agent already knew.

Schneyman: I personally haven’t had to defend a researched tax position before the IRS, but my firm has. We usually start out with an explanation of the position that we took on the return, and then cite substantial authority on which the position was based. It’s key to make sure that the IRS agent not only understands the information, but also feels like it is adequately supported.

CPA Magazine: What advice do you have for a small accounting firm about tax research?

Jackson: Go to the edge of technology and paperless society. Six years ago, our firm jumped into online research, paperless work environment and committed ourselves to stay at the edge of technology. The proper use of technology controls costs and overhead and makes you far better and more efficient. You can process huge volumes far quicker than yesterday. Our small office has been able to survive the economic downturn without compromising efficiency.

Rosenbaum & Massey: A small firm should always consider the risks involved in giving tax advice that may be beyond its expertise. Consulting with members of their peer group on certain subjects could be helpful. Just knowing when you need help is an important skill!

Schneyman: For a small firm with limited resources, investing in the right tools can save you a lot of time and money in the long run. Like I mentioned before, if you have intuitive, easy-to-use software with strong editorial content, you’ll be able to rely on the results of your queries.

CPA Magazine: What interesting tax research assignments have you done?

Jackson: The interesting tax research assignments have come from various fronts. First the client base. One of the most fascinating was a civil case and an issue of liabilities in excess of basis for an agricultural client. The supporting case came from Broken Bow Oklahoma. The next ingredient is state sales and use tax. States are very different in how the law is applied. In the past, I practiced in the state of Washington, now I practice in Idaho. Although both states have sales and use tax, the laws are very different. As I practice here in Idaho, I now facilitate courses on aspects of sales tax. Usually, as presenter, you research and prepare your outline. Another set of courses has been on tax-free exchanges. In the client’s case, if multi-states are involved, you also research each state, and make sure of the tax consequences at the state level.

Rosenbaum: A most recent research assignment involved a client’s loss on an investment — whether it qualified as a Ponzi investment loss, and therefore, could receive special tax treatment. Reading e-mail correspondence between the investor and the investment manager, the court filings, SEC charges, etc. was all very interesting. Another interesting issue was that of a casualty loss — when did it occur, i.e., what tax year should the loss be reported? It’s amazing the amount of detail the courts go into discussing a question — one that appears to be as straight forward as “when did the casualty occur?”

Schneyman: One interesting tax research assignment we have worked on involved solar energy projects and their eligibility for federal grants. There was an issue with bonus depreciation that affected eligibility for a grant. The Department of the Treasury unit dealing with the solar grant program initially ruled that claiming bonus depreciation would render the project ineligible for the grant, but after we presented our position to them, they reconsidered and determined that bonus depreciation was not incompatible with the federal grant program.

CPA Magazine: What do you like to do to relax after work is done?

Jackson: Always live life to the fullest! My wife and I are foodies. We are constantly taking food preparation classes through various venues and our college extension service. Then, our state has a lot of mountains and wilderness; so we camp, we explore, we hike into high mountain lakes. Sometimes during the heat of tax season, we may take a day and road trip to some adventure area.

Rosenbaum: Doing research is like writing an essay for a final exam — afterward, your mind can feel like an elephant sat on it. Afterward, I like to run on the treadmill, take a brisk walk or play a good tennis match — anything to take my mind off the research.

Schneyman: Is the work ever done? I enjoy reading tech thrillers and spy novels, golfing, going to the gym and spending time with my family. 

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Lessons From a Tax Master: Sidney Kess

  • Written by T. Steel Rose, CPA

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The AICPA recently honored Sidney Kess, CPA, J.D., LL.M., by establishing the Sidney Kess Award for Excellence in Continuing Education. Sidney Kess was the first recipient of this award, which recognizes individual CPAs who have made significant and outstanding contributions in tax and financial planning and whose public service exemplifies the CPA profession's values and ethics. Having lectured to more than 720,000 practitioners on tax, financial and estate planning, Kess is one of the nation's best-known lecturers in continuing professional education. More than a million CPAs have taken Kess courses. 

More than anything, Kess is an idea guy, with all the enthusiasm of a triathlete. He is the consulting editor of CCH Incorporated's Financial and Estate Planning Reporter and consultant for the CCH Estate Planning Guide. He was chairman of the advisory board of Tax Hotline and is a member of the PPC Tax Action Panel. Kess has edited a column on "Tax Tips" for the New York Law Journal for the past 41 years. He edits the AICPA's CPA Client Bulletin and CPA Client Tax Letter. He is the recipient of the AICPA Distinguished Lecturer Award. Kess is often quoted in The Wall Street Journal, The New York Times and other national publications. He was included in Accounting Today's "100 Most Influential CPAs in the U.S." for several years, as well as CPA Magazine's "Most Influential CPAs in the U.S." 

Kess was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils for his service to the field of estate planning. He also was inducted into the New York State Society of CPA's Hall of Fame. 

CPA Magazine caught up with Kess after he had just completed a breakfast meeting with reporters from The Wall Street Journal. The Webcast was hosted by the New York Society of CPAs and is available at http://www.totalwebcasting.com/view/?id=nysscpa. 

We asked Kess about his advice for others entering the profession. "What they should realize is that there are so many things that happen of such a major magnitude that a young person has the chance to move ahead more rapidly than ever," he said. "Take the Health Care Act; it is a revolution. Everyone is at the same starting line. The one that masters this is able to run ahead of everyone and become an expert in the field."

"When there are major advancements in the law, whatever area you are involved in, you can develop an expertise and advance quickly," Kess emphasized.

"That's why you should read the articles; and with technology, you can study the committee reports and get access for nothing. You can be aware of changes as soon as the legislation is enacted.

"The world has changed, but with computer technology, everyone can keep up-to-date.

"There is tremendous uncertainty right now creating havoc for everyone: the extender bill, the estate controversy and the small business bill. They might or might not be extended," Kess said, referring to the tax legislation conundrum.

"Then there are the changes that will take place in the Health Care Act. The whole business of health care has changed, and the CPA is the interpreter. There are so many changes that the average practitioners do not know what to do if they don't keep up.

"That is why CPA Magazine is so important. We are pointing out the changes in legislation and the planning opportunities."

Asked about the highlights and fascinating events during his career, Kess responded: "The interesting thing for me was always coming up with new things. To see the ideas come to reality has always been intriguing to me. 

"When they first started doing computerized tax returns, I told the people at CCH that people are not going to use it unless you show them how to use it. After that, I introduced them to audio learning, tapes, CDs. The next idea was a newsletter. They didn't have those. Then I came up with the Estate Planning Guide that is now in 16 editions. I then followed up with an Estate Planning Service. At the time, most lawyers and CPAs did not have estate planning."

The Sid Kess Estate Planning conference is now in its 41st year. He ran the tax practice for Main Hurdman — the ninth largest firm in the country at the time.

"I always created new ideas," Kess said. "I prepared self-study CPA exam guides that predicted which questions would be on the exam. I hit seven of the eight law questions on that CPA exam.

"I am still doing the same. This is the 35th year for the videos for the AICPA for Individual and Corporate Tax Updates on how to prepare tax returns." 

Concerning advice to practitioners, Kess said: "There are more opportunities than we have ever had. The transactions in the business world require more than accounting knowledge. The future is very bright for very bright people. Not everyone can understand the vast implications of business transactions. Technology has changed everything. It has changed how people are learning and keeping up-to-date."

Concerning the future, Kess said that Congress might be acting irresponsibly: "You can't even complete the book or video because you don't know what the tax treatment will be because of the uncertainty of the legislation. A man died in Texas with a $9 billion estate and paid no estate taxes. Right now, there is no step-up in basis."

His advice to small practitioners is that it is important to realize that you must invest with time and tools to keep up-to-date. "You can't get by just bluffing," he said. "It's a tough job. It became a difficult profession because of the constant changes. It is almost impossible to keep up. The feeling in the past was that agents did not know what was going on, and people played the audit lottery. Success now is to the practitioners that master the changes."

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