Tag Archives: Chicago accountants

Can You Discharge Those Unpaid 1040 Taxes in Bankruptcy?

by Larry Goldsmith, CPA, JD, CFF, MAFF

Last week, I reviewed a new client’s IRS transcript. The client apparently filed his individual income tax returns late and wanted to file bankruptcy to discharge his 1040 tax obligations. I subsequently learned that the IRS filed substitute individual income tax returns on the client’s behalf and issued an income tax deficiency before the income tax returns were filed.

 The question was: if the Internal Revenue Service files a substitute tax return on behalf of the debtor/ taxpayer, before the taxpayer files their own income tax returns would that late tax return be considered eligible for a bankruptcy discharge under Section 523 tax return?

I have to admit that it was my belief at the time that if the late filed tax returns increased the income tax assessment, the late filed tax returns would be dischargeable if the tax returns qualified under the various timing constraints. However, after further research, examining several court cases, I have concluded that if the income tax returns were filed after the IRS had issued a substitute tax return, or issued a deficiency, a bankruptcy discharge is not attainable, even where the debtor subsequently filed an income tax return.

It appears that the bankruptcy courts have not consistently held on issues of discharge where the debtor filed a late tax return prior to the IRS issuing a notice of deficiency. From the Appellate court statements I doubt if the courts would favor the discharge of the late filed income tax returns.

Here are a couple of cases exemplifying the court’s consistency in this matter:

IN RE PAYNE 431 F.3D 1055 (7TH CIR 2005)

The taxpayer failed to file a 1986 tax return, and the IRS subsequently filed a substitute tax return for the debtor. In 1992 the taxpayer filed an offer in compromise that was rejected. The taxpayer filed a Chapter 7 in 1997. The bankruptcy court discharged the 1986 tax debt.

The 7th Circuit Court of Appeals stated that, the substitute tax return and an offer in compromise do not constitute a tax return and therefore the income taxes were not dischargeable.

MALLO V. INTERNAL REVENUE SERVICE

A married couple filing jointly, the Mallos filed their individual income taxes several years after the IRS issued notices of deficiency. Two years after filing the income tax returns the Mallos filed bankruptcy seeking to discharge the income tax obligations.

The Mallo bankruptcy court held that post assessment filings do not constitute tax returns and are therefore excepted from discharge under 523(a)(1).

The Court of Appeals held that tax debt was not dischargeable because, “the filing of a return after an assessment negates an honest and reasonable attempt to comply with tax law”.

The Court of Appeals held that, “if a Form 1040 is filed late, the tax debt is non-dischargeable under 523(a)(1)(b)(i). The court reasoned that a late tax return is not a return as defined by Section 523(a); it does not satisfy applicable filing requirements.

The Court observed that the definition of a filed tax return differs from the IRS’s definition.

The U.S. Supreme Court acknowledged the different interpretations and stated that further review was not warranted, thereby upholding the U.S. Court of Appeals for the Tenth Circuit findings.

My advice after researching this matter? Always file your tax returns in a timely manner.

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

Considering a Forensic CPA? Remember That Credibility Means More Than the Sticker Price

by Larry Goldsmith, CPA, JD, CFF, MAFF

I just hung up the telephone with a tire kicker — someone who is shopping for a financial forensic expert to use their expertise to confirm or deny the existence of damages. And, like all tire kickers, this person intends to make their decision primarily based on price; in this case, the forensic expert’s fees.

It reminds me of the true story of a doctor client of mine who was building a medical center for his practice and was outraged by the fees being charged by the general contractor. The doctor, believing himself to be smarter than the contractor, decided he would save money by overseeing the construction himself. Obviously, the doctor did not possess the skills learned through experience that the general contractor possessed. The building’s completion was delayed by two years and suffered a 100% increase in overrun costs as the subcontractors played the doctor for the fool that he was. The project ultimately went into bank foreclosure and the unfinished building was sold at auction. The moral: experience and training are key elements when considering the retention of an expert. Price can be a factor but it should not be the primary factor.

The practice of forensic accounting has recently become a hot service. Both CPA firms and non-CPA financial accounting companies are claiming “expertise” in this area and clamoring for business. I regularly meet with CPA’s and non-CPA’s who claim to be financial forensic experts, and I generally find that their claim to be an expert is based on one of the following:

  1. They are a CPA and have worked in auditing companies
  2. They are a CPA who was grandfathered the designation of a Certified Financial Forensics (CFF) because they had a CPA license for 10 years and paid a fee.
  3. They have a keen eye and were self taught.

Here’s an example of what can happen when a person involved in a legal action does not verify the credentials of their accounting team:

Awhile back I received a call from a woman sobbing on the phone. She said that she was in the middle of a divorce, her husband of several years had stolen her premarital money, and she needed to hire a forensic CPA immediately. After calming her down I asked her where she was in the divorce process. She said that she had just left the courtroom having learned that her “expert witness” lacked the credentials of an expert, had never testified before, and was not even a CPA. Apparently, her so-called expert’s only credentials were that she was a self-taught bookkeeper for 10 years. The Court refused to accept the presented witness as an expert.

In this case, the woman who called me suffered because her “expert’s” findings and opinion were excluded and never heard or read by the court. Her husband’s expert, however, was permitted to present his opinion. Sadly, I had to explain to her that an expert can only be retained in the window of time permitted by the Court. Once that time ends, only the court can grant a party the authority to retain an expert. Her attorney recommended the attorney’s friend as an expert, the attorney and the expert failed to provide the expert’s credentials to the client.

Forensics is the science of investigating people and money. As a science there is methodology, there is testing and there is specific analysis that an experienced financial forensic expert will use. The methods may differ but results should be constant given the similarity of assumptions.

Everyone on my staff at CJBS, including myself, are CPAs who have received at least 40 hours of class room instruction before taking a test in financial forensics. All of us were required to work on engagements to gain experience, and write an actual expert opinion report that was then graded by the National Association of Certified Valuators and Analysts before we received our Masters Analyst in Financial Forensics designation (MAFF). Our expertise in forensic accounting is not wishful thinking; it’s the result of hard work and experience.

CPA’s and other professionals who have not been schooled in forensics may have professional skills but those skills may not be forensic skills. It is important to remember that there is a difference between an auditor and a financial forensic expert: the job of an auditor is NOT to detect fraud but rather is to verify the accuracy and correctness of financial reporting.

The financial forensic expert may be retained to determine if there is a misstatement of financial information, calculate damages, or detect financial misappropriations. They begin studying the people involved before analyzing the data. They keep an open mind in their investigation and let the facts dictate the findings. In my view the forensic expert tries to look at a larger view of a given situation; the auditor only looks at a narrow section of the financial picture.

Last year I was retained to analyze an expert’s report as to damages. The expert retained by the other side of the case calculated damages using an accounting definition of damages; standards that would have been acceptable by the court. For example, he excluded from profits the salaries and benefits of the business shareholders. When my report called attention to the numerous errors in the report and the miscalculations by the other side’s expert, the opposing side conceded rather than risk an embarrassment.

Your financial expert does matter. Your expert has to be able to investigate and to communicate the findings to your attorney, and to be able to communicate the findings to a judge and write a convincing opinion. Your expert must be able to educate the client and their attorney as to the findings and be objective in interpreting the results.

If I retain an expert, such as a medical specialist, I want to know their successes and failures; I want to know their experience handling cases like mine. Is the expert a “part time” expert, accepting engagements during slow periods, or does the expert specialize in my type of case? Is the person able to communicate and appear professional? Finally is the expert a good listener and are they paying attention to my issues and concerns? My last concern will be the cost. “Pennywise and pound foolish” is never more appropriate than when it is applied to choosing a forensic expert.

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

Overcoming the Myths: Taking Control of Your Money & Your Future

Larry Goldsmith, CJBS, moderates this dynamic conversation about women and finance.

Thursday, September 11th at The East Bank Club, 4:30 to 6:30 pm.

ModeratorLarry G. Goldsmith, C.P.A., J.D., C.F.F., and M.A.F.F.

Panelists are dynamic, experienced professionals who are passionate about empowering women to take control of their financial future.

Julie Murphy Casserly, CLU, ChFC, CFP  JMC Wealth Management Inc. Julie  is an 18year veteran of the financial services industry and has often  been referred to as a financial healer and visionary.

Carolyn Leonard, Founder and CEO DyMynd. Carolyn is a serial entrepreneur and was one of the first women to trade at the CBOE. She spent 21 years in the pits before starting  DyMynd.

Linda A. Lucatorto, M.Ed., CPC, Divorce Coach and Mediator, mentors clients during the transitions of divorce. She helps clients: learn about their options, set realistic expectations, make solid decisions and prepare for consultations with attorneys.

Women often forget all the financial decisions they effectuate. They make most of the health care decisions for family members and choose the specialists they see. They arrange for child care and make many of the important school decisions for their children, from pre-school to college. They also have crucial input about the purchase of family cars and household needs. They may even pay the household bills. Although They are always making financial decisions for others, most women don’t feel they are financially savvy. It is time to bust that myth!

I hope you can join Larry, Julie, Carolyn and Linda on September 11th at the lovely East Bank Club. De-stress after the work day and join us for interesting and thought provoking discussion, food, drink and camaraderie!

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

Ethics On The Front Lines

by Larry Goldsmith, CPA, JD, CFF, MAFF

I want to share three quick stories where ethical considerations were considered when accepting or continuing engagements.

Case #1:  A Partnership Dispute, or, The Devil and Larry Goldsmith

The Forensic Accounting portion of my business was uncharacteristically slow. Cases had been settled, and depositions and trials were delayed for months.

Then the devil presented me with the opportunity of a large new case which involved disputing business partners. The engagement required an analysis of expenditures, bank accounts, and the use of business proceeds.  Reading the complaint, I was mystified how the basic facts of the case could be presented so differently by the two parties.

During the interview process for the engagement, as I sat with the referring attorneys and listened as they explained to me their visions of the case, my mental calculator was adding up the staff hours that would be required from my firm. My hands were sweating with excitement.

The more I looked into the matter, the more I became concerned. The accounting records and general bookkeeping was weak. The prospective client took sizable amounts of cash from the company, allegedly to pay sub contractors. No Form 1099’s were issued and only some of the contractors would be willing to sign affidavits that they received the cash. It was explained to me that the company saved money by hiring contractors at a discount by paying cash. The prospective client asked me if I could simply accept his affidavit that the cash was properly spent for business purposes – even though this could not and would not be verified by anyone. Did I mention that the accounting records and the bookkeeping were weak?

Though I suggested alternative techniques where I could quantify the non-verified cash, it seemed that the prospective client only wanted me to investigate the egregious acts of his former partner. The whole thing seemed fraught with potential problems.

I was left with the question: should I accept this proposed engagement? If I answered entirely based on the size and cost of the engagement the answer would likely be yes. But I was concerned about possible ethical issues which seemed very likely to arise. The American Institute of Certified Public Accountants (AICPA) has published various professional standards to provide guidance in cases such as the one that confronted me.

The professional standards say:

Rule 102 of the AICPA professional standards.

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

This is further discussed in the Litigation Services and Applicable Professional Standards publication 03-1 by the AICPA; “The expert does not serve as an advocate for the client’s position and, therefore should not subordinate his or her judgment to the client. The expert’s function is to assist the trier of fact in understanding complex or unfamiliar concepts after having applied reliable principles and methods to sufficient relevant data.”

Rule 201, General Standards, of the AICPA Code of Professional Conduct requires that engagements be conducted with “Due Professional Care” using “Sufficient Relevant Data.” According to AICPA Publication 03-1, “Due care requires diligence and critical analysis of all work performed.”  Furthermore, the AICPA requires that the practitioner “Obtain relevant data that is sufficient to provide a reasonable basis for conclusions or recommendations for any professional services performed.”

“The practitioner should consider analyzing key assumptions to determine whether they are reasonable. In several recent cases, experts had their testimony excluded because their opinions were based on assumptions that were deemed not reasonable.”

And finally, Rule 501-01, Acts Discreditable of the AICPA Code of Professional Conduct, states that a, “Member shall not commit an act discreditable to the profession.” Rule 501-04 states that a member shall be considered to have committed an act discreditable to the profession when, by virtue of his or her negligence the member, “Signs, or permits or directs another to sign, a document containing materially false and misleading information.”

Do I accept an engagement with my hands tied?  Do I accept an engagement where my objectivity is being compromised?  You’ll find my decision at the end of this article.

Case #2:

What to Do When Independence is Compromised?

An attorney referred me to provide financial forensic analysis to a woman going through a divorce. In discussions with her I quickly realized that, not only did I know her husband personally, but I had invested in some of her husband’s projects. The wife was impressed with my knowledge of her husband’s complex business structure and sources of revenue. And she was eager for my help. Though I had not been an investor in any of the husband’s projects/deals in the last ten years, I felt that questions concerning personal and professional integrity, independence and objectivity were sure to come up.

Again, I turned to the AICPA for guidance. The AICPA requires objectively rather than independence as a standard. Objectivity is a soul searching determination. Independence is fact driven.

I called the husband. I laid my cards on the table and told him that his soon to be ex-wife wanted to hire me to investigate his finances. Then I asked him if he found there to be a conflict.

The husband emailed me, his attorneys and her attorneys. In the email he stated that he and I (the two of us) had a previous business relationship; he welcomed my retention by his wife, but wanted his wife to be comfortable that we had a past financial relationship.

The husband told me that my professionalism and my fairness were comforting to him. He had heard stories of experts who performed needless analysis to increase fees and experts who would be an obstacle to any settlement.

During the engagement, we cut the husband no slack; we verified all business and personal assets including sources of income. My past relationship with the husband allowed my firm’s team to ask the right questions and know where to look for future income sources. This experience and knowledge saved the parties money, and gave the wife comfort that there was complete disclosure.

Case #3: An Unexpected Meeting…

I arrived at the charitable golf outing dressed in the height of sporting fashion, wearing my pink plaid golf shorts, my white gym shoe golf shoes and my pink polo golf shirt. To my surprise, the gentleman I was paired with had the same name as the attorney I was retained to testify against in an upcoming malfeasance case.

Maybe it was a coincidence, I thought. People often do have the same names.

I returned to the golf cart after practicing my putting and shanking some drives off the practice tee.  In the cart sat a disheveled man in his sixties who was lifting his glasses past his nose to read his cell phone.

After the introductions, handshake and chit chat, I realized that the man next to me, who looked like Mr. Magoo, was the subject of the malfeasance and he was the individual whom I would be testifying against.

I initially wondered if our golf game was an ethical violation. And my next thought was, did he know who I was and would he kill me?

The fact is, there was no violation of ethics in playing golf with the gentleman. We did not discuss his case and there was no disclosure on either part of our professional situations.

I was fortunate; he did not have a clue who I was. In fact three months later when I deposed him, Mr. Magoo failed to remember that we had ever previously met.

So… did I accept the engagement in Case #1…? 

One engagement can make or break a career. The grim thought of handcuffs being placed on me and seeing my career in tatters was all I needed to make my decision to walk away. This was one of those gut wrenching times when you just need to bite the bullet and say No.

I believe that our professional standards, were created to be a guide.  Sometimes our soul searching will provide the needed guidance.  Sometimes the engagement that we turn down is a blessing.

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

My Perspective of Accountants and CPAs

Larry Goldsmith

by Larry Goldsmith, JD, CPA, MAFF, and Julieann Chaet, CPA, MAFF

I’ve always looked at accountants, CPAs or not, as instruments or tools to be used by the IRS or the banks, or buyers and sellers of businesses. What I mean by that is, accountants working in public accounting firms complete the tasks for the Internal Revenue Service to collect its taxes. We provide the measuring stick used by bankers to lend money. We are the instrument that verifies income and assets for the buyers and sellers of businesses. We are important because we produce the tax returns the IRS looks for and the financial statements the banks require. We provide the verification to business that the company is profitable.

To our clients, we become the trusted individuals they depend on to prepare their tax returns or to prepare their company’s financial statement. But all too many times clients will make financial decisions without asking for their accountant’s opinion. I have to say my favorite clients are the ones who call me up to say “Are you busy?” or “Do you have a minute?”  The truth is, I was busy, but that interruption when they ask for my opinion or ask me a question, can save them hundreds or even thousands of dollars.

It usually takes only minutes to answer a client’s question when they call or e-mail. It’s when clients don’t ask the questions, that it can cause problems that can cost more than money.

I prepared very few tax returns this tax season because I was thankfully busy with my forensics work. However, one of the tax returns that I did prepare was absolutely gut-wrenching. A month later, I still think about these particular clients who I’ve never personally met. As I was sorting through their data and inputting the numbers into our tax program, I became curious. I thought I must be missing something. I finished preparing the tax return. The couple owed what was for them a lot of money – thousands of dollars.

So I asked the partner whose name is on the return, “what’s the deal?” Apparently, this 62 year old couple was making over $100,000 a year for at least the last 5 years. Both husband and wife had their own careers. They owned a home. The husband had even gone back to school to further his professional degree while maintaining his career.

The problem started with a stroke – a stroke had debilitated the husband at the age of 59. The husband could no longer care for himself so a full-time nurse was brought in to care for him. After a couple years the wife could no longer afford the full-time nurse so she quit her job to care for her husband. They sold their house and moved into their daughter’s apartment.

By the time I was preparing the couple’s tax return, most of the couple’s savings including IRAs and proceeds from the house had been spent on living expenses and the husband’s medical care.

So what did I do?  I saw Larry Goldsmith, the head of CJBS’s Financial Group’s litigation, asset protection and tax practices team walking past my desk. “Larry, you need to do something!”, I said. I didn’t care that he was just walking in from the polar vortex that we were having outside, and that maybe he wanted to take off his hat and defrost. This woman was going to live probably for another decade or two. Her husband could live years in his current condition, and all their money was squandered on medical bills. Where would the money come from to pay the tax return?

Unfortunately, even with his vast experience and resources for this sort of thing, Larry wasn’t able to provide a solution. It was too late. The truth is the couple was financially bankrupt and didn’t know it. Their liabilities (the monies they owed) far exceeded the monies and assets they possessed. They spent their savings along with their IRA’s that she would one day need because she didn’t know that there were taxes to pay on the IRAs.

Thousands of dollars of her savings were spent caring for her husband that didn’t need to be. The wife did not know about different agencies that could’ve helped or the benefits of financial planning. She did not know that creditors cannot seize her IRAs from her.

You see she never asked the questions of her accountant so the accountant wasn’t aware of all that was happening.

We became aware the day we called her to try to make sense of the documents in front of me.  There is a solution, but it requires planning.

Julieann Chaet, CPA, MAFF

Julieann is the Manager of CJBS’ forensic accounting and litigation services practice.

Call Julieann at 847.580.5449, or e-mail: jc@cjbs.com

 

Larry Goldsmith, JD, CPA, MAFF

Call Larry at 847.580.5427, or e-mail: Larry@cjbs.com

IRS Increases Audit Examinations

by Michael W. Blitstein, CPA 

The Internal Revenue Service has stepped up its examinations in the past year of taxpayers with high adjusted gross income.

The IRS released its 2012 IRS Data Book on March 25th, providing a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS between October 1, 2011 and September 30, 2012, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce, among others.

The IRS said it examined just under 1 percent of all tax returns filed and about 1 percent of all individual income tax returns during fiscal year 2012.  Overall, in fiscal year 2012, individual income tax returns in higher adjusted gross income (“AGI”) classes were more likely to be examined than returns in lower AGI classes.

The IRS examined about 12.1 percent of the 337,477 tax returns reporting income of $1 million or more, compared to 2.8 percent of those reporting at least $200,000 and under $1 million, and 0.4 percent of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, and 1.1 percent of those with income under $200,000 and filing Schedule E or Form 2106. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds. In addition, the IRS examined 1.6 percent of corporation income tax returns, excluding S corporation returns, in fiscal 2012.

During fiscal year 2012, the IRS collected almost $2.5 trillion in Federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion.

IRS acknowledged that one of the biggest challenges confronting the IRS today is tax refund fraud caused by identity theft. The IRS has more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area. As a result of these increased efforts, the IRS during fiscal year 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion. Despite these efforts, much more work remains on identity theft as well as on overall refund fraud.

The IRS made significant progress last year on international enforcement, specifically in its efforts to combat the practice of illegally hiding assets and income in offshore accounts. They have continued a two-pronged approach: offering a voluntary disclosure program for those who want to come in and get right with the government, while at the same time pursuing tax evaders and the promoters and banks assisting them.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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