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Monthly Archives: August 2014

IRS Streamlines the Process for Setting Up Tax-Exempt Charities by Adam Cohen

Posted on August 28, 2014 by Adam Cohen

Small charities with annual gross receipts of $50,000 or less and assets of $250,000 or less may now apply for 501(c)(3) tax-exempt status more quickly and easier than previously required.

On July 1, the IRS introduced Form 1023-EZ, a streamlined method to enable smaller groups to apply for exemption from paying taxes and accepting tax-deductible donations. The streamlined three-page form, which is a stark contrast to the current 26-page application, does not require applicants to provide financial data. Rather, applicants are asked to check off boxes indicating their indented purposes and classification and eight yes or no boxes regarding their activities. In addition to the gross receipts and total asset limitations, small charities wishing to use Form 1023-EZ must meet 24 additional conditions and conduct research or speak with a tax advisor to determine their eligibility.

According to the IRS, 70 percent of 501(c)(3) applicants will qualify to use the new form, which the IRS expects will help to speed-up its approval process, which currently stands at nine months.

Despite the benefits of the new form, states worry that unqualified groups will slip through the system, wrongfully secure tax-exempt status and avoid paying income and property taxes. The IRS disagrees, stating “Rather than using large amounts of IRS resources up front reviewing complex applications during a lengthy process, we believe the streamlined form will allow us to devote more compliance activity on the back end to ensure groups are actually doing the charitable work they apply to do.”

Berkowitz Pollack Brant’s Tax Services team works with a broad range of not-for-profit clients, including public charities, personal and family foundations, hospitals and other service providers.

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant. He can be reached in the firm’s Ft. Lauderdale CPA office at (954) 712-7000 or e-mail

Not-For-Profits Must Keep Up With Evolving Audit and Reporting Requirements by Megan Cavasini, CPA

Posted on August 26, 2014 by

At the end of 2013, the U.S. Office of Management and Budget (OMB) issued sweeping changes to the current methods the government uses to select, manage and monitor federal awards. Among the eight regulations included in the new guidance are significant revisions to Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and the ways in which organizations receiving federal awards audit and report their financial performance.

While the new requirements are effective for awards issued on or after December, 26, 2014, the OMB is expected to release additional conditions of A-133 compliance later this year and again in 2015, leaving many organizations in a holding pattern unsure of how best to proceed.  To ease reporting burdens on those affected, organizations should consider advanced planning to prepare for the current requirements while addressing those expected in the future.

New Threshold for Single Audits

Since 1984, the U.S. government has required non-federal organizations that receive federal awards to conduct a single audit to test for compliance with governmental guidelines and to obtain assurance of sound financial management of federal funds.  The single audit, which must be conducted by an independent auditor experienced and knowledgeable with federal audit guidelines, is more exhaustive and detailed than a typical financial-statement audit. While it requires the completion of a financial-statement audit, the single audit also emphasizes that the funding recipient has adequate internal controls to ensure that it uses and records the federal awards in accordance with government contract stipulations.

In December 2013, the OMB raised the single audit threshold requirement for state and local governments and non-profits that receive and expend federal awards in a single fiscal year from $500,000 to $750,000. While this increased threshold is expected to reduce the number of organizations subject to the single audit, many expect that the OMB will further modify the amount, perhaps reducing it below the new $750,000 ceiling.

New Process of Major Program Determination

The new guidance also revises the process for determining major programs. Circular A-133 introduced a four-step procedure to differentiate between large and higher-risk Type A programs and smaller Type B programs. Historically, Type A programs receiving $300,000 or more in federal grants required an audit.  With the revised guidelines, auditors will continue to rely on a four-step process for major program determination, but will now implement a sliding scale threshold based on the total federal awards expended.  Specifically, the lowest threshold for Type A/B programs will be set at $750,000 and the highest at .0015 times the total federal awards expended above $20 billion.

Recommendation for Interim Compliance

In the current uncertain environment, organizations that receive federal or state funding should err on the side of caution and continue tracking these funds in the same manner they had previously.  Doing so will ensure they maintain reliable internal controls required for federally funded programs at any threshold. Moreover, because a single audit is essentially a method for demonstrating fiscal accountability and compliance with sound financial principles, continuing to track funding will help the organization avoid breakdowns in fulfilling their requirements to prepare appropriate financial statements, including the Schedule of Expenditures of Federal Awards (SEFA); to meet date-sensitive reporting requirements; and to develop appropriate action plans.  The result of these efforts will ensure ongoing compliance with federal requirements and reduce the likelihood that an organization will lose government funding in the future.

The advisors and accountants with Berkowitz Pollack Brant have extensive experience working with non-profit organizations and recipients of state and federal awards to understand and meet their audit responsibilities and requirements.

About the Author: Megan Cavasini is a senior manager in Berkowitz Pollack Brant’s Audit and Attest practice. She can be reached at the firm’s Fort Lauderdale, Fla., CPA office at 954-712-7000 or via email at

IRS to Limit Direct Deposit Refunds to Combat Fraud by Joseph L. Saka

Posted on August 19, 2014 by Joseph Saka

In an effort to combat fraud and identity theft, the IRS will limit the number of direct deposit refunds it pays to each taxpayer’s bank account or to a prepaid debit card to three, beginning with the 2014 tax season.

Beginning in January 2014, the IRS will covert fourth and subsequent refunds to paper checks that it will mail directly to taxpayers within four weeks time. Taxpayers may continue to track their refunds online through the IRS’s “Where’s My Refund?” application. However, those taxpayers that had previously allowed their tax preparers to recover fees from the refunded amount through joint accounts will need to make other arrangements in the future. Similarly, families in which parents and children previously received refunds into family-held accounts may need to rethink their strategies or expect to receive refund checks via U.S. Mail.

About the author: Joseph L. Saka, CPA/PFS, is director in charge of Berkowitz Pollack Brant’s Tax Services practice. For more information, call (305) 379-7000 or e-mail

Not All IRAs are Protected in Bankruptcy Proceedings by Adam Cohen

Posted on August 14, 2014 by Adam Cohen

The Supreme Court recently made a distinction between Individual Retirement Accounts (IRAs) that an individual owns and funds during his or her lifetime and those that one inherits from a family member.

Specifically, the court excluded inherited IRAs from bankruptcy protection, arguing that such accounts lack the retirement-planning aspects of owner-funded plans. Moreover, because beneficiaries of inherited IRAs are permitted to make early withdraws without penalty, and, in fact, required to take distributions within five years of inheritance, the court deemed those assets open to collection from creditors.

In drafting the court’s opinion, Justice Sonia Sotomayor stated, “For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.” “Allowing that kind of exemption would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a ‘fresh start,’ into a ‘free pass’.”

The one exception to the bankruptcy protection rules for inherited IRAs applies to those IRAs that are passed along to surviving spouses, which will not be subjected to creditor claims.

In light of the Supreme Court’s ruling, individuals who inherited IRAs or who plan to pass assets to their heirs via IRAs might want to revisit their estate plans to identify new strategies to preserve tax-benefits and the easy transfer of wealth to future generations.

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant. For additional information, call (954) 712-7000 or e-mail

New Guidance on Miscellaneous Deductions for Estates and Non-Grantor Trusts by Rick Bazzani

Posted on August 11, 2014 by Rick Bazzani

The Internal Revenue Service recently issued final regulations specifying which costs incurred by estates and non-grantor trusts are subject to the 2 percent floor for miscellaneous deductions. The revised guidelines, which go into effect for tax years beginning after Dec. 31, 2014, aim to clarify treatment of estate-related costs.

In the most basic interpretation, the IRS has held that costs that a hypothetical individual holding the same property outside of a trust would incur “commonly and customarily” are subject to the 2 percent floor (with some exceptions.) Alternatively, costs that are unique to an estate or trust would not be subject to the 2 percent floor.

For example, items subject to the 2 percent floor for miscellaneous deduction include:
• Costs that a hypothetical individual holding the same property would incur “commonly and customarily”
• Costs for preparation of gift tax returns
• Fees for investing advice, unless those fees exceed the customary amount charged to an individual investor, in which case, the excess may be fully deductible
• Insurance premiums, condominium fees, costs for property maintenance services, and automobile registration and insurance fees
• Partnership costs that are passed onto and reported by partners on their individual returns

Items that are not subject to the 2 percent floor include:
• Costs for preparation of estate and generation-skipping transfer tax returns, fiduciary income tax returns and a decedent’s final individual tax return
• Certain fiduciary expenses, including probate fees and costs, fiduciary bond premiums, legal fees for publication of notices to heirs and creditors, costs for certified copies of death certificates and costs relate to fiduciary accounts
• Appraisal fees related to the valuation of distributions
• Bundled fiduciary fees charged on an hourly basis
• Real estate taxes and certain partnership costs

Despite these simplified reporting guidelines for estates and non-grantor trusts, fiduciaries and trustees may face new challenges related to fee structures and substantiating deductions. The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practice have extensive experience helping high-net-worth individuals maximize the management of their assets and the related tax liabilities.

About the Author: Rick D. Bazzani, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. He can be reached in the firm’s Ft. Lauderdale CPA office (954) 712-7000 or at

Five Strategies for Responding to IRS Audits by Edward Cooper

Posted on August 07, 2014 by Edward Cooper

When taxpayers receive notice from the Internal Revenue Service (IRS) advising them that the agency has selected them for an audit, reactions can range from slight anxiety to pure terror. Before diving headfirst into panic mode, taxpayers should consider that an IRS examination is not an investigation into alleged criminal activity. More often, it is merely a request for additional information to ensure taxpayers resolve outstanding issues with their tax obligations. However, failing to cooperate in an IRS audit can result in serious consequences.

Recently, an appeals court ruled against a taxpayer who failed to respond to an IRS audit requesting proof of basis for an unreported $15 million in stock sales. As a result of his failure to act, the taxpayer ultimately owed taxes on the entire $15 million in proceeds.

1. Do not ignore requests from the IRS. Ignorance is not bliss when dealing with IRS audits. Throwing away IRS notices and hiding out will only raise more red flags and escalate the situation.

2. Do respond promptly to requests for information. Taxpayers should contact their financial advisors and tax preparers to help research and compile documentation to support their claims.

3. Do not destroy records. Shredding records of evidence once an investigation has begun is a crime. Moreover, taxpayers should recognize that the IRS has the power to access files from other reporting agencies, interview third parties, subpoena financial statements and even hire private investigators to support its case.

4. Do not lie. Taxpayers have a right to remain silent, but lying to federal agents is perjury, a criminal offense.

5. Be proactive and cooperative. Taxpayers should contact their tax preparers and attorneys to understand IRS requests and all of the options available to them. Together, they may develop a strategy that includes being accommodating to IRS requests and willfully turning over records in order to mitigate risks of penalties and criminal charges.

About the Author: Edward N. Cooper, CPA, is a tax director in Berkowitz Pollack Brant’s Tax Services practice. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or

The ABCs of Required Minimum Distributions for IRAs by Jack Winter

Posted on August 05, 2014 by Jack Winter

Individual Retirement Accounts (IRAs) offer taxpayers a simple method to save for retirement with pre-tax dollars and allow those contributions to grow tax-deferred over time. Account holders incur tax liabilities penalty-free when they withdraw funds at age 59 ½, or when they begin taking the minimum distributions required by law when they reach age 70½.

Required minimum distributions (RMDs) from tax-deductible traditional IRAs are 100 percent taxable. The mandatory amount of withdrawal is not arbitrary nor is it the same each year nor every account holder. While IRA trustees, custodians or issuers typically compute the RMD on behalf of account holders by January 31 each year, it is the account holders’ responsibilities to meet their minimum distribution requirements. Failure to do so will result in stiff penalties as high as a 50 percent tax on the undistributed amount.

While many who invest in IRAs do so with the intent to live off the accumulated savings upon their retirements, circumstances change over the course of one’s lifetime. Balancing evolving situations and needs with distribution requirements demands account holders engage in careful and consistent planning.

Timing Required Minimum Distributions

Taxpayers must begin taking minimum distributions from their IRAs in the year they turn 70½, or no later than April 1 of the following year. For all subsequent years, they must take the RMD by December 31. Failure to meet the RMD requirements will result in a 50 percent penalty on the undistributed amount.

Should taxpayers choose to wait to begin taking RMDs until April 1st of the year after they turn 70 ½, they may end up taking two RMDs in that calendar year. The result of the additional RMD may put taxpayers in a higher tax bracket and increase their tax liabilities on the withdrawn amount. Conversely, taxpayers who withdraw more than the minimum requirement in one calendar year are not permitted to apply the difference to their RMDs in future years.

Calculating Required Minimum Distributions

Required minimum distributions can change from year to year, depending upon several factors. Calculations are based on tax code tables that consider the balance in the retirement account as of Dec. 31 of the prior year, the account holder’s age at the time of the withdrawal, and his or her life expectancy. The RMD may rely on a uniform lifetime table; a joint and last survivor life expectancy table, when the named beneficiary is a spouse who is 10 or more years younger than the account owner; or a single life expectancy table, when the account holder inherited the IRA from someone other than his or her spouse.

Special Rules for Taxpayers with Multiple IRAs

Taxpayers with more than one IRA must consider the value of the aggregate of all of their retirement savings accounts and calculate the RMD separately for each account they own. Subsequently, they have the option to withdraw funds from one, multiple or all of their accounts to satisfy their annual minimum distribution requirements.

Special Rules for Non-Deductible IRAs

Contributions made to non-deductible IRAs create tax basis. In other words, account owners are taxed on the money they contribute to these retirement plans. Subsequently, a portion of the RMDs individuals take from these accounts later in life is tax-free. Challenges can occur when taxpayers comingle deductible and non-deductible IRAs, and they fail to record properly the tax basis of their original contributions. As a result, the account holders may be taxed on the principle of their IRAs rather than the income.

Special Consideration for Inherited IRAs

When individuals inherit IRAs from deceased spouses, they have two choices. They may roll the accounts into their own IRAs and wait to take RMDs after reaching age 59½, or they may keep the accounts as inherited IRAs and begin taking annual distributions, and paying the related taxes, within five years after the original account holder passed away. When non-spouses inherit IRAs, they have no choice but to begin taking the required distributions detailed in the Single Life Expectancy Table and paying the relevant taxes on those distributions. However, depending upon the age at which the original account holder passed away, IRA beneficiaries have the option to take a lump sum distribution or a lifetime payout. With the latter, beneficiaries may stretch tax deferrals over their lifetimes and take more than the required minimum distributions amount each year.

The only time survivors do not pay taxes on inherited IRAs is when the plan is a Roth IRA.

Roth IRAs

Minimum distribution requirements do not apply to Roth IRAs, which enable individuals to grow contributed earnings tax-free. Qualified distributions from these plans are also non-taxable when the following conditions are met: Distributions are taken at least five years after the first taxable year account owners made a contribution to the plan and when the distribution is taken either after the account owner turns 59½, after the account owner’s death or due to the account owner’s disability. When distributions do not meet these qualification standards, the earnings are subject to ordinary income taxes and a 10 percent penalty.

Roth IRAs present a unique tax-planning strategy for traditional IRA owners. By converting some of their traditional IRA earnings to Roth plans, individuals may avoid the RMDs at age 70½ and take future distributions tax-free. However, it must be noted that conversions or recharacterizations of traditional IRAs to Roth plans will trigger tax consequences for which taxpayers will need to evaluate their options and plan properly.

Retirement planning strategies have complex rules and impactful tax consequences. To maximize opportunities and ensure compliance with regulations and accommodations to evolving needs and circumstances, individuals should consult with financial advisors on an ongoing basis. This will ensure that initial strategies will continue to meet desired goals and provide adequate income upon one’s retirement.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director of Berkowitz Pollack Brant’s Tax Services practice. For more information, call (954) 712-7000 or email

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