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Monthly Archives: June 2017

California Court Limits Application of State’s Franchise Tax on Certain Out-of-State Businesses by Karen A. Lake, CPA

Posted on June 29, 2017 by Karen Lake

A recent decision by the California Superior Court limits the economic nexus the state may assert over certain pass-through entities that have a presence in the state and provides qualifying entities with an opportunity to file a claim for a refund of a previously paid California franchise tax.


The matter of Swart Enterprises, Inc. v. California Franchise Tax Board centered around the interpretation of Section 23101 of California’s Revenue and Tax Code, which defines the term “doing business” within the state as “actively engaging in any transactions for the purpose of financial or pecuniary gain or profit.”


In 2010, the California Franchise Tax Board applied this definition and franchise tax treatment broadly to Swart Enterprises, a family-owned corporation based in Iowa that lacks a physical presence and any sales activity in California but does own a 0.2 percent membership interest in a multi-member, manager-managed limited liability company (LLC) investment fund based in the state.  In its 2017 decision to award a tax refund to Swart for $1,106.72 in previously paid franchise taxes, fees and penalties, the court made a distinction between taxpayers who are general partners or managing partners of LLCs and those who hold passive, non-managing interest and lack the right to manage or control the entities’ decision making processes. The court noted that just because an LLC elects partnership treatment for federal tax purposes does not mean that the LLC members should be treated as general partners actively engaged in the business. Yet, depending on the specific facts and circumstances of a California LLCs structure, its non-managing members may still have a requirement to file state tax returns and report their distributive share of source income from the LLC.


The California Franchise Tax Board is narrowing apply the Court of Appeal’s decision in Swart to companies that have identical fact patterns as Swart Enterprises. These fact pattern are summarized as the following:

1.     Company has .002 or less membership interest in a manager-managed LLC that is doing business in California

2.     Company acquired its .002 or less membership interest in manager-managed LLC after the original members made the decision to be manager-managed,

3.     Company’s sole connection to California is the above interest in a California LLC.


Entities that previously filed and paid California corporate franchise taxes on a passive, minority investments in LLCs based in the state should consider filing a protective claim for a tax refund. Moreover, passive investors “doing business” through an LLC in any state should consider how the Swart decision may carry over to those states’ nexus assertions.


About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. A state and local tax expert, she can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email at


Tax Court Decision has Far-Reaching Impact on Depreciation of Real Estate by Angie Adames, CPA

Posted on June 26, 2017 by Angie Adames

Under Internal Revenue Code Section 167(a), taxpayers are permitted to claim a depreciation deduction for the exhaustion, wear and tear, and obsolescence of tangible property that is used in a trade or business or held for income production. The amount and determination of the deduction, which is limited to a “reasonable allowance” for the recovery of a taxpayer’s cost basis in the property (excluding land) over the property’s useful life, recently came under scrutiny by the Internal Revenue Service (IRS).

Generally, taxpayers bear the responsibility of proving depreciation deduction claims, which are determined by using the cost of the property as its basis, as well as the applicable depreciation method, the applicable convention, and the applicable recovery period. When taxpayers make a lump-sum purchase of improved real property and the underlying land, the value of non-depreciable land must be separated from the computation of the basis in the depreciable property. The higher the allocation of depreciable property, the higher the tax depreciation deduction allowable to the taxpayer.

In the matter of Nielsen v. Commissioner, the U.S. Tax Court rejected the taxpayers’ allocation of costs between depreciable and non-depreciable property and concluded that the allocations made by the IRS, based upon County tax assessments, were more reliable than the allocation methods suggested by the taxpayers. The Tax Court stated that while taxpayers are qualified to determine the value of the property they own, there is “no authority that suggests” taxpayers are suitable or eligible to allocate the value of property between land and depreciable property.

In light of this Court ruling, it is vital that property owners substantiate purchase price allocations in order to support the amount of tax depreciation they claim on their federal tax returns. To avoid any potential IRS challenges in the future, taxpayers should consider engaging a county property appraiser or similarly “reliable” professionals to independently assess the value of real estate property’s land separate from its depreciable property. Doing so will provide taxpayers with a more dependable purchase price allocation based on a property’s relative fair market value as well as long-lasting tax benefits.

The advisors and accountants with Berkowitz Pollack Brant work extensively with property developers, contractors, owners and investors to maximize their tax efficiencies, meet complex regulatory requirements and manage issues that require real estate litigation support.

About the Author: Angie Adames, CPA, is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at


Upcoming 2017 Tax Deadlines

Posted on June 23, 2017 by Richard Berkowitz, JD, CPA

July 31:                        Deadline for calendar-year Employee Benefit Plan sponsors to file Forms 5500, 5500-EZ or 5500-SF, Annual Return/Report of Employee Benefit Plan, or receive an automatic extension to file on November 15

July 31:                        Due date for businesses to file 2nd quarter 2017 payroll tax returns and federal unemployment tax

September 15:            Due date for individuals and corporations to make 3rd quarter estimated tax payments.

September 15:            Deadline for calendar-year partnerships and S Corporations to file annual tax returns for 2016, when an extension was previously filed

September 15:            Deadline for June 30 fiscal-year C Corporations to file annual tax returns for 2016, when an extension was previously filed

September 30:            Deadline for calendar-year trusts and estates to file annual tax returns for 2016, when an extension was previously filed

October 15:                 Deadline for individual taxpayers to file federal income tax returns for 2016, when an extension was previously filed

October 15:                 Deadline for calendar-year C Corporations to file annual tax returns for 2016, when an extension was previously filed

Partnerships Must Adapt to New IRS Audit Rules, Liabilities at the Entity Level

Posted on June 23, 2017 by Richard Berkowitz, JD, CPA

For more than three decades, IRS partnership audits have operated under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which required individual partners to pay their share of a partnership’s tax underpayments identified in an IRS audit, unless the partnership elected to be taxed at the entity level.  Since TEFRA’s enactment, partnerships have proliferated in number, size, and complexity, making it difficult for the IRS to audit and collect taxes from partners in large and highly complex entities.  To solve this problem, Congress enacted sweeping changes to the IRS audit rules in the Bipartisan Budget Act of 2015 (BBA).  Beginning in the 2018 tax year, the BBA will require partnerships, rather than individual partners, to be liable for income taxes on all adjustments of partnership income, gains, losses, deductions, credits, and related penalties and interest.

While early adoption of the new rules is permitted, partnerships should begin planning for how these changes will affect the valuation, taxation, and protection of their current and future partners’ interests.

The New Partnership Audit Rules

Under the new partnership audit rules, the burden to pay underreported taxes identified by an IRS audit shifts from individual partners to the partnership in the year the IRS makes the adjustment (the adjustment year), rather than in the year under audit (the audit year).  With this change, a partnership will be responsible for correcting an “imputed underpayment” and remitting taxes at the highest individual rate (currently 39.6 percent), plus penalties and interest, that is in effect during the adjustment year, not the audit year.  This change allows the IRS to collect unpaid taxes directly from a partnership rather than its partners.  Consequently, under the BBA, a partnership’s current partners may be liable to pay for tax benefits received erroneously by former parties in prior years.

The new rules allow a partnership to elect tax treatment at the partner level and transfer audit year tax liabilities back to audit year partners, when the partnership takes one of the following actions:

  1. Within 45 days after receiving an IRS Notice of Proposed Adjustment, the partnership can make a Section 6226 election to issue to all partners during the audit-year examination revised K-1s or similar statements, reflecting each partner’s share of items adjusted by the IRS.  If the partnership elects out of the default rules, each partner would be required to pay taxes for the audit year when the revised K-1 is issued.  Penalties and interest on the underpayment of tax will accrue from the audit year.
  2. Within 270 days after receiving an IRS Notice of Proposed Adjustment, the partnership can issue updated K-1s to all affected partners and convince those partners to file amended tax returns incorporating the IRS adjustments.  All affected partners would be required to pay the additional taxes, penalties and interest for all directly and indirectly affected years.

Time constraints on these elections may cause difficulties for many partnerships, especially those filing an administrative appeal.  Oftentimes, the appeal process may take more time to resolve than the 45- to 270-day timeframe partnerships have to make an election.  Additionally, if a partner-level election is made, the interest rate on tax underpayments will be increased by two percentage points.

Other Exemptions and Relief

The new audit rules apply to partnerships of all sizes for taxable years beginning after December 31, 2017.  However, the law provides an opportunity for certain small partnerships to annually opt-out of the rules when they have 100 or less direct and indirect partners, all of whom are either individuals, C Corporations, foreign entities treated as U.S. C Corporations, S Corporations, or estates of deceased partners.

Taking advantage of this opt-out election requires qualifying partnerships to follow complex reporting and compliance requirements, which includes the obligation to provide the IRS with the names and taxpayer identification numbers of indirect partners who hold an interest in and may be liable for partnership tax liabilities.  Also, when a partnership elects to opt-out, the pre-TEFRA audit rules will apply, which typically means each partner will be audited separately.

Finally, partnerships that wish to avoid underpaid tax adjustments at the 39.6 percent tax rate, can examine the effective tax rates of their individual partners.  Partnerships may qualify for a lower tax rate when they can demonstrate (within 270 days of receiving an IRS notice) that certain partners qualified for a rate adjustment during the audit year because:

  1. Part of the identified underpayment was allocable to a partner that was a tax-exempt entity;
  2. Part of the identified underpayment was due to ordinary income allocable to a C Corporation partner or a capital gain or dividend allocable to an individual partner; or
  3. At least one partner files an amended return consistent with the final partnership adjustment, and pays the tax in full.

Planning Opportunities

One of the first steps a partnership should take to comply with the new audit rules is to appoint a person or entity “with a substantial presence in the U.S.” to serve as partnership representative (PR) to act on behalf of the partnership for all IRS matters.  In contrast to the TEFRA rules, the PR need not be a partner.  Going forward, the IRS will only communicate with and issue notices to the sole PR who represents and binds the partnership and all of its partners in IRS audits and court proceedings.  If the partnership does not appoint a PR, the IRS may appoint one for the partnership.

Regarding timing, a partnership may be able to apply the new rules retroactively to the 2016 or 2017 tax years only when it receives an IRS notice of examination, or files a claim for refund for 2016 or 2017.  To make this early opt-in election, the partners must file a signed statement conforming to the language and manner required by the IRS.

Earlier this year the Treasury Department released proposed regulations on the new partnership audit rules.  Additionally, a Tax Technical Corrections Act was introduced in Congress to address many of the issues arising from these new rules.  While the rules may be modified, partnerships should begin planning now to comply with the new law and address how it will impact their operations.  A partnership should carefully consider each the following items under the guidance of experienced tax professionals:

  1. How will the partnership select a PR to have sole authority in IRS matters?
  2. What processes will be employed to ensure the PR meets his or her reporting obligations to the partners and the IRS?
  3. Does the partnership qualify to opt-out of the new rules or lower its imputed tax?
  4. How should the partnership agreement should be amended to address the new rules?
  5. Does the partnership have any exposure to imputed tax underpayments from prior tax years?
  6. How will the partnership handle tax liabilities incurred by prior partners?
  7. If the partnership issues financial statements, will it be required to accrue income taxes under GAAP or IFRS?

While partnerships have some time to implement the new audit rules, no time should be wasted to meet with tax professionals and begin the planning process.




Reasonable Compensation and Its Effect on the Value of a Business by Scott Bouchner, CMA, CVA, CFE, CIRA, and Sharon F. Foote, ASA, CFE

Posted on June 20, 2017 by Scott Bouchner

Over the next two decades, millions of business owners will sell or transfer several trillion dollars’ worth of privately held business assets. Proper valuations of these entities using an asset approach, an income approach and/or a market approach will provide worthwhile information to both buyers and sellers. However, when using the income or market approaches to valuations, it is important to first normalize a business’ financial statements in order to estimate future expected cash flow that a potential buyer can reasonably expect to receive in return for his or her investment.

The International Glossary of Business Valuation Terms defines normalized financial statements as those “adjusted for non-operating assets and liabilities and/or for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparison”. Such a normalization process requires a business’s valuation to present information on a basis similar to that of other companies in its peer group and in benchmark studies used for comparison and analysis. One of the most common normalization adjustments utilized in valuing closely held companies is officers’ and owners’ compensation.

The purpose of making a compensation adjustment is to remove any distortion of the company’s operating performance caused by compensation and/or perquisites paid to its management team. To reflect a realistic or reasonable value, the valuation professional “normalizes” the company’s cash flows to reflect what buyers can potentially expect to be available to them.

However, the U.S. Tax Court has been examining officers’ and owners’ compensation for decades because the compensation structure of smaller, privately held companies are often less structured and more flexible than that of larger and publicly traded companies. Owners may pay themselves or those related to them higher or lower salaries, or they may provide other forms of incentives and noncash compensation in order to reduce tax liabilities, improve cash flow or business value, or simply to retain cash.

For example, business owners may reallocate income and essentially misrepresent business value when they do any of the following (as well as other actions not mentioned here):

  1. Move income to a close family member who is in a lower tax bracket or who does not actually do any significant work for the company;
  2. Book deferred compensation;
  3. Receive income in another form, such as rent for company facilities held in a separate entity; or
  4. Book loans to the company, which could be considered compensation.

In the context of performing a valuation engagement, owners’ or officers’ compensation must be normalized to reflect the salary and benefits an outside third-party would be paid to fill the same position. To arrive at a normalized compensation figure, valuation analysts would commonly examine the following:

  • The skill set, education, qualifications and experience of the employee;
  • The employee’s duties, the nature, the scope and the time required to do them;
  • The complexity, size and geographic areas serviced by the business’ operations;
  • The condition of the economy and industry the business services; and
  • The salaries, bonuses, benefits and/or other perquisites paid to employees doing comparable jobs in similar businesses in the same geographic region.

To determine if perquisites are at a normal level (for an outside employee), business analysts must evaluate specific items, such as (1) automobile expense allowance, (2) tuition reimbursement, (3) country club and other membership fees, and (4) insurance (health, life, or other types) and retirement benefits. If excessive, these types of expenses would need to be normalized as well.  Analysts must also consider the cost to replace the current owner or officer. Locating a replacement employee could require a long and potentially expensive search as well as a costly signing bonus and/or placement agency fee.

To benchmark what a reasonable range for total compensation may be, valuators will often turn to trade associations, specialty consulting firms or other industry groups that often make this type of data readily available.  Among the more popular resources are the Bureau of Labor Statistics and the RMA Annual Statement Studies. Data can also be found on the Internet, at websites such as, or in the SEC filings of publicly traded companies that may be used as reasonable comparison for the company being valued.

Compensation adjustments can have a significant impact on the value of a business, especially if the business’s value is calculated under an income or market approach using revenues and/or earnings. For that reason, normalization adjustments, such as owners’ and officers’ compensation, must be carefully considered.

About the Authors: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he has served as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. Sharon F. Foote, ASA, CFE, is a manager in the Forensics and Business Valuation practice. For more information, call (305) 379-7000or email

Governor Signs Important Tax Bill for Florida Businesses by Karen A. Lake, CPA

Posted on June 19, 2017 by Karen Lake

On May 25, 2017, Florida Governor Rick Scott signed legislation that affects a wide range of sales and use tax, corporate income tax and property tax issues impacting businesses located in the state.


For businesses, H.B 7109 reduces the sales tax rate on the rental of commercial real estate from current 6 percent to 5.8 percent, effective on January 1, 2018. In addition, the bill extends and expands sales tax exemptions for a wide range of products, including certain animal and aquaculture health products; certain construction materials, equipment and electricity for certain data centers; and (5) purchases of certain building materials, goods and services used for new construction in Rural Areas of Opportunity.


With regard to corporate income taxes, the bill makes the following amendments:

1.     Increases the annual research and development tax credit from $9 million to $16.5 million in 2018

2.     Increases the annual tax credits available for voluntary brownfields clean-up from $5 million to $10 million;

3.     Makes permanent the Community Contribution Tax Credit with a funding level of $14 million each fiscal year, which businesses may also apply against sales tax and insurance premiums tax.


Amendments to property taxes include the following:

1.     An exemption from property taxes for charitable assisted living facilities and a clarification in the required documentation to allow certain nonprofit homes for the aged to obtain an exemption;

2.     A clarification in the property tax exemption extended to properties leased to a charter school, and an extension in the deadline for charter schools to apply for an exemption for the 2016 tax year;

3.     A revised definition of inventory to exempt certain construction and agricultural equipment; and

4.     Tax relief for certain property used as affordable housing, beginning on January 1, 2018;

The advisors and accountants with Berkowitz Pollack Brant work with businesses in Florida and throughout the world to maintain tax compliance and minimize tax liabilities.

About the Author: Karen A. Lake, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant and a SALT specialist who helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at


Renting Your Vacation Home: Tax Benefits and Challenges by Joanie B. Stein, CPA

Posted on June 14, 2017 by Joanie Stein

Purchasing a vacation home provides an individual with a place to get away and relax as well as an opportunity to generate significant cash flow when they rent out those properties throughout the year. However, the IRS will generally consider the rent paid by tenants to be taxable income to the owner and potentially subject to an additional 3.8 percent Net Investment Income Tax.

Whether renting out a home, a condominium, a room or even a boat, taxpayers must understand their rights and responsibilities in order to maximize the benefit of these properties without incurring additional costs.

Sources of Rental Income

Rental income on property may include rent paid by tenants, expenses paid by tenants for repairs or utilities, and costs charged to tenants for early lease termination. Also included in reportable rental income is the fair market value of services provided by tenants in lieu of rent as well as security deposits, when owners use such payment as advance rent for the last month of a lease.  However, owners do not need to report security deposits retained for future damages and intended for return to tenants until the time when the owner actually keeps the money.

Exception to Rental Income Reporting

Owners of vacation property must report on their personal U.S. tax returns all sources of rental income and expenses on Schedule E, Supplemental Income and Loss, unless they use the property as their own residence and rent it out fewer than 15 days per year.

Deducting Vacation Home Rental Expenses

In most cases, owners of vacation homes may deduct from their rental income those expenses  incurred for maintaining, managing and renting the property, including, but not limited to, insurance, maintenance, taxes, interest and professional fees. However, these deduction are subject to limitations.

For example, if the property is used by the owner for personal use for more than 14 days, deductible expenses will be limited to an amount that does not exceed gross rental income. Another exception applies when property owners rent their vacation homes to family members or anyone else who pays less than a fair rental price. In these instances, property owners must divide their expenses between the number of days they use the property for personal use and the number of days they rent it out to others.


Property owners may deduct some of the costs associated with vacation homes by depreciating the portion of the property’s value used for rental each year.  Depreciation begins in the year in which the owner readies the property for income-producing activities and ends when the owner sells the property or converts it to personal use.

The advisors and accountants with Berkowitz Pollack Brant understand the complexities of owning and renting vacation properties and work closely with domestic and international clients to maximize tax efficiencies related to these matters.


About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies.  She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at



Treasury Department, IRS Continue to Focus on Small Captive Insurance Companies by Lewis Kevelson, CPA

Posted on June 13, 2017 by Lewis Kevelson

The Department of the Treasury and the IRS have issued a series of notices that take aim at taxpayers who may use small captive insurance companies (sometimes referred to as mini- or micro-captives) to avoid or evade U.S. taxes. The IRS’s primarily interest is in investigating those taxpayers who create small captives to generate income-tax deductions of up to $2.2 million per year in insurance premiums paid to the captives in 2017 (an amount adjusted annually for inflation).

What is a Captive?

A captive insurance company is a legal entity formed by a business owner to self-insure certain business risks that might be too expensive or not available from commercial insurance carriers. The entity, which is separate from the business, can make a Section 831(b) election to be taxed solely on the investment income from the premiums the business pays to it, excluding taxable income of up to $2.2 million.

Captives may also include certain types of insurance policies for which a high deductible is in place with a commercial carrier and the captive is used to self-insure the deductible portion. The captive must meet the requisite formalities of an insurance company from a regulatory standpoint, and it must also meet the definition of a valid insurance company operation from the IRS or court cases.

Why is the IRS Concerned?

The IRS has focused its attention on small captives because owners of related businesses have the ability to deduct inflated insurance premiums, and the captives can avoid incurring income tax on the net premiums they receive. In addition, the IRS is concerned that high-net-worth families can design the personal holding structure for the captive to allow multiple generations to escape estate tax.

Consider, for example, a business owner who has multiple companies that collectively pay $500,000 per year for insurance coverage needed for ordinary and necessary business needs.   The business owner could keep in place essentially the same necessary insurance policies and then use a captive structure for other, somewhat questionable policies for which the captive may never be called upon to settle a claim. The taxpayer would be allowed to write off up to $2.2 million of additional premiums paid to the captive. In turn, the captive  would accumulate profits in a structure that would not be subject to estate tax but would be able to distribute lower-taxed dividends to family members.

What are Some Recent Law Changes?

Historically, it was common to have a senior family member control an insured business and assign ownership of the captive to a family trust created for the benefit of the business owner’s spouse and children and capable of avoiding estate tax for several generations.  However, Congress included in the Protecting Americans from Tax Hikes Act (PATH Act) certain changes to combat the perception that captives are an estate tax avoidance strategy. Effective January 1, 2017, captives must meet a “relatedness test” so that its ownership is not shifted to the spouse or lineal descendants of the owner(s) of the insured business. The Act requires that there be common ownership (within a 2 percent range) between the insured businesses and the captive. If the captive is owned 100 percent by the senior family member, then the relatedness test does not apply because the junior generation does not own any shares.

Because the PATH Act does not grandfather in existing estate-planning structures, taxpayer will have to modify their prior arrangements to preserve the favorable taxation of the small captive. Alternatively, an existing captive may meet an alternative diversification test when it broadens its pool of policyholders so that it receives at least 80 percent of its net premiums from unrelated parties. Under this alternative test, no more than 20 percent of the net written premiums can be attributable to any one policyholder. To meet the 20 percent threshold, all policyholders deemed related under the Internal Revenue Code are counted as a single policyholder.

Any Good News?

One favorable aspect of the PATH Act is that it increased the deductible net premiums that a small captive could receive, from $1.2 to $2.2 million. Thus, a small captive that can qualify may be in a position to receive net premiums of up to $2.2 million per year tax free.

Are Small Captives Still Viable?

Business owners should continue to consider the use of captives when they have genuine insurance and risk-management needs. The IRS will want to ensure that the captive is operated in accordance with regulatory requirements and that the taxpayer is guided by a team of trusted advisors with the requisite industry experience. With the 2017 increase in premium limits to $2.2 million, business owners may expect some favorable long-term tax benefits as well.


About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he provides tax-compliance planning and business structuring counsel to real estate companies, foreign investors, international companies, high-net-worth families and business owners. He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2050 or via email at



Forensic Interview Techniques are Key to Uncovering Financial Crimes by Richard A. Pollack, CPA

Posted on June 08, 2017 by Richard Pollack

This article originally appeared in Daily Business Review. 

Attorneys involved in forensic investigations are well-versed in the finer points of gathering information and conducting interviews that can uncover the truth from the most reluctant and guarded sources. Careful preparation and planning goes a long way toward building trust and rapport with interviewees, recognizing their verbal and non-verbal clues and avoiding a broad field of legal landmines that can contaminate the entire interview process. Oftentimes, when investigations involve financial issues, for which fraudsters will go to great lengths to cover their tracks, attorneys should consider the benefits of engaging forensic accountants to collect, analyze and interpret complex physical and electronic data and conduct interviews with relevant parties to bring the truth to light.


While forensic accountants do have the technical accounting and audit skills required to understand and unravel complex financial subjects, they are also uniquely proficient in the art and science of investigating the people involved in these matters. It is rare for an alleged criminal to simply confess his or her actions and the extent of their wrongdoing. Rather, a fraud investigation must include interviews with plaintiffs, defendants, expert witnesses and other related parties to identify the non-financial facts of a case, including opportunity and motive as well as causation and damages. Gaining this insight requires forensic accountants, like attorneys, to have a broad understanding of the law, expert knowledge of the financial facts of a particular case and a mastery of effective interview techniques.


Establish Rapport. During the investigation of a purported crime, it is not uncommon for the parties involved to view law enforcement, lawyers, judges and opposing parties as threats. The more intimidated they feel, the more reluctant they will be to answer questions. Therefore, it is important that interviewers take steps to garner the trust of interview subjects and make them feel comfortable from the onset. Remember that an interview should be perceived as a conversation rather than an interrogation.


Establishing a rapport with witnesses can be as simple as offering them a drink before the interview and beginning the conversation with a basic overview of the examiner’s role followed by simple, non-confrontational background questions that are easy for subjects to answer. As the interview proceeds, questions may become more targeted. Another method for interviewers to engage the willing cooperation of witnesses is to mirror the witnesses’ verbal and nonverbal behaviors and repeat their words or sentiments. This gives witnesses the perception that the interviewers “get” them. It puts subjects at ease and allows the interviewers to control the conversation and transition the interview to their line of questioning.


Be Objective.  Establishing a connection with witnesses and avoiding any contamination of evidence also requires interviewers to demonstrate professionalism, empathy and objectivity while avoiding any hints of judgement, criticism or blame. This means that interviewers should choose their words carefully and pay attention to the tone and nonverbal cues they communicate as well as those communicated by witnesses. Open-ended questions should be phrased so that they are not accusatory and do not intimidate witnesses or reveal any facts that the examiners may already know.


Listen and Observe Actively.  Active listening requires interviewers to not only hear and understand the words witnesses speak but to also recognize what they do not say and what they communicate via nonverbal cues. Examiners must pay meticulous attention to a witness’s tone and syntax and his or her body language in order to establish a baseline of the interviewee’s behavioral patterns early on in the interview process. Deviations from these norms may indicate that an examiner has “struck a nerve” and should serve as a signal that they should change the line of questioning or dig deeper to identify if this inconsistency is a sign of deceit. While nervous laughs and uncomfortable pauses are not proof of deception in and of themselves, interviewers must be sensitive to reading changes in witnesses’ behaviors and leverage these opportunities to control the direction of the interview.


Be Flexible. Examiners must remember that the intent of the interview is to gain knowledge and gather new evidence through information provided by the interviewees. Therefore, they should be prepared to think quickly and deviate from a script of carefully prepared questions in order to allow an interviewee’s responses to lead the discussion toward the ultimate pursuit of facts. Some of the most productive interviews are those in which the interviewee does most of the talking.


Understand the People Behind the Numbers.  There is no doubt that financial litigation often involves complex financial transactions. Sorting through layers upon layers of empirical data to connect seemingly invisible dots to trace funds and compute economic damages requires not only technical and analytical math proficiency but also an understanding of the human condition.  Financial statement misrepresentation, fraud and misappropriation of funds do not occur organically in a vacuum. Rather, they require the action of willing participant(s) who have a perceived pressure or motivation to commit these acts, the perceived opportunity to carry them out and a rationalization for their behavior. Forensic accountants are well trained in analyzing communications to identify evidence of these elements, which may be carefully concealed in a subject’s word choice, sentence structure and syntax.


Get out of Your Own Way.  Examiners can be a significant impediment to effective interviews when they fail to pay attention to their own words and behaviors. Interviewers should spend a considerable amount of preparation time deciding how to construct their questions, from the words they use to their tone and demeanor during questioning. There is a fine line between developing a professional rapport with an interview subject and stepping over a line that can contaminate the interview. Similarly, interviewers should be prepared to spend most of their time during the interview process listening, rather than talking, in order to avoid the risk of interfering in a subject’s testimony.


Forensic accountants can be a significant asset to attorneys representing clients in a wide range of litigation matters, including shareholder disputes, breaches of contracts, lost profits, hidden assets and other types of financial fraud. Their advanced knowledge of financial schemes, their ability to analyze significant amounts of complicated data and their understanding of the law are powerful tools that attorneys may leverage to gather pertinent evidence to support and defend claims.


The professionals with Berkowitz Pollack Brant’s Forensic Accounting and Litigation Support practice have extensive experience working with federal and state agencies, legal counsel and other parties on many high-profile fraud investigations.  Their business acumen, technical forensic skills and expert testimony have proven critical in creating a trail of facts to support a wide range of complex legal matters.


About the Author: Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of the Forensic and Business Valuation Services practice with Berkowitz Pollack Brant, where he has served as a litigation consultant, expert witness, court-appointed expert, forensic accountant and forensic investigator on a number of high-profile cases. He can be reached at the firm’s Miami office at 305-379-7000 or via email at




IRS Announces 2018 HSA Contribution Limits by Adam Cohen, CPA

Posted on June 05, 2017 by Adam Cohen

Taxpayers who participate in high-deductible health insurance plans will receive a minimal increase in the amount of pre-tax dollars they may contribute from payroll deductions into Health Savings Accounts (HSAs) in 2018.

The IRS recently announced that the annual HSA contribution limit in 2018 will be $3,450, compared with $3,400 in the current year. For family plans, the annual limitation on deductions will increase in 2018 to $6,900, from the current amount of $6,750.

To qualify for an HSA, taxpayers must participate in high-deductible health plans, which for 2018 are broadly defined as those with minimum annual deductibles of $1,350 for individuals, or $2,700 for family coverage, and those in which deductibles plus annual out-of-pocket expenses do not exceed $6,650 for self-coverage or $13,300 for families.

In addition to providing participants with lower insurance premiums, high-deductible health plans also allow taxpayers to receive triple tax benefits from HSAs. More specifically, taxpayers may make contributions to HSAs with pre-tax dollars, allow those contributions to grow tax-free and withdraw funds tax-free for medical expenses, including out-of-pocket deductibles. Moreover, HSA balances roll over from year-to-year allowing taxpayers to build a sizable financial cushion to pay for the rising costs of medical care, prescriptions drugs and long-term care in retirement.

The U.S. House of Representatives recently and narrowly approved a new healthcare plan that calls for expanding the use of HSAs. Whether this Trumpcare plan passes the Senate or if the U.S. continues an existing of modified Obamacare system is unknown. However, it may be safe to assume that HSAs will be an important component in the U.S. healthcare system in the future.

About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations.  He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail


Florida Residents Can Save on Storm Season Supplies this Weekend by Karen A. Lake, CPA

Posted on June 01, 2017 by Karen Lake

With the start of the 2017 Hurricane Season on June 1, Florida residents will have three days to stock up on storm supplies free of sales tax, thanks to the state legislature.


The Disaster Preparedness Sales Tax Holiday begins at 12:10 a.m. on Friday, June 2, and runs through 11:59 p.m. on Sunday, June 4. During this period of time, qualifying purchases of batteries, flashlights, ice coolers, weather band radios, bungee cords, tarps and portable generators will be exempt from Florida’s 6 percent sales tax, as long as they meet specific sales price thresholds. For example, the sales tax holiday applies only to portable generators with a sales price of $750 or less and to batteries and coolers costing $30 or less. Shoppers may apply retailer coupons, discounts or rebates to reduce a product’s sales price to the amount allowable under the exemption. For more details, visit the Florida Department of Revenue’s Disaster Preparedness website at


About the Author: Karen A. Lake, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant and a SALT specialist who helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at


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