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Monthly Archives: December 2018

To Give Or Not to Give Is No Longer A Taxing Issue by Jeffrey M. Mutnik, CPA/PFS

Posted on December 27, 2018 by Jeffrey Mutnik

One of the welcome provisions contained in the Tax Cut and Jobs Act (TCJA) is a doubling of the estate, gift and generation-skipping transfer tax exemptions for the years 2018 through 2025. Nevertheless, on Jan. 1, 2026, the law calls for those amounts to roll back to their inflation-adjusted 2017 levels. Due to the temporary nature of this provision, many high-net worth families have been left to wonder whether the government will penalize them later for making gifts during the brief period of higher exemption limits. This is no longer an issue, thanks to proposed regulations recently issued by the IRS and U.S. Treasury.

Under U.S. tax law, transfers of assets between U.S. spouses are generally tax-free. However, U.S. citizens and residents who make transfers to all other people via gift or bequest must account for the potential tax liabilities of each of those transactions. If the total of all gifts one person makes to another person in 2018 does not qualify for or exceeds the annual gift-tax exclusion of $15,000, then the excess amount will be absorbed by the grantor’s lifetime exclusion, which the TCJA increased to $11.18 million in 2018, up from $5.49 million in 2017. This higher lifetime exclusion will be adjusted annually for inflation beginning in 2019, when it will be $11.40 million, and through tax year 2025.

Because the TCJA increased the exemption for only eight years and failed to provide immediate guidance about what the sudden reduction in the exemption level would mean for taxpayers after 2025, many families put their estate planning on hold for most of 2018. With the recently issued Proposed Regulations, the government makes it clear that it desires to respect transactions that occur during this eight-year period using the heightened exemption and will not penalize taxpayers who take advantage of this. Therefore, even if your total assets do not rise to the level of being taxed today, the hope of winning the lottery is alive and well and could certainly change your fortunes tomorrow.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.

 

Protect Yourself and Your Business from the Rising Threat of Cyber Fraud by Anya Stasenko, CPA

Posted on December 21, 2018 by Anya Stasenko

As you ring in a New Year and prepare for the April tax filing deadline, it is critical you recognize that this season brings with it a heightened risk of identity theft and cyber fraud for which you must take necessary precautions to protect yourself, your businesses and your clients. Criminals are continuously coming up with new and more sophisticated methods to trick unsuspecting taxpayers into willingly handing over their money and/or personal information to scammers. The good news is that you can take steps to detect and prevent these scams throughout the year.

Common Scams 

Criminals are known to pose as government agencies or other trusted sources, including financial institutions, payroll services companies, accounting software providers and even taxpayer’s own employees and friends, in an attempt to get victims to pay a fictitious bill or release sensitive information. Not only do fraudsters make these communications look official and sound like they are from a legitimate source, they even go so far as to create imitation websites that are extremely difficult for victims to differentiate from the real ones.

In one common scheme, criminals pose as the IRS and either email, telephone or text taxpayers to demand payment of a phony tax liability. If taxpayers do not comply, the scammers become aggressive and threaten victims with arrest and even deportation. Similar frauds alert victims that one of their passwords are expiring or one of their accounts need to be updated. The criminal’s goal is to entice users to click on a link to a fake website that steals usernames and passwords or to open an attachment that downloads malware or tracks keystrokes on victims’ computers.

In addition, there are a number of scams in which criminals may impersonate your business’s actual employees, including payroll and human resource executives, or vendors who you know and work with on a regular basis. These phishing attempts, which appear to be legitimate, involve requests for lists of employees’ names, social security numbers and bank information and/or instructions for changing the pay to account of an employee or vendor. Unless you actually verify through telephone or face-to-face contact that the email is in fact from the purported sender, you may unwittingly send payment to an actual criminal and essential say goodbye to those dollars.

Protect Yourself and Your Business

 Identity theft and cyber fraud are very real problems that endanger individuals and businesses and their financial information. According to the IRS, there was a 60 percent increase in tax-related bogus email schemes alone in 2018.

Here are a few steps to take to protect against phishing and cyber fraud schemes in 2019:

 

  • Be vigilant; be skeptical. Never open a link or attachment from an unknown or suspicious source. Even if the email appears to come from someone you know, proceed with caution. Cyber crooks are adept at mimicking trusted businesses, friends and family — including the IRS. Thieves may have compromised a friend’s email address, or they may be spoofing the address with a slight change in text, such as name@example.com vs. narne@example.com. You can easily be tricked by the mere change of the letter “m” to “r” and “n”.

 

  • Phishing schemes thrive on people opening messages and clicking on hyperlinks. When in doubt, don’t use hyperlinks and go directly to the source’s main web page. Remember, rarely will a legitimate business or organization ask for sensitive financial information via email.

 

  • If you receive an unsolicited email requesting you to share change sensitive data or make changes to bank account information, pick up the telephone, dial the number that you have for the purported sender (do not simply call the phone number listed in the email) and confirm that the request is legitimate before you take any action.

 

  • Remember that the IRS does not initiate spontaneous contact with taxpayers by phone or email to request personal or financial information. In addition, IRS will not call taxpayers with aggressive threats of lawsuits or arrests.

 

  • Use security software to protect against malware and viruses found in phishing emails. Some security software can help identify suspicious websites used by criminals.

 

  • Use strong and unique passwords to protect each of your online accounts. If necessary, use a password manager to help you remember your login credentials for each account. Criminals count on the fact that most people use the same password repeatedly, giving crooks access to multiple accounts if they steal a password. Experts recommend using a passphrase, instead of a password, with a minimum of 10 digits, including letters, numbers and special characters. Longer is better.

 

  • Use multi-factor authentication when offered. Two-factor authentication means that in addition to entering your username and password, you must also enter a security code, often sent to you as a text to your mobile phone. Even if thieves manage to steal your usernames and passwords, it is unlikely they will also have your phone.

 

  • Engage audit professionals to conduct check-ups of your organization’s internal controls. The effectiveness of your business’s efforts to protect sensitive data is dependent on the policies and procedures you have in place.

 

About the Author: Anya Stasenko, CPA, is a senior manager with the Audit and Attest Services practice of Berkowitz Pollack Brandt, where she provides business consulting services, audits of financial statements and agreed upon procedures as well as pre-immigration tax planning for foreign persons and owners of foreign and domestic entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

IRS Increases Retirement Plan Contribution Limits for 2019 by Jack Winter, CPA/PFS, CFP

Posted on December 19, 2018 by Jack Winter

Taxpayers can save more in 2019 for their future retirement thanks to new contribution limits announced by the IRS.

Workers who participate in their employers’ 401(k) or 403(b) retirement savings plans can contribute a maximum of $19,000 to those plans via salary deferral in 2019, up from $18,500 in 2018. Workers age 50 or older can contribute an additional $6,000 per year.

For qualifying taxpayers with Individual Retirement Accounts (IRAs), the IRS increased for the first time since 2013 the annual contribution limit from $5,500 to $6,000 in 2019, or up to $7,000 when taxpayers are age 50 and older. In addition, the IRS increased the income ranges for determining taxpayers’ eligibility to make deductible contributions to IRAs and/or to contribute to a Roth IRA.

Contributions to IRAs are deductible when the taxpayer or his or her spouse is covered by a retirement savings plan at work. Depending on the taxpayer’s filing status and income, the amount of the deduction may be reduced or phased out completely based on the following:

  • The phase-our range for single taxpayers covered by a workplace retirement plan is $64,000 to $74,000, up from $63,000 to $73,000.
  • For married couples filing jointly in which the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
  • When the spouse making the contribution is not covered by a workplace retirement plan, the deduction phases out when the couple’s income is between $193,000 and $203,000.
  • The income phase-out range for single and heads of household taxpayers making contributions to Roth IRAs is $122,000 to $137,000, or $193,000 to $203,000 for married taxpayers filing jointly.

About the Author: Jack Winter, CPA/PFS, CFP, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he provides estate planning, tax structuring and business advisory services to individuals, families and business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Revisiting C Corporations after Tax Reform and Potential Tax-Free Sales of Corporate Stock by Barry M. Brant, CPA

Posted on December 17, 2018 by Barry Brant

The permanent reduction of the corporate income tax rate from a maximum of 35 percent to a flat 21 percent has led many businesses to reevaluate their current tax positions and reconsider their entity choice. The decision to convert from a pass-through entity to a C corporation, however, should not be based solely on how the IRS will tax business earnings in the short-term. Instead, business owners should consider a broader range of short- and long-term factors unique to their specific circumstances, including, but not limited to, their stage of development, the industry in which they operate, the makeup of their investors, their plans for distributing earnings, and their exit strategies.

Over the last few decades, pass-through structures have been the entity of choice for most closely-held domestic businesses. Owners of S corporations, LLCs and partnerships, could avoid both the U.S.’s corporate tax rate, which was among the highest in the world, and the imposition of a second level of tax on dividends distributed to their owners or the sale of corporate stock. On the contrary, owners of these businesses pay taxes just once, at their individual income tax rates, on their share of the entities’ profits. With tax reform and the reduced corporate tax rate changes, C corporations are now a more attractive structure for tax purposes. This is especially true when entities meet the requirements for issuing qualified small business stock (QSBS) and there is a likelihood of selling those shares as part of an exit strategy five years or more down the road.

Under Section 1202 of the tax code, individuals who acquired stock after Sept. 27, 2010, in a qualifying small business structured as a C corporation may exclude up to 100 percent of the gain they incur from selling those shares after Dec. 31, 2017. The amount of the gain eligible for exclusion can be as much as the greater of $10 million or 10 times the shareholder’s basis in the stock, which could translate to hundreds of millions of dollars in tax savings for qualifying C corporation shareholders. In other words, business owners and investors can realize a 0 percent tax rate on the profits they reap from selling stock in qualified small business corporations, provided they meet a long list of requirements. For example, they must have acquired the stock directly from the issuing entity or by gift or inheritance and held onto it for a minimum of five years before the sale. Special care should be taken to document any tangible or intangible property shareholders contribute to the corporation in exchange for the QSBS.

Electing to be a C corporation that issues QSBS is especially beneficial to start-up businesses that seek to raise as much capital as possible, in as many rounds as needed, from private investors and/or the public equity markets. Unlike S corporations that are limited to a maximum of 100 shareholders, C corporations can issue stock to an unlimited number of investors, including private equity funds.

On the downside, C corporations will continue to pass a second level of tax at a rate of 23.8 percent onto their shareholders when they pay dividends to them. However, the slashing of the corporate rate to 21 percent lessens this blow as does a business’s ability to control the timing of the dividend distributions and related tax liabilities they pass on to their owners.

In general, businesses in start-up and early stages are more likely to retain and reinvest earnings, building up ample working capital to finance their operations and continuous growth, rather than distributing profits to shareholders. In fact, owners of C corporations may limit their tax burden to only 21 percent of corporate earnings and avoid additional tax exposure for many years as long as they plan carefully and refrain from paying out dividends or becoming subject to an accumulated earnings tax. Conversely, owners of S corporations will pay taxes on all of their businesses’ earnings at a rate as high as 37 percent as well as a potential 3.8 percent Net Investment Income Tax (NIIT) regardless of whether or not they receive dividend distributions. The only saving grace for these pass-through entities, if they qualify based on such factors as their lines of business, their income, the wages they pay to employees and the cost of their fixed assets, is a new deduction of up to 20 percent on certain items of business income. Yet, even with the full benefit of this qualified business income (QBI) deduction, S corporation owners will still be subject to a top effective income tax rate of 29.6 percent plus potential Net Investment Income Tax of 3.8%, as opposed to C corporations which can limit their tax liabilities to a flat 21 percent rate, plus state income taxes, if any.

In order for shareholders to be issued QSBS, entities must have gross assets of less than $50 million on the date they issue stock to investors and immediately thereafter, taking into account the amount they raised through the stock issuance. In addition, they must use at least 80 percent of their assets to actively conduct non-service-oriented business activities, which specifically excludes those businesses that provide services in the fields of banking, finance, insurance, investing, hospitality, farming, mining and owning, dealing in, or renting real estate. In fact, no more than 10 percent of the value of the issuing company’s net assets may consist of real estate or stock and securities of unrelated corporations.

While the reduction of the corporate income tax rate may increase interest in C corporation status, there is little doubt that such an election will yield even more favorable tax savings for owners of start-up, early stage and smaller companies that intend to go public or be sold for a profit in the future. QSBS investors can enjoy tax-free income from the sale of the corporation’s stock or even roll over their gains free of taxes into shares of another qualified small business corporation without losing the benefit of the gain exclusion upon the sale of the replacement QSBS. With the new tax law, businesses and their owners should plan even more carefully than ever with the guidance of experienced advisors and accountants in order to maximize the potential benefits of a C corporation.

About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters, including multi-national holdings, cross-border treaties and wealth preservation and protection. He can be reached at the CPA firm’s Miami office at (305) 379-7000, or via email at info@bpbcpa.com.

 

 

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Exporters, Other Businesses May Combine Tax Incentives to Yield Substantial Savings by James W. Spencer. CPA

Posted on December 10, 2018 by James Spencer

Tax reform’s aim to protect the US tax base and prevent domestic companies from shifting jobs, manufacturing and profits to lower tax jurisdictions overseas resulted in a significant benefit to export businesses. Not only does the new law preserve the preferential tax treatment of Interest Charge-Domestic International Sales Corporation (IC-DISC), it also introduces a new tax incentive for C corporations that sell American-made goods or services to foreign customers for consumption outside of the U.S.

Interest Charge-Domestic International Sales Corporation (IC-DISC)

U.S. businesses that sell, lease or distribute goods made in the US to customers in foreign countries may realize significant tax benefits when they create an IC-DISC to act as their foreign sales agent to which they pay commission as high as 4 percent of gross receipts or 50 percent of taxable income from the sale of export property.

Essentially, a qualifying business forms the IC-DISC as a separate US-based “paper” company, typically with no offices, employees or tangible assets, to receive tax-free commissions that the business can claim as deductions that ultimately reduce its taxable income. The amount of the tax savings the business may reap for the commission it pays to the IC-DISC can be as high as 37 percent, depending on its structure (21 percent for C corporations beginning in 2018) and its source of income. Only when the IC-DISC distributes earnings to shareholders will there be a taxable event. At that time, the shareholders will be liable for paying taxes on the IC-DISC earnings at lower qualified dividend rates not to exceed 23.8 percent.

While businesses that make IC-DISC elections are most commonly exporters and distributors of U.S.-manufactured products or their components, software companies, architects, engineers and other contractors who provide certain limited types of services overseas may also qualify to take advantage of this permanent tax benefit.

Foreign Derived Intangible Income (FDII)

To encourage U.S. corporations to keep their exporting operations and profits in the country, the TCJA introduces a new tax-savings opportunity in the form of a deduction of as much as 37.5 percent on profits earned from Foreign Derived Intangible Income (FDII).

This new concept of FDII is defined as income C corporations earn from (1) sales or other dispositions of property to a foreign person for a foreign use; (2) an IP license granted to foreign person for a foreign use; and (3) services provided to a person located outside of the U.S. The types of services that qualify for FDII are not severely restricted, like they are for IC-DISC applications.

Under the law, FDII earned after Dec. 31, 2017, is subject to an effective tax rate of 13.125 percent until 2025, when the rate is scheduled to increase to 16.046 percent for a total FDII deduction of 21.87 percent. That’s quite an incentive for domestic businesses to use the U.S. as its export hub and distribute products made in the country to foreign parties located outside the country!

It is important to note that like most provisions of the tax code, the FDII deduction is subject to a number of restrictions and calculation challenges. For example, it applies only to domestic C corporations, which under the TCJA are subject to a permanent 21 percent income tax rate beginning in 2018, down from 35 percent before tax reform. In addition, the amount of the deduction is reduced annually by 10 percent of the corporation’s adjusted basis of depreciable tangible assets used to produce FDII.

Planning Opportunities

Corporate taxpayers that combine the benefits of an IC-DISC and the new FDII deduction may receive enhanced tax savings. However, every business entity is unique and not all businesses will qualify to apply the benefits of both export tax incentives. However, with proper planning under the guidance of experienced tax professionals, businesses can maximize the benefits that are available to them.

For example, an S corporation or LLC with an IC-DISC may not realize the added tax savings of the FDII deduction, which is only available to C corporations. While an S corporation may consider changing its entity structure to a C corporation to take advantage of the lower tax rate, it must first consider its unique business goals and weigh them in context against all of the new provisions of the new tax code, which will affect the tax liabilities of both the business and its shareholders.

Companies doing business across borders can successful plan around the new provisions of tax law with the strategic counsel and guidance of knowledgeable advisors and accountants with deep experience in these matters.

About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service

FAFSA App May Make it Easier for College Students to Apply for Financial Assistance by Joanie B. Stein, CPA

Posted on December 10, 2018 by Joanie Stein

Families with children preparing to attend college for the 2019-2020 academic year may have an easier time applying for loans, grants and scholarships from federal and state sources thanks to a redesigned Free Application for Federal Student Aid (FAFSA) website and the introduction of a new mobile app called MyStudentAid, which is available for Apple and Android phones.

The FAFSA application period for next fall officially began on Oct. 1, 2018. It is recommended that families begin the application process as soon as possible for two important reasons. First, some aid is awarded on a first-come-first-served basis, and the earlier families file the FAFSA, the more time they will have to review their Student Aid Reports, make corrections to their forms, if needed, and compare the offers for aid dollars that they receive. In addition, families should recognize that completing the FAFSA, whether online or on a mobile device, is no walk in the park. The form includes more than 100 questions, many of which applicants will not know the answers to without first doing some research into their finances and other personal information. The sooner families begin the process, the more time they will have to locate requested information and complete the form without significant delay.

Following are some of the steps that families can take to prepare in advance and make the FAFSA application process go as smoothly as possible:

 

  • Know the social security numbers, drivers’ license numbers and birthdates for the student and his or her parent(s);

 

  • Have a hard copy of the family’s tax returns from the most recent tax year and/or access the IRS’s Data Retrieval Tool on the FAFSA website or by visiting https://ww.irs.gov in order to have your tax information automatically transferred from the IRS to the FAFSA;

 

  • Gather the most recent statements of bank and brokerage accounts, 529 college savings plans and the current value of other assets (excluding the family home), and be prepared to identify whether the owner of those accounts are the parent(s) or the student; and

 

  • Be prepared to list at least one college that the student hopes to attend. Students can change this information or add the names of additional schools at a later date.

 

Finally, families should not assume that their students will not qualify for financial aid, perhaps because the parents’ income is too high. In fact, only a small portion of parents’ income and assets figures into a students’ potential aid calculation. Instead, a student’s eligibility for financial aid will be more affected by assets held in his or her own name. This is something that families should consider and plan for under the guidance of professional accountants and financial advisors far in advance of a child’s entry into a higher education institution.

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

Real Estate Rehabilitation Tax Credit Changes under New Tax Law by Joshua P. Heberling

Posted on December 06, 2018 by Joshua Heberling

The rehabilitation tax credit that provides an incentive for real estate owners to renovate and restore old or historic buildings has been modified under the Tax Cuts and Jobs Act (TCJA) signed into law in December 2017.

Under the new law, taxpayers claiming a 20 percent credit for the qualifying costs they incur to substantially rehabilitate a building must spread out that credit over a five-year period beginning in the year they placed the building into service, which is the date on which construction is completed and all or a portion of the building can be occupied. Excluded from the credit are any expenses that taxpayers incurred to buy the structure.

In addition, the law specifically eliminates the availability of a reduced 10 percent rehabilitation credit for pre-1936 buildings. However, owners of certified historic structures or pre-1936 buildings may qualify for temporary relief under a transition rule when they meet the following conditions:

  • The taxpayer owned or leased the building on Jan. 1, 2018, and he or she continues to own or lease the building after that date.
  • The 24- or 60-month period selected by the taxpayer for the substantial rehabilitation test begins by June 20, 2018.

Qualifying for and claiming the rehabilitation tax credit can be a complicated process for which taxpayers should seek the counsel of professional tax advisors and accountants.

About the Author: Joshua P. Heberling is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he focuses on tax planning and compliance services for high-net-worth individuals and businesses in the commercial real estate, land development and office market industries. He can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

 

 

The Law Governing Admissibility of Expert Witness Testimony in Florida – It’s Frye Not Daubert! by Richard S. Fechter, JD, CAMS, CFE

Posted on December 05, 2018 by Richard Fechter

In a crucial 4-3 decision, the Florida Supreme Court in Delisle v. Crane, Case (No. SC16-2182) (Oct 15. 2018), clarified the law governing the admissibility of expert witness testimony in Florida, moving away from the strict Daubert standard used in federal courts to the less rigorous Frye standard. Previously, Florida trial courts that were unsure of which standard to apply when analyzing expert testimony and corresponding pretrial motions typically utilized the Daubert standards enumerated under Federal Rule of Evidence 702.

In 2013, the Florida Legislature passed a law modifying Florida Statute Section 90.702 to adopt the Daubert standard, despite the Florida Supreme Court’s repeated affirmations of Frye. The recent decision in Delisle held that the Legislature overstepped its authority when it adopted Daubert and enacted the 2013 legislation because the manner in which trials and litigation are to be conducted are “procedural” matters, which are entirely within the province of the Florida Supreme Court under Article V, Section 2(a) of the Florida Constitution. The new ruling invalidates Florida Statute Section 90.702 and rejects the Daubert standard for admitting expert testimony in Florida courts.

What are Frye and Daubert?

The Frye and Daubert tests are competing tests that courtroom judges use, prior to trial, to examine the reliability and admissibility of expert testimony that a party seeks to introduce into evidence once the trial begins. The assessment usually follows a request (or Motion) by one of the parties in the legal proceeding. However, that is where the similarities between these two competing standards for assessing the admissibility of expert testimony end.

First, Frye does not apply to all expert testimony. Rather, it applies narrowly to testimony that a judge determines to be “new or novel scientific evidence” that is not firmly well-established in the scientific community. Only after a Court makes such a determination will it then consider the substance of the admissibility of expert testimony.

The initial assessment required under Frye includes a determination that the expert testimony seeking to be admitted is generally accepted in the field. According to Frye, “in order to introduce expert testimony deduced from a scientific principle or discovery, the principle or discovery ‘must be sufficiently established to have gained general acceptance in the particular field in which it belongs.’”[1] Thus under Frye, the experts’ methods and techniques must be “generally accepted” in the scientific community.[2] In practice, it means a judge should evaluate evidence whether a testifying expert forms their opinion from generally accepted principles. This might require a judge to review the expert testimony, scientific and legal publications, and judicial opinions to assess general acceptance of the principles underlying an expert’s opinion.

In comparison, Daubert applies to ALL expert opinions, not just those opinions determined to be new or scientifically novel. Under Daubert, the initial assessment performed by the Court includes an evaluation of the expert’s methods and requires the expert testimony to be not only generally accepted (Frye) but also, “scientifically reliable” and relevant to assist the trier of fact in determining pertinent issues in the case at hand. The Court makes these determinations after a Daubert motion is made and a hearing is conducted. Court hearings to assess the admissibility expert testimony under the Daubert test are often lengthy, technical, and costly; more costly, on average, than hearings under the Frye test. The hearings performed under Daubert to determine admissibility are sometimes referred to as “mini trials,” in which a judge might hear evidence and arguments and before ruling that all or some portion of an expert’s opinions are admissible or inadmissible. These mini trials, also known as Daubert hearings, address many of the substantive issues that are expected to be litigated at trial.

The Florida Supreme Court in Delisle summarized these two competing tests as follows:

“Frye relies on the scientific community to determine reliability, whereas Daubert relies on the scientific savvy of trial judges to determine the significance of the methodology used.” Moreover, Daubert covers more subject areas and involves a multi-factorial analysis to determine admissibility. In contrast, Frye is simply general acceptance inquiry.

The Delisle Opinion and Its Effect on Forensic Accounting Expert Witnesses

Delisle will have a profound impact on litigation in Florida. It ensures that the Frye standard will remain in Florida courts,[3] and, in turn, make it more difficult to strike or exclude expert testimony. This, according to most scholars, is because Daubert involves a much more vigorous threshold for admitting scientific evidence. Without the Daubert requirements of an evidentiary hearing or the scientific reliability and relevancy of expert testimony, there likely will be less barriers to the introduction of expert opinions.

By reverting to the Frye standard, Florida courts will likely raise fewer challenges to litigation involving testimony from forensic accountants and valuation analysts. This is not only because Frye applies only to expert opinions relating to new scientific principles (which arguably does not include many areas of forensic accounting), but also because Frye (unlike Daubert) allows experts to provide testimony that relies solely on their experience and training without regard for scientific fact. This exception is so inclusive that Florida state courts infrequently hear challenges to the admissibility of expert testimony.

Testifying experts are now clearly under one evidential standard for admissibility in Florida courts (Frye) and a different one in Federal courts in the US (Daubert). For forensic accounting expert witnesses, this likely means there will be fewer challenges to exclude expert testimony in Florida cases.

About the Author: Richard S. Fechter, JD, CAMS, CFE,  is associate director of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice, where he has extensive experience conducting forensic accounting investigations and providing expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or via email at info@bpbcpa.com.

Daubert vs. Frye – Key Differences

 

 

Daubert[4]

 

Frye

Applies to all expert opinions, whether they are consider new or not. Applies only to expert opinions considered to relate to a “new or novel” scientific issue.

 

State statute and the courts determine admissibility of expert testimony.

 

Experts’ opinions must be generally accepted in the scientific community to be admissible in Court.
Expert’s testimony must be based upon sufficient facts or data.

 

No sufficient facts or data requirement
Expert’s testimony must be the product of reliable principles and methods (i.e., scientifically reliable).

 

No reliability requirement
Expert’s testimony must be relevant to the case at issue.

 

No relevancy requirement
The expert must apply the foregoing principles and methods reliably to the specific facts of the case.

 

No reliability requirement

 

Determination of whether the principles and methodologies of the offered expert testimony are reliable by considering:

 

·         Whether the expert’s theory or technique can, or has been, tested;

·         Whether the theory or technique has been subject to peer review and publication;

·         Whether there is a known or potential rate of error of the technique or theory for a particular scientific technique; and

·         Whether the theory or technique is generally accepted in the relevant scientific community.[5]

 

No review of principles and methodologies used or how those principles and methodologies were applied to facts of case at issue
Judges act as “gatekeepers” who regulate the admissibility of expert testimony based on relevant factors.

 

Admissibility of expert testimony depends on the standards set by the expert’s scientific community.

[1] Frye v. United States, 293 F. 1013 (D.C. Cir. 1923)

[2] The Frye standard was originally codified under Florida Statute Section 90.702,

“If scientific, technical, or other specialized knowledge will assist the trier of fact in understanding the evidence or, in determining a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify about it in the form of an opinion; however, the opinion is admissible only if it can be applied to evidence at trial.”

The language from this original statute is expected to be reinstated at the next legislative session.

[3] See Bundy v. State, 471 So. 2d 9 (Fla. 1985); Hadden v. State, 690 So. 2d 573 (Fla. 1997).

[4] Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 593-94 (1993).

[5] See, Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) (applying Daubert standard to non-scientists).

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