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50-something and not saving for retirement? There are plenty of us

A Wells Fargo report printed in the LA Times says 41% of people in their 50s are not saving for retirement in any 401(k), IRA or similar vehicle. At age 54, I’m squarely in the middle of this demographic and served as an example of the results. Over the last two years I’ve had to empty every account to rebuild after super storm Sandy and still have over $150,000 in high interest rate debt to repay before I can begin rebuilding my retirement accounts. I made the mistake of thinking that insurance reimbursements, SBA loan FEMA, state funds or commercial loans through mortgage refinance would be available. I was wrong on all accounts. So now I fall into this category of non-savers.

Now I figure that one of five things will happen, listed here in order of most preferred to least preferred: 1) the commercial lending market will eventually ease and I can refinance and pay off my business debt in a normal manner and then return to a “traditional” cash flow that includes retirement savings, 2) I’ll be financially strapped paying off this debt for at least another five years and another decade to rebuild retirement funds, 3) I’ll be able to sell or otherwise cash in on my business for retirement income in about 15 years at age 70 (an unknown at this point), 4) I’ll not live to retirement age so I won’t need to worry about it, or 5) I’ll not get to actually retire and will need to keep working until I need to become dependent on someone else (my kids). Laying it out like this serves as eye-opening reality check for me.

Before this, I never imagined that I’d have debt at this age or not be saving anything. I guess that I always presumed that people with healthy six digit incomes who weren’t saving simply weren’t trying hard enough. Now I know that is not true. But mine is just one story. What about the other millions in this situation? I’d like to read other people’s stories and learn how you plan to handle it.

How I inadvertently contributed to incorrect tax treatment of HRAs

Imagine that you are a mechanic and someone walks into your shop and asks you to put wings on his Honda Civic. You might say, “That’s silly, Civic’s don’t fly” and dismiss the request. Then three more owners walk in with the same question. You think about it some more and say “Well, it might look cool even if it can’t fly; let’s try it”. Then after a few dozen such requests, you assemble a Decorative Civic Wing Mounting Kit that your shop sells to the public. Then one day you get a visit from the Federal Aviation Administration saying that they are investigating a complaint about a Civic stuck on an airport runway that could not take off because the wing mount failed.

Such is the case of my work with Health Reimbursement Arrangements (HRA). I’ve written dozens of articles and produced free resources that have been used and apparently sometimes misused by businesses for about two decades. Then in 2014 federal tax law changed as a result of the Affordable Care Act. Most HRAs are now obsolete and have little practical value in small business planning today. Now the tax problems are coming out of the woodwork as businesses plan to terminate their HRAs. The tax problems we are finding now are not the result of the 2014 changes but are due to mistakes and misinterpretations made well prior to 2014. They don’t have a 2014 tax planning issue but rather a prior year reporting error.

Over the past week I’ve heard from 4 widely different businesses with improperly designed HRAs. All four have prior year tax liabilities as a result of the HRA errors. It is not clear how they will resolve the problems and I am not the accountant for any of these firms. The latest one specifically pointed to  an article I wrote as the source of his misinformation. The passage quoted as the source of his misunderstanding was taken out of context and he apparently ignored the bold type and underscored cautionary portions also included in the same article that would have easily helped  him avoid the tax reporting error.

The specific tax issues that came up in this week’s communications required these clarifications:

1) HRAs can not be used to put away tax-free money for some future health care expenses. (HSAs can be used for this purpose).

2) HRAs can not accept employee contributions or be funded with salary reductions. (FSAs can be used for this purpose).

3) HRAs can not be used in a small LLC where the only employees are a husband and wife.

4) HRAs are usually not useful for small business owners or partners.

5) Beginning January 2014, HRAs can not be used for small business employees who are not covered by the employer’s primary health insurance.

I feel bad that some of my published tax advice was misinterpreted. I admit that part of the reason that I write specific articles it to capitalize on public demand for information on a specific issue. Yet public demand does not always translate into common sense. If a bunch of people ask the same specific question “How do I …” then I’ve been inclined to publish an advisory article on that same tax topic, regardless of whether it makes much sense in the larger scale or context. Going forward, I’m more likely to avoid answering some types of tax question like, for example, “How do I get receipts for my $1 donations to street corner charity collections?”. It’s not that there is anything wrong with answering the question but rather any answer would give undue credibility to some unstated presumption that it is advisable or required to get receipts for small donations. In order to avoid the problem of someone saying “You said I needed receipts to take deductions for $1 charitable donations”, it might be better to not give the advice at all in that context.

In any event, I am available to help with voluntary compliance measures for businesses that have improperly reported HRA transactions. It is always better to take these corrective measures voluntarily rather than wait for an audit. Improper HRA tax treatment is easily detected in any examination of small business records and the potential penalties can be especially severe because the taxes in question represent an under-reporting of wages taxes – something the IRS takes very seriously.

Post-Sandy Government Shame List

In the two years since Sandy, I have found myself on the front line of an unfortunate number of unjustifiable actions taken by government against my small business clients and neighbors in the bayshore region of South Jersey. This list compiles ten of the most terrible government actions taken in the two years since Sandy.

  1. New Jersey state government’s exclusion of Cumberland County and the bayshore region from the nine county recovery funding plan. It was unconscionable for the state government to use a redlining strategy to deny aid to the poorest part of the state.
  2. Issuance of local municipal tax lien foreclosure warnings against those who are struggling to rebuild their homes and businesses since Sandy.
  3. The local municipality charging the usury rate of 18% interest against those who have been unable to catch up on post-Sandy property tax bills.
  4. Cumberland County Health Department’s forcible eviction of lifelong residents who lost their permanent water supply and had to rely on a temporary garden hose supply while their water well was rebuilt.
  5. The state of NJ building inspector’s issuance of stop work orders and resulting fines for even the most basic post-Sandy repair projects.
  6. The local municipality’s insistence on correcting newly discovered zoning deficiencies as a pre-condition of issuing even the most basic storm recovery construction permits even when the previously unknown violations existed for decades before Sandy.
  7. The Small Business Administration’s denial of 98% of all Sandy recovery loan applications.
  8. The New Jersey Economic Development Authority’s denial of aid because IRS pre-Sandy tax transcripts are not in a format acceptable to the Authority (due to no fault of the applicant).
  9. New Jersey Sea Grant’s denial of a waste water pump out grant application because the property owner has not able to obtain insurance after Sandy.
  10. U. S. Treasury’s failure to issue any tax relief to Sandy victims. The only relief offered was an extension of deadlines for the filing tax returns due in 2013. Even the late filing relief was challenged in later IRS enforcement actions against my clients. There was no relief to the casualty loss limitations or the waiver of penalties for those who had to take an emergency withdrawal from their retirement account to repair or relocate.

I’ve already given two interviews and expect to write a few editorials to make the most of 2 year Sandy anniversary. While I don’t like the negative tone of this “shame list” (just as we all hate negative political advertisements), the fact remains that this type of blog post remains the most effective in reaching large number of readers and influencing public opinion. As always, I welcome comments and feedback.

Investment custodian vs. broker/dealer (revisited)

Years ago I wrote a short Q&A format newspaper column, reproduced here, on the topic of  an investment broker/dealer vs. custodian. The topic continues to receive attention today and I presume that the underlying consumer question focuses on safety of investment holdings. Recent inquiries caused me to wonder whether there is an easier and perhaps more useful way to approach the topic from a consumer perspective. This short list is what I came up with:

  1. The basic original distinction was that a custodian firm is responsible for safekeeping client assets. A broker/dealer firm provides trade execution services and insurance.  For most retail investment accounts today, the brokerage firm also serves as custodian so this distinction is lost.
  2. Investment custodians and investment broker/dealer firms are practically indistinguishable from a consumer’s perspective. Collectively, these firms receive and hold your investment dollars, handle transactions and issue periodic reports of your holdings. Combined account services extend insurance provided by  the Securities Investor Protection Corporation (SIPC)  on client assets.
  3.  The line between commissions vs. non-commissioned services is now so blurred now that we should not even bother to list any possible distinction.
  4. It is important to distinguish between an insured firm and an uninsured entity. Almost all of the consumer rip-off cases, like the Madoff case, happened because investor funds were not held by an investment custodian firm or a broker/dealer firm. If you write a check or authorize a wire transfer to “ABC Bank, custodian”, then your assets are insured against embezzlement. If you write your check to “Bernie Madoff Investment Advisers” then you are not insured.
  5. The single most important thing an investor can do to safeguard against embezzlement if investment funds is to receive a statement directly from the investment custodian firm or broker/dealer firm. Do not rely solely on statements received through an adviser, attorney or accountant no matter how much you trust that person.
  6. This discussion has nothing to do with investment risk or market risk. If you buy an investment that later drops in value and then you sell it, you lose money no matter what firm is holding the funds.

New CPA Office Makes a Value Offer for 2014 Tax Preparation

I am pleased to announce the launch my tax return preparation practice for the 2014 tax season. I am prepared with the most advanced software, qualified support staff and ready to handle electronic filing for all types of individual and small business tax returns anywhere in the U.S.

In order to reduce the risk that I’ll be spending valuable time during tax season marketing for new clients, I am making this value offer available now until the end of December:

The first 100 new clients, individuals or businesses, that make an advance reservation for tax return preparation services will be ensured priority scheduling, will be locked in to last year’s median industry rates (this year’s will be higher) and I will include a year-end tax planning session at no additional charge. An advance tax-planning session is the best way to save on taxes and make the filing process as easy as possible. I request a $100 deposit with the reservation for individuals, $200 for business tax returns.

Last year’s industry average tax preparation rates (these include non-CPA services as well) are published on my web site under the title “Managing the cost of accounting services”. I do not plan to accept more than 100 reservations, so this is a first come, first served offer.

If you need an experienced accountant at very reasonable rates, I suggest this is an excellent opportunity to build a professional relationship as one of the first clients of my new CPA practice. Please call or email me to make a reservation.

Tony Novak, MBA, MT
Certified Public Accountant
Mail: P.O. Box 333 Newport NJ 08345
Telephone in NJ: (856) 282-1016 or in PA: (610) 572-1724
Web:  and

Small businesses wrestle with Form 941 Employer’s Quarterly Federal Tax Return

IRS Form 941 Employer’s Quarterly Federal Tax Return is, almost by definition, one of the most often-encountered sources of tax trouble for small businesses. This is the tax form that reconciles the amount of wage tax that has been sent (or is now being sent) with the employer’s liability for collecting and submitting these funds. It must be done every three months. Failure to do so it treated more seriously than other types of tax reporting (income tax filings, for example) and the IRS will quickly threaten criminal action if a small business does not respond to several reminders to file the Form 941.  Interest and penalties also apply to late payment of wage taxes.

As a practical matter, most small business Form 941 filings are handled by the same payroll companies that handle all the other payroll-related transactions. These professionally prepared filings are unlikely to be a problem. Problems are most likely to surface before and after payroll company these service contracts. In those cases, it is usually possible for the accountant to reconstruct the filing information from available accounting records.

The most common source of problems of wage tax reporting stems from mis-categorizing workers as independent contractors. If the IRS considers them to be employees then the business is responsible for the wage taxes (often with interest and penalties by the time to problem is aired).

In my office, I have three ways of submitting the Form 941. Two are electronic filings built into accounting software systems. The third way is manually. The manual approach is best for solving problems left by situations described above. I recently completed work on a “missing 941″ problem and it took about 4 hours to reconstruct the accounting information, verify it and complete the missing return. Earlier I worked on a case where a naive young business owner did not submit wage taxes, used the money to run the business, went bankrupt and then faced severe and even life-altering consequences. In this case, a re-vamp of his entire personal financial planning was required. It took almost a decade but he is back on a good track today.

It makes sense for any small business facing problems with wage tax reporting to speak with an accountant as soon as possible. I offer a limited free telephone consultation for this purpose.


Non-permitted contingent fees and commissions for CPAs

Over the past month two of my web sites have received a growing numbers of visitors from Google and Bing search queries requesting examples of non-permitted contingent fees for CPAs. It appears that they come from multiple sources but I can not explain the sudden public interest. The reason, I suppose, is that I’ve written about two topics peripherally related to the subject: CPAs acting as regulated navigators for the Health Insurance Marketplace and, more recently, various social media posts about how I love the new AICPA Statement of Standards in Personal Financial Planning Services. Each of these posts is only cursory; I’m certainly not an expert on either topic.

The topic it interesting to me and I find it a bit disturbing that there seems to be little information available to the public who may ask “What types of contingent fees or commissions are not allowed for CPAs?” There are two simple and obvious categories of fees that are not allowed and I think that this information ought to be more obvious to the public.

The first area of restriction is for attest clients, AKA audit clients. While this is an important restriction, it applies only to the relatively small number of clients that require some type of independent audit service. Most clients do not, so this restriction does not apply. This restriction rarely applies to a typical CPA’s individual tax or advisory clients because the large majority of CPAs working in this field do not perform audits. As a result this restriction has little significance for most people, especially those who would be searching the internet for information on this topic. For the purposes of my social media posts when I do not perform any audits, I can simply skip this discussion.

The second area of restriction had much wider application. It applies to disclosure of fees and compensation. CPAs are required to disclose contingent fees and commissions. Conversely, a contingent fee or a commission that is undisclosed is not permitted.

This second topic apparently has the potential to trigger multitudes of follow-up questions like “examples of non-permitted fees” or “cases of non-permitted fees”. What does “disclosed” specifically mean in relation to the timing of typical client work? Does this mean the fee specific to a client or the CPA’s total cash and non-cash compensation related to firms that handle such transactions? What about endorsement contracts that extend for periods longer than the client engagement; does this mean compensation only during or before and after as well? All of these questions are likely to come up as consumers search for information governing CPA performance.

As a real life example, my work related to publication of consumer information related to the Affordable Care Act and its required insurance products earns me fees from insurance exchanges and insurance companies. I’m not licensed as an Obamacare agent or navigator but do receive fees for writing, endorsing and referring. As far as I know these fees have never been connected to an individual accounting or planning client. But the point is that I would not know if it was connected and so how would I be able to disclose it? Is simply stating that I receive contingent fees and commissions from the companies I endorse sufficient? If I wanted to make a more specific disclosure, how would I approach that since the amounts change monthly without any data that would allow me to connect the specific fee with a specific client?

The financial services industry is complicated and I don’t presume to have any of these specific answers. Rather, I would continue to rely on the “small test” that contingent fees and commissions must be fairly disclosed under the professional standards known as “ET sections” (the old rules that apply to all CPAs) as well as the new AICPA standards of practice for personal financial advisers.


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