The PCAOB adopted Auditing Standard no. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With An Audit of Financial Statements, to replace Auditing Standard no. 2. The new standard is designed to increase the likelihood that material weaknesses in internal control will be found before they result in material misstatement of a company’s financial statements, and, at the same time, eliminate procedures that are unnecessary, according to a PCAOB statement.

The board also adopted related Rule 3525, Audit Committee Pre-Approval of Non-Audit Services Related to Internal Control Over Financial Reporting, and conforming amendments to certain of its other auditing standards.

The final standard may be used by auditors immediately following SEC approval, and the standard, along with Rule 3525 and the conforming amendments, would be required for fiscal years ending on or after Nov. 15, 2007. The standard is available at www.pcaobus.org/ Rules/Docket_021/2007-05-24_ Release_No_2007-005.pdf.

The SEC finalized guidance for public companies on their responsibilities for internal control over financial reporting (ICFR) as prescribed in the Sarbanes-Oxley Act of 2002. By focusing on controls that best protect against the risk of a material misstatement, the new guidance is intended to strengthen internal control while reducing unnecessary costs, particularly at smaller companies, says an SEC statement.

The SEC also approved the following related rule changes:

Companies that perform an evaluation of ICFR in accordance with the interpretive guidance now satisfy the annual evaluation required by Exchange Act Rules 13a-15 and 15d-15.

Material weakness is now defined as “a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

The auditor’s requirement to report on management’s evaluation process of ICFR has been eliminated and the auditor need only opine directly on ICFR.

The effective date of the interpretive guidance and adopted rules will be 30 days from their publication in the Federal Register. The full texts of the guidance and rules are available at www.sec.gov/rules/interp.shtml and www.sec.gov/rules/final.shtml.

FASB has amended Financial Interpretation no. 48 to replace the ultimately settled standard for negotiation or litigation with an effectively settled standard. FASB Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, provides new guidance on how an enterprise may determine when a previously unrecognized tax position may be recognized under FIN 48, Accounting for Uncertainty in Income Taxes.

FIN 48, which is effective for all fiscal years beginning after Dec. 15, 2006, requires enterprises to assess whether a tax position is more likely than not to be sustained on review and to recognize in its financial statements only the largest amount of benefit from the tax position that is greater than 50% likely to be realized.

Previously, an enterprise could also recognize a tax position when the tax matter was ultimately settled through negotiation or litigation. Under FSP FIN 48-1, the position may be recognized upon effective settlement, which considers the following:

The taxing authority completes its exam procedure, including all appeals and administrative reviews it is required or expected to perform for the tax position.

The enterprise does not intend to appeal or litigate any aspect of the tax position included in the completed examination.

It is remote that the taxing authority would examine or re-examine any aspect of the tax position.

The guidance states that a tax position does not need to be specifically reviewed or examined by the taxing authority to be considered effectively settled; but a tax position is no longer considered effectively settled and should be re-examined if the enterprise becomes aware that the taxing authority may examine or re-examine the position.

The full text of FSP FIN 48-1 is available at www.fasb.org/fasb_staff_positions/fsp_fin48-1.pdf.

The Small Business and Work Opportunity Tax Act of 2007 became law in May as part of a supplemental spending bill for the war in Iraq. Effective with its signing, one provision increases and broadens penalties for tax practitioners who prepare a return or refund claim reflecting an undisclosed unreasonable position. It defines a position as unreasonable unless it is reasonably believed more likely than not to be sustained. Formerly, preparers who signed a return that understated tax liability could be subject to a $250 penalty if the position lacked a realistic possibility of being sustained on its merits and the position was not disclosed or was deemed frivolous. The new law increases the penalty to the greater of $1,000 or half of the income derived from the return. The new law also increases a preparer penalty for a willful or reckless understatement from $1,000 to $5,000 or half the preparer’s income from the return, whichever is greater, and extends penalties to preparers of gift, estate, excise and employment returns.

Other revenue-raising provisions include extending “kiddie tax” treatment for tax years beginning after May 25 to 18-year-olds and students who are 19 to 23 (see “ The Dreaded Kiddie Tax,” page 55), creating a new penalty for refund claims lacking a reasonable basis and doubling to 36 months the time allowed the IRS to notify taxpayers of a deficiency before penalties and interest are temporarily suspended. For the full text, see HR 2206 at www.thomas.gov.


Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.


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