LEVINE, KATZ, NANNIS + SOLOMON, P.C.

The Internal Revenue Service has announced its annual cost-of-living adjustments and dollar limitation adjustments for pension plans for tax year 2003.

Many limitation amounts remain unchanged from 2002. Some of the changes that did occur are not reflective of cost-of-living increases but are a result of the scheduled increases set out in the Economic Growth and Tax Relief Reconciliation Act of 2001.

The following limitations are effective January 1, 2003:

The maximum limitation for the Code Sec. 415(b)(1)(A) annual benefit for defined benefit plans remains unchanged at $160,000.

The Code Sec. 415(c)(1)(A) limitation for defined contribution plans remains unchanged at $40,000.

For participants who separated from service before 2003, the Code Sec. 415(b)(1)(B) limitation is computed by multiplying the participant's compensation limit, as adjusted through 2002, by 1.0159.

The dollar amount under Code Sec. 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan with a 5-year distribution period remains unchanged at $800,000. The dollar amount used to determine the lengthening of the 5-year distribution period remains unchanged at $160,000.

The Code Sec. 402(g)(1) limitation on the exclusion for elective deferrals is increased from $11,000 to $12,000.

The annual compensation limit under Code Secs. 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $200,000.

The limitation under Code Sec. 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $7,000 to $8,000.

The limitation on deferrals under Code Sec. 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $11,000 to $12,000.

The dollar limitation under Code Sec. 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $130,000.

The dollar limitation under Code Sec. 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Code Secs. 401(k)(11) or 408(p) for individuals aged 50 or over is increased from $1,000 to $2,000. The limitation under Code Sec. 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code Secs. 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $500 to $1,000.

The limitation used in the definition of highly compensated employee under Code Sec. 414(q)(1)(B) remains unchanged at $90,000.

The annual compensation limitation under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Code Sec. 401(a)(17) to be taken into account, is increased from $295,000 to $300,000.

The compensation amount under Code Sec. 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450.

The compensation amounts under Reg. Sec. 1.61-21(f)(5)(i) concerning the definition of "control employee" for fringe benefit valuation purposes remains unchanged at $80,000. The compensation amount under Reg. Sec. 1.61- 21(f)(5)(iii) remains unchanged at $160,000.

The Social Security Administration has announced a cost of living adjustment of 1.4% for social security benefits. The increase will begin in January 2003.

"Today’s news tells us that inflation continues to be low, which is certainly good news for the elderly and disabled," said Social Security Commissioner Jo Anne B. Barnhart. "Inflation is one of the biggest challenges for people living on a fixed income. The annual Cost-of-Living Adjustment (COLA) ensures that a person's monthly benefit doesn't drop in value over time."

Social Security and SSI benefits increase automatically each year based on the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the prior year to the corresponding period of the current year. This year's increase in the CPI-W was 1.4 percent.

Additional changes will take place in January based on the increase in average wages. Therefore, in 2003, the level of earnings subject to the Social Security tax will rise from $84,900 to $87,000.

A complete fact sheet showing 2003 Social Security changes is available at http://www.ssa.gov/pressoffice/colafacts2003.htm for viewing.

Faced with changes in business ethics and environments, auditors are being called upon to step up to a new standard of fraud detection. One way to facilitate discussions and communications in this area is to use the 3Cs model. The 3Cs represent broad categories of reasons why fraudulent financial reporting occurs.

Explanations of the 3Cs and how to use the model are provided in an article in the current issue of "The Internal Auditor." Highlights:

Conditions. Conditions are the motivations and pressures to engage in financial statement fraud. In recent accounting scandals, these conditions have included pressures on corporations to meet analysts' earnings forecasts. Executives committed illegal actions to mislead users of financial statements about poor or less-than-favorable financial performance.

Corporate structure. An organization's corporate structure can create an environment that increases the likelihood that fraudulent financial reporting will occur. Attributes of the corporate structure most likely to be associated with financial statement fraud are aggressiveness, arrogance, cohesiveness, loyalty, blind trust, control ineffectiveness, and gamesmanship.

Choice. Management is more likely to choose to engage in financial statement fraud when: 1) its personal wealth is closely tied to the company's performance through pay-for-performance plans, 2) management is willing to take personal risks, including the risks of civil or criminal penalties, for corporate benefit, 3) there are opportunities to commit financial statement fraud, 4) there is substantial internal and external pressure to create or maximize shareholder value, and 5) the probability of the fraud being detected is perceived to be very low.

To use the model, auditors can look for "business red flags," (i.e., conditions and circumstances that arise from the perceived need to overcome financial difficulties, such as the inability to meet analysts' forecasts, increased competition, and cash flow shortages), and then advise their clients on steps that can be taken to help eliminate motives and opportunities to engage in fraud.

"The Internal Auditor" is published by The Institute of Internal Auditors.

The Treasury Department has released amended regulations for the disclosure of tax shelters. These rules expand the reporting requirements currently expected of corporations to include individuals, trusts, and subchapter S corporations. "The net is wider," said Pam Olson, Treasury assistant secretary for tax policy.

Starting this year, all taxpayers are required to disclose on their tax returns and promoters are required to keep investor lists for the following six types of transactions:

§ Transactions already categorized by the IRS as tax shelters

§ Transactions marketed by accountants as being confidential

§ Transactions in which the accountant promises a particular tax reduction

§ Transactions that generate a loss for tax purposes of more than $10 million in one year or more than $20 million over two years

§ Transactions where a corporation reports a disparity of more than $10 million of profits between financial statements and tax amounts

§ Transactions that produce a tax credit relating to assets owned by the taxpayer for fewer than 45 days.

The regulations are part of an ongoing effort to crack down on tax shelters. The IRS estimates that illegal and abusive tax shelters are costing the U.S. Treasury as much as $70 billion per year.

One particular area under scrutiny is that of tax evasion techniques using off-shore accounts. "The Internet has provided average citizens access to the offshore world and credit and debit cares have made it possible to easily access money held offshore," explained Jack Blum, partner in the Washington D.C. firm of Lobel, Novins & Lamont and former special counsel to the Senate Foreign Relations Committee on Terrorism, Narcotics, and International Operations.

The new rules amend regulations for Internal Revenue Code sections 6011 (taxpayer disclosure) and 6112 (promoter list maintenance).

The Sarbanes-Oxley Act may eventually have a major impact on the accounting profession. But most of the rules affecting practitioners are still not finalized, leaving considerable uncertainly about what might lie ahead. One of the most pivotal open questions involves the extent to which the new oversight board will promulgate its own audit standards. Other open questions are addressed in the October issue of the "CPA Letter" by Rich Miller, General Counsel of the American Institute of CPAs.

Highlights of issues and answers:

§ What are the major changes and open issues for CPAs? There will be a big change involving inspections of firms. Inspections overseen by the Public Accounting Oversight Board (PCAOB) will replace the peer review process, and there will no longer be any deferral of disciplinary action for matters subject to litigation. It is not yet clear if this will satisfy the peer review requirements of some state boards. There are also new prohibitions against non-audit services, including "expert services" (this term still needs to be defined) and some tightening of the rules affecting internal audit outsourcing and information systems and design. All other services are still permitted, including tax services other than expert services, if pre-approved by the audit committee. There are also new requirements for workpaper retention, with some inconsistencies still to be resolved.

§ When will these provisions take effect? The five-year required period for audit and review workpapers seems to be effective immediately. The expectation is that the Securities and Exchange Commission (SEC) will release rules covering this section. There is also a seven-year period requirement for all documents that support a firm's report. But this and most other provisions affecting practitioners do not take effect until after firms register with the PCAOB. The timing is still uncertain, since the board has not yet been formed.

§ Which firms need to register and by when? According to the Act, accounting firms that "prepare or issue" or "participate" in the preparation of an audit report for an "issuer" must sign up with the board. But the definitions of the terms are not yet clear. The deadline for registering is 180 days after the SEC certifies the new PCAOB, (i.e., declares the PCAOB operational and able to carry out its responsibilities). The SEC must do this by the end of April 2003, but it could happen sooner.

§ How are foreign affiliates affected? This hasn't been fully decided yet. If a U.S. firm relies on the opinion of a foreign affiliate, the presumption is that the firm has consented to supply the audit workpapers of the foreign firm in response to a request by the board or SEC. But there are still questions as to whether or not foreign laws will permit this.