Bob’s Journal for 9/2/21

Be Sure Your Tax Person Is Serious About Data Security

The cyber thieves changed targets over the last few years, and you need to protect yourself from their new strategies.

For a long time, the cyber thieves would steal data from individuals using various schemes. Then, they’d file income tax returns in the names of the individuals’ whose data they stole and have refunds sent to their own bank accounts, not the real taxpayers’ accounts.

The IRS took various actions that made it more difficult for the cyber thieves to continue those practices. In the last few years, the cyber thieves shifted their attention to tax professionals.

Data thefts from tax return preparers and other professionals have increased dramatically, and the IRS is aggressively warning about the trend. When the thieves steal data from a tax professional, they are stealing data of multiple individuals. All the data of each of a firm’s clients potentially can be obtained in one theft.

Having real taxpayer data makes it easier for the thieves to file returns that slip through the IRS’s screening measures. Your life becomes more difficult, because the IRS will stop processing returns using your ID number until the situation is resolved.

Tax professionals need to take actions to maximize protection of client data. The IRS recommends that tax professionals follow certain policies. You need to ask your tax professional if he or she is taking the appropriate actions.

Multi-factor authentication should be used on all software and online services of the firm. That means more than a username and password is required to access the software or service. The additional authentication might be a texted or emailed code, a fingerprint, or an iris scan, among other possibilities.

The firm also should require strong passwords to be used by all employees in addition to the multi-factor authentication. Even cell phones should be protected.

Employees who work remotely should use virtual private networks to protect their communications.

The firm also should back up all sensitive data to a secure external network that isn’t connected fulltime to a network.

The firm should regularly train all employees, including support staff, in how to avoid phishing, or spear phishing, scams. Most cyber thieves use these scams to obtain access to a tax professional’s systems.

Email isn’t secure. Ask your tax person what the firm does to ensure employees don’t respond to emails in which thieves pose as potential or actual clients and don’t download attachments or click on links in emails from the crooks.

Data files exchanged between employees or between employees and clients should be sent over a secure system, not through email.

The firm, even if it is one person, should track its activity with the IRS. The firm needs to know that there aren’t more returns being filed under its identification number than it has actually filed and that its accounts with the IRS aren’t being used by others.

Be sure the firm uses current software and operating systems. Some firms like to use software they’ve had for years, because it still works fine and is less expensive. But it probably isn’t updated and is full of security holes.

Though the goal is to avoid data and identity theft, a tax professional and its technology staff need to know the signs that there might have been a data breach. Staff needs to be trained to search for the signs regularly.

Paper files and documents still create a threat. The tax firm should ensure all documents with client information are secured in locked cabinets with limited access when not being used. There also should be shredding and recycling protocols that protect data.

Each firm that handles taxpayer data should have a written data security plan. The Federal Trade Commission administers the federal law that requires the plan. The IRS provides materials on its website for small firms to develop a plan. Be sure your tax pro has a written security plan and follows it.

Economic Strength, Federal Aid Spur State Income Tax Cuts

In 2021, 11 states reduced their income tax rates, according to the annual survey from The Tax Foundation. Ten states reduced individual income tax rates, and five states reduced corporate income tax rates, with some states cutting both individual and corporate rates.

In the early stages of the pandemic in 2020, there were many forecasts that states would have substantial reductions in revenue and struggle to close budget deficits.

Instead, many states saw revenues increase and enjoyed budget surpluses for the fiscal year.

Of the 10 states that reduced individual income tax rates, only Wisconsin failed to reduce its top marginal rate.

Eleven states reduced individual or corporate income tax rates: Arizona, Idaho, Iowa, Louisiana, Missouri, Montana, Nebraska, New Hampshire, Ohio, Oklahoma and Wisconsin. North Carolina still is considering reducing both corporate and individual income tax rates.

The rate reductions often were accompanied by other changes, including consolidating tax brackets, eliminating state deductions for federal taxes paid, or increasing the standard deduction to match the federal tax code’s increase enacted in 2017.

Five states reduced the number of tax brackets in their individual income taxes (Arizona, Idaho, Iowa, Montana and Ohio). Five states reduced each of the marginal tax rates in their individual income tax (Arizona, Idaho, Louisiana, Ohio and Oklahoma).

If you’re considering relocating, check the latest tax rules before deciding on a location.

Little-Known 15-year-old Law Dramatically Changed Retirement Plans

A dense, technical federal law was enacted 15 years ago. The Pension Protection Act (PPA) changed retirement and retirement plans, with some of the changes being unintended.

As its name says, the main intent of the PPA was to increase the financial stability of defined pension plans, the old-style pension plans under which retirees are paid a monthly annuity for life.

The PPA increased the financial standards defined benefit plans had to meet, putting pressure on employers to ensure the standards were met. The plans were required to have higher funding levels and meet those levels in a relatively short time.

The motivation for the law was to prevent the Pension Benefit Guaranty Corporation (PBGC) from collapsing. The federally chartered corporation, which is supposed to be self-supporting, guarantees defined benefit plans by taking over payments to beneficiaries when an employer files for bankruptcy or the plan is insolvent.

In the five years preceding the PPA, the PBGC had taken over the obligations of nine large pension plans. There were worries more large pension plan bankruptcies were on the way and the PBGC would run out of money.

Though private sector employers had been closing defined benefit pension plans since the Employment Retirement Income Security Act (ERISA) was enacted in 1974, the closings accelerated after the PPA. The financial crisis that quickly followed enactment of PPA also was a factor in accelerating the closing of traditional pension plans.

The bottom line is the number of workers who will receive benefits from traditional pension plans has declined sharply, and the number of such plans in existence is much lower than it used to be.

The PPA also had provisions that changed defined contribution plans, such as 401(k) plans.

The PPA allowed employers to automatically enroll workers in 401(k) plans and to provide default investment options when a worker didn’t make choices. Employers also are allowed to automatically increase an employee’s 401(k) contributions over time.

The PPA shored up the PBGC’s finances and made 401(k) plans more robust. It’s not clear that it made the majority of employees more financially secure in retirement.

The Data

Home prices continued to increase through June, according to the S&P Corelogic Case-Shiller Home Price Index. In June, prices increased 2.2% for the month.

Over 12 months, the index increased 18.6%, compared to a 16.8% 12-month increase through May. This is the third consecutive month in which the 12-month price increase set a record and the 13th month of accelerating prices.

The report said the higher prices are the result of more people moving from urban apartments to suburban homes.

The FHFA House Price Index reported similar results. It said home prices increased 1.6% in June from May’s level and 18.8% over 12 months.

Pending home sales reported by the National Association of Realtors (NAR) declined by 1.8% in July from June’s level. That’s the second consecutive month of declines. Over 12 months, pending home sales declined 8.5%.

The Kansas City Fed Manufacturing Index remained strong in August. The index came in at 29, down only a little from the 30 it reached in July.

The Dallas Fed Manufacturing Outlook Survey found that manufacturing continues to grow in Texas but at a slower rate than in previous months.

The Production Index derived from the survey declined to 20.8 in August from 30.8 in July. The 20.8 reading still is well above average.

The General Business Activity Index declined 18 points to 9.0 in August.

Economic growth in the Midwest still is strong but slowed significantly in August, according to the Chicago PMI Index. The index declined to 66.8 in August from 73.4 in July. Plus, July’s reading was unusually high, and August’s reading still indicates strong growth.

Consumer Confidence as measured by The Conference Board, declined in August. The Consumer Confidence Index was 113.8 in August, which is down substantially from 129.1 in July.

This is the lowest level since February. There were substantial declines in both the Present Situation and Expectations components of the index. Concerns about both the Delta variant of COVID-19 and higher prices were cited as reasons for the decline.

Personal Income remained strong in July and was higher than economists’ expectations. The increase in July is believed to be the result of the enhanced child tax credit checks the IRS issued as well as an improving labor market.

But personal consumption spending increased by only 0.3% in July, down from the 1.1% increase in June. The Delta variant of COVID-19 is believed to have led to less consumer activity during the month.

The Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Price Index, increased 0.4% in July. That follows a 0.5% increase in June. Over 12 months, the PCE Price Index increased 4.2%.

The core PCE Price Index, excluding food and energy, increased 0.3% in July and 3.6% over 12 months. The 12 month increase ties the highest level in the last 30 years.

New unemployment claims increased by 4,000 to 353,000 in the latest week. The previous week’s number of claims was the lowest since the pandemic began. But the four-week average hit a new low for the pandemic.

Continuing claims reached a new low for the pandemic, declining to 2.86 million from 2.87 million the previous week.

The number of people receiving benefits in all unemployment programs increased 182,165 to more than 12 million.

Consumer Sentiment, as measured by the University of Michigan, increased slightly in the last half of August. The Consumer Sentiment Index was reported at 70.3, compared to 70.2 at mid-month.

The index was at 81.2 at the end of July. Richard Curtin, chief economist overseeing the survey, said the August reading indicates this is the least favorable economic environment in more than a decade. The decline from July to August was exceeded in only six other months since 1978.

The second estimate of second-quarter gross domestic product (GDP) didn’t change much from the first estimate. The economy was estimated to grow at a 6.6% annualized rate, up from 6.5% in the first estimate.

The Markets

The S&P 500 rose 0.80% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.05%. The Russell 2000 increased 1.87%. The All-Country World Index (excluding U.S. stocks) added 0.70%. Emerging market equities are 1.98% higher.

Long-term treasuries lost 0.30% for the week. Investment-grade bonds increased 0.21%. Treasury Inflation-Protected Securities (TIPS) added 0.42%. High-yield bonds gained 0.47%.

In the currency arena, the U.S. dollar declined 0.24%.

Energy-based commodities increased 1.08%. Broader-based commodities rose 1.58%. Gold gained 0.61%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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