Investing Blog Roundup: Tax Protesters and Audit Likelihood

Comments

1. Paul Williams says:

   February 18, 2011 at 7:53 am

   Hey, Mike. I didn’t realize you were going for the CPA exam. Are you planning to work under a CPA for the experience requirement? I’ve considered doing the CPA exam, but to become a CPA I’d have to go work for someone else for at least three years as I understand it.
2. Mike says:

   February 18, 2011 at 8:04 am

   Hi Paul.

   Nope, no plans to do that. Here in Illinois, we have two different types of CPA certification: “registered” and “licensed.” Both have the same educational requirements, both require passing the exam, and both allow you to present yourself as a CPA.

   The differences are that:
   1. In order to perform audit or attest functions, you need to be a licensed CPA.
   2. Licensed CPA-ship has a 1-year experience requirement as well as greater continuing-ed requirements.

   Due to my time as a tax accountant, I have the experience requirement, but I don’t plan to become a “licensed” CPA anyway, since I have no intention of ever going into auditing. I enjoy my current work and don’t really have any plans to change, so “registered” CPA seems like the way to go for me.
3. Paul Williams says:

   February 18, 2011 at 8:55 am

   Ah, OK. I don’t know that Pennsylvania offers those options. Maybe they do and I missed it. I’m almost finished with the Enrolled Agent (EA) designation which will enable me to do anything a CPA can do as far as taxes are concerned. Only problem is that more people recognize CPA than EA, so I’m always having to explain what it is. Maybe that’s a good thing though?
4. Mike says:

   February 18, 2011 at 9:06 am

   From this page it does appear that, yeah, you’d need either 1 or 2 years of accounting experience in PA.

   I wonder the same thing about the EA designation. My anecdotal experience would indicate that it’s perfectly well known within the financial community, but to the general public, much less so. Depending on your goals though, that may not be a problem.
5. Larry says:

   February 18, 2011 at 9:36 am

   Hi. A link to an interview from you led me to find this article, which questions the wisdom of a strict 4% withdrawal rate. The author (Geoff Considine I think) also thinks it might be beneficial to add some individual stocks to an index-fund strategy. Your thoughts?

   http://portfolioist.com/2011/02/04/how-much-income-in-retirement/
   http://seekingalpha.com/article/91833-income-planning-and-safe-withdrawal-rates
6. Paul Williams says:

   February 18, 2011 at 9:49 am

   Yeah, that looks right. My memory was faulty about the experience requirement because it’s been a while since I looked into it.

   I’ve actually run into several financial professionals who don’t know what an EA is. And I’ve never met someone from the general public who knows what it is. What I’ve heard is that it’s better to include an approved explanation with it. Something like “enrolled to represent taxpayers before the IRS in all 50 states and US territories”. Sounds pretty good, eh?
7. Mike says:

   February 18, 2011 at 10:04 am

   Larry: I agree that if an investor has the ability and desire to do so, varying spending as a function of how well one’s portfolio is doing can make sense.

   The 4% “rule” is an attempt to solve the question, “What’s the most I can take out every year if I never want to have to reduce my standard of living?” If the idea of a varying level of spending isn’t particularly unappealing, then the 4% rule is trying to address a problem that you don’t have, and it makes sense to consider different approaches.

   I categorically reject the idea that investing in individual stocks makes sense (retirement plans that include employer stock notwithstanding). Picking individual investments within an asset class rather than owning the whole asset class just means taking on uncompensated risk.

   Paul: That makes sense to me.
8. Larry says:

   February 18, 2011 at 1:29 pm

   Mike: I understand where you’re coming from, and I have no intention of abandoning my index-based approach. However, I’d like to see your reaction specifically to “Step 4″ (and his conclusion) in the following:

   http://seekingalpha.com/article/76481-the-humble-arithmetic-of-portfolio-management

   He does not sound like an unreasonable person to me.
9. Mike says:

   February 18, 2011 at 1:50 pm

   As to this comment, “There is no essential reason to believe that the way that the indexes are weighted is the best approach.” …I fundamentally disagree. I would argue that the fact that the market has allocated a given amount of capital to a company is a meaningful fact. And I think that should be the starting point for all analysis. (That is, varying from the market-cap weighted portfolio should only be done for a very good reason. Or put another way, I think the burden of proof lies on somebody to show why the market is wrong rather than right.)

   The idea of overweighting value stocks to capture the value premium is one I think makes sense, if you’re comfortable with the not-particularly-well-defined incremental risk involved. (That said, if I were to do it, I’d use a regular value index fund rather than a “fundamental” index fund a la Rob Arnott.)

   On the topic of “active share,” Paul Keck (pkcrafter on the Bogleheads forum) did a great job analyzing the study in question here. I think he did a better job addressing it than I could.

   To my above 1-item list of “reasons to own individual stocks” I’ll add Considine’s absolutely valid point about increased tax-efficiency via tax loss harvesting. Though I don’t think savings really kick in until we’re talking about a taxable portfolio of at least a couple million dollars (such that the transaction costs to set up and maintain such a portfolio would be outweighed by the tax savings and the savings in expense ratio).
10. Philip says:

    February 18, 2011 at 3:35 pm

    Good luck with that portion of the exam. I always had trouble with the financial accounting section. That’s the last one I passed. I’m sure you’ll knock it out as knowledgeable as you are. Thanks for including me in the roundup.
11. Mike says:

    February 18, 2011 at 6:05 pm

    Thanks for the good luck wish, PT.

    I think I over-prepared actually, based on the practice tests I’m taking. (Of course, I could be proven wrong! Man, I hope not…) Not as bad as under preparing, but still frustrating in that I think I could have taken it three weeks ago, but by the time I realized I was ready, I couldn’t move up my exam date.
12. Jay says:

    February 19, 2011 at 8:15 am

    Good luck on your exam, Mike. Iam sure you will come out with flying colors.
13. Mike says:

    February 19, 2011 at 8:49 am

    Thanks, Jay.