2. Do the qualifying products change among the different sales tax holidays?
Yes, different items are exempt from sales taxes depending on the date. Details of which items are sales tax exempt on the various dates are provided below.

3. What items are exempt from sales tax on sales tax holidays?
The following items will be exempt from sales tax on August 10, 2012 and August 11, 2012.
a.    Clothes and shoes whose sales price is $100.00 or less.
b.    A single purchase of a personal computer and personal computer accessories whose sales price does not exceed $1000.00.
c.    School supplies with a price of $20.00 or less per item.

On October 5th through October 7th 2012, the following items will be exempt from sales tax:
a.    Energy efficient products with a sales price of $1500.00 or less
b.    Water efficient products with a sales price of $1500.00 or less

4. What items specifically do not qualify for the sales tax exemption on sales tax holidays?
The exemption on August 10th and 11th does not apply to:
a.    Clothing accessories, jewelry, handbags, umbrellas, eyewear, watches, watchbands, cell phones, furniture, recreational use computer accessories, items used in a trade or business or for resale, or rentals; or
b.    Sales in theme parks, entertainment complexes, public lodging establishments, restaurants, or airports

On October 5th through October 7th 2012, the exemption does not apply to the purchase of efficient products for use in trade, business, resale, or commercial use.

5. What are “energy efficient products”:
Any energy efficient product including dishwashers, clothes washer, air conditioner, ceiling fan, fluorescent light bulb, dehumidifier, programmable thermostat, refrigerator, door, or window that has be designated by the United States EPA and the United States Department of Energy as meeting or exceeding energy saving efficiency requirements, or that have been designated as meeting or exceeding Energy Star requirements.

6. What are “water efficient products”:
Any product used for the conservation or efficient use of water which has been designated by the United States EPA or the EPA’s Water Sense program as meeting or exceeding water saving efficiency requirements.

1. Adjust your withholding
Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you’d prefer more money in each paycheck this year. If you owed at tax time, perhaps you’d like next year’s tax payment to be smaller. Use IRS’s Withholding Calculator at www.irs.gov or Publication 919, How Do I Adjust My Tax Withholding?

2. Store your return in a safe place
Put your 2011 tax return and supporting documents somewhere secure so you’ll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year’s return.

3. Organize your recordkeeping
Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Review your paycheck
Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.

5. Shop for a tax professional early
If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. You’ll have more time when you’re not up against a deadline or anxious for your refund. Choose a tax professional wisely. You are ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at www.irs.gov.

6. Prepare to itemize deductions
If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. See the Schedule A instructions for expenses you can deduct if you’re itemizing and then prepare an approach that works best for you.

7. Strategize tuition payments
The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Keep up with changes
Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through www.irs.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during summer and tax season. Special Edition tips are sent periodically with other timely updates.

The IRS emphasizes that each household’s financial circumstances are different so it’s important to fully consider your specific situation and goals before making large financial decisions.

As a general observation, most organizations that I encounter do a fairly good job in managing patches for Microsoft operating systems and applications. Smaller organizations may rely on Windows Update while larger organizations may have a more robust patch management system, such as WSUS, for managing Microsoft updates. In both cases, there is little reliance upon the end-user to interact with the update process. This is generally not the case with patching of third party applications, which tend to have a much higher rate of missing patches.

The purpose of this article is not to pat Microsoft on the back or downplay the risk of unpatched vulnerabilities on Microsoft systems, but rather to highlight the fact that MS KB vulnerabilities represent only a small percentage of the threat landscape and ignoring the others is akin to locking the Windows © and leaving the back door wide open (pun obviously intended – credit Stefan Frei, research analyst director at security research firm Secunia for his initial quote).

Secunia recently released their yearly vulnerability report for 2011 (download it here) analyzing vulnerability trends across various operating systems and software vendors. One of the most telling statistics identified in the report confirms a fact that we as penetration testers have known for some time now – that there is a gaping hole in security as it relates to patching of third party applications. In some cases, these vulnerabilities are cross-platform and can affect Mac and *NIX systems as well, so long as the exploit payload is designed to handle these operating systems.

Secunia reports that Microsoft patching mechanisms (be it Windows Update or WSUS) only address 22% of the vulnerabilities associated with their top 50 software portfolio (comprised of the top 50 most common operating systems and applications), leaving the remaining 78% of vulnerabilities being patched by an additional 11 patch distribution mechanisms. Unfortunately for the network administrator, these patch distribution mechanisms are much more difficult to centrally manage. The result? The most common portion of the vulnerability landscape, being third party applications, is also the portion that is most likely to remain unpatched.

Consider the following real-world example: in a recent vulnerability scan I performed on a small network containing 38 Windows servers and workstations, only 2 machines on the network were detected as missing Microsoft patches (excluding 2 recently issued patches that had not been tested and approved for deployment in the patch management system), while 13 were detected with out of date versions of Adobe Acrobat, 14 with out of date versions of Java, and 5 with out of date versions of Flash. I grant you that this is obviously a small business; however this sort of distribution is consistent with those I see in many organizations of varying sizes and complexities.

Attackers are very aware of the disconnect between vulnerabilities and patching as it relates to third party applications. Many common exploit kits that are used for mass exploitation focus on these third party applications because the attackers know all too well that their success rate will likely be higher attacking them. The Contagio Malware Dump Blog maintains a nice spreadsheet matrix of common malware exploit kits and the various vulnerabilities each exploits here. Review of the summary shows a vast number of exploits associated with Adobe, Java, Flash, and other third party applications – much more so than Microsoft vulnerabilities. Consistent with the Secunia report, sorting the vulnerabilities by CVE date also shows an increasing percentage of non-Microsoft vulnerabilities in recent years.

So, now that we are convinced of the threat that the unpatched 78% poses, what can be done about it?

1. Remove unnecessary applications – The smaller your footprint, the less you have to patch so, if you don’t need it, uninstall it! I have read no less than 5 articles in the last month that advocated completely removing Java. Granted, this is easier said than done as most organizations rely heavily on some of the most common culprits. An assessment of your software environment may identify selected instances where these applications may not be necessary. In the case of Adobe, there are alternative PDF readers that can be used that are less commonly attacked (although vulnerabilities are periodically identified in these products just like their more popular counterpart so the same patch management problems apply). If your workstations are not built from scratch (you use OEM installs), then you will be even more likely to find old and unnecessary applications that can be removed. Start by performing an inventory scan of your entire network and then work through the list of applications.
2. End-user education – If the patch distribution mechanism employed requires end-user intervention, then we need to make sure that our end-users are installing the patches. Inform your employees to take the extra 10 seconds to install that Java update instead of clicking “Remind me later” for the next 6 months.
3. Know when new threats emerge – Monitor the exploit landscape and security blogs for new vulnerabilities affecting applications on your network. http://www.exploit-db.com/ is a great resource for obtaining up to date exploits as they are released, and has an RSS feed that you can subscribe to. http://www.securityfocus.com/ also maintains a comprehensive database of vulnerabilities and has a mailing list option. When a new vulnerability is detected and you must rely on your end users to install it, let them know about it.
4. Monitor your network for missing patches - You don’t have to wait for your periodic independent vulnerability assessment or penetration test to provide you with a list of vulnerabilities. Self monitoring provides much more timely information and will likely result in much cleaner pentest reports in the future. A number of vulnerability scanners, including Nessus ($1,200 per year per scanner – free home feed is not licensed for use in a corporate setting) and Nexpose (free community edition for up to 32 IP addresses) will detect missing patches and can be configured to perform scheduled scans on a regular basis. From the open source community, OpenVAS is a popular alternative to commercial offerings.
5. Centrally deploy common applications – Many of the most commonly exploited third party applications, including Adobe, Flash, and Java can be deployed (via .msi) and updated (via .msi reinstall or .msp patch) using Group Policy. This method requires a good deal of manual labor on the part of the network administrator as the GPO will have to be updated and re-deployed each time a patch is issued. GPO deployments of these applications can also be problematic and should not be relied upon without some form of regular vulnerability scanning to make sure that the updates are being deployed properly.
6. Implement a patch management solution that will deploy third-party patches - Although I have been unable to find a free centralized patch management solution that will handle non-Microsoft patches, there are a number of commercial offerings that will do the job. GFI Languard Network Security Scanner (from $7.50 to $32 per IP depending upon volume discount) is a popular vulnerability scanner that also provides for remote remediation and deployment of patches. Shavlik is another common patch management platform that comes in a variety of flavors.

According to Publication 15-A, there are three factors that aid in determining a worker’s status: behavioral control over jobs or projects, financial control of operations, and the type of relationship of the parties. Applying these three elements to an employment situation will help differentiate an independent contractor from an employee of the company.

Behavioral Control.

To assess this factor businesses will ask the question: What control does the business have over how the work is performed? Furthermore, “how the work is performed” can be answered by:

• When and where the work is done.
• What tools or equipment is used.
• What workers to hire or to assist with the work.
• Where to purchase supplies and services.
• What work must be performed by a specific individual.
• What order or sequence to follow.

1. Unreimbursed business expenses. Independent contractors will generally have unreimbursed expenses along with ongoing cost or overhead. Of course there are situation when an employee will have unreimbursed expenses but they are handled differently for tax reporting purposes. Independent contractors would normally report their income and expenses on a Schedule C and an employee would report any unreimbursed expenses on a Schedule A, with certain limitations.
2. Worker’s investment. More than likely an independent contractor will have a significant investment in the tools and facilities used to perform job duties and an employee will be supplied by their employer with the necessary tools and facilities to get the job done.
3. Availability of workers services. Independent contractors are usually available to all businesses and employment opportunities. They will often times advertise their services and have a central location. An employee will be limited or confined to the duties of the company and not be allowed to work for other companies because possible compete agreement issues.
4. Worker compensation. Employees are often times paid an hourly or regular wage. Employees will have benefits and in certain industries, compensated with sales commission. An independent contractor will usually be paid on a per job basis or as supplies come in and sometimes on agreed upon limited time intervals.

Due to the nature of this vulnerability, more press and internet buzz relating to the bug have been generated than with any Microsoft vulnerability than I can remember – perhaps even more than the “Aurora” vulnerability in Internet Explorer back in 2010 that was released as a zero-day and remained unpatched for several weeks. The biggest difference between this vulnerability and Aurora and the vast majority of other security bugs identified in Microsoft systems is that this vulnerability is remotely exploitable by an attacker without requiring the target to actually do anything such as open a malicious file or visit a malicious webpage.

It is generally considered a poor security practice to have any RDP host visible to the internet even prior to the discovery of such a vulnerability – brute-force login tools such as TSGrinder have been available for years to exploit weak passwords on RDP-enabled operating systems. An unauthenticated remote code execution vulnerability discovered in the service means that unpatched systems that are accessible from the internet will likely soon become the equivalent of putting your server out in your parking lot with a big flashing sign that says “come on and log in.” The risk does not stop with internet-facing terminal servers, either. Another logical exploit of the vulnerability would be to use it to propogate a worm throughout a networked environment a’ la NIMDA.

The good news is that patches have already been released and workstations with automatic updates enabled should be patched automatically. The bad news is that many machines rely on users to install the updates (“Remind me later” button). Servers frequently are patched manually in an enterprise environment to prevent automatic reboots and mitigate the risk of a patch taking down a mission-critical server.

The following steps can be taken to keep from getting pantsed by this bug:

1. Patch management – if you are using a patch management solution such as WSUS (if you’re in an enterprise environment and you’re not, then you should), verify that the MS12-020 patch has been approved for distribution and check the patch status of all machines in your environment.
2. Identify your targets – a quick nmap scan of both your internet and external IP ranges for machines listening on TCP port 3389 will narrow down the list of machines that may have the service running (nmap -sT -sV -p 3389 <IP RANGE>). Verify patching of these machines, particularly those that are accessible from the internet.
3. Disable RDP – if you don’t need it then disable it (if you haven’t guessed by now, this is a recurring theme in my posts). In an Active Directory environment, use group policy to centrally administer which machines have RDP enabled and disabled.
4. Secure access – even after patching the bug, it is still best practice not to have RDP directly visible through your firewall. If you must use it remotely, consider disabling direct access to the server and connect to the service through a VPN tunnel or RDP Gateway proxy.

References & Resources:
Microsoft Security Bulletin MS012-020
Technet Blog Post RE: MS12-020
Exploit proof of concept code

In addition to being exposed to vulnerabilities by connecting to wireless networks that you do not own and control, hosting your own wireless network can also open you up to compromise. A common misconception among the non-technical home or SMB user is that if it works then it is configured properly. This is a particularly dangerous misconception in the case of wireless networking since an insecure wireless implementation is basically the same thing as plugging a 200 ft. network cable into your switch and tossing the other end out into your parking lot for the whole world to use. Below we will discuss some basic do’s and don’ts of wireless network configuration.

1. Use WPA encryption instead of WEP. Your access point will have a variety of security options including no security (open access / no encryption), WEP encryption, WPA/PSK encryption, and WPA-RADIUS (enterprise) encryption. WEP encryption has inherent flaws in its design and can be cracked through statistical analysis. You should always use at least WPA/PSK encryption with a strong passphrase to avoid being compromised via WEP vulnerabilities. In the case of an office environment with a Windows domain controller, WPA-RADIUS is a more secure method in which users are authenticated against a domain controller as opposed to the access point itself.
2. Change the default SSID (network name) – By default, your consumer grade wireless access point will be configured with a vendor-specified network name (such as “default” or “Linksys”). Although WPA cannot be directly compromised in the same manner as WEP, the passphrase can potentially be cracked using rainbow tables. Since password hashes are SSID-specific, a separate set of rainbow tables must be used to crack the same password for different SSIDs. These rainbow tables are readily available for thousands of common SSID names including vendor default names. By renaming your network you will force an attacker to generate a specific set of rainbow tables for your SSID before he can try to crack your password.
3. Use a strong WPA passphrase – to further mitigate the risk that your passphrase will be compromised, use a complex password consisting of upper/lowercase letters, numbers, and symbols that are at least 14 characters in length.
4. Disable SSID broadcast on your network – there is no sense in advertising the presence of a network if you don’t have to. Although the network can still be detected using a promiscuous mode scanner, disabling the SSID broadcast reduces the risk that the network’s presence will be identified by a potential hacker.
5. Place the access point in a DMZ – if the wireless network will only be used for accessing the internet and will not be used for communicating with other computers on the network, then placing the AP in a separate network segment behind a firewall will prevent a compromised AP from turning into a compromised network.
6. Try to break in – The best way to answer the question “is my network secure” is to engage a specialist to try to break in to test the security (penetration testing).

Note that this is the last of a four part series of articles dealing with WiFi security for the non-technical user. The previous article in the series may be found here. Please do not hesitate to contact us if you are interested in our various IT general control review, penetration testing, and vulnerability assessment services.

The taxpayers who qualify for this penalty relief include:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17, 2012, filing deadline.
• Self-employed people who, in 2011, experienced a 25% or greater reduction in business income due to the economy.

The penalty relief is available to taxpayers whose income does not exceed $200,000 for married filing jointly or $100,000 for single or head-of-household filers, and cannot be used by taxpayers who owe more than $50,000. New Form 1127-A, Application of Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship, must also be filed to qualify for relief.

Although the IRS frequently provides penalty relief to victims of disasters, offering relief across the board to both unemployed taxpayers and the self-employed who have suffered reduced incomes is unprecedented.

In the same announcement, the IRS said it is doubling the dollar threshold for tax balance due amounts that qualify for the streamlined installment agreement program. Effective immediately, the threshold for taxpayers using an installment agreement without supplying the IRS with a financial statement (Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement) is raised from $25,000 to $50,000 (which was itself raised from $10,000 to $25,000 in the first Fresh Start initiative (IR-2011-20)). The maximum term for streamlined payment agreements was also raised from five years to six years. The IRS emphasized that taxpayers can set up an installment agreement by going to the online payment agreement page (OPA) at www.irs.gov and following the instructions.

The IRS also noted that it liberalized its rules for offers-in-compromise in the earlier round of Fresh Start (IR-2011-20), which also reformed the rules for tax liens.

–Original article from Journal of Accountancy article written by Sally P. Schreiber here.

But the fact of the matter is that truly random audits are much like unicorns – while they exist in mythical folklore, nobody ever actually ever sees one in real life.  Realistically, if you get a notice from the IRS questioning or auditing items on your return, it was NOT random but resulted from a specific cause.  Discussion and education on some of the primary causes of audits will help you both file more accurate returns and reduce the aggravation and expense associated with subsequent notices and audits.

Some of the top reasons for notices and audits are:

1. Unreported/Unmatchable Income from Form 1099’s– Most everyone knows that income payers report certain types of income paid to you on Form 1099 and also send the IRS a copy of the form.  Generally, the income is reported on the return where it would be expected and an IRS computer scan of the return scores a match between the item on the return and the item in the IRS database.  When no match can be determined, the IRS will contact you asking why.Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.There are certain cases where the Form 1099 may be in error or not properly reflect the true taxable income that needs to be reported.  The pragmatic workaround for this situation that will still avoid a notice, is to report with amount from the Form 1099 in the proper place on the return followed by compensating correcting entry (with explanation).  This way, you both insure a match on the computer cross-check and still only report the correct net amount of taxable income. But always make sure to provide ALL Form 1099’s to your accountant to insure they are accounted for in the return.
2. Abnormally High Deduction Levels as Compared to your Income– The IRS keeps excellent statistical records as to the spending profiles associated with certain income levels. For example, if John Q. Normal is considered an average taxpayer with an income of $100,000 per year, he may also be expected to have home mortgage interest in the range of $8,000 and charitable contributions of $4,500.In contrast, if John deducts home mortgage interest of $50,000, it would imply that he owes $950,000 on his residence.  Or as another example, let’s say instead that he deducts $40,000 in charitable donations.Common sense tells us that it just does not smell right for a guy making $100,000 can live in a million dollar house or give away 40% of his pre-tax income to charity.  It will not smell right to the IRS either so expect a letter.

    

3. Recurring Business Losses – When taxpayers deduct recurring losses from partnerships and S corporations, it raises the issue as whether the losses exceed their combined investment and the share of loans to the company.  Under the at-risk rules, this total constitutes their tax basis and establishes the cap for deducting losses.  Large recurring losses are a flag for an audit.
4. Information Items from Outside Sources Indicating Unreported Income– The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts. A recent report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agrees and it will make greater use of these forms in its audit process. So if you are a person who makes large cash purchases or deposits, be prepared for IRS scrutiny. Also, beware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 cash one day and an additional $9,500 cash two days later).
5. Below-Market Salary to Owners of S Corporations – Many owners of S corporation opt to keep their salary arbitrarily low and compensate for the below-market salary by paying out a correspondingly higher dividend.  While this practice is generally income-tax neutral (since any foregone salary increases the pass-thru income from the K-1 by the same amount), the savings rationale is an allocation weighted to heavy dividends and low salary reduces the FICA and Medicare taxes that are only associated with salary.As an example, a noted neurosurgeon’s S corporation business nets $750,000 a year.  He sets his salary at $50,000 and pays out $700,000 in dividends.  It is obvious to anyone that he could not hire a another neurosurgeon for $50,000 to replace himself should he become disabled.The IRS is currently targeting S corporation returns with minimal or below market owner salaries for audit.  Any companies with dividends and owner salaries deemed below market will be subject to reclassification and assessment of FICA and Medicare taxes.

    

6. Other Red Flags –
• Cash businesses – Small business owners, especially those in cash-intensive businesses…taxi drivers, car washes, bars, hair salons, restaurants and the like…are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income.
• Business meals, travel and entertainment – Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too large for the business.

In summary, IRS audits are rarely, if ever, random – they happen for a reason.  Please call our office to discuss any area that you think may put you at an elevated audit risk.

The act extends the 4.2% rate for the employee portion of Social Security tax through the end of 2012. It also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors. The act also repeals earlier-enacted shifts in the timing of corporate estimated tax payments.

The act raises revenue through an auction of the spectrum of public airwaves, currently reserved for television, to allow for more wireless internet systems.

A 2% recapture tax enacted in the December legislation that extended the payroll tax cut through Feb. 29, which effectively capped the amount of wages eligible for the payroll tax cut at $18,350, was also repealed by the act.

TDR’s arise when the creditor grants a concession to the debtor for outstanding debt.  This concession includes any restructuring that is made for economic or legal reasons related to the debtor’s financial difficulties.  The concessions are usually developed under one of two situations: A) an agreement is made between the borrower and creditor or B) the concession is mandated by law or court order.  These concessions usually include, but are not limited to, the following two scenarios: 1) the creditor modifies the terms of the debt or 2) the creditor accepts cash, an equity interest in the debtor, or some other form of assets in full satisfaction of the debt even though the value received is less than that of the balance owed by the debtor.  Regardless of the form of the concession, the objective of the creditor for granting this concession is to maximize the probability of receipt for the outstanding debt.  We will take a look at both scenarios to ensure TDR’s are appropriately identified and accounted for.

Scenario 1): When the creditor modifies the terms of the debt by making the terms more favorable to the debtor to protect the creditor’s investment, the modified terms usually include one or a combination of the following:  A) Reduction of the stated interest rate for the remaining original life of the debt; B) Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk; C) Reduction of the face amount or maturity amount of the debt as stated in the agreements; or D) Reduction of accrued interest.  Although the terms listed above are characteristics of TDR’s, the underlying cause and availability of the modified terms for the debtor is what ultimately determines if a TDR truly exists.

If the Debtor is experiencing financial difficulties and the creditor grants the debtor a lower interest rate than that of the original terms but this decrease is primarily due to a decrease in market interest rates or the decrease is done to maintain a relationship with the debtor because the debtor could obtain simliar funds from other sources at the current lower market rates then this does not constitute a TDR.  What constitutes the TDR as such, under the modified terms scenario, is that the debtor could only obtain funds from other creditors at interest rates so high that it cannot afford to pay them.

Scenario 2): Assuming the creditor accepts some form of cash, or other form of assets in full satisfaction of the debt, the creditor must determine if the fair value of the assets received, less cost to sell, will be less than the outstanding debt.  If so, this will be considered a TDR.  However, if the fair value of the assets received, less cost to sell, are equal to or greater than the outstanding debt, this would not be considered a TDR.  The creditor must use professional judgement, based on the circumstances, to ensure a TDR is properly identified.  Once a TDR is identified, the creditor should determine the appropriate accounting treatment.  This treatment will differ based on scenario one or two.

The accounting treatment for a TDR in which the creditor receives cash or some other form of assets if full satisfaction of the outstanding debt is fairly straightforward.  The creditor should account for the asset received at fair value less cost to sell.  The excess of the debt over the fair value of the asset received, less cost to sell, must be recorded as a debit to the allowance for credit/loan losses or as a debit against income if no allowance account is available.  Also, any legal fees and/or other direct cost incurred by the creditor to obtain the asset should be charged to expense when incurred.  Subsequent to the initial recording of the TDR, the creditor should account the assets received just as if the assets had been acquired by cash.

A creditor that recognizes a TDR under the modified terms scenario should account for the transaction as impaired debt under FAS114.  A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amount due according to the contractual terms of the loan agreement.  The creditor must remember for TDR’s that the contractual terms of the loan agreement refers to the terms specified by the original loan agreement and not the terms of the restructuring agreement.  Additional consultation of  FAS114 may be needed to insure proper accounting and monitoring is acheived.  Do not hesitate to contact us with any questions or concerns.