Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

INCOME TAXES

(9) INCOME TAXES

Earnings (loss) before income taxes relate to the following jurisdictions (in thousands):

	Years Ended December 31,
	2011			2010			2009
United States	$	(3,182	)	$	(3,189	)	$	4,369
Foreign		7,290			8,324			13,986
	$	4,108		$	5,135		$	18,355

The provision for income taxes consists of the following (in thousands):

	Years Ended December 31,
	2011			2010			2009
Current:
Federal	$	—		$	—		$	40
State		79			30			85
Foreign		3,364			3,206			3,419
		3,443			3,236			3,544
Deferred:
Federal		(1,603	)		(514	)		—
State		(133	)		—			—
Foreign		(415	)		(840	)		(516	)
		(2,151	)		(1,354	)		(516	)
Total	$	1,292		$	1,882		$	3,028

The significant differences between the U.S. federal statutory tax rate of 35% and the Company’s effective income tax expense for earnings (in thousands) are as follows:

	Years Ended December 31,
	2011			2010			2009
Statutory federal income tax rate	$	1,397		$	1,746		$	6,424
State income taxes, net of federal effect		(130	)		577			90
Change in deferred tax asset valuation allowance		(1,910	)		(3,254	)		(6,093	)
First Audit Partners acquisition – basis difference		—			—			668
Foreign taxes		1,481			2,407			586
Compensation deduction limitation		360			448			1,104
Other, net		94			(42	)		249
	$	1,292		$	1,882		$	3,028

The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2011			2010
Deferred income tax assets:
Accounts payable and accrued expenses	$	1,875		$	2,100
Accrued payroll and related expenses		3,046			1,748
Stock-based compensation expense		8,716			8,314
Depreciation of property and equipment		4,177			4,074
Non-compete agreements		50			84
Unbilled receivables and refund liabilities		(1,675	)		1,064
Foreign operating loss carry-forwards of foreign subsidiary		1,422			1,875
Federal operating loss carry-forwards		26,332			20,877
Intangible assets		11,935			17,686
State operating loss carry-forwards		2,625			2,321
Other		3,582			4,032
Gross deferred tax assets		62,085			64,175
Less valuation allowance		52,047			54,801
Gross deferred tax assets net of valuation allowance		10,038			9,374
Deferred income tax liabilities:
Intangible assets		7,531			7,177
Capitalized software		974			1,106
Other		679			652
Gross deferred tax liabilities		9,184			8,935
Net deferred tax assets	$	854		$	439

We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planning strategies.

Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative tax losses in recent years are the most compelling form of negative evidence considered by management in this determination. As of December 31, 2011, management determined that based on all available evidence, a valuation allowance of $52.0 million is appropriate, representing a decrease of $2.8 million from the valuation allowance of $54.8 million recorded as of December 31, 2010. A portion of this decrease relates to our December 2011 acquisition of BSI (see Note 14 – Business Acquisitions below). We recorded a $1.7 million reduction in the deferred tax asset valuation allowance that resulted from the deferred tax liabilities that we recorded relating to the acquisition. This reduction was accounted for as an income tax benefit in 2011.

As of December 31, 2011, we had approximately $75.2 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income. The federal loss carry-forwards expire through 2031. As of December 31, 2011, we had approximately $90.5 million of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2016 and 2031 and are subject to certain limitations.

Generally, we have not provided deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanently reinvested. However, in 2011, we determined that the earnings of our Canadian subsidiary should no longer be considered to be permanently reinvested. This change resulted in earnings of $4.8 million that we anticipated we would repatriate, and we provided additional deferred taxes of $0.2 million in 2011 relating to this potential repatriation, representing the estimated withholding tax liability to be due when such amounts are repatriated. We did not provide additional incremental U.S. income tax expense on these amounts as the Canadian subsidiary is classified as a branch for U.S. income tax purposes.

On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $75.2 million of U.S. federal loss carry-forwards available to the Company, $19.2 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million.

We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording potential interest and penalties associated with uncertain tax positions is to record such items as a component of earnings before income taxes.

We recorded unrecognized tax benefits of $2.6 million as of December 31, 2011, an increase of $0.5 million over the $2.1 million recorded at December 31, 2010. We recorded accrued interest and penalties of $2.2 million as of December 31, 2011, an increase of $0.4 million over the $1.8 million recorded at December 31, 2010. We recognized interest expense of $0.4 million in 2011 and $0.3 million in 2010 related to the liability for unrecognized tax benefits. Due to the complexity of the tax rules underlying these unrecognized tax benefits, and the unclear timing of tax audits, tax agency determinations, and other events, we cannot establish reasonably reliable estimates for the periods in which the cash settlement of these liabilities will occur.

We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. As of December 31, 2011, the 2008 through 2011 tax years generally remain subject to examination by federal and most state and foreign tax authorities. The use of net operating losses generated in tax years prior to 2008 may also subject returns for those years to examination.