Last fall, George Kurtz, the chief executive officer of CrowdStrike Holdings Inc., gave investors a quarterly financial update that sent shares soaring. Among the details Kurtz highlighted was a major deal to sell cybersecurity tools for use by the U.S. government.
“Identity threat protection wins in the quarter included an eight-figure total deal value win in the federal government,” Kurtz said on the earnings call after markets closed on Nov. 28, 2023.
Kurtz was referring to a $32 million order from Carahsoft Technology Corp., which serves as a middleman between technology companies and government agencies, that arrived on the last day of CrowdStrike’s fiscal third quarter. It was for identity threat protection software intended for the Internal Revenue Service, according to documents from both companies.
But the IRS never bought the software, according to records reviewed by Bloomberg News and people with knowledge of the situation.
Still, Carahsoft has been making on-time payments on the $32 million to CrowdStrike, according to the cybersecurity firm. When asked for comment by Bloomberg News, both companies explained that they had a “non-cancellable order” between them. They declined to say why that deal was struck without a purchase in place from the IRS.
Some legal and accounting experts, who reviewed the arrangement at Bloomberg’s request, said it raises red flags that merit scrutiny from regulators. The deal also raised concerns within CrowdStrike — according to people familiar with the matter and the company itself — and many specifics of the transaction remain unclear.
CrowdStrike’s offices in Sunnyvale, California.
Benjamin Fanjoy/Bloomberg
Depending on how CrowdStrike accounted for the deal in financial statements — the company didn’t explain those details — it was big enough that it could have made the difference between the company beating or missing Wall Street projections for the period. The day after CrowdStrike reported results for the record quarter, its shares rose 10%.
Jeremy Fielding, a spokesperson representing CrowdStrike, dismissed employees’ concerns as baseless and the order’s timing as insignificant. The Austin, Texas-based cybersecurity firm closes deals “throughout the quarter, starting the first day and often through the last day,” he said.
“The Carahsoft deal went through a separate and extensive review,” he said, adding that it “was given a clean bill of health.” Fielding characterized the experts’ comments as “inaccurately speculating about a transaction that CrowdStrike confirmed fully met” an accounting standard on revenue from contracts.
CrowdStrike “closed and recognized” the deal once Carahsoft placed the order, and its booking of the revenue is consistent with standard accounting principles, according to Thomas Clare and Elizabeth Locke, lawyers representing the cybersecurity company.
A representative of Carahsoft, Mary Lange, said in an email, “Carahsoft is a private company and we do not disclose financial information or customer details. That said, we placed a valid, non-cancellable order with CrowdStrike and stand by that transaction.” The company declined to answer any other questions.
The IRS didn’t answer detailed questions. The tax agency said in a statement that it doesn’t hold any contracts with CrowdStrike directly and, in keeping with federal procurement rules, acquires its software and services through third-party vendors.
No IRS contract or payments matching the deal appear in the public government spending database USASPENDING.gov. The database excludes some information — for instance, material that could compromise national security. But the tax agency’s purchases of CrowdStrike’s products through vendors total less than $10 million, according to a person familiar with the matter.
This story is based on records of the transaction and interviews with five people familiar with the matter, who requested that their names not be published because they aren’t authorized to discuss it.
“It raises an eyebrow,” said Lawrence Cunningham, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance.
“It appears on its face to be uncompensated risk, and rational businesses don’t usually accept uncompensated risk,” Cunningham said, referring to Carahsoft’s payments to CrowdStrike.
Carahsoft declined to answer questions about whether it was taking a loss on the deal or if it found a way to recoup the money.
In recent months, separate issues at CrowdStrike and Carahsoft have drawn negative attention and government scrutiny.
CrowdStrike, with annual revenues of more than $3 billion, sells security software to thousands of businesses and government agencies globally. But in July, a flawed update from the firm knocked out millions of Windows computers around the world, disrupting air travel, medical care, banks and other businesses. Executives have apologized repeatedly, including before members of Congress; the company’s share price plummeted after the outage and hasn’t fully recovered.
Carahsoft is a dominant player among resellers and distributors that help technology companies navigate the complexities of selling to government agencies. In September, agents from the FBI and the Department of Defense searched the company’s Reston, Virginia, headquarters. Lange, the Carahsoft spokesperson, previously said the company was cooperating with the FBI probe and that it involved “an investigation into a company with which Carahsoft has done business in the past.”
The Justice Department is also conducting a civil probe of Carahsoft and software giant SAP SE for potential price fixing on government contracts. The German firm is cooperating with the civil probe, a spokesperson said. SAP chief financial officer Dominik Asam told Bloomberg News that SAP had “gotten written assurance from Carahsoft” that the FBI search was “entirely unrelated” to SAP and a U.S. subsidiary.
There’s no known link between CrowdStrike and either the civil investigation or search of Carahsoft’s office. Fielding, the CrowdStrike representative, said neither investigation is connected to the cybersecurity company.
A potential deal for the IRS dates to early 2023, when CrowdStrike sales representatives began talking with agency officials about buying an identity verification tool to help prevent fraud in a new program that lets people file their taxes directly with the government, according to three people familiar with the matter.
Work continued on a potential deal in the following months, but by mid-October it had become clear to at least some CrowdStrike staff that the IRS wouldn’t order the software before the company’s quarter closed at the end of the month, the people said.
Nevertheless, on Halloween, Carahsoft ordered $32.25 million worth of subscription access to CrowdStrike’s “Government National Identity Threat Protection” service for as many as 40 million users, according to records and two of the people. The order split the purchase into four $8 million payments, with the final payment due at the end of this October. The order indicates that Carahsoft should be billed for the CrowdStrike software and that it should be shipped to the IRS’s Washington headquarters.
That day, CrowdStrike sent an automated email to dozens of staff, saying, “Opportunity has been Closed Won for Internal Revenue Service (IRS).”
The closing of the deal and Kurtz referring to it on the earnings call alarmed some staff who raised internal concerns that CrowdStrike was “pre-booking” a transaction that they viewed as incomplete because it was unclear whether the IRS would ever make the large purchase, according to three of the people. U.S. regulators have in some cases sued and fined companies over alleged pre-booking, also known as channel stuffing, claiming they misled investors by improperly recognizing revenue to inflate their financial figures.
Fielding said it was “demonstrably false” that there was any pre-booking.
That quarter, $32 million was enough to make the difference between CrowdStrike beating analysts’ expectations on two key financial metrics — annual recurring revenue and net new annual recurring revenue — or falling short of them. CrowdStrike highlighted both metrics in the earnings announcement for the quarter, but the company declined to answer questions about whether the deal was recorded under them.
Annual recurring revenue is widely used by software companies to track income from subscriptions. CrowdStrike has consistently emphasized it with investors, writing in a 2019 regulatory filing that it “is a key metric to measure our business.”
Theresa Gabaldon, a professor at the George Washington University Law School, said that for CrowdStrike to appropriately book the deal as revenue it would need to have not only received payment but also delivered the product. Neither CrowdStrike nor Carahsoft answered questions about what became of the subscription software.
“I characterize it as raising red flags,” Gabaldon, who teaches securities regulation, law and accounting, said of the deal.
Whatever happened, Carahsoft was among the companies that CrowdStrike feted at a June “partner symposium.” There, Kurtz and other CrowdStrike staff mingled with guests at a luxury resort on the southern California coast. A video shows attendees enjoying drinks and live string music on a bluff overlooking the Pacific Ocean and getting sushi-making lessons from a celebrity chef.
At the event, CrowdStrike named Carahsoft “Distributor of the Year.”
Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week.
The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.
Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.
The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved.
Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.
The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections.
“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said.
The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses.
Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.
The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.
Political realities
Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.
Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.
The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps.
The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.
The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.
The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.
If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.
The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts.
House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.
Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.
The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.
Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.
“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”
Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.
“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”
The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.
“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”
That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.
“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”
The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.
“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”
Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.
“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”
For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.
Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.
“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.
Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.
That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.
The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.
“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”
Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.
The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.
While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.
President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.
The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.
“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.
There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.
Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later.
There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.
Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.
“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.
The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said.
Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.
“Non QM requires higher downpayments and interest rates than traditional financing,” he said.
In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.
Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective.