Small Business fraud

According to the Article published by a Linkend group member, Terry Corbell, "Small companies are fleeced by an aggregate $2.9 trillion from employee fraud -- suggesting the need for financial controls".  (Research done by the Association of Certified Fraud Examiners or ACFE.)

ACFE research showed:

• The median loss is $150,000, or 5 percent of the annual revenue.
• Twenty-five percent of the persons responsible for the fraud had been trusted employees-at least 10 years in the company.
• Thirthy percent of the companies have 100 or fewer workers.
• It took the company about a year and a half before discovering the shortages.
• More than 85 percent of the perpetrators didn’t have records of ever committing fraud.

Some considerations that could explain the findings are: 

• Some long-time employees seem to have a sense of entitlement when working at small companies that probably pay less than large firms.
• Small companies are probably more trusting of workers and are likely less sophisticated in financial controls while being focused on marketing for survival.

 What can you do to mitigate these findings:  

• These findings suggests the need for the implementation of sound financial internal controls on the day to day operations.
• The need for some insurance protection against losses.  
• The need of a thrird-party professional to review your finances, and internal control structure.
• Cooperation between your insurance company and your accountant to explain/understand your risk and controls so you can better be protected at a reasonable cost. 

Opinion- Personal in Nature:

These findings are alarming considering that for a small business with total sales of $500,000 could be at risk of lossing thousand of dollars in a given year (i.e., 5 percent of total Revenues) from fraud perpetrators.  

I recognize that most small businesses cannot afford a full-time CPA in their organization, but they could afford to engage for few weeks a professional with strong credentials (i.e., CPA, CFE, or CIA) for a fraction of a cost of a full time employee.  This professional could come to your business at least once a year and look out your weakenesses and recommend improvements in your internal controls to help you prevent and mitigate away from these alarming events.  The cost of hiring a CPA outweight many times over your potential losses.  

Definitions:
CPA= Certified Public Accountant
CIA=Certified Internal Auditor
CFE=Certified Fraud Examiner

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Taxpayers can be assessed accuracy-related penalties.

These IRS penalties can be the result of many factors, and I am not pretending to outline all posibilities. One that comes to mind is the Omission of Income. In this case maybe the taxpayer acted on the belief that the item in question was not income contrary to a specific IRS regulations and the like.  Maybe because, the taxpayer is under the belief that their is not a specific regulation that address the transaction in question. 

The general rule start from the premise that everything is income unless specifically exempt from taxes. That in itself stress the importance of having a tax professional on your side to look all transactions you had been involved. 

It can get even worst if the understament is over $5,000 or 10% of the tax required to be shown on your tax return. In this case the required accuracy-related penalty is 20% of the underpayment amount, or $400 ($5,000 x 20%).

Be careful and make sure that all items of income are included, it is the taxpayer responsibility.  They are exeptions, rules and procedures to be followed not discussed here.

For more information you may want to go to http:///www.irs.gov

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Taxpayer Indentification Number

Definition of TIN.

TIN is a Taxpayer Identification Number.

Types of TIN.

They are many types of TINs: Social Security Number (SSA), Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), Adoption Taxpayer Identification Number (ATIN), and Preparer Identification Number (PTIN).

Self-employee:

If you are self employee, you probably are using a SSA, EIN, TIN, and or a PTIN; depending on many factors such as type of work and entity.  You must provide the correct TIN number to the vendor you provide services to so that he or she can prepare/submit the necessary forms to you and the IRS at year end.

Employers:

All employers are required to obtain the correct TIN from vendors they get service from to be in compliance with the IRS regs and applicable IRC law.  Failure to do obtain the correct TIN and do the due deligence documentation required can make you subject to penalties.  In the event you do everything possible to obtain accurate information you are required make all payments to the payee subject to backup withholding. In some cases is 28% and others 30% of the amount paid. 

Payments that can be subject to backup withholding include: interest, dividends, rents, royalties, non-employee compensation, broker and bartering exchange transactions.

Due Diligence from Employers: (some of notice are below)

1-Ascertain that the TIN provided is correct

2-Update information from provider

3-Solicit and proerly document all efforts to obtain correct information

4-Make all efforts by the due date

5-Have Policies and Procedures

Failure to know the IRS regulations and keep documentation cannot relief you from being penalized by the IRS.

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Earned Income Credit changes for 2012

IRS Issues Proposed Regulations - That Would Require Tax Preparers to File Due Diligence Checklist with All EITC Claims Submitted in 2012.  THIS IS A PROPOSAL not a requirement just yet.  

IR-2011-98, Oct. 6, 2011

Proposal reads:

Preparers wold be require, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.  So, the propsed regulation require you, the preparer, to attach along with the tax return.

Objective

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals.

Currently we have...

The IRS created Form 8867, Paid Preparer's Earned Income Credit Checklist, to help preparers meet the requirement by obtaining eligibility information from their clients. Preparers have been required to keep copies of the form, or comparable documentation, which is subject to review by the IRS. To help ensure compliance with the law and that eligible taxpayers receive the right credit amount, the proposed regulations would require preparers, effective Jan. 1, 2012, to file the Form 8867 with each return claiming the EITC.

Further details can be found in REG-140280-09. Comments on the proposed regulations are due by Nov. 10, 2011, and a public hearing on the proposed regulations is scheduled for Nov. 7, 2011.

What's EITC

The EITC benefits low-and moderate-income workers and working families and the tax benefit varies by income, family size and filing status. Unlike most deductions and credits, the EITC is refundable –– taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be $5,751.

Although as many as one in five eligible taxpayers fail to claim the EITC, some of those who do claim it either compute it incorrectly or are ineligible. The IRS is proposing this step as part of its efforts to ensure that the credit is afforded to taxpayers who qualify. For 2009, over 26 million people received nearly $59 billion through the EITC. Tax professionals prepare close to 66 percent of these claims.

Source: http://www.irs.gov/

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2011 IRS Mileage rates

On June 23, 20011, the Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

Business Miles:

The rate will increase to 55.5 cents a mile and apply to miles driven from July 1, 2011, through Dec. 31, 2011.

Medical and Moving miles rates:

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011.

Charitable mile rate:

The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

Actual cost vs Mileage rate:

The optional business standard mileage rate and the actual cost are methods generally used to compute the deductible costs of operating an automobile for business use.

The mileage rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

Keep in mind that gasoline price is a significant factor in the mileage figure, but not the only factor to take into account. Other factors are depreciation and insurance and other fixed and variable costs of operating a vehicle.

Source: IRS.gov

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Tax Relief for Employers who wants to reclassify workers correctly

The IRS resently (7-21-2011) launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers-from self-employee to employees.

At low cost means:

..making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

IRS Program objective is...

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

Who is elegible?The applicant must:

1- Consistently have treated the workers in the past as nonemployees,

2- Have filed all required Forms 1099 for the workers for the previous three years, and

3- is not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.

Benefits for participating:

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Source: IRS.gov






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Tax, Accounting, and Auditing: Bartering is taxable Income

Tax, Accounting, and Auditing: Bartering is taxable In come: In today’s economy, small business owners sometimes look to the oldest form of commerce – the exchange of goods and services, or bartering. ...

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Bartering is taxable In come

In today’s economy, small business owners sometimes look to the oldest form of commerce – the exchange of goods and services, or bartering. The IRS wants to remind small business owners that the fair market value of property or services received through barter is taxable income.

Form to report income.

Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

Income tax reporting.

Taxes Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Source: htpp://www.irs.gov

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Tax relief on reporting as Income any Cancelation of Debt

Debt discharge income is reported on the IRS form 1099-C of an individual or business from a taxpayer's personal residence, rental properties , business debts or personal debts (e.g., credit card debts).

What is the tax remedy?

The IRS regulations allows you to exclude all or a portion of the debt canceled (i.e., income reported on 1099-C), if the taxpayer is either insolvent or is Bankrupt. 

Do you need to do any calculations?

Yes, you not only need to file a form with the IRS but you need to run the numbers and consider what constitute your Insolvency by consiidering all your Assets and Liabilities at their Fair Market Value and oustanding liabilities.  For some taxpayers this calculations can involve lots of calculations and considerations.  So there is tax relief if you have to consider thousands of dollars as Income and you are not getting actual money.

Get some help from a tax professional it is well worth it.

Source: IRS.gov

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Self-employed individual

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited.  (See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information.)

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

Do not wait until year end to determine if you have net earnings of $400 or more; do the calculations every quarter; 'cause you may be required to sent quarterly estimated payments to the IRS.

Source: http://www.irs.gov/

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