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BUSINESS FORUM

Fraud: It’s More Common than You Think

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Fraud is a shockingly common problem for businesses. According to a 2012 study performed by the Association of Certified Fraud Examiners (ACFE), the average business loses approximately 5% of its gross revenue to fraud schemes each year. Business owners would be wise to realize that financial fraud may be happening right now in their company, perhaps even perpetrated by their most trusted employee. Potential fraudsters are often people of good character who are experiencing intense financial pressure. They are usually aware of the threshold amounts that require higher level approval for fund disbursement, and are cognizant as well of the amounts that internal and external auditors are likely to flag for review. Thus, they are confident that their fraud will go undetected. What’s a business owner to do? The first step is to be aware of the most common fraud crimes. They include:

  • Billing Fraud – creating false vendors, submitting personal invoices for payment
  • Check tampering- stealing blank checks or diverting checks to a personal account
  • Skimming- accepting payments from a customer and failing to report them

The next step is to perform a risk assessment. This involves a review of current internal controls and the ranking of potential vulnerabilities to fraud. These vulnerabilities should be addressed by eliminating the temptation and opportunity for fraud, as well as ensuring prompt detection of fraud, should it occur. The changes made should be revisited on an ongoing basis and reassessed for effectiveness.

Factors that can further enhance fraud prevention include stricter due diligence and control procedures. Business owners should be aware that their conduct plays an important role as well, setting the “tone at the top”. Creating a strict code of conduct that is adhered to by all establishes a low-tolerance atmosphere that keeps fraudsters at bay.  Setting up a whistleblower telephone hotline is another prevention practice worth considering.

If fraud is detected, it is essential to seek assistance of an experienced fraud investigator. The expert may choose to conduct the investigation with oversight from general counsel or outside attorneys.

Urbach & Avraham specializes in risk assesment. Our fraud team, which includes several Certified Fraud Examiners, is ready to help you prevent and identify fraud in your business. Contact us today for a free consultation to assess your company’s needs.

   

NJ Employer Contribution Deadline Arriving Soon

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 Beginning 2012, employers no longer receive an annual paper Notice of Employer Contribution Rates. Instead, the notice is now accessible through the Tax Web Enabled System (TWES). As a result of this change, it’s urgent that you check your TWES account as soon as possible. The new rates were posted as early as July 18, and there’s a 30 day deadline (from the date of “mailing”) to make a voluntary contribution. In many circumstances a voluntary contribution represents an excellent opportunity to reduce labor costs.  For more information regarding TWES check out our blog at: Set Up TWES Account.

 

The unemployment expense is a substantial component of your labor cost. Staffing agencies should give it careful attention. If you wish to make a voluntary contribution to your reserve balance you have 30 days from the date of your notice to do so. In addition, we suggest that you verify the amount of the employer contributions and the benefits charged to your account.  Report any discrepancies to the NJ Dept. of Labor.

 

If you would like assistance in determining if a voluntary contribution will save you money, please do not hesitate to contact us. We will provide you with an illustration of the benefits which you stand to reap from making such a contribution. You will be able to weigh the considerations and act accordingly.

 

 

Payroll Cards Under Investigation by N.Y. Attorney General

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If your company uses payroll cards to compensate its employees, watch out. New York Attorney General Eric Schneiderman has launched an investigation into companies that pay hourly employees by depositing payroll onto pre-paid cards. Why the concern? Payroll cards, like debit cards, typically have fees associated with inquiries, card replacement, ATM withdrawals, or inactivity. Schneiderman’s concern is that the fees associated with these cards may be insufficiently disclosed or excessive and that the fees reduce employees’ take home pay. Payroll cards can raise a host of legal issues for the employer as well. For example, federal law prohibits mandatory use of the cards as a condition of employment. It has been reported that many employees have been forced to accept the card. It would be highly advisable for employers to seek competent counsel to ensure their compliance before it’s too late.

 

Are you in Business or is it Just a Hobby?

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Whether an activity is classified as a business or a hobby can make a significant difference when it comes to taxes. Hobby losses are subject to “hobby loss rules”, under which the deductible expenses are limited to the amount of income generated by the activity. Even the expenses that can be deducted are subject to a 2% of adjusted gross income (AGI) floor. Deductions from business activity income, however, may exceed income and are fully deductible.

 To illustrate, let’s suppose John, a photographer, decided to start a side business, taking pictures at weekend weddings. He earned $4,000 and incurred travel expenses of $3,000 and supply expenses of $2,000. If John’s side job is classified as a business activity he may deduct both expenses to arrive at a $1,000 loss. If it’s classified as a hobby, however, he may only deduct expenses to the extent of his earnings $4,000(assuming those expenses exceed the 2% of AGI floor), and no loss would be allowed. 

While the difference is clear in terms of the tax ramifications, whether or not to classify an activity as a hobby is a rather complex matter.

For an activity to be considered a business, it must be engaged in for profit. How will the IRS determine the intent of the business owner? Here are several factors they consider:

  • How the activity is handled – To be considered a business an activity must be conducted in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, and keeping records and books, maintaining a website

 

  • Historic performance- A long streak of losses indicates a hobby, whereas sustained earnings indicate a for-profit activity

 

  • Nature of the activity- If the activity can provide some sort of recreation or other personal motive, it points to hobby status. If, however, there is no conceivable personal motive it points to business activity

 

These are only a few of many factors the IRS may consider. We recommend that you consult with a tax professional to determine the proper classification of your business activity.

IRS Offers New Simplified Option for ‘Office in the Home’ Deduction

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Beginning 2013, the Internal Revenue Service is offering a simplified method that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

The new optional deduction is capped at $1,500 per year based upon $5 a square foot for up to 300 square feet. This will serve to reduce the paperwork and recordkeeping burden on small businesses.

While the new safe-harbor may be more convenient, in many cases the traditional ‘office in the home’ deduction would yield a greater tax savings. Between mortgage interest, real estate tax and utilities, many taxpayers exceed the $1,500 cap of the new deduction. The new deduction also has the disadvantage that if it would result in a loss it cannot be taken. This is in contrast to a regular office in the home deduction, which can result in a loss carry-forward. The new deduction also cannot be combined with a loss that is carried forward from the previous year.  

Supreme Court Decision Impacts Same-Sex Couples

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The Supreme Court’s ruling that a key component of the Defense of Marriage Act (DOMA) is unconstitutional was perceived by most as a victory for same-sex couples. The Court decided to leave the definition of a “marriage” to the States, 12 of which currently permit same-sex marriages. Same-sex couples living in one of those states will now be entitled to the same federal benefits as traditional couples. The 12 states include NY and all of the New England states, MD and DE. This has many far-reaching implications, including:

  • Medical insurance coverage will become more affordable, as they will now be recognized as a married couple. Employers must offer insurance to same-sex spouses of employees in the 12 states.

 

  •  They will be able to file jointly on their federal tax returns to ensure tax savings, and will be able to amend prior year tax returns (most likely as far back as 3 years).

 

  • Federal benefits, such as Social Security, military and veteran benefits, pension and health benefits for federal employees will be available.  

 

  • The federal gift and estate tax marital deduction will be available to same sex married couples. As a result, they will be able to transfer assets between one another without payment of a transfer tax. This also means they can amend prior year estate tax returns to claim refunds previously disallowed due to DOMA.

 

 Sounds like cause for celebration, right? Welcome to married life. While the ruling is clearly a victory for equality, it actually has a negative tax implication for many same-sex couples. They will now be subject to the “marriage penalty,” a penalty that has become more significant due to several recent changes in tax law. Under the Patient Protection and Affordable Care Act (“Obamacare”), for example, an additional 0.9% Medicare tax on wages and self-employment income, as well as a 3.8% tax on investment income will be imposed. While the threshold is $200,000 for a single taxpayer, married taxpayers only get a $250,000 threshold. As a result of this ruling, many married same-sex couples that would have previously avoided the new tax by filing their federal income tax returns separately will now have to pay the tax.

All this is just the beginning. With over 1,000 federal rules and regulations that need rewriting, aside from tax, time will tell just how far reaching the implications will be.