IRS to Accept Electronic Books and Records

In a departure from the IRS’ current practice of primarily using paper records in connection with a tax examination, the IRS will begin accepting records in electronic format.  With the widespread use of accounting software packages, this change has both positive and negative implications for business owners. In the past, submission of electronic records was limited to the occasional Excel spreadsheet and PDF burned to a CD, and even then not all agents would accept such files.  This change is in response to the many taxpayers and tax professionals who in recent years have requested the IRS accept electronic records.

 The IRS has acceded to this request and is training approximately 1,100 revenue agents on how to use QuickBooks.  It will not be long before they are trained on other accounting software products.  These agents are now being encouraged by the IRS to accept the QuickBooks data file, as well as electronic records produced by other accounting software.  QuickBooks will be first, with more to follow, which may eventually lead to the savvy IRS agent sitting in the taxpayer’s office logged into Deltek or Timberline.

 The IRS cites three benefits:

•  Reduction of taxpayer burden, since documents do not have to be printed
• IRS gets the taxpayer’s books in their entirety, substantially reducing the IRS’ additional requests for information
• Speeds up the examination due to revenue agent’s increased efficiency gained by electronic records

 Those that clamored for this change, however, may have been shortsighted.  With the IRS now getting the entire data file, the real benefit to the IRS is that they have access to everything – not just information for the year under audit, and not just certain parts of the books, but absolutely everything that data file holds.  The opportunity for an agent to go on a fishing expedition has just gotten a whole lot easier, so taxpayers should be aware of the possibility the IRS will obtain their entire accounting data file, and to that end to be cautious as to how transactions get recorded and what annotations are made.  Needless to say, sufficiency of records to support each item shown on the general ledger is still required.

 A little information goes a long way.  This is a complex, new issue and we encourage you to call our knowledgeable tax controversy experts at 301.231.6200 to learn more about proper substantiation for deductions and how to appropriately use electronic annotation with your current accounting software package.

Accounting for Reductions in Amounts Charged for Goods & Services

A reduction in the amount charged for goods and services should be accounted for as reduction in the amount of revenue received (a discount), provided the organization did not receive anything in return for the discount and incurred no additional costs to provide the discount.

When dealing with student financial aid grants, the amount granted should be accounted for as a tuition discount, netted against revenue, on the statement of activities and changes in net assets. If the school incurs additional expense to provide the services, then the scholarship would be recorded as an expense up to the amount of additional expenses.

For example, a school offers a $1,000 scholarship to a needy student. If the student causes the school to incur additional expenses of $400 (a teacher and facilities would already be needed for the full-tuition students), then the $1,000 scholarship would be recorded as scholarship expense of $400 and as a tuition discount of $600.

To learn more on this topic read:

FASB Codification 958-720-25-7&8 Recognition

FASB Codification 958-605-45-2 Other Presentation Matters

PPC Audits of Non-profits Organizations, chapter 9, para. 904.6

Social Media – Finally All In One Place?

There are an abundant number of social media outlets that non-profits can utilize to help raise visibility. Updating all of them can be a bit of a pain. Finally, one of the co-creators of Facebook has come up with a possible solution. Jumo is a new social networking site and before you say “not another one!” hold on a second – this one looks like it might be different. The creator, Chris Hughs says the intent is to streamline and provide one outlet that would then sync with all of your other social media sites. His hope is that this will elevate some of the smaller organizations that don’t have the same budgets as the big guys when it comes to getting their message out there and provide an inexpensive source for fundraising. The platform is set to go live November 30. It could be worth checking out.

The Hit to Hospitals

The recession has reduced incomes for many Americans over the past couple of years and as a result, charitable donations have declined significantly. Hospitals have been hit especially hard in this recession according to a study released by the Association for Healthcare Philanthropy. The study collected fundraising data from 66 hospitals and medical centers for 2008 and 2009. In 2009, one dollar of fundraising costs yielded an average return of $3.57, a decline of 23% compared to the $4.63 it raised the year before. There are two main schools of thought to deal with the declining donations. The first is to increase fundraising spending and hopefully charitable revenues to counteract the decline in donations. The second school of thought believes that hospitals should not reduce their fund-raising staff, even as donations decline and fundraising spending should remain stable. The second group believes that they will be better positioned to take advantage of increased charity giving when the economy improves.

These hospitals need to step back and think about the cost-benefit relationship between increasing costs or keeping them steady, even as donations decline. It could be that the recession will last longer than anyone anticipates and fund raising costs will continue to increase compared to donations at an unsustainable rate. There are no easy answers for hospitals, but they should be cautious in these tough economic times. For more information see the Chronicle of Philanthropy.

Cost Effective Fraud Prevention

According to the Association of Certified Fraud Examiners in their 2010 Global Fraud Report, the number one method of *catching* fraudulent behavior is by a tip/hotline.  Key methods for *preventing* fraud include the following:

 Proper segregation of duties – Especially in small offices, separating incompatible tasks is crucial. Consider having the bank statement be delivered to someone that doesn’t do the reconciliation. The person signing checks should not be the one performing the bank reconcilliation. Think in terms of who has access and the chain of possession.

Use of authorizations – Take note – if you are signing checks and don’t bother to look at the invoice or insist support be presented, you are leaving the door wide open and practically inviting fraud to come in and get cozy. If you aren’t somehow denoting on the invoice that it has been paid – there is potential it could be run through again and the check diverted. Authorizations don’t have to be complex but if it isn’t inked, it might as well have not happened. A manager putting his/her initials on an invoice as approval goes a long way in providing effective control. Continue reading »

Fraud Risk Assessment

The Association of Certified Fraud Examiners has issued their 2010 Global Fraud Study based on 1,843 cases of occupational fraud across 100 countries. At the end of the report they have a checklist to help organizations assess their fraud risk and design effective prevention. Much of fraud prevention involves the employees’ perception, how management communicates, and what it communicates. Included in that list are the following questions to help assess fraud risk:

Is ongoing anti-fraud training provided to all employees of the organization? Do employees understand what constitutes fraud?

Is an effective fraud reporting mechanism in place? Do employees trust that they can report suspicious activity anonymously and/or confidentially and without fear of reprisal?

Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely?

Is the management climate/tone at the top one of honesty and integrity?

Are employees surveyed to determine the extent to which they believe management acts with honesty and integrity?

Are employees surveyed to determine their level of job satisfaction and morale?

Are performance goals realistic? is there a pressure cooker type of atmosphere?

Internal controls do not have to be complex or expensive in order to be effective. The key is consistent application of those controls and setting a good example of integrity. Controls fall apart if they are only occasionally followed, essentially taking a gamble that the time you bother to apply it will be the exact time something was going to be attempted.

 ACFE suggests that to increase employees’ perception of detection, the following proactive measures should be taken and publicized to employees: communication that fraudulent conduct will be addressed aggressively; communication that the organization regularly assesses their fraud risk; and surprise internal audits or inspection. Surveys can help you determine if you are getting your message across and the general attitude of the personnel.

Stay tuned for cost effective suggestions for fraud prevention!

Penalties on Escheat Tax

Last week we discussed escheat taxes or what to do with unclaimed property. It is important to be familiar with the possible penalties on these payments as it relates to your area.

DC Penalties:

Failure to remit unclaimed property as required carries interest of 1 ½% per month or fraction of a month on the property or value of the property from the date the property should have been delivered;

Failure to report and/or remit carries penalties of $200 per day not to exceed $10,000; 

A holder who willfully fails to report or remit is subject to interest as stated above as well as a penalty of $1,000 per pay not to exceed $25,000, plus 25% of the value of the property;

The interest and penalties may be waived if failure to report and/or remit is satisfactorily explained, i.e., due to reasonable cause.

Failure to exercise required due diligence will result in a $10 penalty per item.

Maryland Penalties:

Late remittances will result in a 15% penalty on the value of the property;

Willful failure to file will result in a penalty of $100 per day, not to exceed $5,000 in addition to the 15% penalty;

Failure to perform due diligence will result in a $50 penalty per item.

Virginia Penalties

Failure to file the report and remittance will result in the payment of interest at the annual rate as applicable to delinquent taxes; 

Penalties of $1,000 for each day the report and remittance is delinquent up to a maximum of the lesser of $50,000 or 100% of the value of the property.

Positive Pay – How It Prevents Fraud

Positive pay is a service that many banks offer to companies as a tool to deter and prevent check fraud. Check numbers and corresponding amounts are submitted electronically to the bank prior to disbursement to the payee. The bank records the check numbers and amounts in its system and only allows checks that match what was authorized by the company to clear. Checks that have not been authorized are sent back to the company for review. If a check is deemed to be fraudulent it is treated as a returned check.

Positive pay is an excellent option for companies that have been the victims of fraudulent check schemes or those that want to avoid becoming victims. The system has provided help to companies fighting the growing number of check fraud schemes that have grown significantly more sophisticated. 

Good Reasons to Check In With Your Banker

Last Friday, our nonprofit department met with the Vice President of the Payments Solutions Division and the Assistant Vice President of the Nonprofit Group from a national bank  to discuss the banking side of the non-profit world. As an audit firm, we do not endorse any particular bank and we are not in a position to give banking advice but some interesting points were brought up that I thought I would share here.

Both of the bank representatives we met with are in positions at the bank where they see a lot of fraud in real time and it is their job to jump on it as soon as it happens. According to the VP, between 70-80% of the fraud he sees this year will occur between now and December 31. As bankers, they will be the first to see new scams in action.

New scams that they are seeing with increasing frequency are ACH frauds where a business check is manipulated and then run through as an ACH thereby circumventing a number of the organization’s control. Another one is a survey scam where the victim receives a check for about $500 to participate in a study of wire transfers. The victim receives the check and wires the money to the specified account. By the time the check bounces because it’s fraudulent, the victim has already sent the money and is now out $500.

Banks are continually updating controls and ways to provide increased protection to their clients. There are numerous types of banking accounts that provide different types of protection (in both controls and insurance coverage) as well as levels of return. Changing the type of account your organization is in can be accomplished without changing account numbers or check numbers with minimal effort on the organization’s part.

The type of account that was appropriate for your organization five or ten years ago may not be the best option for you today. With fluctuations in interest rates, changes to FDIC levels, and updates to fraud prevention, it is worth your time to check in with your banker to see if there is a newer option that may be a better fit for your organization. Your banker may be an uptapped resource for information that could help strengthen controls and returns.

2010 Global Fraud Study by ACFE

The Association of Certified Fraud Examiners has issued their 2010 Global Fraud Study based on 1,843 cases of occupational fraud across 100 countries. They estimate that the current global losses due to fraud are more than $2.9 trillion annually.  

There are three basic categories of fraud:

Asset misappropriation – This is not limited to cash larceny! This includes cash, investments, diverted funds, stolen inventory, and fake vendor payments among other schemes. Median losses in these schemes were approximately $135,000 worldwide and $105,000 in the U.S. in 2010.

Financial statement fraud – this includes intentionally misstating the books and inflating beneficial items while deflating detrimental ones with the intent of causing the user of the financial statements to come to a different conclusion than they would have otherwise. Motives include obtaining loans or funding, keeping better ratios to impress stockholders or donors, or decrease tax obligations, among others. Median losses worldwide due to financial statement fraud increased to over $4 million in 2010, up from $2 million in 2008.

Corruption – this area is not just limited to government and can include collusion with vendors, kickbacks, “gifts”, and less than arms length transactions with related parties, among others. This is why conflict of interest policies are so important. Median losses worldwide due to corruption were estimated at $250,000 in 2010. Continue reading »