Embezzlement: You Need to Know How it Works and How to Prevent it

It has been said that if fraud were a country, it would be the fifth most productive country in the world.

Whether this is true or not, fraud is responsible for crippling many businesses.

Embezzlement is a huge part of the fraud industry. Because the crime is being committed by a trusted employee, it often goes undetected for long periods of time, if ever.

What are some of the most common forms of embezzlement, and how does the business owner protect his company against such thievery? Here are a few common methods of embezzling.

Cash - In businesses such as bars and restaurants, an employee can simply fail to ring up a sale and pocket the cash. Using receipts that are sequentially numbered can put a road block in the embezzler's way.

Kiting - Check kiting takes advantage of the "float time" between when a company check is written and when it clears the bank account. The embezzler writes a check to himself and deposits it in his account. He can then write a check against his new balance back to the employer's account. The size of the back and forth checks can continue to increase in size. Improved banking technology has reduced float time, making kiting less attractive for an embezzler.

Lapping - A payment received from customer A is deposited in the embezzler's account. When customer B makes a payment, the thief records it as a payment by customer A. Likewise, when customer C pays, his payment is credited to customer B. Unchecked, lapping can escalate into huge amounts of money. This scheme requires that the employee take little or no time off. He can't afford to have someone else handling his paperwork.

Fake refunds - Fake refunds can take different forms. A refund is issued to a customer but the funds go directly to the employee in charge of issuing refunds (often the only office employee). Or the employee overpays an invoice or the payroll tax deposits and pockets the refunds when received.

The smaller your company, the more vulnerable you are to fraud. The reason is the lack of separation of duties. If one employee is responsible for enough different money handling functions, the company is ripe for the picking.

So, what does a business owner do? Separate some of the duties. The owner may need to step into a couple of the cash-handling functions or outsource certain duties. For example, the owner should always open and review the bank statements. On a random schedule, the owner should review a few customer transactions from billing to collection to the deposit into the bank.

Having your accountant do an "internal control" review is another good idea. That will include a look at who does what on a daily basis and which duties need to be assigned to different employees to help prevent employee theft.

It's no secret that sales and use tax is a confusing and complex area of tax law. With more than 7,500 jurisdictions across the country imposing a sales or use tax on transactions that occur within their borders, it's easy to see why. And, what might seem to be an insignificant detail can affect the taxability of a transaction.  

In our experience in assisting our clients through Wisconsin DOR audits, we see the same common sales and use tax errors appearing time and again. Some of the issues below raise a "red flag" and can increase the likelihood you'll be audited. Others are so widespread that they're examined in nearly every audit. Your business should take steps to correct both types of mistakes now, in advance of an audit, to limit your exposure and possible penalties.

Many exceptions and exemptions can apply when it comes to calculating sales and use tax. However, here are five of the most common errors we see businesses making across the board.  

1.       Not paying use tax on purchases - This is one of the most common errors found in audits. If you're making purchases from out of state (or international) vendors, you are required to pay use tax on those purchases to the state of Wisconsin, if sales tax was not charged and an exemption does not apply. Make sure you are maintaining careful records in this area in case of an audit.

Does your business make purchases with a credit card? If so, it's very important to keep all invoices with your credit card statements. If you're audited and do not have a receipt or invoice to prove that all or part of a purchase was taxed or was non-taxable, you'll likely be assessed use tax on the total amount of your out-of-state purchase. Keep those receipts and invoices!

2.       Not knowing which services you provide are taxable, and which are not - It's critical to know the rules within your industry. Services that seem to be related or similar may vary in their taxability. For example, landscapers should collect sales tax on lawn maintenance charges, but not on snow removal. Also, the installation, repair, service, alteration, maintenance, and inspection of computer hardware and prewritten software, including internet access services, are subject to Wisconsin sales or use tax-however; web design and hosting are not taxable.

Auditors will be familiar with the most common mistakes within your industry, so it's worth the time investment to make sure you're following the rules. Errors here can result in liabilities that add up quickly.

3.       Incorrectly applying sales tax to labor - The physical location at which labor is performed, and what type of work it is, will determine its taxability. Construction and repair contractors are often at risk of labor-related tax errors. A contractor's gross receipts from the installation or repair of personal property are subject to sales tax on the total sale price (labor and material), unless an exemption applies. For example, the installation or repair of cabinets or counters used to carry on a trade or business (such as in a restaurant, bank, hotel, movie theater or medical office) is subject to Wisconsin sales or use tax.

Even if you're not in the construction industry, it's important for your business to know these rules. If you remodel or make repairs to your facility and are audited, you could be liable for any taxes that were not collected and remitted by the contractor (including penalties and interest). Because of the complexity of these rules, it's a good idea to have a professional knowledgeable in sales and use tax review all invoices to ensure you haven't over- or underpaid your tax liability.

4.       Not charging sales tax when selling business assets - Even though it's not a typical sale, most ongoing businesses selling equipment used in their trade or business need to collect sales tax on that transaction and provide a receipt to the purchaser. Examples could include a landscaper selling a used lawn mower, or a transportation company selling a truck.

In certain situations, such as a manufacturer selling production equipment to another manufacturer, exemptions exist. In those cases, make sure you obtain a sales tax exemption certificate from the buyer.

5.       Not registering for sales and use tax - Voluntarily registering for sales and use tax will save your business interest and penalties in the long run. If your business comes under audit by the Wisconsin DOR, and your business is registered with the Wisconsin DOR when you receive the audit notice,

i.      the audit itself will be limited to four years, and

               ii.      assessment interest will be assessed at a rate of 12%.

However, if your business is unregistered when you receive the audit notice, there is no limit to how far back in years that the Wisconsin DOR can go. Typically, the Wisconsin DOR will only audit the last six years if you are not registered, but they may go all the way back to the period in which the business originated. In case of an assessment, delinquent interest of 18% is statutory for a non-filer.

Penalties can be significant, so take the time to evaluate your practices relating to sales and use tax to ensure that you are in compliance. For all the above, an experienced sales and use tax professional can help you to assess the unique aspects of your business and where exceptions may apply, and provide direction to ensure you are in compliance.  Call your Nohre Account Manager @ 715-834-2225 for more information.

Manage Your MAGI to Preserve Tax Breaks

How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions, many of which are based on modified adjusted gross income, or MAGI. Knowing how close you are to the "edge" can help you preserve tax breaks for 2013.

A caution: Since the definition of MAGI as applicable to individual phase-outs varies, you might have to choose between conflicting opportunities. For instance, if you have a child in college this semester, the American Opportunity Credit and the Lifetime Learning Credit may be on your mind. Both benefits are education-related, yet the qualifying requirements differ - including the MAGI threshold.

Education benefits - The American Opportunity Credit is a partially refundable, dollar-for-dollar reduction of your tax bill, with a maximum of $2,500 per student. This year the credit starts to shrink when your MAGI reaches $160,000 and you're married filing jointly ($80,000 when you're single). It disappears completely when your MAGI is greater than $180,000 for joint returns, and $90,000 when your filing status is single.

For 2013, the Lifetime Learning Credit begins to phase out at $107,000 when you're married filing a joint return and $53,000 when you're single. Once your MAGI reaches $127,000 (married) or $63,000 (single), the credit is no longer available.

Other education benefits, such as the above-the-line tuition and fees deduction, also have MAGI limitations. If you qualify, you can claim the maximum annual limit of $4,000 when you're married filing jointly and your MAGI does not exceed $130,000 ($65,000 if you're single). The deduction phases out completely when your income reaches $160,000 ($80,000 for singles).

Retirement plans - Phase-outs affect retirement planning, too. The deduction for contributions to your traditional IRA is limited when you are eligible to participate in your employer's plan and your MAGI exceeds $95,000 ($59,000 when you're single).

And while Roth IRA contributions are not tax-deductible, the amount you can contribute for 2013 begins to phase out when your MAGI reaches $178,000 ($112,000 if you file single).

In addition, the federal "saver's" credit for making contributions to retirement plans phases out when your 2013 modified adjusted gross income is more than $59,000 and your filing status is married filing jointly ($29,500 for singles).

Other phase-outs - Finally, the exclusion of social security benefits from taxable income also has a phase-out calculated on the amount of your MAGI over the base amount of $32,000 when you're married and $25,000 when you're single.

Other phase-outs affecting your 2013 federal tax return reduce personal exemptions, itemized deductions, and the alternative minimum tax exclusion.

Contact our office for guidance in managing income for maximum tax breaks.