Look Out for These Five Fraud Perpetrators

The Embezzler. The Common Thief. The Hacker. The Inventor. The Glutton. No, these aren’t cartoon villains. They’re all-too-real occupational fraud perpetrators who fleeced their employers of thousands — or even millions — of dollars. Although we’ve attached the names to actual criminals in cases reported by the U.S. Justice Department, they could just as easily apply to crooked employees working in your organization.

1. The Embezzler. Embezzlement is the theft of money or assets by someone in a position of trust or responsibility — and it happens all too often. In one recent Missouri case, an office manager and accountant was indicted for embezzling more than $116,000 from her employer.

The employee made close to $48,000 in unauthorized purchases on company credit cards, including an airline ticket for her boyfriend. She also allegedly issued approximately $41,000 in unauthorized checks to herself, claimed $20,000 in unauthorized expense reimbursements and invented extra paychecks for herself totaling more than $5,000.

For a while, the thieving office manager lived the high life. She used her embezzled funds on travel, restaurants and vehicles. She even used ill-gotten gains to pay her attorney — a decision that made her subject to money laundering charges.

2. The Common Thief. Most occupational fraud perpetrators are little more than common thieves. They’re so ordinary and benign-seeming that their bosses and coworkers may consider them “above suspicion.” This provides them with the ideal cover to steal large sums over the course of many years.

Consider this Boston-based crime perpetrated by a long-time employee: On hundreds of occasions between 2004 through 2016, the worker used her company’s credit card (issued in the name of another employee) to make unauthorized purchases. She bought clothing, furs and jewelry at boutiques, then sold the items to consignment shops. The employee also issued checks from the company to herself and primarily used the funds to pay personal credit card bills. In the end, this common thief got away with a not-so-common sum of $2.4 million before being caught.

3. The Hacker. Computer hackers can do major financial damage — particularly when they’re working from the inside. Current or former employees may steal valuable customer and employee data and use or sell it to commit identity theft. Or they may simply do malicious damage to files — and their companies.

For example, an Arizona man was convicted of deleting files from the computer systems of the California-based consulting company where he had formerly worked. Besides consulting with clients (usually Native American tribal governments), the employee-led the firm’s IT and marketing departments. In 2014, he was relieved of IT and marketing duties after he failed to keep up with his work.

The employee responded by deleting the firm’s website and marketing materials. After resigning from the company, he continued to delete files, including client information, work product and backup files stored by a third party. He then issued a final “wipe” command. These actions cost the employer more than $50,000.

4. The Inventor. Occupational thieves are nothing if not imaginative. Take this Texas man who received a 27-month sentence after he pleaded guilty to charging his employer for nonexistent goods from a nonexistent company.

The employee submitted invoices from his invented company for nonexistent goods, which he purchased using his employer-issued credit card. He then used his home computer to submit charges for the goods. When handing down the man’s sentence, the court noted that it was “incredible” that the crime went on for eight years before an auditor spotted it.

5. The Glutton. Employees who commit fraud often feel that they’re “owed” more than their employer pays them. So they take what they want, even if it’s illegal — and even if they’ve sworn to uphold the law.

Such was the case with a retired Massachusetts State Police trooper. While still employed, he lied about overtime hours he worked and received pay for full shifts even though he departed one to seven hours early. The former trooper earned approximately $68,000 in overtime pay in 2016, $14,000 of which was attributable to partly or entirely missed shifts.

It’s bad enough that the former trooper got greedy with overtime hours. What made his conduct even worse was that the funds were earmarked to help reduce accidents and injuries on the Massachusetts Turnpike through an enhanced police presence.

These are only some of the types of characters who are regularly arrested for fraud. Obviously, you can’t be expected to spot all potential perpetrators in your midst. But you can put internal controls in place that make it harder for crooked employees to commit fraud. Talk to your accountant about the controls your company needs.

Warm weather and rainy days bring the urge to purge. But before you clean your file cabinets or declutter your computer files, it’s important to review these guidelines.

Federal Tax Records

Most tax advisors recommend that you retain copies of your finished tax returns indefinitely to prove that you actually filed. Even if you don’t keep the returns indefinitely, hold onto them for at least six years after they’re due or filed, whichever is later.

It’s a good idea to keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. Examples of supporting documents include canceled checks and receipts for alimony payments, charitable contributions, mortgage interest payments and retirement plan contributions. You can also file an amended tax return during this time frame if you missed a deduction, overlooked a credit or misreported income.

Which records can you throw away today? You can generally throw out records for the 2015 tax year, for which you filed a return in 2016.

Have you also considered Spring Cleaning your IT?

You’re not necessarily safe from an IRS audit after three years, however. There are some exceptions to the three-year rule. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there’s no time limit for the IRS to launch an inquiry.

In addition, records that support figures affecting multiple years, such as carryovers of charitable deductions or casualty losses for federal disasters, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

There are also some cases when taxpayers get more than the usual three years to file an amended return. For example, you have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

State Tax Records

The previous guidelines are all geared toward complying with federal tax obligations. Ask your tax advisor how long you should keep your records for state tax purposes, because some states have different statutes of limitations for auditing tax returns.

Plus, if you’ve been audited by the IRS, states generally have the right to resolve their own issues related to that tax year within a year of the federal audit’s completion. So, hold on to all tax records related to an IRS audit for a year after it’s completed.

Essential Personal Records

Your files probably contain more than just tax information. Certain essential documents should be kept indefinitely. Examples include:

Birth and death certificates,
Marriage licenses and divorce decrees,
Social Security cards, and
Military discharge papers.

These should be kept in a safe location, such as a locked file cabinet or safety deposit box. If stolen, essential documents can be used to steal your identity. In turn, a stolen identity can be used to file for bogus tax refunds or apply for credit under your name.

Bills and Receipts

In general, it’s OK to shred most bills — like phone bills or credit card statements — when your payment clears your bank account or at year end. However, if a bill or receipt supports an item on your tax return, follow the tax guidance above.

If you purchase a big-ticket item — like jewelry, furniture or a computer — keep the bill for as long as you have the item. You never know if you’ll need to substantiate an insurance claim in the event of loss or damage.

Real Estate Records

Keep your real estate records for as long as you own the property, plus three years after you dispose of it, and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing.

These documents help prove your adjusted basis in the home, which is needed to figure any taxable gain at the time of sale. They can also support calculations for rental property or home office deductions.

Investment Account Statements

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, and dividend reinvestment and investment expenses, such as brokers’ fees. It’s a good idea to keep these records for as long as you own the investments, plus until the expiration of the statute of limitations for the relevant tax returns.

Likewise, the IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.

If an account is closed, treat IRA records with the same rules that apply to stocks and bonds. Don’t dispose of any ownership documentation until the statute of limitations expires.

Got Questions?

Before you clear your files of old financial records, discuss the records retention requirements with your tax advisor. You don’t want to be caught empty-handed if an IRS or state tax auditor contacts you.

Information is power. And today’s manufacturers are more informed — and powerful — than ever before. Owners and managers can assemble volumes of data, ranging from real-time information gleaned from machines and RFID readers on the plant floor to regular input from customer service and sales staff.

But data collection is only part of the story. Once you have all this information, what do you do with it? In broad terms, data analytics can be used to improve your business processes, refine operational efficiency and even transform your existing business model. Increasingly many manufacturers are investing large sums in analytics technology.

Upsides of Analytics

Let’s take a closer look at three specific ways analytics are likely to benefit manufacturers:

1. Enhanced cost efficiency. Manufacturers have made great strides in reducing costs by implementing lean manufacturing and Six Sigma programs. Such approaches have enabled many companies to improve yield and quality while reducing variability and production process waste.

Nevertheless, certain manufacturing niches — for example, chemical and pharmaceutical companies — typically still experience significant variability due to production volumes and the complexity of their processes. These niches may need to take a more granular approach to identifying and correcting process flaws. Analytical tools, including ratio analysis and statistical trends, can help. Specifically, manufacturing managers may focus on historical processing data to understand relationships and patterns, then use the analysis to optimize production.

Companies may “slice and dice” real-time information from the plant floor, as well as performing sophisticated statistical assessments. For example, a biopharmaceutical manufacturer that produces two batches of a specific substance using identical processes might experience a yield variation of 50% to 100%. Such broad variability can affect both quality and quantity. However, the company can use targeted data analytics to identify key variables and enable it to eliminate waste and reduce production costs.

2. Improved productivity. Data analytics can uncover unexpected or overlooked opportunities to maximize production efforts. Even if a manufacturer has been in business for decades and has seemingly exhausted opportunities for greater efficiency, management may find room for improvement by exploiting the information now at its disposal.

Management consulting firm McKinsey points to a mining company that discovered, from data collected from environmental monitoring and control systems, a positive correlation between worker productivity and oxygen levels in mine locations. Recognizing this factor, the company altered the oxygen levels in its underground mines, thereby increasing average yield by 3.7% over a three-month period. On an annual basis, this simple modification boosted profits by roughly $10 million to $20 million — without requiring any incremental capital investment.

3. Higher customer satisfaction. For most companies, customer satisfaction is a top priority. However, before you can meet the needs of customers and earn their long-term loyalty, you must obtain information about customer practices and preferences.

Online surveys or questionnaires can be used to collect data from customers, and then the results can be analyzed and shared with members of the management team. It’s important to identify similarities and differences between customers. Although you can’t satisfy all of the people all of the time, you can adapt enough to meet the needs of most customers and engender broad support for your brand.

For example, German automaker BMW uses big data to analyze input from manufacturing outlets and dealerships around the world. Before full production of a car begins, BMW tests its prototypes, identifies any problems through analytics (a single prototype might have more than 15,000 data points) and makes necessary adjustments. As a result, BMW enjoys a reputation for manufacturing luxury cars that include features that customers appreciate (like laser cruise control and in-vehicle infotainment systems) and that cost less to produce and require fewer repairs.

Surviving and Thriving

Manufacturing is a competitive industry. Surviving and thriving requires your company to seize opportunities and implement reasonable cost-saving measures. It’s critical that you collect and analyze data — and use it to change your production processes, as necessary. Talk to your financial advisor and consult technology professionals about how your company can profit by using the latest data analytics tools.

In the current political climate, just about the only thing manufacturers can be certain about is continuing uncertainty. Everything from changes to foreign trade policies, to new tariffs, to military actions threaten to disrupt smooth operations in the manufacturing sector.

To complicate matters, there’s no clear timeframe for when (or if) events will transpire. Already, manufacturers are coping with the rising costs of raw materials and subsequent pushback from customers with long-term contracts. For example, your firm may have been forced to find cost-effective alternatives or make certain concessions.

So what’s the forecast? For most manufacturers, it’s “wait and see.” However, you can take several steps now to weather the storm and minimize potential economic damage. These steps can also help position your company to benefit from any favorable conditions that may arise.

Business Benefits

Review the following to determine whether they may benefit your business.

1. Negotiate and renegotiate. Even if the goods your company produces aren’t directly affected by tariffs, you may be hurt indirectly by extra costs associated with materials like steel and aluminum. Take this into account when hashing out contracts. For instance, build higher supplier costs into new customer agreements.

For agreements already in place, see if the other party is willing to renegotiate Then consider a long-term arrangement that provides pricing you think you can live with. Incorporate clauses into the contract that provide protection if additional tariffs are imposed.

2. Analyze profit margins. Thorough analysis is necessary to help prepare your company for possible tariffs and rising materials cost. This involves deciding which costs your firm can absorb and which ones you can pass along to customers. Of course, you might also be able to find a satisfactory middle ground.

To help offset unexpected expenses, locate opportunities for efficiencies or cost rationalizations that customers will be able to tolerate. If a customer has an existing contract that provides price escalation clauses or limits, further renegotiation may be required.

3. Explore alternate sources. You might be able to avoid disruptions by tariffs if you can find alternative sources for supplies and materials. And be prepared to move quickly when warranted. This may include modifications to existing systems and processes to accommodate new business relationships. Have your professional advisors guide you concerning the logistics and legalities.

4. Get into “the zone.” One way to cut costs may be right under your nose: Take advantage of free-trade zones (FTZs). These are areas where goods can be landed, stored, handled, manufactured or reconfigured, and re-exported under specific customs regulation. Generally, these goods aren’t subject to customs duty.

FTZs usually are organized around major seaports, international airports and national frontiers.

There, your business can produce products and export them to a U.S. customs territory or foreign destination, thus bypassing potential tariffs.

5. Join the club. Be aware that you’re not facing these complex issues alone. To share thoughts and possible solutions, participate in trade compliance groups that focus on issues such as inventory and supply chain strategies, resource alternatives, and multiple data sources. Consider how your association can present a united front.

And if you can’t find a group? Start one yourself.

6. Find an exclusion. Your company may be eligible for an exclusion retroactive to the date a tariff becomes effective. Contact the U.S. Commerce Department to request exclusions for aluminum and steel tariffs and the U.S. Trade Representative for China tariffs. The Commerce Department has been willing to provide exemptions from the 25% tariff on steel and the 10% tariff on aluminum imposed in 2018.

7. Assess imports. Whether a product will be affected by a tariff depends on its classification. Therefore, misclassifications in borderline cases can result in unnecessarily higher costs. In addition, if imports of materials are currently subject to a low tariff or have no tariff, you might be able to stockpile those materials now. A CPA can review your company’s books and may be able to help you avoid unpleasant surprises.

Don’t Wait

In any event, it doesn’t make much sense to just sit back and wait for the other shoe to drop. Be proactive about protecting your manufacturing company’s interests.

Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Question #2: Where’s my refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

Question #3: Can I still collect a refund if I forgot to report something?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time!

Yeo & Yeo CPAs & Business Consultants, has been named one of West Michigan’s Best and Brightest Companies to Work For by the Michigan Business & Professional Association for the fifteenth consecutive year.

“We are thrilled to be named among the top companies in West Michigan again,” said Carol Patridge, CPA, managing principal of Yeo & Yeo’s Kalamazoo office. “We understand the significance of caring for our employees, which encompasses numerous aspects of rewards and career development. It is our commitment to support our employees both professionally and personally.”

Yeo & Yeo is proud to offer more than 150 employees rewarding careers in the accounting industry. Yeo & Yeo develops future leaders through its award-winning CPA certification bonus program, in-house training department, professional development training and formal mentoring while sustaining work-life balance.

“This recognition is a testament to our dedicated employees and the culture we have built here on the west side of the state,” says Mark Perry, CPA, managing principal of Yeo & Yeo’s Lansing office. “I take pride in seeing our employees report that they are enriched and engaged through their work.”

The annual competition is a program of the Michigan Business & Professional Association and identifies organizations that display a commitment to exceptional human resources practices and employee enrichment. An independent research firm evaluates organizations on a list of key metrics.

For years, life insurance has played a critical role in estate planning, providing a source of liquidity to pay estate taxes and other expenses. Today, the gift and estate tax exemption has climbed to $11.4 million, so estate taxes are no longer a concern for the vast majority of families. But even for nontaxable estates, life insurance continues to offer estate planning benefits.

Replacing income and wealth

Life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).

As a tax-exempt entity, the CRT can sell the assets and reinvest the proceeds without triggering capital gains tax. In addition, you and your spouse will enjoy an income stream and charitable income tax deductions. Typically, distributions you receive from the CRT are treated as a combination of ordinary taxable income, capital gains, tax-exempt income and tax-free return of principal.

After you and your spouse die, the remaining trust assets pass to charity. This will reduce the amount of wealth available to your children or other heirs. But you can use life insurance (a cost-effective second-to-die policy, for example) to replace that lost wealth.

You can also use life insurance to replace wealth that’s lost to long term care (LTC) expenses, such as nursing home costs, for you or your spouse. Although LTC insurance is available, it can be expensive, especially if you’re already beyond retirement age. For many people, a better option is to use personal savings and investments to fund their LTC needs and to purchase life insurance to replace the money that’s spent on such care. One advantage of this approach is that, if neither you nor your spouse needs LTC, your heirs will enjoy a windfall.

Finding the right policy

These are just a few examples of the many benefits provided by life insurance. We can help determine which type of life insurance policy is right for your situation.

In the governmental arena, transparency continues to be a buzzword. The internet is flooded with financial data. Governmental units post budgets on their websites, audited financial reports are publicly available through the Michigan Department of Treasury, and financial information is discussed at board meetings. Yet residents and other stakeholders struggle to interpret what the information means. While governments have strict rules and regulations to abide by when reporting certain information, governments should emphasize producing understandable information. Sometimes less really is more. Here are a few tips to improve how financial information is communicated.

1. Graphs and Pictures

Yes, a picture is worth a 1,000 words! Displaying financial information graphically helps users see the 10,000-foot view. If a user needs a thorough understanding of a particular financial segment, they can review more in-depth reporting.

The City of Midland, Michigan, includes a “City Budget at a Glance” section in its annual budget. This portion of the budget provides basic users with an understanding of the City’s financial outlook in an easily digestible manner.

2. Trends and Context

Presenting current year information in the context of past trends or future forecasts provides users a benchmark of what the information means related to experience or future expectations. If a government wants to demonstrate that measures have been taken to control expenditures, then it would be more effective to present a graph of the level of expenditures over time, than simply presenting the most current actual expenditures or the upcoming budgeted amount. Following is an example.

The dollar amounts involved in governmental finance can be difficult to comprehend, especially when we start talking about millions of dollars. Adding context assists the reader with comprehension. What does it mean when a City plans to spend $10 million on public safety?

Here’s a written example:

Option 1: City of ABC budgeted $10 million for public safety expenditures.

Option 2: City of ABC budgeted $10 million for public safety expenditures which includes police and fire services. The City employs 35 and 25 full time police and fire personnel, respectively. During the prior fiscal year the police and fire departments responded to 12,775 and 2,500 calls, respectively.

3.Outcomes

Discussing financial information as it relates to desired future outcomes or the accomplishment of past goals helps users answer the question, “Why?” Here is a graphical portrayal of a township that strategically increased fund balance in anticipation of significant future capital improvements. This graph answers the following questions:

Why did the Township’s fund balance increase for several years in a row?
Why did fund balance decrease in 2018?
After the 2018 capital improvements was additional fund balance used?

4.Management’s Discussion and Analysis

The Management’s Discussion and Analysis (MD&A) included in the annual financial statements provides management the opportunity to discuss the entity’s financial position and changes in the financial position, in laymen’s terms. Specific situations encountered during the year that had a significant financial impact should be discussed in a way that a basic reader can understand what happened and what the financial impact was. For further information on improving the MD&A, refer to the Yeo & Yeo blog article below.

Management’s Discussion and Analysis – Does Yours Need a Facelift?

When presenting financial information, consider your audience, the level of information required, and the most effective manner of presenting the information. Contact your Yeo & Yeo professional if you need further assistance.

Although Network for Good (NFG) has been established for several years, recently the nonprofit community has seen the popularity of the online service rise. If you received a check from Network for Good unexpectedly, you probably had several questions. Why am I getting this money? Who did it come from? Is there a catch if I cash the check? Is the check legitimate? For those of you asking these questions, here is likely what happened.

NFG has several products and subscriptions, including a means for donors to remit contributions to nonprofit organizations. Donors can go online to the NFG website, search for any nonprofit organization that is in the GuideStar database, and set up a one-time or recurring donation. NFG then collects the money from the donor and remits all funds, less a service fee, to the nonprofit organization once per month. The donor has the option to pay the service fee in addition to the donation, to allow the organization to receive the full intended amount.

If the organization wishes, they can sign up for direct deposit on the website to have donations placed directly into their bank account. The organization will receive donor information and amounts given, unless the donor has chosen to remain anonymous.

While the scenario above sounds convenient for both the nonprofit organization and the donor, there are pros and cons to utilizing this service. We caution organizations that the Terms and Conditions, as of the time of this publication, contain several provisions the organization should be aware of before cashing a check.

First, it appears that NFG considers any organizations that have cashed checks remitted to them by NFG to have, by default, agreed to the terms and conditions or Giving Agreement. The Agreement acknowledges that donors officially give to the Network for Good’s Donor Advised Fund,
NFG has full legal control over this donation, and NFG re-grants the money to nonprofit organizations.
Also, the Agreement grants NFG the authority to collect funds on your behalf and acknowledges that they may re-grant these funds if you have not cashed a check within six months or you are currently not in good standing with the Internal Revenue Service.
It also states that donor information is jointly owned by NFG and the nonprofit organization and that donations are not refundable to the donor and cannot be canceled.

You may find this service to be very beneficial to your organization, and may even wish to set up your organization’s page on their website or utilize other services. It is recommended that nonprofit organizations carefully read these Terms and Conditions and become familiar with the donation process before cashing any checks or utilizing other services.

No matter how much effort you’ve invested in designing your estate plan, your will, trusts and other official documents may not be enough. Consider creating a “road map” — an informal letter or other document that guides your family in understanding and executing your plan and ensuring that your wishes are carried out.

Navigating your world

Your road map should include, among other things:

A list of important contacts, including your estate planning attorney, accountant, insurance agent and financial advisors,
The location of your will, living and other trusts, tax returns and records, powers of attorney, insurance policies, deeds, stock certificates, automobile titles, and other important documents,
A personal financial statement that lists stocks, bonds, real estate, bank accounts, retirement plans, vehicles and other assets, as well as information about mortgages, credit cards, and other debts,
An inventory of digital assets — such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and social media accounts — including login credentials or a description of arrangements made to provide your representative with access,
Computer passwords and home security system codes,
Safe combinations and the location of any safety deposit boxes and keys,
The location of family heirlooms or other valuable personal property, and
Information about funeral arrangements or burial wishes.

Laying out your intentions

Your road map can also be a good place to explain to loved ones the reasoning behind certain estate planning decisions. Perhaps you’re distributing your assets unequally, distributing specific assets to specific heirs or placing certain restrictions on an heir’s entitlement to trust distributions. There are many good reasons for these strategies, but it’s important for your family to understand your motives to help avoid hurt feelings or disputes.

Finally, like other estate planning documents, your road map won’t be effective unless your family knows where to find it, so it’s a good idea to leave it with a trusted advisor (and consider giving copies to other trusted parties). Please contact us if you’d like help drafting your road map.

An unexpected outcome of the recent death of designer Karl Lagerfeld is that the topic of estate planning for pets has been highlighted. Lagerfeld’s beloved cat, Choupette, played a major role in his brand. The feline was the subject of a coffee table book and has a large Instagram following. Before his death, Lagerfeld publicly expressed his wishes to have his ashes, and those of his cat if she had died before him, to be scattered with those of his mother’s. It’s unknown if Lagerfeld accounted for his beloved Choupette in his estate plan, but one vehicle he could have used to do so is a pet trust.

Another celebrity who famously set up a pet trust for her dog was hotel heiress Leona Helmsley. She left $12 million in a trust for her white Maltese, Trouble. (A judge later reduced the trust to $2 million and ordered the remainder to go to Helmsley’s charitable foundation.) Thanks to the pet trust, Trouble lived a luxurious life until she died in 2011, four years after Helmsley’s death.

ABCs of a pet trust

A pet trust is a legally sanctioned arrangement in all 50 states that allows you to set aside funds for your pet’s care in the event you die or become disabled. After the pet dies, any remaining funds are distributed among your heirs as directed by the trust’s terms.

The basic guidelines are comparable to trusts for people. The “grantor” — called a settlor or trustor in some states — creates the trust to take effect during his or her lifetime or at death. Typically, a trustee will hold property for the benefit of the grantor’s pet. Payments to a designated caregiver are made on a regular basis.

Depending on the state in which the trust is established, it terminates upon the death of the pet or after 21 years, whichever occurs first. Some states allow a pet trust to continue past the 21-year term if the animal remains alive. This can be beneficial for pets that have longer life expectancies than cats or dogs, such as parrots or turtles.

Specify your wishes

Because you know your pet better than anyone else, you may provide specific instructions for its care and maintenance (for example, a specific veterinarian or brand of food). The trust can also mandate periodic visits to the vet and other obligations. Feel more secure knowing that your pet’s care is forever ensured — legally. Contact us for additional details.

Donating to charity is a key estate planning strategy for many people. It reduces the size of your taxable estate and it can help you leave a lasting legacy with organizations you care about.

The benefit of making such gifts during life rather than at death is that you may be eligible for an income tax deduction. Qualifying for a charitable deduction is, in some respects, a matter of form over substance. The IRS could disallow a deduction, even if it’s otherwise legitimate, if you fail to follow the substantiation requirements to the letter.

If you’ve made charitable donations in 2018, it’s wise to review the substantiation rules as you file your 2018 tax return. Here’s a quick summary of the rules:

Cash gifts under $250: Use a canceled check, receipt from the charity or “other reliable written record” showing the charity’s name and the date and amount of the gift.

Cash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity stating the amount of the gift, whether you received any goods or services in exchange for it and, if so, a good-faith estimate of their value. An acknowledgment is “contemporaneous” if you receive it before the earlier of your tax return due date (including extensions) or the date you actually file your return. Also, there’s no need to combine separate gifts of less than $250 to the same charity (monthly contributions, for example) to determine if you’ve hit the $250 threshold for the contemporaneous written acknowledgment requirement.

Noncash gifts under $250: Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more: Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts plus a description of the property. File Form 8283 if total noncash gifts exceed $500.

Noncash gifts of more than $500: In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it.

Noncash gifts of more than $5,000 ($10,000 for closely held stock): In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art): In addition to the above, include a copy of the signed appraisal (not the summary) with your return.

Failure to follow the substantiation rules can mean the loss of valuable tax deductions. We can help determine if you’ve properly substantiated your 2018 charitable donations.

If you’re getting a divorce, you know it’s a highly stressful time. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and your marital property will include all or part of it.

Transferring property tax-free

You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that, under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to postdivorce transfers so long as they’re made “incident to divorce.” This means transfers that occur within:

A year after the date the marriage ends, or
Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Future tax implications

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the IRS now extends the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid adverse tax consequences

Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

When fraud strikes, the culprit might be sitting in your accounts payable department. This department is particularly vulnerable to fraud because of the volume of transactions it processes and the varying pricing and billing policies that vendors use. Here’s a close-up of common vendor fraud scams and ways to lower your risks.

Phony vendors

A common type of purchasing scheme involves fictitious vendors. Here, an employee in the accounts payable department might set up a bogus supplier in the accounting system and then deposit payments to the supplier into his or her personal checking account.

Warnings of fictitious vendors include invoices that are photocopied, sequentially numbered, and from companies that have post office box addresses or addresses that match an employee’s home address. Also be wary of invoices with amounts that consistently fall just below sums that require approval for payment and, depending on your business, invoices for round dollar amounts.

Bogus invoices with real vendors

Some purchasing scams require collusion between an employee in the accounts payable department and someone at the vendor’s office. For example, a vendor might submit falsified invoices, and then an employee in the accounts payable department will deposit refunds into his or her personal account or split duplicate payments with his or her accomplice at the supply company.

Connections between procurement staff and suppliers may provide clues to these types of schemes. Is an employee related to, or otherwise linked with, the owner or management of a supplier? If so, that employee shouldn’t make purchasing decisions that involve the vendor.

Kickbacks

If you perform contract work, you also might be susceptible to kickbacks. That is, the person who approves the contracts could be receiving kickbacks from vendors. Red flags include fewer bids than expected or required, widely divergent bids on the same projects and unexplained deadline changes.

Kickbacks also might occur if it seems like you’re paying higher prices for lower quality products. Cash payments to employees can be difficult to detect because those payments are not reflected in the company’s books. They probably are, however, reflected in higher pricing from the vendor. Even fraudulent vendors must cover their costs.

Companies should look for consistent shortages, informal communication (such as mobile phone calls or personal emails) between accounts payable/purchasing staff and suppliers, and poor record-keeping.

Preventive measures

You can prevent vendor fraud by targeting one of the legs of the fraud triangle: motive, opportunity and rationalization. Many preventive measures strengthen internal controls and develop policies and procedures to prevent theft, thereby reducing the opportunity to commit fraud.

For example, no employee should be authorized to handle most or all of your purchasing or accounts payable procedures. The person who orders supplies and materials, for example, shouldn’t check shipments or approve invoices. Consider separating these functions or rotating who’s responsible for them every quarter.

Also, consider performing background checks on new vendors. Such checks can provide information on the vendors’ affiliations, ownership, Litigation Support, regulatory or legal violations or suspensions and financial standing. This can help you weed out vendors with dubious histories.

Companies also should state in writing how they expect employees — and vendors — to conduct business. This code of ethics should be reviewed and updated annually, and employees and vendors should be required to sign it every year, even if nothing changes. Annual reminders will reinforce the idea that the company considers ethical, professional business practices a priority.

Anonymous hotlines — one for employees and a separate one for vendors — can be a cost-effective way to detect purchasing fraud, especially those involving collusion. Giving vendors a separate hotline makes them more comfortable sharing concerns and allows them to ask questions about the business’s ethics practices.

To catch a thief

If you notice the warning signs of vendor fraud, contact your CPA immediately. He or she can help unearth the cause of any anomalies, quantify your losses, build a defensible case (if you decide to prosecute the thief) and fortify your defenses against future scams.

Have you made substantial gifts of wealth to family members? Or are you the executor of the estate of a loved one who died recently? If so, you need to know whether you must file a gift or estate tax return.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 for 2018 and 2019); there’s a separate exclusion for gifts to a noncitizen spouse ($152,000 for 2018 and $155,000 for 2019).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, so the deadline for 2018 gifts is coming up soon. But the deadline can be extended to October 15.

Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.18 million for 2018 and $11.40 million for 2019).

Filing an estate tax return

If required, a federal estate tax return (Form 706) is due nine months after the date of death. Executors can seek an extension of the filing deadline, an extension of the time to pay, or both, by filing Form 4768. Keep in mind that the form provides for an automatic six-month extension of the filing deadline, but that extending the time to pay (up to one year at a time) is at the IRS’s discretion. Executors can file additional requests to extend the filing deadline “for cause” or to obtain additional one-year extensions of time to pay.

Generally, Form 706 is required only if the deceased’s gross estate plus adjusted taxable gifts exceeds the exemption. But a return is required even if there’s no estate tax liability after taking all applicable deductions and credits.

Even if an estate tax return isn’t required, executors may need to file one to preserve a surviving spouse’s portability election. Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exemption amount, but it’s not automatic. To take advantage of portability, the deceased’s executor must make an election on a timely filed estate tax return that computes the unused exemption amount.

Preparing an estate tax return can be a time consuming, costly undertaking, so executors should analyze the relative costs and benefits of a portability election. Generally, filing an estate tax return is advisable only if there’s a reasonable probability that the surviving spouse will exhaust his or her own exemption amount.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift or estate tax return needs to be filed, contact us.

Mike Evrard Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of Michael Evrard, CPA, to senior manager. Along with his promotion, Mike has transferred to Yeo & Yeo’s Kalamazoo office from Flint.

Mike is a member of the firm’s Nonprofit Services Group and the Audit Services Group. He assisted in the development of the firm’s award-winning YeoLEAN audit process and provides audit services, with an emphasis on school districts and nonprofit organizations. He has nine years of public accounting experience.

“We are excited to welcome Michael to our Kalamazoo team,” said Carol Patridge, managing principal of Yeo & Yeo’s Kalamazoo office. “His extensive experience in the nonprofit industry and audit adds to the depth of our client services and is a great addition to our community.”

Mike holds a Bachelor of Science in Business Administration in accounting from Central Michigan University. He is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants.

On April 1, 1923, a father and son joined in an accounting partnership in Saginaw, Michigan. Today, Yeo & Yeo has grown to more than 200 employees and is proud to be among the leading CPA firms in the country. Through our affiliates, we have created a strong network of professionals who are a complete resource for our clients – in accounting, tax, computer services, medical billing, wealth management and many other areas.

To our people: Thank you for your hard work and for using your ideas, knowledge and expertise to exceed client expectations. And thank you for donating your time, talent and financial support to more than 200 different community service organizations. Your commitment to our clients and community together is reflective of the firm’s core values – and that is how we are able to deliver outstanding business solutions every day.

To our clients: Thank you for giving us your trust and your business. Our success story is incomplete without your patronage. Not only have you helped us grow, but you have made us part of your lives. Because of clients like you, we are inspired and driven to continue to deliver the highest level of service.

To our communities: Thank you for your continued support. At Yeo & Yeo, our community is our foundation, and you have given us strong ones. We are proud to have nine office locations in Michigan, each of which is surrounded by passionate people who have helped us become the company we are today.

In the years to come, we look forward to continuing to adapt to the new, ever-changing challenges in technology, government regulations and social shifts to provide solutions for our clients and opportunities for our dedicated employees. As always, we will stay true to our roots of contributing to the great communities that we serve.

Tim_Crosson_Jr Yeo & Yeo CPAs & Business Consultants is pleased to announce that Timothy P. Crosson Jr., CPA, has been promoted to senior manager.

Tim provides audit services, with an emphasis on nonprofit organizations, government entities and school districts. He has 11 years of public accounting experience. He is a member of the firm’s Education and Audit Service Groups and serves in the Ann Arbor office.

“We are proud to recognize Tim for his leadership and expertise. He has excelled in providing professional services to our clients and is committed to helping them succeed,” said Michael Georges, Principal in the Ann Arbor office.

Tim holds a Bachelor of Business Administration, majoring in accounting, from The University of Michigan-Dearborn. He is a member of the Michigan Association of Certified Public Accountants, the American Institute of Certified Public Accountants, and The University of Michigan-Dearborn Alumni Association. He serves on the board of directors for Community Choice Credit Union.

AJ_Licht Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of A.J. Licht, CPA, to senior manager.

A.J. has eight years of public accounting experience. His areas of expertise include business consulting for management, financial reporting and tax planning and preparation with an emphasis in the construction sector, review and compilation services, and accounting software consulting.

He is the leader of the firm’s Construction Services Group and is responsible for the strategic direction and management of the firm’s state-wide Group, and oversees the Group’s business development, training and staff development.

“We are proud to recognize A.J. for his leadership and expertise, and for his commitment to serving our clients. He has excelled in providing professional services and is committed to helping Yeo & Yeo’s clients succeed,” said Suzanne Lozano, Principal in the Saginaw office.

A.J. is a member of the Associated Builders & Contractors Greater Michigan Chapter, the Home Builders Association of Saginaw, and the Construction Industry CPAs/Consultants Association. He is based in the firm’s Saginaw office. In addition to his work at Yeo & Yeo, A.J. is treasurer of the Saginaw Township Business Association. He is a member of the Saginaw Valley Young Professionals Network and the Saginaw County Chamber of Commerce, and is a Habitat for Humanity volunteer.

Employee stock ownership plans (ESOPs) offer closely held business owners an exit strategy and a tax-efficient technique for sharing equity with employees. But did you know that an ESOP can be a powerful estate planning tool? It can help you address several planning challenges, including lack of liquidity and the need to provide for children outside the business.

An ESOP in action

An ESOP is a qualified retirement plan, similar to a 401(k) plan. But instead of investing in a selection of stocks, bonds and mutual funds, an ESOP invests primarily in the company’s own stock. ESOPs are subject to the same rules and restrictions as qualified plans, including contribution limits and minimum coverage requirements.

Typically, companies make tax-deductible cash contributions to the ESOP, which uses the funds to acquire stock from the current owners. This doesn’t necessarily mean giving up control, though. The owners’ shares are held in a trust, and the trustees vote the shares.

An ESOP’s earnings are tax-deferred: Participants don’t recognize taxable income until they receive benefits — in the form of stock or cash — when they leave the company, die or become disabled.

Retirement and estate planning benefits

If a large portion of your wealth is tied up in a closely held business, lack of liquidity can create challenges as you approach retirement. Short of selling the business, how do you fund your retirement and provide for your family?

An ESOP may provide a solution. By selling some or all of your shares to an ESOP, you convert your shares into liquid assets. Plus, if the ESOP owns 30% or more of the company’s outstanding common stock immediately after the sale, and certain other requirements are met, you can defer or even eliminate capital gains taxes. How? By reinvesting the proceeds in qualified replacement property (QRP) — which includes most securities issued by U.S. public companies — within one year.

QRP provides a source of retirement income and allows you to defer your gain until you sell or otherwise dispose of the QRP. From an estate planning perspective, a simple but effective strategy is to hold the QRP for life. Your heirs receive a stepped-up basis in the assets, eliminating capital gains permanently.

If you want more investment flexibility, you can pay the capital gains tax upfront and invest the proceeds as you see fit. Or you can invest the proceeds in qualifying floating-rate long-term bonds as QRP. You avoid capital gains, but can borrow against the bonds and invest the loan proceeds in other assets.

If estate taxes are a concern, you can remove QRP from your estate, without triggering capital gains, by giving it to your children or other family members. These gifts may be subject to gift and generation-skipping transfer taxes, but you can minimize those taxes using traditional estate planning tools.

Weigh the pros and cons

ESOPs offer significant benefits, but they aren’t without their disadvantages. Contact us to help determine if an ESOP is right for you.