In today’s world of immediate communication, we continually hear about instances of employee fraud at school districts. How can you keep your school district’s name out of the newspaper and off the internet?

It all starts with developing an ethical culture and establishing strong internal controls to deter employees from committing fraud.

Developing a strong, ethical culture begins with setting a strong tone at the top. Management should set the proper tone through their actions, which will encourage employees to adhere to the value system that the district has defined.

The school district needs to communicate its ethical values through a written code of conduct that emphasizes the importance of integrity and ethical behavior. Administrators should disseminate the written code of conduct to all employees and could potentially go as far as to ask each employee to sign it annually.

Also, having a positive workplace environment is extremely important in establishing and maintaining an ethical workplace culture. The school district should take definitive steps to create a work environment where employees have a clear understanding of what is right and wrong, and feel free to discuss and ask questions about ethical issues and to report any violations.

Consider implementing an anonymous and confidential fraud hotline, in conjunction with a whistleblower policy at the district. A confidential service for reporting suspected fraud through email, telephone, or a website provides employees the peace of mind that they can report suspicious activity without pressure or threat.

Hiring is another key factor in developing a strong, ethical company culture. It is important for school districts to establish and maintain policies for hiring and promoting individuals with high levels of integrity, especially in positions of trust or areas where fraudulent activity is commonly found. These hiring policies might include drug screenings, integrity testing, pre-hire investigations and bonding.

New employees should be trained and informed about the school district’s values and code of conduct at the time they are hired. Once your employees are on board, the training needs to continue periodically to ingrain those ethical behaviors.

Finally, employees who commit fraud or perform unethical activities need to be swiftly terminated and prosecuted. Termination and prosecution emphasize the tone at the top and can be a powerful deterrent for wrongdoing.

As an employer, you must pay federal unemployment (FUTA) tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate of tax imposed is 6% but can be reduced by a credit (described below). Most employers end up paying an effective FUTA tax rate of 0.6%. An employer taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at least $7,000 per year, while an employer taxed at 0.6% pays $42.

Tax credit

Unlike FICA taxes, only employers — and not employees — are liable for FUTA tax. Most employers pay both federal and a state unemployment tax. Unemployment tax rates for employers vary from state to state. The FUTA tax may be offset by a credit for contributions paid into state unemployment funds, effectively reducing (but not eliminating) the net FUTA tax rate.

However, the amount of the credit can be reduced — increasing the effective FUTA tax rate —for employers in states that borrowed funds from the federal government to pay unemployment benefits and defaulted on repaying the loan.

Some services performed by an employee aren’t considered employment for FUTA purposes. Even if an employee’s services are considered employment for FUTA purposes, some compensation received for those services — for example, most fringe benefits — aren’t subject to FUTA tax.

Recognizing the insurance principle of taxing according to “risk,’’ states have adopted laws permitting some employers to pay less. Your unemployment tax bill may be influenced by the number of former employees who’ve filed unemployment claims with the state, the current number of employees you have and the age of your business. Typically, the more claims made against a business, the higher the unemployment tax bill.

Here are four ways to help control your unemployment tax costs:

1. If your state permits it, “buy down” your unemployment tax rate. Some states allow employers to annually buy down their rate. If you’re eligible, this could save you substantial unemployment tax dollars.

2. Hire conservatively and assess candidates. Your unemployment payments are based partly on the number of employees who file unemployment claims. You don’t want to hire employees to fill a need now, only to have to lay them off if business slows. A temporary staffing agency can help you meet short-term needs without permanently adding staff, so you can avoid layoffs.

It’s often worth having job candidates undergo assessments before they’re hired to see if they’re the right match for your business and the position available. Hiring carefully can increase the likelihood that new employees will work out.

3. Train for success. Many unemployment insurance claimants are awarded benefits despite employer assertions that the employees failed to perform adequately. This may occur because the hearing officer concludes the employer didn’t provide the employee with enough training to succeed in the job.

4. Handle terminations carefully. If you must terminate an employee, consider giving him or her severance as well as outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Effective outplacement services may hasten the end of unemployment insurance benefits, because a claimant finds a new job.

If you have questions about unemployment taxes and how you can reduce them, contact us. We’d be pleased to help.

© 2019

Yeo & Yeo CPAs & Business Consultants is proud to announce that Jamie L. Rivette, CPA, CGFM, has received the Women to Watch Experienced Leader Award from the Michigan Association of Certified Public Accountants (MICPA). The MICPA awards honor individuals within the accounting profession who have exemplified excellence through dedication, leadership, and service. Rivette was nominated by her colleague, Mary Kreider, Senior Manager in Yeo & Yeo’s Saginaw office.

“Jamie is a passionate advocate and a wonderful example for women in our firm,” Kreider said. “She is a mentor, a positive role model for both men and women in the accounting field, and a highly respected leader in the eyes of our clients and other accounting professionals.”

Rivette is a Principal based in Yeo & Yeo’s Saginaw office audit department and has been with the firm for 19 years. She leads the firm’s Government Services Group and is a Certified Government Financial Manager (CGFM). Jamie performs reviews for the Certificate of Achievement in Financial Reporting program administered by the Government Finance Officers Association. She is a board member for the Michigan Government Finance Officers Association and serves on its Accounting and Auditing Standards Committee. She is also a member of the Michigan Municipal Executives.

Ali Barnes, Managing Principal of the firm’s Alma office, works closely with Rivette as a member of the Government Services Group.

“Jamie has influenced those who have the privilege of working with her,” Barnes said. “Her commitment and diligence within not only the governmental industry but the accounting profession, as a whole, make her deserving of this award.”

Rivette leads the firm’s Career Advocacy Team, supporting Yeo & Yeo’s young accounting staff with resources and tools they need to be successful in their careers.She is an advocate for flexible work arrangements and spearheaded initiatives including a new parent checklist to help men and women at Yeo & Yeo transition into parenthood, career maps, peer-to-peer mentoring, and a career coaching program to further strengthen the future of the accounting professionals within her firm.

“It is an honor to receive this award alongside other incredible women role models in accounting,” Rivette said. “I look forward to continuing to provide support and encouragement to our future leaders as they develop in their careers.”

In the community, Rivette is treasurer of the Hemlock School Board of Education, volunteer cross country coach for Hemlock Middle School, a member of the Junior League Community Advisory Board, and is finance committee chair for Hemlock Board of Education.

Honorees will be awarded the evening of October 3, 2019, at the MICPA Awards Dinner in Novi, Michigan.

As we head toward the gift-giving season, you may be considering giving gifts of cash or securities to your loved ones. Taxpayers can transfer substantial amounts free of gift taxes to their children and others each year through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the exclusion is $15,000.

The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.

Gifts by married taxpayers

If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple, because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).

If gift-splitting is involved, both spouses must consent to it. We can assist you with preparing a gift tax return (or returns) to indicate consent.

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Giving gifts of appreciated assets

Let’s say you own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. A 15% or 20% tax rate generally applies to long-term capital gains. But there’s a 0% long-term capital gains rate for those in lower tax brackets. Even if your income is high, your family members in lower tax brackets may be able to benefit from the 0% long-term capital gains rate. Giving them appreciated stock instead of cash might allow you to eliminate federal tax liability on the appreciation, or at least significantly reduce it. The recipients can sell the assets at no or a low federal tax cost. Before acting, make sure the recipients won’t be subject to the “kiddie tax,” and consider any gift and generation-skipping transfer (GST) tax consequences.

Plan ahead

Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact us before year end to discuss your options.

© 2019

Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low.

There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. And it helps to know what might catch the attention of the IRS.

Audit red flags

A variety of tax-return entries may raise red flags with the IRS and may lead to an audit. Here are a few examples:

• Significant inconsistencies between previous years’ filings and your most current filing,
• Gross profit margin or expenses markedly different from those of other businesses in your industry, and
• Miscalculated or unusually high deductions.

Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them • for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email message 100cs about an audit. The IRS doesn’t contact people in this manner. These are scams.)

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS chooses you for an audit, our firm can help you:

• Understand what the IRS is disputing (it’s not always crystal clear),
• Gather the specific documents and information needed, and
• Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.

© 2019