The Chances of IRS Audit are Down but you Should Still be Prepared

The IRS just released its audit statistics for the 2018 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. However, even though a small percentage of tax returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.59% of individual tax returns were audited in 2018, as compared with 0.62% in 2017. This was the lowest percentage of audits conducted since 2002.

However, as in the past, those with very high incomes face greater odds. For example, in 2018, 2.21% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited (down from 3.52% in 2017).

The richest taxpayers, those with AGIs of $10 million and more, experienced a steep decline in audits. In 2018, 6.66% of their returns were audited, compared with 14.52% in 2017.

Surviving an audit

Even though fewer audits are being performed, the IRS will still examine thousands of returns this year. With proper planning, you should fare well even if you’re one of the unlucky ones.

The easiest way to survive an IRS examination is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected when they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.

More audit details

The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses is likely to take longer to examine than a return with only salary income.

An audit can be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.

Important: Even if your return is audited, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Representation

It’s advisable to have a tax professional represent you at an audit. A tax pro knows what issues the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow deduction of a certain expense) even though courts and other guidance have expressed a contrary opinion on the issue. Because pros can point to the proper authority, the IRS may be forced to throw in the towel.

If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to assist you. Contact us to discuss this or any other aspect of your taxes.

If federal income tax and employment taxes (including Social Security) are withheld from employees’ paychecks and not handed over to the IRS, a harsh penalty can be imposed. To make matters worse, the penalty can be assessed personally against a “responsible individual.”

If a business makes payroll tax payments late, there are escalating penalties. And if an employer fails to make them, the IRS will crack down hard. With the “Trust Fund Recovery Penalty,” also known as the “100% Penalty,” the IRS can assess the entire unpaid amount against a responsible person who willfully fails to comply with the law.

Some business owners and executives facing a cash flow crunch may be tempted to dip into the payroll taxes withheld from employees. They may think, “I’ll send the money in later when it comes in from another source.” Bad idea!

No corporate protection

The corporate veil won’t shield corporate officers in these cases. Unlike some other liability protections that a corporation or limited liability company may have, business owners and executives can’t escape personal liability for payroll tax debts.

Once the IRS asserts the penalty, it can file a lien or take levy or seizure action against a responsible individual’s personal assets.

Who’s responsible?

The penalty can be assessed against a shareholder, owner, director, officer, or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:

Be responsible for collecting, accounting for, and paying over withheld federal taxes, and
Willfully fail to pay over those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.

The easiest way out of a delinquent payroll tax mess is to avoid getting into one in the first place. If you’re involved in a small or medium-size business, make sure the federal taxes that have been withheld from employees’ paychecks are paid over to the government on time. Don’t ever allow “borrowing” from withheld amounts.

Consider hiring an outside service to handle payroll duties. A good payroll service provider relieves you of the burden of paying employees, making the deductions, taking care of the tax payments and handling recordkeeping. Contact us for more information.

When you retire, you may consider moving to another state — say, for the weather or to be closer to your loved ones. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complicated than it initially appears to be.

Identify all applicable taxes

It may seem like a no-brainer to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If the states you’re considering have an income tax, look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.

Watch out for state estate tax

The federal estate tax currently doesn’t apply to many people. For 2019, the federal estate tax exemption is $11.4 million ($22.8 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish domicile

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

How do you establish domicile in a new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:

Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
Change your mailing address at the post office,
Change your address on passports, insurance policies, will or living trust documents, and other important documents,
Register to vote, get a driver’s license and register your vehicle in the new state, and
Open and use bank accounts in the new state and close accounts in the old one.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help with these returns.

Make an informed choice

Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises.

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as homes, cars or stock — to specific people, you may inadvertently disinherit them.

Illustrating the problem

Let’s say Debbie has three children — Abbie, Mary Kate and Lizzie — and wishes to treat them equally in her estate plan. In her will, Debbie leaves a $500,000 mutual fund to Abbie and her home valued at $500,000 to Mary Kate. She also names Lizzie as beneficiary of a $500,000 life insurance policy.

When Debbie dies years later, the mutual fund balance has grown to $750,000. In addition, she had sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. But she neglected to revise her will. The result? Abbie receives the mutual fund, with a balance of $1.5 million, and Mary Kate and Lizzie are disinherited.

Even if Debbie continued to own the home, it could have declined in value after she drafted her will (rather than increased), leaving Mary Kate with less than her sisters.

Avoiding this outcome

It’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Debbie, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to avoid undesired consequences. For example, your trust might provide for your assets to be divided equally but also provide for your children to receive specific assets at fair market value as part of their shares. If you have questions regarding the division of your assets to your heirs, contact us. We can review your plan and address your concerns.

There are many reasons why knowing the value of your business throughout its life-cycle is important. While valuations are recommended annually, several events can spark the need for a business valuation. Business valuations can help owners establish a baseline value, outline the economic value of their interest in the business, calculate a selling price, and plan for future succession. Below are ten common events that precipitate the need for a business valuation:

Lack of a Buy/Sell Agreement. Business owners should always have a buy/sell agreement, especially when there is more than one shareholder or partner in the entity. If a ‘triggering event’ such as death, disability, withdrawal of a partner, etc. occurs, it is essential to have a buy/sell agreement that values the company and can provide guidance to stakeholders. Having a buy/sell agreement allows stakeholders to talk about possible scenarios rather than forcing them into intensive Litigation Support down the road.
Succession Planning. Business owners should always be thinking about their long term goals. When are they planning on retiring or otherwise selling the business? How much will they need in retirement? These questions will naturally move to company value as it is important to ensure the owners’ financial security upon retirement, and ensure that the company will not lose value when it changes hands.
Family Planning. If business owners have family members who will be taking over the business, will they be gifting shares of stock? If so, they will most likely need a business valuation to establish value as well as the price per share that will be the basis for the gifts.
Employee Stock Purchases. Key employees who have the ability or confidence to take over the business may want to discuss buying stocks, which can include consideration of an ESOP (Employee Stock Ownership Plan). ESOPs allow employees to purchase shares in a company’s stock, which can be held until the employee retires or leaves the company. ESOPs are required to have a valuation performed annually.
Divorce. When a business is involved, a valuation is usually required to determine the division of marital assets. In the event of a divorce, business owners typically work with attorneys and CPAs to evaluate the company and divide the company’s assets and liabilities between the parties.
Death. In the event of a shareholder or business owner’s death, a valuation will most likely be required to establish fair market value. Also, consideration should be made if an estate tax return is required. CPAs can determine the value of the gross estate, find any applicable deductions and establish a final taxable estate value.
Buying a Business. For those who might be expanding or purchasing additional businesses, CPAs can help. Experienced CPAs and business advisors can evaluate prospective companies and determine whether or not the value is in line with the purchase price as well as assist with strategic growth planning.
S-Corp Conversion. Converting from a C Corporation to an S Corporation can have a significant impact on the fair market value of a business and consequently its taxable value. If business owners are considering switching, CPAs can conduct a business valuation and establish a company’s value at the conversion date.
Baseline Value. Establishing a baseline value for a company is important for every stage of business. Having a baseline value gives owners a starting point for setting goals and growing their business, and allows owners to develop ways to increase value as part of their exit planning strategy.
SBA Loan Financing. Small Business Loans can help business owners grow their business and pursue new opportunities. SBA funding requires a business valuation when the loan is greater than $250,000.

Having your business valuated paves the way for your company’s continuing success and builds a solid foundation to retire, exit or otherwise transition away from your business when the time is right.

Need Help Valuating your Business?

Yeo & Yeo’s experienced CPAs can help you navigate the road to success at each stage of your business. We can work with your other advisors, including attorneys, financial professionals, and insurance specialists, to help ensure that your planning is coordinated and in tune with your goals.

We go through the annual audit process and it can at times seem routine but, in truth, how routine is anything nowadays in the finance department, business office or just in general? The real truth is that it is an opportunity worth seizing. This is the chance to ask your auditor questions in an ever changing environment. I have pulled together a list of five questions we auditors wish our clients would ask us.

#1 – How is my team performing and what could we do better?

Auditors have a unique insight as we get to see several other organizations that are similar to yours. We have seen a lot of things that work well and certainly others that don’t work as they should. Many times some of these will find their way into our management letter, but most processes are adequate so nothing gets communicated. So if you ask this question you might find some very specific information about your staff, as well as possibly a solution as to how to address your unique situations.

#2 – Can we get together throughout the year so we can talk about how our year is going?

We spend a lot of time with you after year end, but many times we find that something new or unique has happened that we weren’t aware of. Finding out this information after year end really ties our hands as to what kind of help we can provide. We also tend to find that our prior findings or comments were not addressed and become repeat findings, which typically leaves everyone unhappy. If we got together once or twice a year outside of the audit process, then we would have the chance to avoid some of these potential issues.

#3 – If you could change one thing about how we prepare for the audit, what would it be?

Just like you, we tend to go through the routine motions as we start the audit. We schedule our dates, send our assistance lists, and get ready to start the audit. Sometimes our clients are very honest with us and let us know that something we are doing is bothering them or what we are asking for is very difficult to obtain. Usually we don’t know that we are causing you a problem, but we wish you would just let us know. There might be something else we could use that doesn’t take as much of your time, or we could look for an alternate way to perform our testing.

#4 – Would you review our budget assumptions and help with long-range planning?

At the end of the audit, when we are doing our budget analysis and financial reporting, we occasionally find some large variances. Often it is related to some unusual transactions or some assumptions that were not used or considered when a budget amendment was completed. One of our strengths is data analysis, as well as financial projections. This is an area that we can provide some good advice and offer some useful information that our clients could use to plan for the current year and into the future.

#5 – Can you help us prepare for unexpected turnover?

This is a great question that always seems to come up when it is too late. The key phrase is “prepare for, not react to.” We do go through your internal controls in detail and have a very good understanding of how they work. What we would like to do more of is to help create a detailed listing of procedures or handbooks that address all the steps in the process. Also, we can offer suggestions for cross-training or downsizing while maintaining checks and balances in your internal control system.

I am sure we can all think of several more questions, but these are a few of the most important ones I wanted to share. Take advantage of the relationship you have with your auditor to come up with new thoughts or ideas. Remember, we are your auditors all year, not just at year end.

Do you know who in your nonprofit has authority to make certain types of decisions? The guidelines should be spelled out in a delegation of authority policy.

The delegation of authority policy should first delineate which decisions must be addressed by the board of directors. This likely includes strategic items such as the organization’s mission and some higher level items such as approvals of the budget, financial statements, and IRS Form 990. Second, it should indicate which things management is specifically responsible for and that any matters not specifically identified to the board that relate to day-to-day management are delegated to management.

Also, a delegation of authority policy may identify certain matters that specific roles in the organization have authority over, establish approval limits, and establish parameters on the temporary delegation of authority.

Having these matters documented in a policy makes it very clear to everyone in the organization who has the authority to make different decisions. This can help make operations more efficient and helps ensure that employees are properly following the internal controls which are in place.

Check Out Our eBook on Creating Policies for Your Nonprofit

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Millions of Americans were surprised by their 2018 personal income tax results. Some owed less than in previous years, while others received a smaller refund. 2018 was the first year that the Tax Cuts and Jobs Act took full effect, so all taxpayers were affected to some degree.

While a large refund is easier to handle than a large amount due, both require careful consideration of a taxpayer’s current withholding levels.While some individuals enjoy a large refund, this also means that the government held onto your money throughout the year, when you could have enjoyed increased cash flow and put the money to work, versus providing the federal or state government with an interest-free loan.

A large amount owed could result in underpayment of estimated tax penalties if certain safe-harbor requirements are not met.That said, as we are only a third of the way through a new year, now is a great time to evaluate your current withholding and estimated tax levels, and see if an adjustment one way or another is needed.

The TCJA and withholding

To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, elimination of personal exemptions and changes in tax rates and marginal brackets — the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.

The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers not to have enough withheld to pay their ultimate tax liability, especially those with other sources of income besides wages. In that case, careful attention must be paid to one’s overall projected tax liability, and associated withholding or estimated income tax levels.

Perils of the new tables

The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes under-withheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.

The IRS has updated its withholding calculator to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

Learn more about the IRS resources in our article, IRS Encourages ‘Paycheck Checkup’ for Taxpayers to Check Their Withholding.

More considerations

Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

You get married or divorced,
You add or lose a dependent,
You purchase a home,
You start or lose a job, or
Your investment income changes significantly.

You can modify your withholding at any time during the year, or even multiple times within a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)

The TCJA and your tax situation

If you rely solely on the new withholding tables, you could run the risk of having your federal income taxes under-withheld. As a result, you might face an unexpectedly high tax bill when you file your tax return next year or even have an underpayment of estimated tax penalty due on top of the taxes owed. Contact us for help with determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.

The gift and estate tax exemption is higher than it’s ever been, thanks to the Tax Cuts and Jobs Act (TCJA), which temporarily doubled the exemption to an inflation-adjusted $10 million ($20 million for married couples who design their estate plans properly). This year, the exemption amount is $11.4 million ($22.8 million for married couples).

If you’re married and you executed your estate planning documents years ago, when the exemption was substantially lower, review your plan to ensure that the increased exemption doesn’t trigger unintended results. It’s not unusual for older estate planning documents to include a “formula funding clause,” which splits assets between a credit shelter trust and the surviving spouse — either outright or in a marital trust.

Formula funding clause in action

Although the precise language may vary, a typical clause funds the credit shelter trust with “the greatest amount of property that may pass to others free of federal estate tax,” with the balance going to the surviving spouse or marital trust. Generally, credit shelter trusts are designed to preserve wealth for one’s children (from an existing or previous marriage), with limited benefits for the surviving spouse.

A formula clause works well when an estate is substantially larger than the exemption amount — but, if that’s no longer the case, it can lead to undesirable results, including inadvertent disinheritance of one’s spouse.

For example, Ciara and Mike, a married couple, each own $10 million in assets, and their estate plan contains a formula funding clause. If Ciara died in 2017, when the estate tax exemption was $5.49 million, that amount would have gone into a credit shelter trust and the remaining $4.51 million would have gone to a marital trust for Mike’s benefit. But if Ciara dies in 2019, when the exemption has increased to $11.4 million, her entire estate will pass to the credit shelter trust, leaving nothing for the marital trust.

Exemption amount heading up and then down

With the TCJA temporarily doubling the gift and estate tax exemption amount, unexpected results may occur if you don’t review and revise your plan accordingly. This is especially true if your plan includes a formula funding clause.

Also, be aware that, even though the exemption amount will continue to be adjusted annually for inflation, it expires after 2025. Without further legislation, the exemption will return to an inflation-adjusted $5 million in 2026. We’d be pleased to help review your plan and determine if changes are needed.

Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

Why it matters

When your business classifies a worker as an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of these taxes, pay federal unemployment tax, file federal payroll tax returns and follow other burdensome IRS and U.S. Department of Labor rules.

You may also have to pay state and local unemployment and workers’ compensation taxes and comply with more rules. Dealing with all this can cost a bundle each year.

On the other hand, with independent contractor status, you don’t have to worry about employment tax issues. You also don’t have to provide fringe benefits like health insurance, retirement plans and paid vacations. If you pay $600 or more to an independent contractor during the year, you must file a Form 1099-MISC with the IRS and send a copy to the worker to report what you paid. That’s basically the extent of your bureaucratic responsibilities.

But if you incorrectly treat a worker as an independent contractor — and the IRS decides the worker is actually an employee — your business could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including penalties under federal laws.

Filing an IRS form

To find out if a worker is an employee or an independent contractor, you can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Then, the IRS will let you know how to classify a worker. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It can be better to simply treat independent contractors so the relationships comply with the tax rules. This generally includes not controlling how the workers perform their duties, ensuring that you’re not the workers’ only customer, providing annual Forms 1099 and, basically, not treating the workers like employees.

Workers can also ask for a determination

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Defending your position

If your business properly handles independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that stand up to IRS scrutiny.

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

Investigate the creation or acquisition of a business,
Create a business, or
Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

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.

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.

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!

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.

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.