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The Southbourne Tax Group Review: How to Protect Your Business from Fraud

 

5 Commercial Fraud Prevention Tips

 

This March marks the 13th anniversary of Fraud Prevention Month. While the annual program focuses on protecting the consumer, businesses should take advantage of the time to better educate themselves on commercial fraud. A recent poll of Canadian businesses found that half of them know or suspect that they have been hit by fraud in past year.

 

There are numerous ways that business fraud can occur in a transaction. It can occur from business to consumer or consumer to business. It can come from internal staff or external threats. But the one familiar element is that the party committing the fraud has acted dishonestly. Business fraud is more common in some industries than others. Banking and financial services, government, manufacturing, healthcare, education, and the retail sector are all industries that struggle with fraud. However, no commercial enterprise, big or small, is safe.

 

As a business insurance and risk management expert, Park Insurance is here to provide you with some helpful tips that could save you from the impending threat of commercial fraud.

 

5 Fraud Prevention Tips You Need to Apply to Your Business Today

 

  1. Preparing for Commercial Cyber-fraud

 

It should come as no surprise that cybercrime headlines this list of commercial fraud prevention tips. But the fact that 50% of Canadian executives admit that their businesses were hacked last year is alarming. Credit card fraud, identity theft, account takeover and/or hijacking attempts are becoming so common that businesses are hiring full-time staff and/or consultants to monitor cyber security. Cyber-fraud occurs from internal (employees stealing corporate information) and external culprits alike and they are becoming more sophisticated with each passing month. Improved staff awareness, real-time software updates, enhanced backup protocol, and encrypted communications will help stave off sophisticated cyber-fraudsters. Follow these six tips to protecting your business from cyberattacks.

 

  1. Pre-Employment Screening

 

Internal fraud is one of the most common forms of business fraud and is certainly one of the most impactful. Not only can it go undetected and occur over a long period of time, devastating your business financially, it can ruin your corporate culture. Trust is immediately lost. From this point forward, institute an improved pre-employment screening program that includes intensive backgrounds checks and more thorough reference checks. If fraud is a significant concern (you operate in one of the higher risk industries mentioned in the introduction) consider using a professional service that specializes in pre-employment screening. Some human resource recruiters offer specialized screening.

 

  1. Improved Internal Accounting (w/Redundancy)

 

You may think that placing one person in charge of accounting, including the processing of payments and invoices, making bank deposits, handling petty cash and managing bank statements is smart because it provides a single point of responsibility. It’s not. It opens you up to internal fraud, should that employee/manager seek to do your business harm. Even if the individual can be trusted, they are at risk of being compromised. If they hold all of the chips, your business can be hit and decimated in one shot.

 

Instead, spread and/or rotate these duties amongst qualified staff. In addition, create redundancy when it comes to the accounting of all financials. This will allow you, for instance, to check duplicates of a month’s invoices and statements to ensure that the numbers match. Have separate parties check financial statements too, for added caution.

 

All of these improved internal accounting policies should be compiled and posted for all to see. If you do have an internal threat working within the company, they will be less likely to take harmful action if they know that these redundant checks and balances are in place.

 

  1. Encourage Whistleblowing

 

Whistleblowing may seem like a dirty word when it comes to fostering a trusting corporate culture, but in the end your staff should see that it is nothing to worry about – if there is nothing to worry about. Institute an official fraud reporting protocol for staff, vendors and even customers/clients to anonymously report suspected fraudulent activities. It is essential that everyone involved receives a clear document that explains what constitutes fraud. It must also state that the process should never be used to air grievances, which can happen when there is friction between employees. Reports should be backed by facts and evidence. Lastly, it must be made clear to employees, vendors, and customers/clients that all reports are regarded as confidential without reprisal.

 

  1. Secure Insurance to Hedge Business Risk of Fraud

 

For all of your efforts, fraud can still occur. You want to protect your business from this, hedging the risk of all damages that can come in the form of financial loss, liability, and innumerable other concerns. For a comprehensive and unbiased accounting of your existing policy, secure the services of an independent insurance broker with expertise in all forms of commercial crime and commercial liability insurance. Contact Park Insurance before your business joins the approximate 50% of Canadian businesses that have been hit by fraud.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: 5 surprising things you can deduct from your income taxes

 

“Can I deduct this?” When Americans sit down to fill out their income-tax forms on or before the April 15 deadline, that’s the question they’ll likely ask the most.

 

They may be shocked by how often the answer is “yes,” and the sheer variety of expenses they can deduct. Most people know that business-related items are usually tax deductible — no matter how odd. That could include body oil for a masseuse or professional body builder, says Dave Du Val, vice president of customer advocacy at TaxAudit.com, which is based in Sacramento, Calif. Ditto, free beer used for a sales promotion. But a recent survey showed that only 51% of more than 1,000 people surveyed understood relatively basic questions about their income taxes, and the estimated average $2,840 tax refund for 2017 likely does not include the refunds that people did not know they could claim.

 

Of course, most people know many charitable donations are deductible, but some people are especially watchful for deductions others might miss. Grafton “Cap” Willey, managing director at CBIZ Tofias, an accounting and professional services provider in Providence, R.I., helped a client who’d bought a house and land — and wanted to build a better house — write off the fair market value of the windows, lumber and other usable items from the property that he donated to a homeless charity. And documentation is critical. “Take a photo with your iPhone of that bag of clothes you donate, and get a receipt. That all counts as evidence.”

 

To help people think more broadly about the kinds of things they can deduct, here are five unusual tax deductions:

 

Swimming pools

 

Context is everything when it comes to deductions, especially when expenses are being characterized as being for medical purposes. Johanna Turner, senior partner at Milestones Financial Planning in Mayfield, Ky., had clients who successfully deducted the full cost of a $40,000 swimming pool. “Their child had been injured in an accident,” she says. “They received doctor’s orders for swimming therapy.” The key here is making sure a doctor signs off on the deductions, Turner says. There are also deductions taken for hot tubs and pools as long as they, too, are doctor-prescribed, adds Megan Thompson, a certified public accountant at Thompson Accounting in San Jose, Calif. Upgrading your property for lifestyle or reselling, for instance, would not count.

 

Abortion

 

This may be the most politically and ideologically divisive of all deductions. The IRS says: “You can include in medical expenses the amount you pay for a legal abortion.” So an abortion — which can cost from $500 to $1,000 — could be deductible if it was included with other medical expenses. Taxpayers can also include in medical expenses the amount they pay to purchase a pregnancy test kit to determine if they are pregnant, and the cost of a sterilization or vasectomy. When it comes to all medical expenses, you cannot include those that were paid by insurance companies or other sources, and the total medical expenses in question need to exceed 10% of your adjusted gross income (this falls to 7.5% for those who are 65 or over for all medical expenses).

 

Gambling losses

 

“If you have gambling gains, you can deduct a large number of expenses to go to Vegas up to the point where it offsets much or all of the gains,” says Scott Bishop, director of financial planning at STA Wealth Management in Houston. You can deduct your losses, but no more than your winnings in that tax year. Gambling income includes winnings from lotteries, raffles, horse races and casinos, and fair market value of prizes such as cars and trips. “To deduct your losses, you must be able to provide receipts, tickets, statements or other records,” the IRS states. For casinos, you need copies of check-cashing records. Some states don’t allow deductions on gambling losses, however.

 

Service dogs and dog food

 

Man’s best friends can be another tax-deductible expense. “I had a client with a warehouse deduct the cost of buying guard dogs,” Bishop says. Their pet food may also be deducted. He is aware of one case where a person deducted the cost of transporting their six dogs as a work-related moving expense. Taxpayers may also include as medical expenses the costs of buying, training and maintaining a guide dog or other service animal to assist a person with physical disabilities. This includes any costs, such as food, grooming and veterinary care incurred in maintaining the health of the service animal.

 

Gender confirmation surgery

 

In 2010, the federal tax court ruled in favor of a transgender woman, Rhiannon O’Donnabhain, who had taken up a case against the IRS for refusing to allow a $5,000 deduction for $25,000 in medical expenses for gender confirmation surgery, those costs “not compensated for by insurance or otherwise, for medical care of the taxpayer.” In its ruling, the tax court said gender-identity disorder is widely recognized in diagnostic and psychiatric reference texts, and all three experts testifying in the case consider the disorder a serious medical condition, and the mental-health professionals who examined O’Donnabhain found that her disorder was a severe impairment.

 

Additional resources for business accounting tips are available here.

The Southbourne Tax Group Review: The state of play on tax evasion and avoidance

 

Sometimes it can be hard to keep up with the avalanche of government announcements on tax avoidance and evasion. This guide, produced by Jason Collins, a member of the CIOT’s Management of Taxes Sub-Committee, should bring tax agents, journalists and others with an interest in tax compliance up to speed with the rapidly changing landscape in this area

 

Offshore evasion

 

The 1st of January 2017 was a seminal date in the war against offshore tax evasion because it is the date on which financial accounts in existence in jurisdictions in the 'late' adopters of the Common Reporting Standard (CRS), will have to be reported, even if they are closed after this date.

 

Although the trigger dates were earlier for the Crown Dependencies and Overseas Territories (CDOTs) (1 July 2014) and early adopters of the CRS (1 January 2016), the late adopter countries are perhaps the most significant because they include the major financial centres of Switzerland, Hong Kong, Dubai and Singapore.

 

HMRC received the data from the CDOTs in September 2016 and has begun the process of matching that data to information it already holds in order to decide who to investigate. The data pot will be enhanced by the receipt of the CRS early adopter data in September this year and late adopter data in September 2018.

 

Enablers

 

The date of 1 January 2017 also brought the start of Finance Act 2016 penalties for enablers of someone else's offshore tax evasion or careless non-compliance. Penalties can be up to 100 per cent of that other person's tax liability.

 

It is worth noting here that the taxpayer will be entitled to mitigation of his or her own penalty if he or she provides information about any enabler.

 

Strict liability offence

 

HMRC is under pressure to prosecute more people for offshore tax evasion, and FA 2016 introduced a new 'strict liability' offence which may achieve this end. The offence will apply if a UK taxpayer fails to notify HMRC of his or her chargeability to tax, fails to file a return or files an incorrect return in relation to income, gains or assets in a non-CRS country and the underpaid tax is more than £25,000 per tax year. There will be no need for the prosecution to prove that the individual's actions were dishonest but the taxpayer can put forward a 'reasonable excuse' defence. The maximum sanction is six months of imprisonment. We do not yet have a definite date, but it is expected this will apply from April 2017.

 

Corporates

 

As with the above, HMRC is also under pressure from the public to see more companies and partnerships prosecuted – in particular those who fail to prevent their staff and agents from criminally facilitating third party tax evasion. A new offence is being introduced in the Criminal Finances Bill and will be effective by September 2017 at the latest.  Liability is again 'strict', but it will be possible to advance a defence that reasonable procedures were in place to try to stop the misconduct (or that it was not reasonable in all the circumstances to expect there to be a procedure in place).  The offence is being introduced because under the current law a corporate will only be criminally liable if very senior management (usually board level) were involved or knew about the facilitation, meaning that it can be all too easy for senior management to let unscrupulous practices go on, provided they know nothing about them.

 

Tougher civil penalties

 

Despite bringing more prosecutions, most cases will continue to be dealt with by HMRC levying financial penalties rather than seeking a criminal conviction. The current maximum penalties for offshore evasion depend upon the extent that the UK has exchange of information arrangements with the jurisdiction connected to the non-compliance, with a maximum penalty of 200 per cent of the tax for the most opaque regimes. The standard penalty payable can be increased by up to 50 per cent where there has been a deliberate attempt to move assets in order to avoid exchange of information regimes (Sch 21, FA 2015).

 

In addition, a new 'asset-based' penalty is being introduced (Sch 22 FA 2016) for the most serious cases of evasion with an offshore connection. It is levied in addition to the standard penalties for deliberate behaviour. The asset-based penalty starts at the lower of 10 per cent of the value of the asset and 10 times the potential lost revenue related to the asset and is subject to mitigation. It is not yet known when this penalty will come into force, but it is likely to be sometime in 2017.

 

Disclosure facilities and 'Requirement to Correct'

 

The Liechtenstein Disclosure Facility (LDF), which despite its name could be used for irregularities in other jurisdictions, has been withdrawn and replaced with the much less generous Worldwide Disclosure Facility (WDF). The WDF offers no tax amnesty, penalty reduction or guarantee of non-prosecution and therefore provides little incentive for the hard core who have resisted the numerous previous settlement initiatives to regularise their position. The WDF requires the taxpayer to pay the tax, interest and a self-assessed reckoning of the penalties which apply.

 

Linked to this, Finance Bill 2017 will include new measures applying to a person with any undeclared tax relating to offshore matters as at 5 April 2017. The law will impose a special 'new' statutory requirement to correct the issue between 6 April 2017 and 30 September 2018. The issue is treated as corrected if the taxpayer takes certain steps, including formally bringing it to the attention of HMRC under the WDF, before the deadline.

 

A failure to correct by the deadline will lead to two things. First, the time limit applying to HMRC's powers to assess will be extended so that HMRC is given a further four years beyond the usual timeframes in which to discover and collect the under-declared tax.

 

Second, the old penalty regime will fall away and a new super penalty will be applied.  The penalty is between 100 per cent and 200 per cent of the potential lost revenue (depending on the levels of cooperation).  The underlying conduct giving rise to the non-compliance is irrelevant.  However, there is a 'reasonable excuse' defence and provision for reduction of the penalty in special circumstances.

 

This super penalty can be imposed in addition to the asset–based penalty mentioned above. It is also subject to an increase of up to 50 per cent under Sch 21 FA 1015 if HMRC can show that assets or funds have been moved in a deliberate attempt to avoid exchange of information (see above).

 

Obligation to write to clients

 

Advisers who have provided tax advice to UK residents in relation to offshore accounts, assets and sources of income and financial institutions who have provided offshore accounts are required to send a letter to their clients enclosing a HMRC leaflet and reminding them of their obligation to disclose offshore income and gains. It will apply in respect of advice provided in the year to 30 September 2016 and there are exclusions. A useful exclusion for advisers covers the situation where all the adviser has done is prepare tax returns disclosing offshore income.  Letters need to be sent by 31 August 2017 but advisers need to start working out which clients they need to contact, if they have not already done so.

 

Requirement to notify offshore structures

 

HMRC is consulting until 27 February 2017 on a proposed new legal requirement for intermediaries (both within and outside the UK) creating or promoting certain complex offshore financial arrangements to notify HMRC of the details and provide a list of clients using them. The measure aims to target arrangements which could easily be used for tax evasion purposes. It is proposed that the requirement should apply to arrangements in existence at 31 December 2016, rather than just new arrangements entered into after the new measure comes into force, in order to tie in with the start of CRS.

 

Onshore evasion

 

More tax is lost to onshore evasion or non-compliance than to offshore evasion and avoidance but it does not always attract the same level of public interest - for example a former minister for tax was vilified for making the very valid point about the scale of the tax loss from paying tradespeople in cash. Indeed, the largest single type of loss to the exchequer is from the 'hidden' economy - for instance those who fail to register for tax at all (known as 'ghosts') or fail to declare an entire source of income (known as 'moonlighters'). In 2014/15 (the latest figures available), 17 per cent of the tax gap (some £6.2bn) was estimated to be down to this type of non-compliance.

 

As with offshore evasion, HMRC has adopted a two pronged strategy to counteract domestic tax evasion. This involves a combination of 'encouraging' recalcitrant individuals to come forward and increasing HMRC's powers to obtain information from third parties who may provide the key to finding those who are non-compliant.

 

Disclosure initiatives

 

Recent 'encouragement' initiatives involve HMRC targeting areas where they believe there may be non-compliance. In the past HMRC has focused on specific industries, eg plumbers, solicitors and doctors, but over the last year it has launched campaigns targeting specific types of income that may be relevant to the population more generally, such as buy-to-let rental income and income from second occupations. These initiatives enable a voluntary disclosure to be made of previously undeclared income and generally offer reduced penalties, compared to the position if it is HMRC that discovers the non-declared income.

 

'Nudge' letters

 

A more controversial aspect of the strategy to encourage non-compliant people to come forward voluntarily has been the use of 'nudge' letters. These letters to taxpayers reminding them of their obligations are sometimes not copied to agents, such as one that was sent out just before Christmas to those who had declared interest income on their 2014-5 tax return asking them to check the figures returned. It was not clear from the contents of this standard letter whether it had been sent randomly or to specific individuals as a result of HMRC receiving different information from banks and building societies about the interest paid. Anecdotal evidence from tax advisers suggests that the letter worried some individuals who had, in fact, complied with their obligations.

 

Increased HMRC powers

 

In relation to the second prong of the strategy, there were three consultations last year on additional powers to clamp down on the hidden economy. One consultation proposed extending HMRC's data gathering powers to enable it to collect data from money services businesses (for instance businesses that provide money transmission, cheque cashing or currency exchange services). As part of the 'Fintech' revolution, more and more people are buying bank services outside the traditional bank supply lines and HMRC has had to respond to try to ensure that the 'shadow banking' sector cannot easily be used to hide sources of income or wealth.

 

Another consultation proposed making access to public sector licenses such as licences for private hire vehicles, environmental health, planning and property letting conditional on registering for tax. As an alternative the government is considering measures which will effectively give financial services companies an indirect role in policing the hidden economy, by making access to business services such as insurance and bank accounts conditional on proving that you are registered for tax.

 

The third consultation document proposed tougher sanctions for those involved in the hidden economy, including higher penalties for those who repeatedly fail to notify chargeability, additional tracking and enhanced monitoring of taxpayers with a history of non-compliance, and strengthening the penalty regime where an immigration offence is also committed.

 

Connect

 

In this high-technology age, HMRC has invested heavily to keep up.  It has spent a very large sum of money on a database, called 'Connect'.  All information is fed into this data trove and reviewed in order to inform HMRC's deployment of resource to meet onshore and offshore risks, as well as identifying specific instances of non-compliance.  The flip side is that as the country moves away from using cash, the traditional channels for the hidden economy are closing.  Tax evasion is as old as the hills, but one wonders whether it has met its match. 

 

Tax avoidance

 

A crackdown on tax evasion is probably only just ahead of a crackdown on avoidance in the political popularity stakes. In the eyes of HMRC, aggressive avoidance is no more acceptable than evasion and shares the feature that (because of their overwhelming success rate in challenging avoidance) tax is legally due but unpaid. This perspective has justified a barrage of measures in recent years.

 

Penalties for enablers of avoidance

 

The most contentious measure is the suggested imposition of penalties on the 'supply chain' in avoidance – not just the designers and promoters, but those who provide advice and who sell the arrangements to others.

 

A first consultation drew gasps from among the tax industry as it suggested penalties would be applied to any bank or adviser whose client was successfully challenged under, among other things, a targeted anti-avoidance rule. The penalty would be up to 100 per cent of the tax due from the client.

 

Thankfully HMRC listened to stakeholders' concerns about the breadth of the proposals and the draft legislation for inclusion in Finance Bill 2017 provides that the measure will only apply to 'abusive arrangements'. This uses the 'double reasonableness' test used for the general anti-abuse rule (GAAR) – arrangements which cannot reasonably be regarded as a reasonable course of action having regard to all the circumstances. The penalty will be capped at the fee received by the adviser/intermediary.  It is proposed that the new rules will apply to activity taking place after Royal Assent is given to the 2017 Finance Bill.

 

Serial tax avoiders

 

A new 'serial tax avoiders' regime has been in force since 15 September 2016. It applies where a tax avoidance scheme is 'defeated' (either by the decision of a tribunal or court or by settlement with HMRC). Anyone who has participated in a scheme on or after 15 September 2016 can be issued with a warning notice which lasts for five years and imposes an annual obligation to notify HMRC of further schemes used, with enhanced penalties, possible 'naming and shaming' and restriction of access to tax reliefs if any schemes used within the period are defeated. A warning notice can be issued to those who entered into schemes before 15 September 2016 which are defeated on or after 6 April 2017, but then only the annual notification requirements apply and not the other sanctions.

 

Increased transparency

 

Tied in with international measures and the fight against tax evasion and avoidance we have also seen a number of measures to increase transparency. These include the requirement since April 2016 for certain UK companies and LLPs to formally identify and keep a register of 'persons with significant control' over them and to provide this information to Companies House at least annually. There are also proposals for a register of people controlling non-UK companies owning UK real estate as well as a register of settlors and beneficiaries of trusts which generate UK tax consequences. Further details are expected this year.

 

Large businesses will also be required to publish their tax strategy online. This will include details of their attitude to tax planning and their appetite for risk.  Country-by-Country Reporting, under which large companies have to formally break down where they make profits and where they pay tax, will also go live in 2017.

 

VAT

 

Clause 95 of the Finance Bill 2017 provides for a new penalty which will apply to anyone found to have claimed input tax on a transaction which they 'knew or should have known' was connected with a VAT fraud (the input tax claim thus being bad in law).  HMRC say that the current VAT penalty regime (which identifies careless or deliberate errors) requires HMRC to specify whether they are alleging one or the other of actual and constructive knowledge for the purposes of the penalty, whereas they do not need to make this distinction for the legal test in respect of the tax itself.  Under this new fixed 30 per cent penalty, liability is engaged irrespective of the type of knowledge. The penalty cannot be reduced for co-operation with HMRC and company officers can be personally liable.

 

Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax

 

The Government will revise the VAT avoidance disclosure regime (VADR) and widen it to cover other indirect taxes from September 2017. Among the proposals is to move the principal obligation to report schemes from VAT-registered businesses to scheme promoters and align the penalties for non-compliance with VADR obligations with those chargeable under DOTAS. The Government insists that it will reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. HMRC plans to introduce a wider disclosure mechanism applicable to all IHT arrangements that are contrived or abnormal, or which contain contrived or abnormal steps. More details are to be included in the regulations.

 

Conclusion

 

Although the pace of change has already been very rapid, a significant number of the measures outlined above are due to take effect in 2017. This will give HMRC considerably more fire power in its battle against tax evasion and avoidance.  Tax advisers need to be aware of the impact these changes could have on their clients and of the increasing number of measures which could catch the unwitting tax adviser.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: Beware tax preparer fraud, other ‘dirty dozen’ scams

 

If you’re rushing to get your tax return in the mail, take care when choosing your tax preparer. If you don’t, you could lose your refund and face fines or jail time if your preparer files a fraudulent return.

 

Tax preparer fraud was the focus of a March 1 alert from the National Consumers League (NCL).

 

“Getting caught up in a tax preparer scam will not just cheat you out of your refund and scam you into paying bogus fees, it can also expose consumer victims to other liabilities,” John Breyault, an NCL vice president, said in a statement. Those liabilities include hefty fines and even imprisonment associated with the criminal offense of filing a fraudulent tax return.

 

In February 2017 alone, tax preparers in New York, Nebraska and Louisiana were charged with tax fraud. And in 2015, the U.S. Department of Justice closed more than 35 tax return preparers’ operations because of fraud.

 

Tax preparer fraud also makes the Internal Revenue Service’s list of the “dirty dozen” tax scams for 2017.

 

How the scam works: Often, the tax preparer will falsify your earnings, claim credits for you that you didn’t earn or steal your refund by having it deposited into someone else’s account, according to the NCL.

 

To protect yourself, the NCL and IRS offer tips when choosing a tax preparer, including:

 

  • Check for his or her Preparer Tax Identification Number (PTIN). The IRS offers a tax preparer directory so you can check his or her credentials.
  • Refuse to sign a blank tax return.
  • Steer clear if your preparer doesn’t require you to submit your W-2s.
  • Avoid preparers who charge fees based on a percentage of your refund, or who claim they can get bigger refunds than other preparers.
  • Avoid giving your Social Security number or tax documents when you’re just inquiring about a tax preparer’s service. Otherwise they might file a fake tax return in your name.
  • Be sure to review your return before it’s filed, and make sure you get a copy of your return.

 

You also may cut your risk of fraud by getting free tax preparation help sanctioned by the IRS. If you make less than $54,000 a year, you likely qualify for free, in-person guidance through Volunteer Income Tax Assistance programs.

 

If you make less than $62,000 per year, you can get free online help through the IRS Free File program.

 

Tax preparer fraud isn’t the only thing to be on your guard against this year. Also making the “dirty dozen” are phone scams,  in which fraudsters call up and impersonate IRS agents. These fraudsters claim you owe taxes and try to get you to cough up cash.

 

Between October 2013 and January 2016, the Treasury Inspector General for Tax Administration received nearly 900,000 reports of such calls, and more than 5,000 victims paid more than $26 million to the scammers.

 

The fake agents often threaten to sue, arrest or deport you if you don’t pay using prepaid debit cards or wire transfers.

 

Other frauds on the “dirty dozen” list are phishing emails, which look as if they come from the IRS or a tax software company. If you click a link, you land on an official-looking website and are asked for personal information, which the criminals use to create false tax returns.

 

Identity theft also continues to be a major concern, with bad guys using stolen Social Security numbers to file fraudulent returns. While the number of identity theft tax cases has plunged, almost 238,000 cases were reported in 2016.

 

“It’s the second year tax return fraud has decreased,” Breyault says, “but they’re not going to be able to catch all of it.”

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: How To Recognize the Signs of Tax Identity Theft

 

Tax filing season is upon us. Soon you will be filing your paperwork and perhaps receiving a nice check — unless thieves file a return in your name first and falsely claim your refund.

 

Unfortunately, if a thief has your Social Security number and other relevant information, tax identity theft is very hard to prevent. Greg McBride, Chief Financial Analyst for Bankrate.com, notes that "somebody could have your Social Security number and they could have been sitting on it for a while... you would have no idea until they go and file a bogus tax return under your Social Security number. You only find out at the point where your legitimate return gets rejected."

 

While recent IRS efforts have resulted in a 50% drop in both confirmed fraudulent identity theft tax returns and new identity theft reports from 2015 to 2016, tax-identity thieves still falsely claim millions of dollars in undeserved refunds every year.

 

The IRS is attempting to help taxpayers be proactive by recognizing the signs of potential tax ID theft. The "Taxes. Security. Together" program urges taxpayers to take reasonable precautions and to work with the IRS whenever any activity occurs that suggests tax ID fraud.

 

Examples of suspicious activity include receiving tax–related documents that you did not request and should not receive, including receiving a bogus refund. Occasionally, information meant to be delivered to the thief will be sent to you by mistake. If you receive a tax document from an employer that you have never worked for, a tax transcript that you did not request, or a reloadable prepaid debit card that you did not expect, you should be highly suspicious of potential tax fraud.

 

You may also receive a letter from the IRS asking you to verify a suspicious tax return filed with your name and Social Security number. A greedy thief may try to claim a large refund or make a basic error in the return that compels the IRS to label the return as suspicious. When that occurs, the IRS will contact you to see if the return is legitimately yours.

 

If your return is rejected, start by immediately looking for any simple errors such as transposed Social Security numbers or confusion with respect to dependents — for example, your teenage son or daughter filed their own return claiming themselves when you have also claimed them as a dependent. If no errors are evident, you will have to deal with what McBride calls the "massive headache" of rectifying the situation.

 

McBride offers perhaps your best line of defense: "To whatever extent you can, try to file your tax return early." Beat the thieves at their own game and file as soon as you have the necessary tax documents from employers and financial accounts. However, since the thieves don't care if your information is correct or not, they have an inherent time advantage.

 

It's preferable to be preventative and extremely careful with your personal information. The IRS urges you to take reasonable and simple steps, such as securing your computer and mobile devices, using strong passwords, avoiding phishing e-mails, and not engaging in suspicious texts and calls from alleged IRS officials.

 

Make sure that you take similar precautions with your mobile and wireless connections. Never transmit personal information over unsecured Wi-Fi connections or to unverified websites.

 

With respect to tax fraud, the IRS is your ally. Neither one of you wants tax-identity thieves to succeed. Do your part, be proactive and vigilant, and help to make 2017 a difficult year for tax-identity thieves.

 

Additional resources for business accounting tips are available here.

The Southbourne Tax Group: Lowell tax preparer allegedly kept refunds; tips for choosing tax preparer

 

There are a lot of scam warnings at tax time, but you may not have considered this one before: Make sure you check out your tax preparer.

 

Last week, a court approved an injunction requested by State Attorney General Maura Healey, aimed at stopping a Lowell tax preparer, Samuel Dangaiso, of Tax Enterprises, from doing business.

 

“We allege that this defendant filed more than $2 million in fraudulent deductions and pocketed tens of thousands of dollars of the falsified refunds,” said Healey. “This tax season, we will be watching for scam tax preparers and will take action to stop tax fraud in order to protect the public.”

 

The attorney general's office alleges that Dangaiso filed tax returns that included invented, unjustified deductions without the knowledge of his clients.

 

Dangaiso would then direct the full refund to his own bank account, pay the customer their expected amount and then keep the rest, Healey said.

 

The investigation revealed that he kept at least $150,000 in refunds from more than 300 returns since 2009.

 

The IRS strongly suggests that consumers check the qualifications and history of their tax preparer. The IRS maintains a directory of credentialed preparers that you can access through this website.

 

Additionally, the IRS said that consumers should never sign a blank return.

 

They should also double-check all routing numbers for bank accounts on their filings to verify that refunds will be sent directly to them and not to the preparer.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group Review: Struggling middle class give less to charity

 

Donations by wealthy Americans surge

 

The divide between the rich and not-so-rich in America can be seen most glaringly in the amount of money they give (and have stopped giving) to charitable causes.

 

The average American household is giving far less to charity than it did a decade ago, but this hides two vastly different patterns of charitable giving. Over the past 10 years, charitable giving deductions from lower-income donors have declined significantly, at almost the same rate that charitable giving from higher income donors increased. Itemized charitable deductions from donors making less than $100,000 a year declined by 34% from 2005 to 2015, while the same deductions from donors making $100,000 or more a year increased by 40%, according to a study of tax filings by the Institute for Policy Studies, a left-wing think tank.

 

“The growth of inequality is mirrored in philanthropy,” Chuck Collins, report co-author said. “As wealth concentrates in fewer hands, so does philanthropic giving and power.” As a result, charities are increasingly relying on larger donations from smaller numbers of high-income, high-wealth donors, which could lead to undue influence of funds in major charitable organizations. And they are receiving less from the vast population of donors at lower and middle-income levels. (The authors consider low and mid-range donor income as under $100,000 per year.) Overall, charitable giving increased 4% to $373.25 billion year-over-year in 2015, regardless of income level.

 

 

The number of donors giving at typical donation levels has also been steadily declining. (In terms of donations, below $10,000 is considered a low to mid-range gift, while over $10,000 is considered a high-dollar gift.) Lower and middle income donors to national public charities have declined by as much as 25% between 2005 and 2015. These are the people who have traditionally made up the vast majority of donor files and lists for most national nonprofits since their inception. This rate of decline “correlates strongly” with overall economic indicators, such as wages, employment and homeownership rates, the study said. And more and more giving is going into warehousing vehicles like foundations and donor advised funds, instead of to charities on the ground, it added.

 

It’s not all doom and gloom: Giving to schools and colleges is expected to grow by 6.3% this year and 6.1% next year, according to a separate report released last year by the Indiana University Lilly Family School of Philanthropy and presented by Marts & Lundy, a fundraising and philanthropy consulting firm based in Lyndhurst, N.J. But the middle class likely had less to do with this spike too. “This may be due in part to the increasing interest of donors, and especially wealthy donors, foundations and even corporations, in funding higher education, as well as a growing role for philanthropy in K-12 education,” the report added.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: 7 Tips For Preventing Invoice Fraud

 

The Accounts Payable department is a prime target for fraud. Criminals looking to exploit your business take advantage of AP departments buried in paperwork to submit phony invoices and hope they’ll slip by as legitimate.

 

A single fraudulent invoice might not impact your company too much. However, over time invoice fraud can become quite a costly problem. Foiling invoice fraud is often frustrating, but implementing these tips will significantly reduce the risk of your company falling victim.

 

1) Employ 3-Way Matching

 

If you can match each invoice to a purchase order and receipt of goods, then you’re much less likely to pay a fraudulent invoice. Most fraudsters won’t bother fabricating three separate documents.

 

2) Watch Invoice Amounts

 

Amounts on invoices can provide clues that the invoice isn’t on the up-and-up. If your company requires additional review for invoices over $1,000 (for example), checks squeaking by right under that threshold (such as $999.98) should raise suspicion.

 

3) Keep Up Moral

 

Invoice fraud can come from inside the company or from an outside source. Happy employees are unlikely to commit fraud and more likely to catch fraud from outside sources. If they don’t have reason to complain, then they’re more likely to care about doing right by the company.

 

4) Check On Vendors

 

Fraudulent invoices are typically issued under fake business names or use a legitimate name but a fake address or bank account number. You’ll want to look up any new vendors to make sure they’re legitimate and find the address on Google maps. If the address is residential or a post-office box, that’s a big red-flag. Also, check-in with your existing vendors directly if their account information changes.

 

5) Track Invoice Activity

 

If you’re tracking invoice activity, you’ll be able to notice when something changes. For example, one vendor typically submits 5 to 10 invoices a month and suddenly you see 50 from them in a single month. It might be legitimate, but you’ll still want to get in touch with them and double-check.

 

6) Implement “Fuzzy Matching”

 

Duplicate payments are one way to commit invoice fraud – fraudsters submit a near-perfect copy of a legitimate invoice and hope no one notices one payment is going to a different account number. Sometimes they’ll also change date, invoice number, or amount. You’ll need a program that allows for “fuzzy matching” to catch near-duplicates as well as identical invoices.

 

7) Employ Automation

 

Automation in the AP department gives you the tools you need to more effectively implement all these other tips for preventing fraud. It’s probably the single most important step you can take to stop invoice fraud.

 

With NextProcess’ AP Automation Software, you instantly get detailed insight into everyday invoice processing. Our software automates invoice processing according to your custom specifications. It can catch many sorts of suspicious invoices on its own and gives you the tools you need to more easily track invoice activity and check on vendor information. On top of that, automation software is easy to use and frees up employees for more interesting work. It’s a win-win for the company and everyone in the AP department.

 

Additional resources for business accounting tips are available here.

 

The Southbourne Tax Group: It's tax season, avoid fraud by following these tips

 

The person calling began to threaten the OPP civilian employee that if she did not send money to him, terrible things would happen to her

 

With tax season on the horizon OPP will be receiving calls from citizens who have been contacted and in some cases, have lost money. If you are contacted over the phone by someone saying they are the Canada Revenue Agency (CRA) here are some tips taken right from the CRA website:

 

The CRA:

 

* never requests prepaid credit cards;

* never asks for information about your passport, health card, or driver's licence;

* never shares your taxpayer information with another person, unless you have   provided the appropriate authorization; and

* never leaves personal information on your answering machine or asks you to leave a message containing your personal information on an answering machine.

 

When in doubt, ask yourself the following:

 

* Is there a reason that the CRA may be calling? Do I have a tax balance outstanding?

* Is the requester asking for information I would not include with my tax return?

* Is the requester asking for information I know the CRA already has on file for me?

* How did the requester get my email address or telephone number?

* Am I confident that I know who is requesting the information?

 

When in doubt hang up the phone and call the CRA phone number included on the previous year tax returns or documentation received from the CRA. The number provided on the CRA website is 1-800-959-8281 for individual inquiries.

 

This story that happened in the late fall and speaks to the randomness of these calls.

 

A would be fraudster called the Orillia OPP detachment and was greeted by an administrative assistant with "good morning Orillia OPP". The person calling began to threaten the civilian employee that if she did not send money to him, terrible things would happen to her and he was going to be the one to do it.

 

The randomness comes from the fact that most people from Ontario understand that the OPP stands for Ontario Provincial Police. Many times these calls originate from foreign countries and are intended to scare you into sending money. If you receive one of these calls hang up and call the Canadian Anti-Fraud number at 1-888-495-8501.

 

If you or someone you know receives an e-mail, phone call or letter demanding money, asking for money, threatening you for money or saying the most terrible thing has happened and they need money to help a loved one please call someone you trust and talk it over with them. Think about the following when receiving an e-mail, phone call or letter:

 

* Is it reasonable? Would a police agency call you for money to bail someone out? Would someone notify you of a million dollar win over e-mail?

* If it's too good to be true it probably isn't true.

* Just hang up then report it.

* Call someone else and tell them the story before sending money.

* Call the agency that is calling you; if you receive an e-mail asking for updated information call the bank or go to the bank and talk to a live person.

* If there is any doubt call the Canadian Anti-Fraud Centre.

* Please talk to your relatives about frauds especially elderly relatives as they are more likely to be victims.

 

Sadly each year Canadians are defrauded of millions of dollars.

 

If you receive a call, e-mail or letter and know it's a scam please hang up, delete the e-mail or shred the letter. If you have been the victim of a fraud no matter how small please contact the Canadian Anti-Fraud Centre at 1-888-495-8501.

 

Additional resources for business accounting tips are available here.

 

The Southbourne Tax Group: Tips - Against Tax Refund Fraud

A survey conducted by the data security and identity protection firm found more than half of Americans aren’t worried about tax fraud, despite federal reports showing identity thieves filed 787,000 fraudulent returns in 2016, which adds up to more than $4 billion in fraud.

 

The survey also found that only 35% of taxpayers ask their preparers to use two-factor authentication (which is stronger than a single password) to protect their information. On top of that, only 18% use an encrypted USB drive to save tax documents that contain sensitive information. When it comes to choosing a tax preparer, 50% of respondents said they chose their tax preparers online, didn’t screen them beforehand or weren’t sure how to evaluate a tax preparer at all. CyberScout said this puts consumers at risk of getting scammed. Finally, more than half (51%) of taxpayers expecting refund checks in the mail don’t use a locked mailbox.

 

Americans taxpayers are too lax about identity theft, according to CyberScout.

 

These findings come from a nationally representative survey of more than 1,500 Americans aged 18 and over commissioned by CyberScout, using Google Consumer Survey.

 

“In tax season, it is crucial that everyone remain vigilant and on high alert to avoid tax-related identity theft or phishing schemes,” said Adam Levin, founder and chairman of CyberScout and author of “Swiped.” Levin is also the co-founder of Credit.com.

 

How taxpayers can protect themselves

 

This is one of the busiest times for identity thieves, but there are steps taxpayers can take to protect themselves. Here’s what CyberScout recommends:

 

- Use a password-protected Wi-Fi connection when filing your taxes. Use a long and complex password – not just for your Wi-Fi but also for any accounts you’re using during the tax-filing process.

- Get your return via direct deposit. If you must receive a return check via mail, have it sent to a locked mailbox.

- Ask your tax preparer to use two-factor authentication to protect your documents and personal information.

- Use an encrypted USB drive to save sensitive tax documents.

 

Additional resources for business accounting tips are available here.

 

The Southbourne Tax Group: Why Tax Refund Fraud Losses Are Growing Rapidly

 

Over the past five years, the IRS has been experiencing issues around identity theft. Evidence of stolen identity tax refund fraud, or simply tax refund fraud (TRF), began to emerge as early as 2004 when individuals began submitting fictional tax returns from prison. According to the Treasury Inspector General for Tax Administration (TIGTA), in 2004, prisoners submitted 18,000 returns, which cost U.S. taxpayers $68 million. In 2010, they submitted 91,000 returns, with a loss of $757 million. Over that time, the prisoners also increased the average amount of money they collected, jumping from $3,777 in 2004 to a staggering $8,318 in 2010. Their tax fraud scheme exposed a flaw within the tax filing system.

 

Organized criminal enterprises understand flaws in the tax filing and refund system that allowed them to exploit procedural weaknesses and reap large returns for their efforts. TRF has evolved into a sophisticated criminal enterprise process with organized fraud rings filing thousands of fraudulent tax returns annually.

 

Factors Leading to the Growth of Tax Refund Fraud

 

The advancement of technology has had implications across many facets of TRF. The increase in personal computing power of taxpayers, the evolution of the Internet since the early 1990s, the ability to electronically file tax forms and subsequent growth of third-party tax filing services and the ability to receive tax refunds via direct deposit (including prepaid debit cards) have all been major contributing factors to the growth of TRF. Additionally, the conversion of personally identifiable information (PII) to digital records has created an opportunity for cybercriminals to steal PII in large quantities, as evidenced by recent health care provider and government agency data breaches.

 

The IRS has offered and allowed direct deposit of tax refunds since the 1980s; however, it never built systems to confirm that deposits were being made to an account of the same name as the tax filer. In 2008, TIGTA reported that “the IRS has not developed sufficient processes to ensure that more than 61 million filing season 2008 tax refunds were deposited into an account of the name of the filer.” In fact, TIGTA found that the IRS was not in compliance with direct deposit regulations. The IRS claimed that it was the responsibility of the taxpayer to ensure compliance — which obviously played into the fraudsters’ hands.

 

The problem of multiple direct deposits to one account was evident in a 2012 report in which an analysis of 2010 data indicated that 4,157 direct deposit refunds totaling more than $6.7 million went to just 10 accounts.

 

A corresponding July 2012 TIGTA report recommended that the IRS limit the number of direct deposits to one account. The IRS agreed with that suggestion and instituted a limit of three direct deposits to one account for the 2015 filing season.

 

A New Trend Takes Hold

 

Around 2010, a new trend emerged centering around true identity theft. Based on lessons learned from the prisoner tax filing scam, organized criminal groups (OCGs) focusing on TRF began to emerge. OCGs from street gangs to international crime groups learned that they could make a lot money with little risk involved. The OCG would obtain true identity information about a taxpayer, which is otherwise known as “FULLZ” in Dark Web marketplaces. The OCG would then submit a tax return in the victim’s name with fictitious employment and wage documents to support it.

 

Since two returns cannot be filed for the same person in one year, once the victim would submit a true tax return it would be rejected, alerting them to the identity theft. One of the issues at hand is that the IRS does not reconcile wage documents from individual returns to those supplied from employers until six to nine months into the year. According to TIGTA, the IRS may have paid $5.2 billion in potentially fraudulent tax refunds on 1.5 million tax returns in 2010.

 

So Where Does One Get FULLZ Information?

 

FULLZ information is readily available from many places. These include data breaches, retail stores, health care records and more. Once cybercriminals get access to this data, they will then put the information into a website marketplace that allows fraudsters to access any of the data that is available for a price. Many of these websites are in what is known as the Dark Net or Dark Market. The Dark Net listings provide fraudsters with all the information they would need to execute TRF.

 

If you are a novice or would-be fraudster, there are websites that will provide a how-to tutorial for committing TRF. The pictures below are examples of a few websites that teach people each step of TRF, from getting a person’s PII and opening a bank account in that individual’s name to actually submitting a fraudulent tax return and receiving an illicit refund.

 

Another important thing to note is that rules, regulations and silos within companies hinder the organizations’ ability to effectively communicate, share information and limit the losses from TRF. However, the bad guys are not hindered by any such rules and regulations. They are free to communicate among themselves about successes, failures and other conditions that will help refine their processes to be more successful. This is usually done in Dark Net chat forums. In these forums, criminals are free to discuss what was successful and what was not.

 

Technology has made it increasing easy for fraudsters to commit their crimes anonymously. The Internet and phone channels provide areas that can be used to grant anonymity. On the Internet there are many products that provide virtual private network (VPN) services to hide the true identity and IP address of the bad actor; two of the best known are Tor and I2P.

 

Data Breaches Fuel the FULLZ Supply

 

All data breaches are not created equally. Some of the large retail breaches over the last 18 months, while significant, do not pose as much of an identity theft risk as the more recent health insurer and government data breaches. Some of the high-profile retail breaches involved payment card compromises, which would allow a fraudster to create and use counterfeit cards. Typically, card issuers will bear losses associated with counterfeit card use, sparing consumers any financial burden. However, data breaches that involve complete PII records of consumers present a high risk of identity theft and TRF.

 

Until recently, the compromise of full PII data often came from malicious insiders with access to consumers’ information. Insiders at banks, medical offices, schools and other organizations that possess PII help provide access for criminal enterprises. Large-scale data breaches at health insurers and government agencies have provided a tremendous supply of consumer PII to cybercriminals looking to execute TRF.

 

So far in 2015, more than 100 million PII records have been compromised through health care and government data breaches alone. For example, the IRS announced that the breach of its Get Transcript system may have included the PII of 334,000 taxpayers. Unlike payment card compromises, these breaches may have profound negative effects to individuals for years to come.

 

IRS Attempts to Control the Issue

 

In response to TIGTA’s direct deposit concerns, the IRS introduced limits on Automated Clearing House (ACH) deposits for the 2015 tax season. It implemented new procedures about how money would be sent to accounts by ACH and by check. For instance, a new direct deposit refund request limits the number of refunds that can be deposited into one bank account to three. After three deposits into one bank account, the IRS will convert any subsequent direct deposit refund requests to a paper check and mail the check to the taxpayer’s address. Also, the IRS is limiting the number of bank accounts among which a taxpayer can split one refund to no more than three.

 

These changes were implemented in an effort to curb TRF. However, the reforms did not achieve the intended result because fraudsters adapted their tactics to exploit systematic weaknesses. The issues that arose for the 2015 tax season are twofold:

 

  1. Workarounds With Tax Preparation Services

 

The master accounts associated with tax preparation services are a weakness in the system to which fraudsters navigated once the IRS instituted the direct deposit limitations. When an individual files a tax return with a refund through some of the popular tax preparation services, the refunds are often routed from the IRS to the tax preparation company, which then sends it to the individual’s bank and account of record.

 

Through this method of filing, fraudsters were able to bypass the direct deposit limits. Refunds processed through master accounts do not contain robust event descriptions. The lack of event descriptions means the banks can’t detect and stop these refunds since they have no information from which to validate and match information to the bank account.

 

  1. Financial Institutions Cannot Help Monitor for Fraud

 

The direct deposit limits took financial institutions out of the game with regard to being a detection point. An ACH deposit coming from the IRS to a bank contains a robust event description including the name, address and Social Security number of the beneficiary. Financial institutions were in a position to detect suspicious activity of multiple deposits going to one account for the benefit of individuals not named on the account.

 

As with many regulations and controls designed to stop fraud, there are unintended consequences. As a result of criminals’ ability to adapt to the ACH limitations, they found another way. Their new methods resulted in a higher success rate and increased losses to U.S. taxpayers.

 

What Does This Mean for the Future?

 

TRF is expected to increase dramatically for this tax season. According to the IRS, fraud losses will reach a staggering $21 billion by 2016, while just two years ago, losses were $6.5 billion.

 

Recent large-scale PII data breaches will contribute to the growth of TRF. Although the IRS is making changes to try to limit fraud, there are still structural weaknesses in the process that will allow this activity to continue.

 

Are There Solutions to the Tax Refund Fraud Issue?

 

No one solution will stop tax refund fraud, but it can be slowed down and its losses limited. The focus should be on better fraud detection capabilities. The detection process should be built like an onion with multiple layers and parties involved. Proposed cuts of the IRS’ budget by more than $800 million for fiscal year 2016 may make it increasingly difficult for the agency to create a better detection strategy, however.

 

Limiting the number of direct deposits to one account is a good start. However, financial institutions need to be brought into the detection loop. The refund process via master accounts must be enhanced to the point where the name, address and Social Security number of the beneficiary are included in the event description of the ACH transaction between the master account and the receiving bank. Once that is done, banks can build fraud strategies to identify multiple deposits to one account.

 

The IRS, financial institutions, tax preparation service companies and card companies should work together to devise and implement detection controls that may allow each party to potentially identify suspicious activity, raise red flags and halt the refund process to allow for identity verification. With a detection process that includes all these parties, there will be three different industries that can review refund transactions at different points in the process. This could significantly decrease the losses that are seen with tax refund fraud.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: Adjustments After Nuptials - Tax Tips!

June had the reputation as being THE wedding month of the year and flowers were everywhere. Now it seems like wedding season goes from early spring to late summer. Whether they’re traditional with a bunch of flowers or have a Harry Potter theme, weddings strive to be a happy occasion for all parties involved and guests invited. They can also, however, be quite stressful! Between trying to plan a wedding, staying within budget, finding the perfect dress and finalizing plans, it can be an overwhelming task! Not to mention that two people’s lives are going to change, so it’s understandable that a few things might fall to the wayside.

 

While trying to choose the right flowers for the bouquet, which flavor of cake to have, and planning a seating chart, no one really has time to think about everything they need to do after festivities and honeymoon. Besides, who wants to think about name changing forms when a sandy beach with fruity drinks is calling their name? There’s other important things to do, too, like writing thank you notes and trying out all the new gadgets family and friends gave you.

 

When the fun dies down, though, we’re here to give all newlyweds a friendly reminder of tedious tasks to consider and or do once they’re married. So first things first! Some people really like the whole name change idea that is associated with getting married; you know, at some point we all tried out how our name would flow with some hottie we admired by scribbling it all over our school notebooks.

 

A new name can be exciting, but keep in mind that for tax purposes, your name, social security number and tax return all have to match. Therefore, take a few minutes to report your new name to the Social Security Administration and file a Form SS-5. Make sure you have a copy of your driver’s license or passport and your marriage certificate because you’ll need them. Lastly, the SSA will take about two weeks to process the name change so try not to make your name change too close to the tax season because data sharing between the IRS and the SSA can be problematic towards the end of the year.

 

Another tip to keep in mind is to make sure your address is up-to-date if you move after the nuptials. There are some types of federal and certified mail that the postal service won’t forward to a new address. Seems like a no brainer, but for newlyweds coming fresh off a honeymoon and go right into a big move, it can be easy to forget to notify the postal service. Further, report to your employer any name or address changes to make sure you receive your Form W-2 after the end of the year.

 

Now here’s the nitty gritty; filing a tax return after you’re married. The combined income for you and your spouse could potentially put you in a new tax bracket. If that’s the case, use the IRS Withholding Calculator to see if you need to file a new Form W-4 for your employer. Then, make sure you choose the right tax form to fill out. Being married, you’ll have enough deductions to itemize your return rather than take standard deductions. Finally, decide which filing status will be most beneficial for you.

 

For most married couples, there’s a lower tax liability for filing jointly, but the married filing separate option could be more beneficial. For instance, if your spouse has past debt with the IRS or another agency, filing separate will prevent any refund the spouse may get from being used to offset the debt. These little details are easy for anyone to overlook, but as they say, the devil is in the details. Making sure things like names changes and filing correctly are taken care of well before tax time will save you from of heck of a headache!

 

With all of that out of the way, enjoy the honeymoon period and enjoy being blissfully married!

 

Additional resources for business accounting tips are available here.

The Southbourne Tax Group: Red Flags for Audits

The IRS at times seems like a living, breathing entity that’s often the source of bad dreams and stress. With all their rules, regulations, deadlines and forms, the IRS can be a little daunting, and nothing is scarier than the word audit. Often we are asked what are the chances of being audited, how the IRS chooses people to audit, and if whatever change they make in their life will put them on the radar of the IRS. These are all logical questions and completely reasonable to ask.

 

Unfortunately, the IRS chooses people at random for auditing, but on the other hand, there are some things that can tip the IRS off into auditing you. We’ve compiled a list of things that can tip off the IRS in no particular order that act as red flags so to speak.

 

-Not reporting all your income

 

There are numerous ways to receive income outside of what’s listed on a 1099 or W2. You may receive dividends, pension pay from a previous employer, royalties or whatever it may be. The more sources of income you have, the harder it can be to remember to report all of it or easy to overlook it. Any institution to distribute income will report it to the IRS, so make sure you check and double check that all your income has been recorded.

 

-Breaking the rules of foreign accounts

 

Foreign accounts sound like something from high budget espionage film, but some people do in fact have them. The law states that it is required for overseas banks to identify American asset holders and provide that information to the IRS. If you have a foreign account, you must report assets worth at least $50,000.

 

-Burring lines on business expenses

 

It’s a great tax advantage to be able to write off business expenses, however, the IRS has gobs of data upon data about typical business expenses. In laymen terms, they know when someone is spending more than what the average is. Tax returns showing 20 percent or more above the normal might get a second look. Therefore, always keep proper documentation of all your business expenses.

 

-Earning more than $200,000

 

Higher incomes require more complicated returns that tend to contain audit triggers. The IRS audited 1 percent of those earning $200,000 and almost 4 percent earning more. IF you make more than one million, the chance for an audit increases to 12.5 percent. Again, keeping good paper trails and the proper documentation is a must! This isn’t a bad thing at all, just the nature of the beast in this case.

 

-Taking large charitable deductions

 

Just like business deductions, the IRS has gobs of data about typical charitable contributions people at every income level usually make. If someone tries to deduct a contribution that’s largely disproportionate to their income level, eyebrows might raise. When donating, make sure you get the right paperwork for your own records and make sure to file a form 8283 for noncash donations over $500.

 

-Taking an early payout from an IRA or 401k

 

Red flags get raised if payments are taken out before 59.5 years of age and you can be subject to a 10 percent penalty on top of regular income tax. There are ways to get around the penalty for things like large medical costs and total and permanent disability, but otherwise, it’s best to not touch the pension plans.

 

If they see a common mistake popping up, the IRS is liable to look deeper into returns if they think those mistakes were made. There are any number of reasons the IRS may look deeper into someone’s tax return for auditing. The list we provided are not the only reasons, but are common reasons. The IRS still keeps it random, probably just to keep people on their toes, but keep in mind the IRS likes to change a lot. With proper documentation and accurate records, don’t worry about auditing!

 

Additional resources for business accounting tips are available here.

The Southbourne Tax Group: How to Protect Your Identity and Assets

 

Tax Fraud Awareness

 

The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.

 

Understand How Tax Fraud Happens

 

Dishonest individuals may steal taxpayers’ personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer’s data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.

 

Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don’t usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it’s received another tax return in his or her name, the thief is long gone and has already cashed the refund check.

 

In addition to refund fraud, thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer’s knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect.

 

Recognize the Warning Signs

 

Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:

 

Your electronic tax return is rejected. When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, first check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return?

 

You’re asked to verify information on your tax return. The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn’t file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number.

 

You receive tax forms from an unknown employer. Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn’t do work for in 2016. Someone else may be using the phony forms to claim a fraudulent refund.

 

You receive a tax refund or transcript that you didn’t ask for. Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.

 

You receive a mysterious prepaid debit card. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they later use to collect a fraudulent electronic refund.

 

Take Preventive Measures

 

You may wonder how many taxpayers file electronic vs. paper returns. “There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they’re done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn’t, or skipping an important computer security update, leaving them vulnerable to hackers,” said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See “IRS Creates Security Summit Group” above.)

 

How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:

 

  1. Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with “https” in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers and symbols).
  2. Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what’s being sent. Don’t install software from unfamiliar websites or disable pop-up blockers.
  3. Protect personal information. Treat personal information like cash. Don’t carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about new car or home purchases, past addresses, vacations and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing.
  4. Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.

 

Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS begins processing tax returns on January 23. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number.

 

Join the Fight

 

The deadline for filing your 2016 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2016, and it’s on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.

 

Additional resources for business accounting tips are available here

The Southbourne Tax Group: Educational Tax Tips

I’m sure growing up you heard your parents say that education was the key to success. Whether that meant going to college, vocational school or having an internship or apprenticeship, education was always the answer for good, stable futures. However, schooling at all levels can be rather expensive. There’s crayons, pencils and notebooks to buy, new clothes to buy, tuition to pay for, paying for room and board and even meal plans. It can be quite expensive and adds up really quick, but surprisingly enough, there are tax benefits for knowledge! So to add to your knowledge are some tax tips to keep in mind. As they say, knowledge is power…and at times financially beneficial!

 

First and foremost is the easiest tip that probably everyone knows about; tax free weekend. In Virginia, this year (2016) tax free weekend was August 5 through August 7. It’s a three-day event where there is no sales tax on qualified items such as most school supplies, clothing and shoes, and even things like first aid kits and batteries. It’s a nice little perk, and tax break, to help parents load up on much needed school supplies and that’s only the beginning!

 

Did you know there is a tax credit where before and after school care can be deducted for children under thirteen? Babysitters, summer camp or other care providers may qualify for the tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or up to $6,000 for two or more dependents. The tax credit was designed to help working parents with some of the expenses involved with raising children and the credit helps reduce the amount of federal income tax, which can then increase a taxpayer’s refund.

 

Educational saving plans, such as 529 plans, are also something designed to help parents have some extra funds for education in terms of college and university. These plans are specifically geared towards education and are not federally taxable. Further, withdraws from the account are not taxable as long as the money is used for college expenses such as textbooks, computer, calculators, etc.

 

Even with something like a 529 plan, sometimes further assistance by way of student loans is necessary. There’s not much to be excited about where student loans exist, but there is a slight silver lining to them. For instance, when filing your taxes, make sure you list the interest you’ve paid on the loan because up to $2,500 can be deducted within a given year. Yippee!

 

If you do have a student loan, you should receive a 1098T, and it’ll let you know the amount of interest you’ve paid. This nifty little form is also helpful for the American Opportunity Tax Credit (AOTC). This can amount to $2,500 in tax credits and up to 40 percent of the credit is refundable. This is available for the first four years of post-secondary education (vocational school, college and graduate school) and eligible expenses include tuition, books and required supplies, not room and board. AOTC is intended to help offset college expenses but keep in mind there’s an income limit attached to this credit.

 

We just wanted to give our beloved clients a heads up on some options they may have when it comes to their children’s education, or if they themselves are thinking about further education. While education can be spendy at times, but we try to help lessen the stress of it if when we can!

 

Additional resources for business accounting tips are available here.

The Southbourne Tax Group: Stopping tax identity theft - Practical advice for CPAs and clients

Tax return and other tax-related identity theft is a growing problem that CPAs can help their clients with—both in taking preventive actions and in correcting problems after an identity thief has struck. Tax return identity theft occurs when someone uses a taxpayer’s personal information, such as name and Social Security number (SSN), without permission to commit fraud on tax returns to claim refunds or other credits to which a taxpayer is not entitled, or for other crimes.

 

Thieves normally file early in the tax-filing season, often before the IRS has received Forms W-2 or 1099, to thwart information matching and avoid receiving duplicate return notices from the IRS. Taxpayers sometimes discover they are victims of identity theft when they receive a notice from the IRS stating that “more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past” (FS-2012-7 (January 2012)).

 

In 2011, the IRS processed about 145 million returns. About 109 million were claims for refunds, with an average refund amount of almost $3,000. As of May 16, 2012, the IRS had pulled 2.6 million returns for possible identity theft, and that trend is on the increase. The IRS recently reported an inventory of more than 450,000 identity theft cases. For the 2011 filing season, the Treasury Inspector General for Tax Administration (TIGTA) estimated that identity-theft-related fraud accounted for approximately 1.5 million tax returns in excess of $5.2 billion.

 

CONSEQUENCES OF IDENTITY THEFT

 

Tax return identity theft delays legitimate taxpayer refunds because the return appears to be a duplicate return and may be a sign of other fraud or identity theft problems. IRS support to solve traditional and nonfraud problems may be delayed as well when IRS resources are diverted to combat identity theft. Other tax-related identity theft can cause problems for the taxpayer as well. If an individual fraudulently used a taxpayer’s SSN to get a job, the taxpayer may have extra W-2 wages erroneously reported (and perhaps also extra taxes withheld), leading to a correspondence matching audit. The National Taxpayer Advocate notes that time and money are spent to clear the individuals’ names, during which “victims may lose job opportunities, may be refused loans, education, housing or cars, or even get arrested for crimes they didn’t commit” (IRS Publication 4535, Identity Theft Prevention and Victim Assistance).

 

Further, until recently, the IRS would hold suspicious refunds while verifying the underlying W-2 information, for up to 11 weeks. With the increase in the number of cases and budget limitations, refunds may take longer. So, the IRS says, “[I]dentity theft can impose a significant burden on its victims, whose legitimate refund claims are blocked and who often must spend months or longer trying to convince the IRS that they are, in fact, victims and then working with the IRS to untangle their account problems” (IR-2012-66).

 

A typical identity theft starts when thieves have (illegally) bought or stolen information from individuals, employers, hospitals, or nursing homes or have used the public list of deaths with SSNs issued by the Social Security Administration. With a number or list of numbers, they file false tax returns for refunds. For example, investigators found a single address that was used to file 2,137 tax returns for $3.3 million in refunds (see TIGTA Rep’t No. 2012-42-80). Most thieves prefer to receive the refund using direct deposit or prepaid debit cards. In another example, 590 tax refunds totaling more than $900,000 were deposited into a single bank account. Although banks have strict rules to verify the identity of account holders, they don’t have the ability to monitor whether the direct deposit is for a legitimate refund.

 

Although the IRS planned to spend about $330 million in 2012 to combat identity theft, the IRS has limited resources and needs additional funding to combat this problem. Identity theft also happens to tax systems in other countries, but the extent of the problem is lessened in countries where the government can immediately (or in “real-time”) match income and withholding with the tax return. IRS Commissioner Douglas Shulman called for real-time matching in his prepared remarks at the AICPA Fall 2011 National Tax Conference for the purpose of reducing the number of taxpayer audits, but such a system should help reduce identity theft fraudulent tax returns as well (IR-2011-108).

 

IDENTITY THEFT IN THE MAKING: HOW ID IS STOLEN

 

Common ways to obtain personal information include email or telephone phishing and Dumpster diving. Thieves are looking for “discarded tax returns, bank records, credit card receipts or other records containing personal and financial information” (FS-2008-9 (January 2008)). For example, some taxpayers receive email messages allegedly from the IRS advising them that they are under investigation or have a refund pending. To get the victim to respond, the email may threaten a dire consequence (see Exhibit 1 for a typical phishing message). Often, the recipient is asked to click on a link to access what appears to be—but is not—the legitimate IRS website.

 

The IRS does not send unsolicited, tax-account related emails to taxpayers and never asks for personal and financial information, including PINs and passwords, via email. The IRS advises that “[s]ince the IRS rarely contacts taxpayers via e-mail, and never about their tax accounts, taxpayers should be cautious about any e-mails that claim to come from the IRS” (FS-2008-9). (People receiving a suspicious email from the IRS are encouraged to report the email by calling the IRS at 800-829-1040 or forwarding the email to phishing irs; note in Exhibit 1 how the email uses “irs.org” not “irs.gov.”)

 

IDENTITY THEFT DETECTION: HOW IDENTITY THEFT IS CAUGHT

 

The IRS has several filters that address different issues. These filters are designed to distinguish legitimate returns from fraudulent ones and to prevent the recurrence of identity theft. If a tax return is caught by a filter, it is manually reviewed to validate the taxpayer’s identity. If the IRS identifies a suspicious return, it corresponds with the taxpayer to verify the correct information. Alternatively, if a second, unauthorized person is using the taxpayer’s SSN, the taxpayer may receive a correspondence audit notice informing the taxpayer that he or she failed to report income from another (erroneous) employer.

 

When a taxpayer’s identity has been stolen, the legitimate taxpayer may be issued a confidential identity protection PIN (IP PIN) that identifies the taxpayer as the legitimate party using the SSN and other identifying information. The IRS issues these numbers to taxpayers who have reported that their identities have been stolen, verified their identities, and had an identity theft indicator applied to their accounts. Not all victims of identity theft will receive an IP PIN—the IRS says that taxpayers who submitted Form 14039, Identity Theft Affidavit, and proper documentation or taxpayers whom the IRS has itself identified as victims will receive them. During the 2012 filing season, the IRS issued 250,000 IP PINs, up from about 54,000 the year before. Once the IP PIN has been issued, it must be present and correct on the specific tax return for which it was issued. For the 2012 tax year, the six-digit IP PIN is inserted at the bottom of page 2 of Form 1040, to the right of the taxpayers’ signatures.

 

If two taxpayers are married filing jointly and each taxpayer receives an IP PIN, the couple should use the IP PIN of the SSN that appears first on the tax return. Tax preparation software is generally equipped to ask taxpayers if they received an IP PIN. If a taxpayer is filing a printed copy of the return, however, this number will not print, and should be handwritten in the space provided. A request for an extension or installment agreement using an IP PIN must be made on paper, but the tax return may still be filed electronically.

 

A new IP PIN is issued every subsequent year as long as the theft indicator remains on the legitimate taxpayer’s account. Returns with an IP PIN are processed more efficiently, in that they bypass the regular filtering system, and the IP PIN prevents fraudulent returns from being processed. The IRS began a pilot program in 2010 to mark the accounts of deceased taxpayers to prevent misuse by identity thieves.

 

IDENTITY THEFT CORRECTIVE ACTIONS: WHAT TO DO IF AN IDENTITY IS STOLEN

 

As trusted financial advisers, CPAs may be asked what to do if a client’s identity is stolen. The CPA should consider advising or helping the client with several steps:

 

1.For tax and nontax identity theft, report the theft to the Federal Trade Commission at 877-438-4338 or TTY 866-653-4261.

2.File a report with the local police.

3.Close any affected bank and credit card accounts.

4.Inform the credit bureaus and consider putting a credit freeze on the accounts. A credit freeze restricts access to credit reports, making it unlikely that thieves can open new accounts in the client’s name. Credit freeze laws vary from state to state.

5.If personal information is lost or stolen during the year, contact the IRS Identity Protection Specialized Unit at 800-908-4490, and complete Form 14039, if necessary. Expect to be patient, though. The National Taxpayer Advocate noted in her semiannual report that “this unit has been unable to answer about two out of every three calls it has received from taxpayers so far this year. At times during the filing season, it was answering only about one out of every nine calls it received—and those who managed to get through waited an average of over an hour to speak with an employee.”

6.Respond to all IRS notices immediately, using the name and number printed on the notice.

7.Tax preparers should ask their clients if they received an IP PIN.

 

IDENTITY THEFT PREVENTION TECHNIQUES

 

Since identity theft is so prevalent and growing, a CPA may consider providing general preventive advice through newsletters, websites, and other communications. This advice may include:

 

1.Have clients arrange for masked SSNs where possible, e.g., on insurance cards, so that client SSNs are closely protected and circulated as little as possible.

2.Watch credit reports from the three major credit bureaus; consider offering this as an off-season service or adding a timely reminder with contact information to the firm newsletter. (Contact details for the fraud departments of the three major credit bureaus are: Equifax – 800-525-6285; Experian – 888-397-3742; and TransUnion – 800-680-7289.)

3.Advise clients to forward all information appearing to be from the IRS promptly and to not click on links or open attachments from emails claiming to be from the IRS.

4.Advise clients to safeguard their Social Security cards, store them in a safe and secure location, and not discard any documents with an SSN on them.

5.Advise clients to resist giving businesses an SSN or other personal information just because they ask for it; often it is not required, and dissemination of SSN information is risky.

6.Advise clients to protect financial information by investing in and using a shredder before discarding documents.

7.A taxpayer should secure personal information in one’s own home. For example, copies of tax returns can be kept in a locked file cabinet or safe.

8.Taxpayers should protect personal computers by using firewalls and anti-spam or anti-virus software, updating security patches, and regularly changing passwords for internet accounts with sensitive information, such as online banking sites.

 

CPAs may be able to take additional preventive steps for tax returns, where the client is cooperative:

 

1.File clients’ returns early if possible.

2.E-file returns to be notified of duplicate return notices more quickly.

3.Consider truncating or masking SSNs on Forms 1098, 1099, and 5498 consistent with Notice 2011-38.

4.Communicate with the client to change client expectations: Refunds might take longer in future years as additional system security steps are taken.

5.Finally, CPAs with new online clients should be very careful to confirm the identity of those new clients, so that an identity thief cannot trade on an unwitting CPA’s credibility in filing false returns.

 

CPAs can find additional information at:

IRS website, and

IRS resources including the Taxpayer Guide to Identity Theft page, or the Identity Protection page.

Additional resources for business accounting tips are available here.