Audit Findings in small businesses!

My firm routinely audits business entities.  Many of our audits reveal a problem with segregation of duties (usually A/R and A/P and bank reconciliations performed by a  "trusted" employees or volunteers).  I raise the issue and the entity will try to placate my objections by saying I am going overboard with my audit. 
Well, Mr.Yigal M. Rechtman of Grassi & Co. recently concluded a fraud investigation involving a cash-skimming scheme. Here he shares his findings to help give tax professionals performing audits new perspective.

The Scheme Investigated:
A clerk collected cash from customers and provided a sequentially numbered receipt. At the end of the day, the receipts were supposed to be entered into the accounts receivable system and reconciled with the deposit slip. Instead, the clerk pocketed the cash, and used one of several methods to conceal her acts:
1. She would record an unauthorized credit memo to the customer account.

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2. She would take payments from other customers, and credit the account from which she stole. This is a kiting scheme where the clerk “robbed Peter to pay Paul.”
After roughly three years, the clerk was able to pocket an amount greater than $270,000 (that’s $90,000 a year!) and was caught when a customer complained about their account status, which was shorted due to the scheme.

How did the audit fail?
Although we don’t know what the auditors (not our firm) did in terms of their audit procedures, from what we can gather, here are a few points we think they missed:
• The auditors apparently failed to see that this is a high-risk area. Most of the receipts were in cash—this presents a high risk for fraud and theft of cash. It appears they did very little by way of sampling the paper receipts and tracing them to the accounts receivable system. Had they done it, they had a good chance of finding discrepancies and raising questions.
• The auditors appear to have not identified a lack of segregation of duties; the clerk was the one collecting the cash, entering the cash in the accounts receivable system, reconciling the cash collected, depositing the cash, and responding to customer complaints and questions regarding their accounts. At no time did the auditor inform management this is a lack of segregation of duties that should be addressed, nor did he/she recommend changes.
• The cash shortfall could have been identified if the auditors had simply looked at the top-level analysis of the credit-memo balances. They would have noticed the allowance for uncollectable accounts (or its equivalent) would have been "off" because of all the credit memos. The amount would be material, and that should have prompted more questions, an expanded scope in terms of the nature, timing and extent of the audit procedures for revenues.
• The auditors also did not confirm balances, review the reconciliations, or look at why it takes sometimes up to three weeks for daily reconciliations to be prepared. The delay in the daily reconciliations (between the system and the bank deposit) should have been noticed, and at least mentioned to management and the board. That didn’t happen.
What I see here is a lack of critical thinking by the auditors. Although we are not entirely sure what they did, it appears they did not think in a skeptical manner about the risks to revenues, especially when cash collection was a significant portion of the receipts. They also appear to have created a good analysis of the risks of fraud and may have done “check-list mentality” on their audit programs.
Bottom Line:
• Think about what you see and hear.
• If you think there is a chance that the audit plan is not responsive to what’s needed, say something.
• If you think something is fishy, follow that trail.
• And most importantly, be skeptical of what you're told and verify the facts.
I hope this scenario helps all us auditors and accountants do a better job!
Yigal M. Rechtman, CPA, CFE, CITP, CISM, is a principal in Grassi & Co.’s Forensic

The Shared Responsibility Payment and its consequences

How Coverage You Offer (or Don’t Offer) May Mean an Employer Shared Responsibility Payment for Your Organization

Under the Affordable Care Act, certain employers, based on workforce size – called applicable large employers – are subject to the employer shared responsibility provisions. The vast majority of employers fall below the workforce size threshold and, therefore, are not subject to the employer shared responsibility provisions.

If you are an employer that is subject to the employer shared responsibility provisions, you may choose either to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents, or to potentially owe an  employer shared responsibility payment to the IRS.  Many employers already offer coverage that is sufficient to avoid owing a payment.

If your organization is an applicable large employer, and you choose not to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents, you may be subject to one of two potential employer shared responsibility payments.

More specifically, you may need to make an employer shared responsibility payment to the IRS if you are an applicable large employer and either of these circumstances applies for 2015:

• You offered minimum essential coverage to fewer than 70 percent of your full-time employees and their dependents, and at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and received the premium tax credit.    
• You offered minimum essential coverage to at least 70 percent of your full-time employees and their dependents, but at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and received the premium tax credit.  A full-time employee could receive the premium tax credit because the coverage that was offered was not affordable, did not provide minimum value, or was not offered to the full-time employee. 

For both of these circumstances, the 70 percent threshold changes to 95 percent after 2015.

The terms “affordable” and “minimum value” have specific meanings under the Affordable Care Act that are explained in questions 19 and 20 on the employer shared responsibility provision questions and answers page on IRS.gov/aca.  Transition relief for offers of coverage to dependents for 2015 is described in question 33 on the same page.  

Health car law and letters sent from the IRS

The Health Care Law and You: Nine Facts about Letters Sent by the IRS

The IRS sent letters to taxpayers this summer who were issued a Form 1095-A, Health Insurance Marketplace Statement, showing that advance payments of the premium tax credit were paid on the taxpayer’s behalf in 2014. At the time, the IRS had no record that the taxpayer filed a 2014 tax return.

Here are nine facts about these letters and the actions you should take:

• IRS letters 5591, 5591A, or 5596 remind you of the importance of filing your 2014 federal tax return along with Form 8962, Premium Tax Credit.
• You must file a tax return to reconcile any advance credit payments you received in 2014 and to maintain your eligibility for future premium assistance.
• If you do not file, you will not be eligible for advance payments of the premium tax credit in 2016.
• Even if you don’t usually file or if you requested an extension to Oct. 15, you should file your 2014 tax return as soon as possible.
• Until you file a 2014 tax return to resolve the issue with your Marketplace, you will not be eligible to get advance payments of the premium tax credit to help pay your health coverage premiums in 2016 from the Marketplace.
• You should have received a Form 1095-A, Health Insurance Marketplace Statement, earlier this year if you or a family member purchased health insurance coverage through the Marketplace in 2014.  This form provides the information you need to complete Form 8962. You must attach Form 8962 to the income tax return you file.
• Contact your Marketplace if you have questions about your Form 1095-A.
• If you have recently filed your 2014 tax return with Form 8962, you do not need to file another tax return or call the IRS about these letters.   In general, if you filed your tax return electronically, it takes three weeks before it is processed and your information is available. If you mailed your tax return, it takes about six weeks. However, processing times can vary based on other circumstances.
• You should follow the instructions on any additional IRS correspondence that you receive to help the IRS verify information to process your tax return.

In addition to these letters from the IRS, your health insurance company may contact you to remind you to file your 2014 federal tax return along with Form 8962. In some cases, they may contact you even if you did not receive advance credit payments in 2014. If you are not otherwise required to file a tax return, you do not have to file a return if you or anyone on your return did not receive advance credit payments in 2014.

Business returns on extension coming due

Business returns are due to the IRS 9/15/15.  They need to be postmarked by then at least.  At my firm we finished our remaining few yesterday....but would enjoy the chance to help any business get finished on time.  Call direct to my cell phone at 8133090504 if you need to get your returns filed!

Traditional IRA vs. a Roth IRA

Traditional IRA vs. Roth IRA

A Traditional IRA or a Roth IRA? Here are the differences.

A Comparison
The type of individual retirement account you choose can significantly affect you and your family’s long-term savings. So it’s worth understanding the differences between traditional IRAs and Roth IRAs in order to select the best one for you.
Here are the key considerations:

Income Limits

Anyone with earned income, who is younger than 70 ½, can contribute to a traditional IRA. Roth IRAs, however, have income-eligibility restrictions: Single tax filers, for instance, must have modified adjusted gross incomes of less than $129,000 in 2012 to contribute to a Roth IRA. (Contribution limits are phased out starting at $114,000 in modified AGI, per IRS guidelines.) Married couples filing jointly must have modified AGIs of less than $191,000 in 2012 in order to contribute to a Roth; contribution limits are phased out starting at $181,000. You can also see the full income limits here.

Tax Incentives

Both traditional and Roth IRAs provide generous tax breaks. But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. So with traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.

Future Tax Rates

Do you expect your income to increase or decrease in retirement?
Deciding to contribute to a traditional or Roth IRA should depend on whether you expect your income tax rate in retirement to be higher or lower than what you currently pay. That’s because it determines whether the tax rate you pay on your Roth IRA contributions (today’s tax rate) is higher or lower than what you’d pay on your traditional IRA’s withdrawals in retirement.
Of course, it’s hard to predict what federal and state tax rates will be 10, 20 or even 40 years from now. But you can ask yourself some basic questions to help determine your personal situation: Which federal tax bracket are you in today? Do you expect to your income including Social Security to increase or decrease in retirement? Although conventional wisdom suggests that gross income declines in retirement, taxable income sometimes does not. Think about it. Once the kids are grown and you stop saving for retirement, you lose some valuable tax deductions and tax credits, leaving you with higher taxable income in retirement.
What about tax rates? Do you expect your tax rate will be higher or lower when you retire? Given today’s historically low federal tax rates and large U.S. deficit, many economists believe federal income tax rates will rise in the future — meaning Roth IRAs may be the better long-term choice.

Withdrawal Rules

One major difference between traditional IRAs and Roth IRAs is when the savings must be withdrawn. Traditional IRAs require you to start taking required minimum distributions (RMDs) at age 70 1/2. Roth IRAs, on the other hand, don’t mandate withdrawals during the owner’s lifetime. So, if you don’t need the money, Roth IRAs can continue to grow tax-free throughout your lifetime, making them ideal wealth-transfer vehicles. Beneficiaries of Roth IRAs don’t owe income tax* on withdrawals and can stretch out distributions over many years.
*Beneficiaries may still owe estate taxes—particularly if congress drops estate tax exclusion limits after 2012.
Both traditional and Roth IRAs allow owners to begin taking penalty-free, “qualified” distributions at age 59 ½. However, Roth IRAs require that the first contribution be at least five years before qualified distributions begin.

Extra Benefits & Considerations

It’s also worth factoring in some of the specific rules and benefits of traditional and Roth IRAs. Here’s a breakdown:

Traditional IRAs:

• Contributions to traditional IRAs lower your taxable income in the contribution year. That lowers your adjusted gross income, helping you qualify for other tax incentives you wouldn’t otherwise get, such as the child tax credit or the student loan interest deduction.
• Up to $10,000 can be withdrawn without the normal 10% early-withdrawal penalty to pay for qualified first-time homebuyer expenses. However, you’ll pay taxes on the distribution.

Roth IRAs:

• Roth contributions (but not earnings) can be withdrawn penalty- and tax-free any time, even before age 59 ½.
• five tax years after the first contribution, you can withdraw up to $10,000 of Roth earnings penalty-free to pay for qualified first-time homebuyer expenses.

Keep in mind that Congress can change these rules at any time. So while these are the rules today, they may be very different when you retire.
Thanks to Kelly Spors of RothIRA.com who compiled much of this information.