In 2015 during the Obama Administration, Congress signed into law the “FAST Act” or America’s Surface Transportation Act” for the purpose of authorizing funds for highways and transit programs. Attached towards the end of the bill on page 418 of 490 was section 32101. This provision named the “Revocation or Denial of Passport in Case of Certain Tax Delinquencies” gave the IRS authority to share a list of taxpayers who were seriously delinquent with the State Department, the group responsible for passport issuance.
The IRS is Talking with the State Department
The intended purpose of Section 32101 was to involve the State Department for the purpose of “denial, revocation, or the limitation of one’s passport.” Fast forward to 2018 and we find the IRS and the State Department acting in communion to exercise the provisions of the bill’s section. We know this to be true as the Wall Street Journal recently confirmed that at least 362,000 Americans will have their passport applications denied due to outstanding “seriously delinquent” tax debts.
The Hard Facts
According to the FAST Act, “Seriously delinquent tax debt” is best defined as an unpaid, legally enforceable Federal tax liability in excess of $50,000 (for an individual) where a notice of lien or a levy has been made.
Oh No, I Can’t Renew My Passport?
Once your passport has been taken, you have no other choice but to establish an Installment Agreement or Offer in Compromise. Just making a payment so that the bill is under $50,000 will not help you get your passport back.
Are You Safe?
An individual is relatively safe if they’re current on an installment plan or an offer-in-compromise plan. In addition, those currently in court citing tax identity theft, have filed for innocent spouse relief or filed for bankruptcy are safe for the meantime. Also safe are those serving in a combat zone or in a federally declared disaster area.
Finding yourself overseas? If you are seriously delinquent and have been certified to the Department of State by the Secretary of the Treasury as having seriously delinquent tax debt, you cannot be issued a U.S. passport and your current U.S. passport may be revoked. However, if you are already overseas you may be eligible for a limited or “one-way” passport good for a direct return to the United States.
Can I Pay Just Enough?
So, you don’t want to lose your passport. One way is to pay down your tax debt so that it’s below the $50,000 threshold. Remember: This only works if you act “before” the IRS suspends your passport. If you’re too late and find that your passport has already been revoked, this method will not work.
What Are Your Options?
If you find yourself in disagreement of the amount owed or have a serious tax problem, the following methods may apply to your situation:
California, unlike many other states charges a “Gross Receipts Tax” on LLC’s. This means your business is taxed on the first dollars received, not the net! Don’t worry, they do that as well. California’s tax rate for business is 8.84% which is also higher than the national average. For those thinking of starting a business in California, it’s best to organize as an S or C Corporation. On a positive note, the State does allow owners of an LLC to later convert to a corporation thus taking advantage of the lower corporate tax rates.
LLC’s with revenues of at least $1 Million must pay an additional $6,000 in State tax.
The California LLC gross receipts tax was first introduced in 2010 and since then, businesses within the State have been leaving in droves. The fee is based on the total income of the LLC. Along with the annual franchise tax fee of $800 that is imposed on all LLCs and corporations operating in the state, the additional gross receipts tax applies to LLCs. However, “corporations are not required to pay the gross receipts tax.”
According to UpCounsel.com, businesses on average must generate $250,000 or more in gross receipts just to break-even. This means owners of LLC’s are paying higher taxes and fees than had they originally organized as a corporation. Remember, even if your LLC is operating at a loss, you are still subject to the Gross Receipts Tax.
A year or so ago I received in the mail a letter addressed to my father from the California Franchise Tax Board claiming dad had not filed a CA tax return for 2013. Now, depending on the circumstances the statute of limitations for the IRS is between 3 to 6 years and the State of California, 20. I guess someone has to pay for Governor Jerry Brown’s “Train to Nowhere.”
While my father and I didn’t always agree, and what father and son can say differently? I can say unequivocally that my dad who had served in the Navy was honest in his business dealings, how he treated others and as a family man. In January of 2014, I had dad’s mail forwarded to me. And now I receive this letter from the Tax Board looking for money…..hmm. Funny thing is, Dad never lived in California.
Nevertheless, the State of California wanted Dad to file a tax return for 2013. Like I said, this letter came to me about a year or so ago. So as his Trustee, I responded informing the State that dad had lived in Nevada for all these years and had not conducted business in California. However, if they had any further questions they were free to contact him. I went on to provide a Las Vegas address and advised them not to expect a reply anytime soon. Dad had passed away in January of 2014 and the address I gave was that of the cemetery.
What triggered this I believe was a change of address! It took a few months, but I did finally receive a letter from the State informing me that the case had been closed.
While I’ve found the people over at the IRS to be helpful and very nice, my opinion and experiences with the Franchise Tax Board has been much different. While my written response to them was polite, I could’ve just as easily discarded their inquiry. But then again, I would’ve received even more notifications. So, if you or someone you know receives a “tax due” or other mail from the California Franchise Tax Board, I recommend that you immediately seek the assistance from a tax professional. Definitely, don’t try and go it alone!
Doing the work is one thing. Presenting your case visually is an entirely different matter. Using Excel, I've recreated some diagrams used in fraud related matters that present relationships, links and associations for FREE! Just send me an email and I will forward the Excel file to you at no cost. No signup, no email list, no newsletter, no nothing! But if you happen to venture into the Burbank area, a kind word, a prayer or a cup of coffee are always welcomed.
When working with the different charts, you will find that having knowledge of Excel is vitally important as you modify each chart to meet your specific need. If you encounter problems, I've found the "Help" page in Excel to be really helpful. If you're still confused, check Google. Better yet, YouTube.
Data Analytics using specialized software examines the client's Quickbooks' files to determine whether or not fraud or other suspicious activity is present in their business.
Examples of which are: Duplicate payments, misappropriation of cash in accounts payable transactions, false expense reporting, overcharging by vendors, erroneous billing, overstatement of revenues, evidence of skimming, cash larceny, fraudulent shipments etc.
Business owners are provided with a written report (most often within 3 to 5 business days) as to whether fraud or other suspicious activity is present. While not everything is considered fraud, items found during this audit that are suspicious in nature are reported back to the business owner. This often means taking action, exploring further or discontinuing the examination at no additional charge.
Employees having knowledge that the business owner is quick to implement a fraud detection audit are more likely to understand that incidents of fraud will not be tolerated.
The Internal Revenue states that every organization exempt from federal income tax under IRS Code section 501(a) must file an annual information return (the Form 990). As with most tax legislation, there are exceptions; (for this example) churches and religious nonprofits. These organizations while not required to file the Form 990 may wish do so in an effort to demonstrate transparency, but more importantly, to raise money.
With a large number of nonprofits competing for the same pool of donors, Maureen Butler, a CPA states in the Journal of Accountancy that in her belief and widely shared by others, that each nonprofit needs to be strategic in communicating its mission, marketing, and fundraising efforts. Although the Form 990 is an information tax return, it can also serve as a key component of the nonprofit’s overall marketing plan designed to enhance its fundraising efforts. Overall, the Form 990 provides a snapshot of the financial health, governance, and operations of these nonprofits:
Who Are the Primary Viewers of Form 990?
Donors and Grantors
Creditors and Banks
Vendors and Service Providers
What do these viewers have in common? All use Form 990 to make decisions that affect the organization's ability to obtain funding, provide services, maintain proper governance, and, ultimately, achieve the goals for which the nonprofit exists. Information provided on the Form 990 makes a compelling argument for the nonprofit by restating its particular mission and program accomplishments.
Technology by way of the internet has provided would-be donors with the ability to conduct due diligence of their own by examining how much a charity pays its executives, what percentage of donations goes to overhead, how much is given to each project (cause) it supports, how much is spent on fundraising efforts and more. For example, websites like Charity Navigator, Charity Watch and Guide Star are providers of such information. While many (not all) charities are happy to use this internet platform, the primary objective of these sites is to act as “Watchdogs” often monitoring tax-exempt organizations, asking tough follow-up questions and exposing corruption when they find it.
John Montague in the Cardozo Law Review found that in 2011, donors gave $298 billion to nonprofits, and the largest percentage, 32% went to religious organizations. As such, donors who participate in “Kingdom Projects” through local church giving often have little idea of what is happening to their money. In fact, many churches maintain little or no oversight (weak controls) compared to for-profit businesses. Thus, the lack of strong internal controls and minimal oversight has led to “unscrupulous” church leaders “using charitable gifts to enrich themselves.” Montague in a “kind” way describes this action as pushing the boundaries of “reasonable compensation.” However, donors in several legal actions have viewed this “enrichment” as a misappropriation or misdirection of funds.
Accountability / Form 990
In 2008, the Form 990 was redesigned to include a question regarding significant theft or embezzlement. Part VI, Section A, Question 5 of the Form 990 asks “Did the organization become aware during the year of a significant diversion of organization’s assets?”
A diversion of assets encompasses theft, embezzlement, or any unauthorized use of the association's assets. It can involve any person, regardless of whether he or she is an officer, director, key employee, volunteer, or independent contractor. The definition also includes diversions by investment advisors and recipients of grant funds.
Katrina Walker, J.D. in a Washington Post article published in October of 2013, stated that more than 1,000 nonprofit organizations had experienced such a significant diversion of assets and that many of these cases were attributed to frauds of theft or embezzlement.
A significant diversion occurs when the gross amount exceeds the lesser of 5% of gross receipts, 5% of total assets at year end, or $250,000. Significant diversions must be reported no matter who is involved whether it be an officer, a director, an employee or an unrelated third party.
As demonstrated here, the IRS Form 990 has many uses. While its initial objective was for nonprofits to disclose amounts raised, monies spent, etc., several charities have found ways of benefiting from the disclosure by capitalizing on the amount of good that's being done with funds raised while others face scrutiny for doing so little.
Maureen Butler, CPA, Ph.D and Brian Butler – Journal of Accountancy, Dec. 2016 “Telling the not-so-profit story through Form 990."
John Montague – Carodozo Law Review, Oct. 2013 “The Law and Financial Transparency in Churches: Reconsidering the Form 990 Exemption."
Katrina D. Walker, J.D., AICPA, The Tax Advisor, June 2014 “Charitable Diversions: Tax Implications and Tips for Addressing Them”
With so many nonprofits asking for donations, here a few tips to remember when giving:
- Be proactive in your giving: Have targeted goals and give to those charities that best reflects your interests.
- Eliminate the middleman: Do not take the calls nor respond to questions from telemarketing campaigns. Remember, many of these telemarketers are employed not by the charity but by a third party.
- Be careful of soundalike names: Know the difference between the Children’s Defense Fund and the Defend Children Fund.
- Confirm 501(c)3 status.
- Check the charity’s commitment to accountability and transparency: Look at websites providing information on salaries and fundraising activities.
- Obtain copies of charity’s financial records: At a minimum request the charity’s Form 990 for the past three years.
- Review executive compensation: The reported average compensation for a CEO is $150,000. Keep in mind that a well compensated CEO is not a bad thing if the charity is performing well.
- Start a dialog with the charity: Before giving, learn about the charity’s accomplishments, goals and challenges.
- Concentrate your giving: Diversification is not the key! Donations made to a single entity have a greater impact of bringing significant change.
- Share your intentions: Make the effort to be a committed partner and support your charity for the long term. Eliminate the charity having to waste resources by sending numerous solicitations.
Think your safe? Think again. In a recent survey, 84% of respondents to Kroll’s latest Global Fraud Report had fell victim to at least one instance of fraud in the last 12 months. In fact, findings from the Kroll report reveals the biggest fraud threat to companies comes from within. To that effect, the Association of Certified Fraud Examiners (ACFE) in their report from 2016 stated that fraud was most often caused by first-time offenders and that only 8.3% of fraudsters had previously been fired from their last job for fraud related conduct. Although companies do their best to hire the right people, legislation oftentimes precludes employers of what they can divulge regarding an employee’s conduct in the workplace.
Fraud from Within
Companies that experienced fraud where the perpetrator was known, four in five (81%) suffered at the hands of at least one insider. One in three victims (36%) experienced fraud at the hands of a member of their own senior or middle management, 45% at the hands of a junior employee, and for 23%, the fraud resulted from the conduct of an agent or intermediary.
Fraud on the Rise
The incidence of Fraud continued to climb in 2017. 84% of surveyed executives reported their company fell victim to at least one instance of fraud in the past 12 months. This represents a continuous, year-in-year rise since 2012, when the reported incidence was 61%.
Employee Turnover is a Serious Problem
Not widely known, employee turnover constitutes a high risk. Executives responding to the survey believe that high staff turnover is the main driver of increased exposure to fraud, with one in three (33%) citing it as being a problem.
Fraud in the United States
In the United States, 75% of companies responding to the survey were affected by at least one incident of fraud in the past year. The survey also showed that the U.S. has a substantial problem with insider fraud: where the perpetrator was known. 40% of American respondents said that a senior or middle manager had been a major player in at least one such crime, noticeably above the global average of 36%.
Threat of Fraud Overseas
Overseas, 72% of companies in the past year were dissuaded from operating in a particular country or region because of the heightened exposure to fraud. Latin America was the region which saw the most businesses turn away, followed by Africa, a close second.
Excerpts (edited from Kroll Global Fraud Reports: 2015/16 and 2017/2018
You don’t have to be on “Undercover Boss” to find out what’s happening inside your business? Data Analytic software allows for the quick identification of discrepancies in the accounting department. The “brains” of the operation. Sure, knowledge of Excel and accounting helps, but wouldn’t it be great knowing that your Payables department is doing everything right? And if errors, typos or miss-keyed entries do exist, wouldn’t it also be nice to know, these problems can be quickly fixed? On the downside, you may also learn that a 10-year employee with family medical problems has been stealing from you for the past two years.
Benefits for lenders includes:
- Knowing if the borrower has held on to invoices, purposely waiting to the subsequent period before posting. In effect, the borrower is trying to improve its cash position by showing a smaller amount of liabilities.
- The lender can know (with certainty) if the borrower has misrepresented its posted earnings. This can be solved by using the Beneish Model to compare financial statements from previous periods.
Benefits to business owners:
- Testing for duplicate payments of invoices – Was the same invoice paid twice?
- Quickly match payments on invoices that have exceeded purchase order amounts – Someone not paying attention
- Being able to identify abnormal occurrences - Knowing if the “outlier” is fraud or misentered data
- Quickly identify open or unpaid invoices – Compare at period end invoice amounts to payment amounts
- The ability to manage invoices and check customer balances through the aging of receivables
- Compare invoice date to shipping date – How close are the dates within reason?
- Detect errors in payments to vendors – Miskeyed or fraudulent entry?
- Decipher if any of your employees are also your vendors – Conflict of interest, possible fraud?
- The ability to quickly summarize user accounts – Fired employees, hackers or unauthorized access?
- Detect gaps in the journal – Incomplete data processing or hidden entries?
- Identify journal entries made on weekends – Ask why?
- Find journal entries where the balance is not equal to zero – Fraud or erroneous journal entry?
- Detect if journal entries are divisible by 1,000 or 10,000 – Possible fraud?
- Detect if nonstandard or manual journal entries were made – Fraud or end of period adjustments?
Jerold Ipsen is a Certified Fraud Examiner providing due diligence for commercial real estate.