Wednesday, February 27, 2013

11 Changes You Must Know Before Filing Your Tax Return for 2012


With so many changes looming for 2013, it’s easy to forget that there were some significant tweaks to the Tax Code for 2012. Here’s a list of eleven changes to keep in mind before you file your 2012 tax return, due April 15, 2013:
1. Payroll tax credit will still affect self-employed taxpayers. The expiration of the payroll tax credit for 2013 was big news – but don’t forget that the credit was still in place for 2012. While that means nothing for employees subject to withholding (no additional breaks on your federal income tax return since you’ve already received the benefit of the payroll tax credit in your withholding), if you were self-employed you will receive an adjustment on your self-employment (SE) taxes when you file your federal income tax return. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.
2. Forms W-2 have more information this year. Under the Affordable Health Care Act, most employers are required to report the value of health care benefits received by an employee on a 2012 federal form W-2 (a few small businesses are still exempt from reporting under the transitional relief offered by IRS). The amount will be reported in box 12 with Code DD and should include both the portion paid by the employer as well as any amount paid in by an employee. Even though it appears on a W-2, this amount remains federal income tax free for 2012.
3. Roth Conversions May Be Taxable. Taxpayers who converted or rolled over amounts to a Roth IRA in 2010 and did not elect to include the entire amount in income in 2010 may need to report half of that taxable income on their 2012 returns. Favorable tax treatment made conversions in 2010 more appealing than normal: specifically, taxpayers had a three year window to pay the taxes due. That window expires with tax year 2012.
4. Relief For Underwater Taxpayers. With record numbers of taxpayers in foreclosure, Congress enacted the Mortgage Forgiveness and Debt Relief Act of 2007 to provide limited tax relief for taxpayers facing financial difficulties. Under the Act, qualified homeowners who were forced into foreclosure or mortgage restructuring on a principal residence could exclude income of up to $2 million ($1 million for married taxpayers filing separately) on the mortgage forgiveness (the difference between the lower amount received and the higher amount owed to the mortgage company). The fiscal cliff tax deal extended that tax relief through 2013 making it possible for taxpayers to avoid a huge tax bill on 2012 short sales.
5. Increased Standard Deduction.The amount of the standard deduction increased for all taxpayers in 2012. The rates for 2012 were:
  • Single: $5,950, up $150 from 2011
  • Married Filing Separately: $5,950, up $150 from 2011
  • Head of Household: $8,700, up $200 from 2011
  • Married Taxpayers Filing Jointly and Qualifying Widow(er): $11,900, up $300 from 2011
This is good news for most taxpayers since two out of every three taxpayers will claim the standard deductionin 2012.

6. Increased Personal Exemption. Similarly, the value of the personal exemptions for 2012 also increased. While exemptions were worth $3,700 in 2011, they rose to $3,800 for 2012.
7. Sales Tax Deduction Still An Option. Taxpayers who itemize may deduct state income taxes paid on their federal return putting those taxpayers who live in a state without an income tax arguably at a disadvantage. A federal law which allowed taxpayers the option of choosing to deduct state income taxes paid or sales taxes paid offered temporary relief for those folks – and those who made high dollar purchases but lived in low tax states. That tax break – which debuted in 2005 – expired at the end of 2011. However, the tax deal extended that option through 2013, making it still a viable option for taxpayers in 2012.
8. Tax Breaks for Charitable Donations from IRAs Extended. The new tax deal extended the qualified charitable distribution provisions which were set to expire through 2012 and 2013. Generally, distributions from an IRA are taxable when withdrawn whether payable to an individual or a charity. However, under the special rules, a withdrawal from an IRA (other than an ongoing SIMPLE or SEP) owned by an individual who is age 70½ or over that is paid directly to a qualified charity can be excluded from gross income. Up to $100,000 of distributions be distributed – and that amount can be used to satisfy a taxpayer’s required minimum distributions (RMDs) for the year. Even better? Special rules allow taxpayers to treat donations made before February 1, 2013, as qualifying distributions for 2012.
9. Education Tax Breaks Strengthened. The American Opportunity Credit (the super-charged version of the Hope Credit) was extended through 2012 for expenses paid for tuition, certain fees and course materials for higher education. The maximum credit available is $2,500 in 2012 which includes 100% of qualifying tuition and related expenses not in excess of $2,000, plus 25% of those expenses that do not exceed $4,000. Additionally, the Lifetime Learning Credit sticks around for 2012, capped at $2,000, which applies to 20% of the first $10,000 of qualifying out-of-pocket expenses (but no double-dipping: you can’t claim both credits in the same tax year for the same student). Also getting a boost? The above-the-line Tuition and Fees Deduction was extended so that taxpayers who don’t itemize can continue to benefit.
10. Alternative Minimum Tax (AMT) Relief. The tax deal passed in January 2013 provided significant AMT relief for middle class taxpayers in 2012 – and beyond. The AMT exemption for 2012 was increased to $50,600 for single taxpayers (an increase of nearly $20,000) and $78,750 for married taxpayers filing jointly (an increase of more than $30,000). Even better? Beginning with 2012, AMT relief will be adjusted for inflation each year – no more patches!
11. Adoption Credit Survives – But Is Limited. Under the new tax deal, the adoption credit was saved. Originally, the adoption credit was scheduled to sunset at the end of 2010 but was temporarily extended as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010; it was also made refundable (a nonrefundable credit can reduce the amount of tax you owe to zero while a refundable credit can reduce your tax liability to zero and any remaining credit will be refunded to you). The new tax deal did extend the adoption credit permanently with one significant hit: the credit is no longer refundable. The credit was only refundable in 2010 and 2011. Taxpayers in 2012 can claim the adoption credit but it is not refundable

Monday, February 25, 2013

Beware of Bogus IRS E-Mails.

The IRS has issued a warning to taxpayers who receive emails claiming to be from the agency.
Scammers use the IRS name or logo to make the message appear authentic so you will respond to it,” the warning reads, adding that the tactic is actually “phishing” -- attempting to trick recipients into revealing personal and financial information, which can lead to ID theft.
The agency advises recipients of e-mails claiming to be from the IRS that they should not:
  • Reply to the message;
  • Open attachments; or,
  • Click on any links in a suspicious e-mail or phishing Web site or enter confidential information. 

The IRS, which has long warned about phony sites, also points out that it does not initiate contact with taxpayers by e-mail or social media channels to request personal or financial information or ask for detailed personal and financial information such as PINs, passwords or similar access information for credit card, bank or other financial accounts.
“Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov,” the warning adds. “If you discover a Web site that claims to be the IRS but you suspect it is bogus, do not provide any personal information on their site and report it to the IRS. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040.”
The service has also set up sites to help taxpayers and preparers report phishing and protect identity information, and has posted multi-language YouTube videos on phishing malware and self-protection against ID theft. Podcasts in English and Spanish also cover the topic.

Wednesday, February 20, 2013

Clocking Out: Tax Planning for Individuals Near Retirement

For the last 30 or 40 years, clients who are near retirement have been working and saving every dollar possible, and while they’re almost at the finish line, there are still savings to be had.

Clients who are nearing retirement provide a unique tax planning opportunity, as they are likely to have both more income and more income taxes now than they will when they leave full-time employment in the near future.

Here are some important steps advisors should take to reduce their clients’ taxes while they’re working but on the cusp of retirement:

Max Out the 401(k)
Workers on their way out should do whatever they can to increase contributions to a pre-tax retirement plan, like a 401(k) or 403(b). In 2013 the limits are generally the lesser of the employee’s income, or $17,500. That figure rises to $23,000 for contributors over age 50.

Depending on the employee’s tax bracket, every dollar deposited into a 401(k) could save the client about 10 to 40 cents in income taxes for the year in which the contributions are made.

Say the client contributes $10,000 while working, and it would otherwise be taxed at a rate of 35 percent. Then he retires a few years later, and the funds are taxed at 15 percent when pulled out of the retirement account. That gap of 20 percent between tax rates produces a theoretical savings of $2,000.

Don’t Forget the HSA
Employed clients who are eligible and able might want to take out a high-deductible health insurance option, and then make corresponding tax-deductible contributions to a Health Savings Account (HSA). The HSA contribution limits for 2013 are $3,250 for individuals and $6,450 for families, with another $1,000 for those over age 50.

The high-deductible health insurance helps users save money on premiums now and adds some flexibility on how they spend their health care dollars. Any unspent money in the HSA rolls over every year, and can be spent tax-free on future qualifying medical expenses. Once the client reaches age 65, the left-over funds can be withdrawn as taxable income, just as if it were in an IRA.

Refinance the Mortgage
Those increased contributions to tax-advantaged savings vehicles could mean a cash flow crunch for many workers. But your clients may be able to lower total monthly expenses (and taxes) and raise liquidity by re-financing their mortgage—preferably for as much (and as long) as the lender will allow.

There may be new or higher monthly mortgage payments, and the interest cost can’t be ignored. But this might be the last best time for clients to tap the equity in their homes at historically-low rates, relatively-high valuations, and within relatively friendly lending standards.

Those low mortgage rates can be even more advantageous since the interest may be tax-deductible, as long as the clients itemize. Check out Publication 936 at for more information.

Any cash-out proceeds from the mortgage should be parked in safer savings vehicles, and used for future big expenses that would otherwise cause the client to borrow (i.e. a new car, home improvement, or college costs).

Take Your Losses
When a working, higher-income client experiences investment losses outside of tax-sheltered accounts, make sure you consider making the best of the unfortunate occurrence by realizing the losses, and the ensuing tax benefits.

In 2013 the client can usually use any losses to offset realized gains, and then up to $3,000 of the losses against ordinary, taxable income. Again, depending on the clients’ tax bracket, that amount could save up to $1,000 or so in taxes. Losses over that $3,000 amount that can’t be used this year can be “carried forward” into future years, and potentially used to reduce future taxable income or gains.

Just make sure you avoid the “wash sale” rules by not buying the security within 30 days before or after you sell it for the tax loss.

Wait to Take Gains
Tax concerns usually aren’t enough justification to hold off selling a stock, bond, or fund. But if you can help it, there are at least two thresholds to meet before liquidating an appreciated security, especially for those high-income clients who will soon retire.

Start by waiting at least a year from the date of purchase, so that the gains will be considered “long-term.” Beginning in 2013 the federal tax rate on those gains will be 15 percent for those in the 25 percent through 35 percent federal income tax brackets.

The long-term capital gains tax rate is now 20 percent for those taxpayers in the new 39.6 percent bracket. In addition, high income earners could incur the new additional 3.8 percent “Medicare Tax” on their gains, as well.

Once the clients retire and are (hopefully) in the lower income tax brackets, the long-term federal capital gains tax hit could be as little as 0 percent.

Tax Benefits Today, Charitable Giving Tomorrow
Another aspect of tax planning that retiring clients should consider is their long-term charitable giving. It’s possible to accelerate the tax benefits of giving to now, and delay the actual transfer of the money to the charity until later.

The strategy starts with the clients projecting how much money they may plan to give to qualified charitable organizations over the next decade or longer. The clients then transfer that amount to a “donor advised fund,” or “DAF.” They can get an immediate tax deduction on the donation now, when it’s most useful, since they’re likely in a higher tax bracket now.

The money is then invested among a limited menu of options, and in the future clients can “advise” the account custodians as to the recipients, timing, and amounts of donations.

Those donations will not produce an additional tax benefit at that time

Friday, February 15, 2013

Top Red Flags That Trigger an IRS Audit!

The Internal Revenue Service uses a combination of automated and human processes when selecting which tax returns to audit. All tax returns are compared with statistical norms, and those with anomalies undergo three layers of review by personnel.

Audits then occur either by mail or in meetings at taxpayers’ places of business. They can be unpleasant and are sometimes unavoidable. Rice says certain red flags are sure to draw scrutiny. Some are easy to sidestep – unreported income, for example. Others, such as high income, can’t be helped.

Not reporting all of your income

Unreported income is perhaps the easiest-to-avoid red flag and, by the same token, the easiest to overlook. Any institution that distributes an individual’s income will report it to the IRS, and the more income sources you have, the greater the difficulty in keeping track.

Old brokerage accounts are commonly overlooked, as are Form 1099s, Rice says. One of Rice’s recent clients took a distribution from a college savings account to pay tuition, exactly as he was supposed to do with those funds. But he forgot to tell the IRS, which had received notification from the institution. “The IRS matches all reportable items to a person’s return,” Rice says. “If they don’t see it they will automatically conduct at least a letter audit.”

Breaking the rules on foreign accounts

The Foreign Account Tax Compliance Act has strict reporting requirements for foreign bank accounts. The law requires overseas banks to identify American asset holders and provide information to the IRS. Individuals must report foreign assets worth at least $50,000 on the new Form 8938.

“It used to be you didn’t have to report it; you just had to check a box that you had one,” Rice says. “Now you have to not only check the box, you have to identify the institution and the highest dollar amount the account was at the previous year.”

The regulations demand openness, which in turn increases the likelihood of an audit. That’s because of a “perception that people with foreign accounts are trying to hide something,” Rice says. But it’s a Catch-22: Compliance with the law increases the likelihood of an audit, and noncompliance can result in stiff penalties and significant legal liabilities.

Blurring the lines on business expenses

The IRS will give a close look to excessive business deductions. The agency uses occupational codes to measure typical amounts of travel by profession, and a tax return showing 20 percent or more above the norm might get a second look, Rice says. Also, take-home vehicles aren’t considered strictly business, so a specific purpose should accompany any vehicle-related deduction.

Generally speaking, the IRS can be picky about mixing business and personal expenses. Meals and entertainment can be allowable, but exceeding the occupational norm by a great amount invites an audit. “Meals and entertainment oftentimes can be a blurred line, and the IRS doesn’t like any blurred lines,” Rice says.

Earning more than $200,000

Last year the IRS audited about 1 percent of those earning less than $200,000, and almost 4 percent of those earning more, according IRS data. Raise the threshold to $1 million and the percentage of audited tax returns increases to 12.5 percent. The same patterns exist when it comes to business tax returns: 1 percent of corporations with less than $10 million in assets, compared with 17.6 percent above that threshold. Rice says the IRS isn’t arbitrarily picking on high earners. "The IRS is applying the rule of big numbers,"

Rice says. "If people make more money, there is a better likelihood of a higher claim."

For one thing, higher incomes are likely to result in more complex tax returns that are more likely to contain audit triggers. More importantly, the IRS wants to maximize return on investment, something the agency gets better at every year: $55.2 billion was collected through enforcement activities last year, a 63.8 percent increase since 2001 without adjusting for inflation. But enforcement personnel increased only 9.8 percent during that time.

Tuesday, February 12, 2013

IRS Warns of Delays with Child Tax Credit Claims

The Internal Revenue Service is cautioning tax preparers about delays in processing tax returns claiming the Child Tax Credit because of incorrectly filled out forms.
“We have observed instances in which the Schedule 8812 is attached to form 1040 and 1040A and is not filled out correctly,” the IRS wrote in an email to tax professionals Monday. “These instances are causing downstream processing delays.”
The IRS noted that it has experienced the following two conditions: (1) The Schedule 8812 Part 1 checkboxes A, B, C, and D are checked when taxpayers list a dependent child with a Social Security Number qualifying for the Child Tax Credit; and (2) the Schedule 8812 Part 1 checkboxes A, B, C, and D not being checked when taxpayers have a child with an Individual Taxpayer Identification Number, or ITIN, on Form 1040 and 1040A line 6c identified as qualifying for the Child Tax Credit in column 4.

The Schedule 8812 instructions direct the taxpayer, the IRS noted, to “use Part I of Schedule 8812 to document that any child for whom you entered an ITIN on Form 1040, line 6c; Form 1040A, line 6c; or Form 1040NR, line 7c; and for whom you also checked the box in column 4 of that line, is a resident of the United States because the child meets the substantial presence test and is not otherwise treated as a nonresident alien.”
The IRS said it is working to implement business rules to reject these incorrectly completed returns, but the date of the fixes has yet to be determined.
In the meantime, the IRS is requesting tax prep software providers to include an alert to help tax preparers identify inconsistencies when they are completing the Schedule 8812. It also asked for communication with the tax practitioner community to avoid delays in processing tax returns.
An Accounting Today reader also warned Monday evening that the IRS has been sending letters to tax practitioners informing them that Form 8867 was not completed correctly, resulting in unnecessary processing delays in client refunds because either questions 22 or 23 were not answered. However, if the children in question are the taxpayer’s son or daughter, this question does not apply, the reader noted. Practitioners may also be informed that questions 26 a or b were not answered, or the box labeled "no qualifying child" or the box labeled "no disabled child."

Monday, February 11, 2013

Taxing Tax preparation and accounting? New Ohio bill would expand sales tax to nearly all services.

As a part of his broader attempt to overhaul the tax system in his state, Ohio Governor John Kasich's plan would expand sales taxes to virtually all services that are currently not subject to sales tax under state laws.
That includes the services that accountants and tax professionals provide, as well as trips to the barber or hair stylist, mechanic labor, phone services and even funerals.
Supporters of the plan, including Kasich, say that the changes are necessary to reflect the movement of the state to a more service-based economy.
Other parts of the overal state tax law rewrite would include cutting small business taxes by as much as 50 percent, and lowering the income tax rate by 20 percent over three years.
Gary Gudmundson, spokesman for the Ohio Department of Taxation, is among those in favor of the proposal.
He said that economic experts have demonstrated "that a consumption-based tax system is more conducive to job creation than one that relies more heavily on an income tax base. The point of this reform is to create jobs. To create an environment in Ohio that is friendly to job creation."
But while some economists agree, others note that it would likely face pushback from those who provide professional services and consulting, notably accountants, lawyers and architects.
According to the state's own estimates of the taxation provisions, these types of professionals, along with engineers, designers, marketers, lobbyists and advertisers could end up contributing much of the anticipated revenue, as much as $661 million by 2015, if the new tax laws are passed by the state legislature.
The sales taxes would also apply to concerts, festivals, professional sports and even online dating websites and digital movie rentals.

Sunday, February 10, 2013

When Married Filing Separately Will Save You Taxes

The Internal Revenue Service considers wedded taxpayers married if they live together in a state-recognized common-law marriage, or have no separation maintenance or final divorce decree as of the end of the tax year.
Of the 56 million tax returns married couples filed in 2009, the latest year for which the IRS has published statistics (at the time of writing), 4.3 percent belonged to twosomes who filed separately. These partners reported individual income and expenses on individual tax returns. They had to agree on either itemizing expenses or using the standard deduction. By filing separately, their similar incomes, miscellaneous deductions or medical expenses likely helped them save taxes.
Filing separately with similar incomes
A couple may pay the IRS less by filing separately when both spouses work and earn about the same amount. When they compare the tax due amount under both joint and separate filing statuses, they may discover that combining their earnings puts them into a higher tax bracket. Their savings depends on a variety of other factors, however, including their investment situation and whether they have children. The "married filing separately" status cuts the deductions for IRA contributions and eliminates child tax credits, among other tax breaks.
Using miscellaneous deductions by filing separately
Miscellaneous deductions can lower taxable income, but in order to enter them on Schedule A, they must add up to more than 2 percent of adjusted gross income (AGI). Spouses with union dues, job-search costs, tax-preparation fees and unreimbursed business expenses may find their miscellaneous deductions don't qualify when their higher combined income raises their AGI. A spouse who travels frequently for business could rack up a sizable tally in airline fees for baggage and itinerary changes that makes the miscellaneous deduction worth pursuing.
Filing separately to save with unforeseen expenses
Adjusted gross income also determines if a couple can use unreimbursed health care costs and casualty losses on Schedule A to save taxes. Unless out-of-pocket medical expenses exceed 7.5 percent of AGI, they don't qualify as a deduction. Casualty losses must total more than 10 percent of AGI. The spouse with the loss or substantial medical outlay calculates deductibility against his own, lower AGI when he and his partner file separate returns. When one spouse can lower taxable income this way, married filing separately might trim a couple's overall tax burden.
Filing separately to guard the future
When you don't want to be liable for your partner's tax bill, choosing the married-filing-separately status offers financial protection: the IRS won't apply your refund to your spouse's balance due. Separate returns make sense to prevent the IRS from seizing a spouse's refund when the other has fallen behind on child support payments.
Couples in the process of divorcing may shun joint returns to avoid post-divorce complications with the IRS, while a spouse who questions her partner's tax ethics may feel more comfortable living a separate tax life.
All couples living in community-property states must consider state law when deciding how to file.

Thursday, February 7, 2013

Ever have an Embezzlement Susceptibility Probe?

All companies are candidates for embezzlement. Let’s face it, human’s work at companies, interface with companies, program computer software for companies and humans are fallible.
They can lie, cheat, steal and commit all types of anti-social and criminal behavior if the right triggers are set into motion. Many times these triggers are hidden from company view, because they happen away from the workplace. They are environmental, genetic, organic or inorganic. In other words, you just never what may cause a previously trustworthy and loyal employee to turn to the dark side.
So, have you wondered how susceptible your company is to embezzlement? Have you probed your company to see if you have an average level, a low level or a high level of probability that your company can be victimized?
Having a low or high level doesn’t mean you have been a victim of embezzlement, or for that matter will be a victim. What it does mean is that embezzlement at your company maybe harder or easier to accomplish.
The ideal is impervious to embezzlement, but this ideal is impractical. The next best solution is to get as close to that ideal as is possible, but you have to be open to seeing the pitfalls.
Think about it….

Wednesday, February 6, 2013

Accounting policies that prevent embezzlement

Embezzlement is a huge problem in the workplace. Needless to say, most businesses that experiences embezzlement and fraud from their employees are more likely to get bankrupt. While ethics and morals are important in business, the lack of it in people is more or less, a fixed nature– one that cannot be altered or restructured for the business’ benefit.
On the other hand, internal control is something which can be implemented to battle not just the problem of embezzlement itself but the entire culture of unethical practices in a workplace.

Internal control is crucial in determining the success of a business. Businesses that implement strict and effective internal control will prevent any kind of embezzlement or fraud. Similarly, there are accounting and managerial policies that help prevent and detect embezzlement committed by employees.

1) Documentation of receipts, vouchers, checks, etc.

The first and foremost accounting policy used in battling embezzlement is the documentation of receipts, vouchers and checks. Such source documents are used in preparing financial statements. Similarly, such documents can also be used to detect embezzlement in the workplace.

By implementing a strict policy of documentation, business owners can easily identify embezzlement and fraud.

2) Regular and surprise auditing

Auditing is one of the primary accounting policies used against embezzlement. Auditing should be done by a separate accountant to assure the reliability and faithful representation of the financial data. More so, regular audits specifically monthly audits should be done.

Furthermore, surprise audits must also be implemented to catch employees involved in illicit acts by surprise.

3) Checks should require more than one signature

Another way to prevent embezzlement in the workplace is by requiring two signatures when issuing company checks. It is also imperative that checks should not be signed by the same employee who prepares the company’s expenses vouchers.

4) Petty cash and bank reconciliation control

Petty cash and bank reconciliation control are also effective ways to battle embezzlement and fraud in the workplace. Petty cash should be maintained at a minimum and must also integrate a voucher system while the preparation of bank reconciliation statements should be done on a monthly basis.

Receipts and other source documents concerning petty cash transactions should always be kept for documentation purposes.

With a reliable internal control system and effective accounting policies, business owners can easily detect embezzlement, fraud and even honest mistakes committed by employees.

Tuesday, February 5, 2013

Fraud and Embezzlement: Don’t Let it Happen to You

The five most dangerous words nonprofit executives can think or utter are: It can’t happen to us.  Fraud and embezzlement do happen.  Further, fraud and embezzlement is done by individuals who were believed to be loyal and trustworthy.  Fraud and embezzlement send several shocks through a nonprofit organization – shocked surprise, anger over the crime and the loss, and an embarrassing public relations nightmare.  Don’t let it happen to you.
Implementing safeguards against fraud and embezzlement is not an act of distrust, but rather a best practice that should be exercised by all nonprofit executives.
Fraud and embezzlement are the ultimate crimes against an organization.  In every instance I have seen, the actions were perpetrated by people who were highly trusted within the organization.  Once it was a trusted employee of out-of-town owners of a retail organization.  In another instance, it was the Executive Director of a nonprofit organization where there was no oversight of the executive.  There was even a case of a trusted Treasurer of a religious organization.  No one saw it coming.
The common theme has always been lack of oversight, and lack of processes, controls and procedures that would have brought the person’s actions to light through normal control processes versus the discovery of a huge amount of money missing from the organization.
Simple controls are effective
Here are examples of three simple controls that could be more than reasonably effective in uncovering wrong-doing.
  1. Have someone other than the accountant perform bank reconciliations – maybe it’s a board member, maybe it’s just someone outside the accounting office.  If you’ve balanced a checkbook, you can do bank reconciliation, it doesn’t take a rocket scientist.
  2. Conduct a careful comparison of the reconciled bank balance to the books of the organization.
  3. Review and sign-off of another reliable person within the organization of the bank reconciliation and it’s reconciliation to the bank balance displaying in the organizational financial statements.
Cash Receipts are another area vulnerable to misdeeds.  Here are three measures to put in place for Cash Receipts.
  1. Keep a log of every check that crosses the threshold of the organization.  The best practice is a log that lists every cash receipt (whether cash or check), and is totaled every day.  That total should match the bank deposit for that day.
  2. Make sure a deposit is made every day.  In an organization where there are significant amounts of cash deposited – there should be a bank deposit made every day.  I once found an embezzlement when the deposits hitting the bank were dated 15 days earlier.  Cash had been embezzled, and the deposits were only being made when “replacement” cash was available.
  3. Cash entries into the financial accounting system must agree to the physical bank deposit documentation and receipt.
I’ve also seen cases where fictitious vendors were created by someone with access to the financial system.  Checks were then issued to the fictitious vendors and sent to a bank account controlled by the embezzler.  A review of vendors within the organizations system is certainly worth routine attention.
Protect, Educate and Enlist Your Board
If you’ve read any nonprofit publication or attended a conference, chances are you saw something on Board Governance.  It’s a popular topic these days for good reason.  There is significant liability in sitting on the board of directors for a nonprofit organization, yet few organizations do serious board training, nor appropriate due diligence by way of oversight of management of the organization.  It’s unfortunate because there are so many wonderful people in the management of nonprofit organizations.
The bottom line is that an organization must have appropriate financial controls, segregation of duties, and board oversight.  Otherwise, it becomes possible that the organization finds their name on the front page of the newspapers, and a hugely embarrassing and dangerous picture of the organization evolves.

Monday, February 4, 2013

IRS Will Start Accepting Some Business and Nonprofit Tax Returns Monday

The Internal Revenue Service plans to begin accepting corporate, partnership and tax-exempt returns starting at 9:00 am Eastern Time on Monday, but with some important exceptions.
In an email to tax professionals on Friday, the IRS said that effective 9:00 am Eastern Time on Monday, February 4, it will begin accepting many of the tax year 2012 calendar and fiscal-year Corporate (Form 1120 series), Partnership (Forms 1065/1065-B), and Tax Exempt Organization (Form 990 series) income tax returns with the exception of filers claiming depreciation deductions and various energy and business tax credits. The IRS said it plans to accept the remaining tax returns in late February or early March.
“In general, this means any business attaching Form 3800 (General Business Credits), Form 4562 (Depreciation and Amortization) or any of the other forms listed below, should wait to file their 2012 tax return at the later date,” said the IRS. “A specific date will be announced in the near future.”