As you ring in a New Year and prepare for the April tax filing deadline, it is critical you recognize that this season brings with it a heightened risk of identity theft and cyber fraud for which you must take necessary precautions to protect yourself, your businesses and your clients. Criminals are continuously coming up with new and more sophisticated methods to trick unsuspecting taxpayers into willingly handing over their money and/or personal information to scammers. The good news is that you can take steps to detect and prevent these scams throughout the year.
Criminals are known to pose as government agencies or other trusted sources, including financial institutions, payroll services companies, accounting software providers and even taxpayer’s own employees and friends, in an attempt to get victims to pay a fictitious bill or release sensitive information. Not only do fraudsters make these communications look official and sound like they are from a legitimate source, they even go so far as to create imitation websites that are extremely difficult for victims to differentiate from the real ones.
In one common scheme, criminals pose as the IRS and either email, telephone or text taxpayers to demand payment of a phony tax liability. If taxpayers do not comply, the scammers become aggressive and threaten victims with arrest and even deportation. Similar frauds alert victims that one of their passwords are expiring or one of their accounts need to be updated. The criminal’s goal is to entice users to click on a link to a fake website that steals usernames and passwords or to open an attachment that downloads malware or tracks keystrokes on victims’ computers.
In addition, there are a number of scams in which criminals may impersonate your business’s actual employees, including payroll and human resource executives, or vendors who you know and work with on a regular basis. These phishing attempts, which appear to be legitimate, involve requests for lists of employees’ names, social security numbers and bank information and/or instructions for changing the pay to account of an employee or vendor. Unless you actually verify through telephone or face-to-face contact that the email is in fact from the purported sender, you may unwittingly send payment to an actual criminal and essential say goodbye to those dollars.
Protect Yourself and Your Business
Identity theft and cyber fraud are very real problems that endanger individuals and businesses and their financial information. According to the IRS, there was a 60 percent increase in tax-related bogus email schemes alone in 2018.
Here are a few steps to take to protect against phishing and cyber fraud schemes in 2019:
- Be vigilant; be skeptical. Never open a link or attachment from an unknown or suspicious source. Even if the email appears to come from someone you know, proceed with caution. Cyber crooks are adept at mimicking trusted businesses, friends and family — including the IRS. Thieves may have compromised a friend’s email address, or they may be spoofing the address with a slight change in text, such as email@example.com vs. firstname.lastname@example.org. You can easily be tricked by the mere change of the letter “m” to “r” and “n”.
- Phishing schemes thrive on people opening messages and clicking on hyperlinks. When in doubt, don’t use hyperlinks and go directly to the source’s main web page. Remember, rarely will a legitimate business or organization ask for sensitive financial information via email.
- If you receive an unsolicited email requesting you to share change sensitive data or make changes to bank account information, pick up the telephone, dial the number that you have for the purported sender (do not simply call the phone number listed in the email) and confirm that the request is legitimate before you take any action.
- Remember that the IRS does not initiate spontaneous contact with taxpayers by phone or email to request personal or financial information. In addition, IRS will not call taxpayers with aggressive threats of lawsuits or arrests.
- Use security software to protect against malware and viruses found in phishing emails. Some security software can help identify suspicious websites used by criminals.
- Use strong and unique passwords to protect each of your online accounts. If necessary, use a password manager to help you remember your login credentials for each account. Criminals count on the fact that most people use the same password repeatedly, giving crooks access to multiple accounts if they steal a password. Experts recommend using a passphrase, instead of a password, with a minimum of 10 digits, including letters, numbers and special characters. Longer is better.
- Use multi-factor authentication when offered. Two-factor authentication means that in addition to entering your username and password, you must also enter a security code, often sent to you as a text to your mobile phone. Even if thieves manage to steal your usernames and passwords, it is unlikely they will also have your phone.
- Engage audit professionals to conduct check-ups of your organization’s internal controls. The effectiveness of your business’s efforts to protect sensitive data is dependent on the policies and procedures you have in place.
About the Author: Anya Stasenko, CPA, is a senior manager with the Audit and Attest Services practice of Berkowitz Pollack Brandt, where she provides business consulting services, audits of financial statements and agreed upon procedures as well as pre-immigration tax planning for foreign persons and owners of foreign and domestic entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
In a crucial 4-3 decision, the Florida Supreme Court in Delisle v. Crane, Case (No. SC16-2182) (Oct 15. 2018), clarified the law governing the admissibility of expert witness testimony in Florida, moving away from the strict Daubert standard used in federal courts to the less rigorous Frye standard. Previously, Florida trial courts that were unsure of which standard to apply when analyzing expert testimony and corresponding pretrial motions typically utilized the Daubert standards enumerated under Federal Rule of Evidence 702.
In 2013, the Florida Legislature passed a law modifying Florida Statute Section 90.702 to adopt the Daubert standard, despite the Florida Supreme Court’s repeated affirmations of Frye. The recent decision in Delisle held that the Legislature overstepped its authority when it adopted Daubert and enacted the 2013 legislation because the manner in which trials and litigation are to be conducted are “procedural” matters, which are entirely within the province of the Florida Supreme Court under Article V, Section 2(a) of the Florida Constitution. The new ruling invalidates Florida Statute Section 90.702 and rejects the Daubert standard for admitting expert testimony in Florida courts.
What are Frye and Daubert?
The Frye and Daubert tests are competing tests that courtroom judges use, prior to trial, to examine the reliability and admissibility of expert testimony that a party seeks to introduce into evidence once the trial begins. The assessment usually follows a request (or Motion) by one of the parties in the legal proceeding. However, that is where the similarities between these two competing standards for assessing the admissibility of expert testimony end.
First, Frye does not apply to all expert testimony. Rather, it applies narrowly to testimony that a judge determines to be “new or novel scientific evidence” that is not firmly well-established in the scientific community. Only after a Court makes such a determination will it then consider the substance of the admissibility of expert testimony.
The initial assessment required under Frye includes a determination that the expert testimony seeking to be admitted is generally accepted in the field. According to Frye, “in order to introduce expert testimony deduced from a scientific principle or discovery, the principle or discovery ‘must be sufficiently established to have gained general acceptance in the particular field in which it belongs.’” Thus under Frye, the experts’ methods and techniques must be “generally accepted” in the scientific community. In practice, it means a judge should evaluate evidence whether a testifying expert forms their opinion from generally accepted principles. This might require a judge to review the expert testimony, scientific and legal publications, and judicial opinions to assess general acceptance of the principles underlying an expert’s opinion.
In comparison, Daubert applies to ALL expert opinions, not just those opinions determined to be new or scientifically novel. Under Daubert, the initial assessment performed by the Court includes an evaluation of the expert’s methods and requires the expert testimony to be not only generally accepted (Frye) but also, “scientifically reliable” and relevant to assist the trier of fact in determining pertinent issues in the case at hand. The Court makes these determinations after a Daubert motion is made and a hearing is conducted. Court hearings to assess the admissibility expert testimony under the Daubert test are often lengthy, technical, and costly; more costly, on average, than hearings under the Frye test. The hearings performed under Daubert to determine admissibility are sometimes referred to as “mini trials,” in which a judge might hear evidence and arguments and before ruling that all or some portion of an expert’s opinions are admissible or inadmissible. These mini trials, also known as Daubert hearings, address many of the substantive issues that are expected to be litigated at trial.
The Florida Supreme Court in Delisle summarized these two competing tests as follows:
“Frye relies on the scientific community to determine reliability, whereas Daubert relies on the scientific savvy of trial judges to determine the significance of the methodology used.” Moreover, Daubert covers more subject areas and involves a multi-factorial analysis to determine admissibility. In contrast, Frye is simply general acceptance inquiry.
The Delisle Opinion and Its Effect on Forensic Accounting Expert Witnesses
Delisle will have a profound impact on litigation in Florida. It ensures that the Frye standard will remain in Florida courts, and, in turn, make it more difficult to strike or exclude expert testimony. This, according to most scholars, is because Daubert involves a much more vigorous threshold for admitting scientific evidence. Without the Daubert requirements of an evidentiary hearing or the scientific reliability and relevancy of expert testimony, there likely will be less barriers to the introduction of expert opinions.
By reverting to the Frye standard, Florida courts will likely raise fewer challenges to litigation involving testimony from forensic accountants and valuation analysts. This is not only because Frye applies only to expert opinions relating to new scientific principles (which arguably does not include many areas of forensic accounting), but also because Frye (unlike Daubert) allows experts to provide testimony that relies solely on their experience and training without regard for scientific fact. This exception is so inclusive that Florida state courts infrequently hear challenges to the admissibility of expert testimony.
Testifying experts are now clearly under one evidential standard for admissibility in Florida courts (Frye) and a different one in Federal courts in the US (Daubert). For forensic accounting expert witnesses, this likely means there will be fewer challenges to exclude expert testimony in Florida cases.
About the Author: Richard S. Fechter, JD, CAMS, CFE, is associate director of Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice, where he has extensive experience conducting forensic accounting investigations and providing expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes. He can be reached in the firm’s Miami CPA office at (305) 379-7000 or via email at firstname.lastname@example.org.
Daubert vs. Frye – Key Differences
|Applies to all expert opinions, whether they are consider new or not.
||Applies only to expert opinions considered to relate to a “new or novel” scientific issue.
|State statute and the courts determine admissibility of expert testimony.
|Experts’ opinions must be generally accepted in the scientific community to be admissible in Court.
|Expert’s testimony must be based upon sufficient facts or data.
|No sufficient facts or data requirement
|Expert’s testimony must be the product of reliable principles and methods (i.e., scientifically reliable).
|No reliability requirement
|Expert’s testimony must be relevant to the case at issue.
|No relevancy requirement
|The expert must apply the foregoing principles and methods reliably to the specific facts of the case.
|No reliability requirement
|Determination of whether the principles and methodologies of the offered expert testimony are reliable by considering:
· Whether the expert’s theory or technique can, or has been, tested;
· Whether the theory or technique has been subject to peer review and publication;
· Whether there is a known or potential rate of error of the technique or theory for a particular scientific technique; and
· Whether the theory or technique is generally accepted in the relevant scientific community.
|No review of principles and methodologies used or how those principles and methodologies were applied to facts of case at issue
|Judges act as “gatekeepers” who regulate the admissibility of expert testimony based on relevant factors.
|Admissibility of expert testimony depends on the standards set by the expert’s scientific community.
 Frye v. United States, 293 F. 1013 (D.C. Cir. 1923)
 The Frye standard was originally codified under Florida Statute Section 90.702,
“If scientific, technical, or other specialized knowledge will assist the trier of fact in understanding the evidence or, in determining a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify about it in the form of an opinion; however, the opinion is admissible only if it can be applied to evidence at trial.”
The language from this original statute is expected to be reinstated at the next legislative session.
 See Bundy v. State, 471 So. 2d 9 (Fla. 1985); Hadden v. State, 690 So. 2d 573 (Fla. 1997).
 Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 593-94 (1993).
 See, Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) (applying Daubert standard to non-scientists).
Entertaining clients, referral sources and employees with tickets to sporting events, country club outings, fishing trips or other forms of business promotion are common business practices. No matter how significant these costs, businesses have had the reassurance that the IRS would permit them to deduct all or a portion of these meals and entertainment (M&E) expenses from their taxable income. This benefit changes in 2018 with the passage of the Tax Cuts and Jobs Act (TCJA), which limits or, in some instances, eliminates the deductibility of M&E expenses and potentially puts businesses at greater risk of falling victim to expense report fraud.
While taxpayers are accustomed to keeping track of the costs they incur for activities that are “ordinary, necessary and directly related to the active conduct of a trade or business or for the production or collection of income,” the language of the new tax law complicates the rules regarding the deductibility of these expenses beginning in 2018. Gone are deductions for entertainment expenses, while certain meals enjoyed outside of entertainment activities may be 50 percent deductible when they meet certain criteria. As a result, businesses and workers that frequently entertain clients or referral sources will likely feel the loss of the tax savings that they once enjoyed. This, in turn, may create an environment in which employees seek out ways to get around the new rules and manipulate their expense reporting.
What is Expense Reimbursement Fraud?
According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, expense reimbursement fraud is one of the most common types of occupation fraud. While it can be easy to identify, once detected, it often indicates just the tip of the iceberg in a larger scheme that can cost businesses millions of dollars. Therefore, it is critical that businesses understand the following forms of expense report fraud that employees commonly commit, and be vigilant in recognizing early warning signs:
- Mischaracterizing expenses by falsely claiming purchases for personal use are business expenses;
- Creating fictitious expenses by producing bogus receipts for expenses that they never incurred;
- Padding expense reports by overstating or inflating legitimate expenses;
- Remitting the same receipt more than once in an effort to yield multiple reimbursements for one expense.
Importantly, businesses must recognize that even a minor embellishment, such as rounding up the costs of a business lunch, can quickly turn into a more elaborate scheme that can go unnoticed for years. To avoid falling victim to fraudulent schemes and exposing themselves to millions in losses, businesses should have in place appropriate controls to prevent deceptive business practices and/or to monitor and detect misuse and abuse.
Preventing Expenses Report Fraud
While the TCJA represents some of the most significant changes to the U.S. Tax Code, its rapid enactment into law leaves taxpayers with numerous uncertainties in how they should interpret many of its provisions. However, there are certain steps that businesses can and should take to reduce their exposure to fraud and the economic and reputational losses that they will incur because of these schemes.
- Establish and educate employees about changes to written corporate expense policies, for which non-deductible entertainment expenses should be separate from potentially deductible meal expenses;
- Assess membership and other fees associated with professional trade organizations (deductible), entertainment venues (nondeductible) and event sponsorships (for which the fair market value of the sponsorship may be deductible);
- Require employees to submit original receipts that describe the expense, the names of the attendees/participants, the business purpose of meetings/meals, and the topics of business discussed;
- Require employees to attach to receipts additional proof that an expense is work-related (i.e. conference brochure) and not a form of entertainment;
- Establish a policy that requires supervisors/managers, payroll or HR personnel to review/approve every one of workers’ expense reports prior to reimbursements;
- Compare workers’ expenses to their work schedules, prior month and prior year expenses;
- Avoid reimbursing workers in cash;
- Consider using the IRS-recommended per diem rates for meals and mileage;
- Consider the use of corporate credit cards to track employee’s expense activities and compare them to expense reports;
- Verify mileage claims and require employees to detail claims of miles traveled by including exact addresses of locations;
- Conduct spot audits to detect anomalies or flag unverified expenses; and
- Strictly enforce expense-reporting policies, investigate suspicious claims and establish a formal system for managing the process and prosecuting fraudsters.
Businesses should not overlook the potential impact expense reimbursement fraud can have on their operations, their corporate reputation and their net income.
About the Author: Richard A. Pollack, CPA/ABV/CFF/PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of the Forensic and Litigation Support practice with Berkowitz Pollack Brant, where he has served as a litigation consultant, expert witness, court-appointed expert, forensic accountant and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Attorneys involved in economic damages cases understand that they have an obligation to prove lost profits with “reasonable certainty” based on their use of “best evidence.” However, the courts have not agreed on one universally accepted standard or criteria for what specifically constitutes best evidence; such decisions inevitably rely on the facts and circumstances of each individual case. Therefore, two courts faced with similar issues may reach entirely different opinions when deciding whether a plaintiff has supported its damage claim using the best evidence.
In Eastern Fireproofing Co. v. United States Gypsum Co., No. 57-938-G (US District Court Mass., 1970), the court stated:
“a plaintiff may not conjure up favorable estimations and hold back more solid but less favorable evidence otherwise available. And the admissibility of a particular class of evidence will depend to a degree upon the availability of less speculative evidence. On the other hand, there is no rule of law that only the best available evidence may be used. This would necessarily imply a determination of what class of evidence is best and it seems that such a determination cannot be made without infringing on the proper function of the jury as the finder of fact.”
With this in mind, attorneys have an opportunity to strengthen damages cases when they focus on reliable facts and sound methodology that other experts have attempted to use to meet or fail to meet the reasonable certainty standard. Following are just some of the factors that attorneys should consider when proving or disproving economic damages.
Use of Plaintiffs / Defendants Historical Financial Data
Supporting claims for economic damages in a commercial dispute typical starts with an historical review of a plaintiff and/or defendant’s financial data that preceded the alleged bad act of the other party. This assessment can include historical revenue, costs and profits/losses in the years leading up to a point in time and compare it to the same facts that occurred during and after the alleged damages period. Yet, experts should also consider whether or not there are factors other than the defendant’s alleged bad acts that could have caused a change in the injured party’s financial results. This may include changes in the economy, competition, technology, governmental regulation, the introduction of alternative products, etc.
Use of Contemporaneous Third-Party Market Data
The availability of contemporaneous, third-party market data can potentially help a plaintiff’s expert establish claims for damages. Conversely, defendants’ experts have been successful using contradictory data to demonstrate flaws in the plaintiffs’ analyses. Therefore, expert witnesses should tread carefully and consider the credibility and relevance of the data they use as a foundation for their testimony and make efforts to consider how other information could potentially lead to different conclusions. Moreover, they should be prepared to explain how they weighed alternative sources of data and the reasons why one set of data was preferable or more reliable than an other.
Use of Plaintiffs Other Businesses
When a plaintiff’s business does not have a sufficient track record to establish evidence of profitable operations, its historical financial data may not be an appropriate basis for estimating future profitability. Under these circumstances, some courts have accepted the historical data of a plaintiff’s other businesses as a benchmark or yardstick to establish economic damages.
However, the plaintiff ultimately bears the responsibility to demonstrate sufficient comparability between the subject business and the other benchmark businesses and make adjustments to account for differences to the extent applicable.
Reliance on Specific Customer Sales Data
Ideally, the identification of specific lost sales caused by the defendant’s bad acts helps to substantiate a claim for lost profits and can be very persuasive to a jury. With this in mind, it is generally a useful exercise to review historical sales patterns, analyze communications with customers and attempt to demonstrate sales that a plaintiff would have made but for the defendant’s actions. From a practical standpoint, however, it is rare that the plaintiff can identify the name of the customer, along with the date, amount of the would-be sale and the reasons for the loss. When it is not possible to identify these specific lost sales, some plaintiffs have been able to overcome this lack of direct information by analyzing changes in customer behavior and sales patterns, and demonstrating their connection to the specific allegations.
Use of Contemporaneous Pre-Litigation Projections and Transactions
The court’s decision in Reese Schonfeld vs. Russ Hilliard, Les Hilliard and International News Network, Inc., 218 F.3d 164; 2000 U.S. App. LEXIS 15684 is frequently cited in economic damages cases to demonstrate that a plaintiff’s contemporaneous, arm’s-length transactions involving investments in or the sale of ownership interests in the subject company may provide more reliable evidence of damages than lost profit calculations, especially when the lack of a track record would require the development of potentially “speculative assumptions.”
Similarly, the courts have often found that financial projections prepared by one or both parties prior to any litigation to be more persuasive than those prepared solely for, or in response to, litigation.
With this in mind, attorneys should be prepared to share with their experts their clients’ accounting and operational data, budgets, financial forecasts and projections, pre-trial business and marketing plans, sales and pricing agreements, memorandums of understanding and other transactional contracts, all of which may be useful to identify and substantiate assumptions used to quantify damages.
Use of Multiple Regression Analysis / Statistical Analyses
Multiple regression analysis, sampling methodologies and other statistical analyses have become increasingly common and accepted methods used to establish reasonable certainty in damages calculations. However, the effectiveness of such statistical approaches are dependent on an expert’s understanding of how to conduct them properly, based on verifiable facts, to avoid common errors that could invalidate the results.
Plaintiffs, along with their counsel and retained experts, should work collaboratively to identify the best evidence available to establish with reasonable certainty a defensible claim for economic damages. In determining what constitutes best evidence, it generally is advisable that the parties identify other information that may be contrary to the data they relied upon and that they be prepared to explain how they considered this additional information in the preparation of the damages claim.
About the Author: Scott Bouchner, CMA, CVA, CFE, CIRA, is a director with Berkowitz Pollack Brant’s Forensic Accounting and Business Valuation Services practice, where he serves as a litigation consultant, expert witness, court-appointed expert and forensic investigator on a number of high-profile cases. He can be reached at the CPA firm’s Miami office as (305) 379-7000 or via email at firstname.lastname@example.org.
The April tax filing deadline has passed, but taxpayers are still at risk of falling victim to tax-related fraud and identity theft schemes that continue throughout the year. Following is a list of the top-12 scams that the IRS identified for 2018.
- Identity Theft. If criminals gain access to your personal information, such as your Social Security number, they can steal your identity to file fraudulent tax returns in order to claim a refund before you do. Never give your personal information to anyone you do not know, and take precautions to protect your sensitive information stored on computers, mobile devices and online financial sites.
- Phone Scams. The IRS will never make an unsolicited telephone call to a taxpayer to request personal information or to threaten the taxpayer with arrest or deportation for unpaid tax liabilities. If you receive a call from someone claiming to be from the IRS, hang up without providing any details about yourself.
- Email Phishing Scams. Phishing occurs through unsolicited emails or fake websites that lure potential victims into clicking on links and divulging personal and financial information. Often, the emails come from criminals posing as a bank or other legitimate institution you know. To avoid falling victim to phishing attacks, remember that that the IRS will never initiate contact with a taxpayer to request personal information, and such personal data should never be shared via email or text message.
- Tax-Return Preparer Fraud. Consumers must do their homework before engaging the services of a tax preparer to ensure that the individuals they choose to work with are in fact qualified and are not among the many scam artists that pose as legitimate professionals. Never sign a blank tax return. Before sharing any of your personal information with a new tax preparer, ask for an IRS Preparer Identification Number and search the IRS database of credentialed professionals at https://irs.treasury.gov/rpo/rpo.jsf
- Falsely Inflating Refunds. In order to yield a higher refund from the U.S. government, taxpayer and their return preparers may falsely report artificially low income or report credits, deduction or exemptions that you are not legally qualified to claim.
- Falsely inflating income in order to qualify you for a refundable tax credit to which you are not legally entitled.
- Falsely padding deductions to create a larger refund than you are entitled to or to reduce the amount of tax you are required to pay.
- Improperly claiming business credits to which you are not entitled.
- Making frivolous tax arguments in an effort to reduce your tax liability or defend against fraudulent claims.
- Abusive Tax Shelters. Hiding income and structuring assets to avoid taxes is illegal. The IRS is especially concerned about the use of schemes involving the use of “micro-captive” insurance structures that do not meet the true attributes of an insurance product.
- Fake Charities. It is common for scammers to take advantage of a natural disaster or other national issue and develop fake charities though which they solicit donations from the unsuspecting public. Before opening your heart and your wallet, verify that the organizations is a qualified charity with the IRS. If you are unsure, refocus your donation to well-established charities.
- Hiding Money Offshore. While it is perfectly legal to hold assets in offshore banks and brokerage accounts, you are responsible for reporting and paying applicable U.S. taxes on those assets. If you previously failed to report foreign financial assets, you have until Sept. 28, 2018, to voluntarily disclose this information to the IRS and avoid criminal prosecution. After this date, the IRS will end its Offshore Voluntary Disclosure Program (OVDP).
About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where he provides a full range of income and estate planning, tax and business consulting and compliance services, and financial planning expertise to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.