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12 Ways to Reduce the Increased Threat of Expense Report Fraud under Tax Reform by Richard A. Pollack, CPA

Posted on August 27, 2018 by Richard Pollack

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:

  1. Mischaracterizing expenses by falsely claiming purchases for personal use are business expenses;
  2. Creating fictitious expenses by producing bogus receipts for expenses that they never incurred;
  3. Padding expense reports by overstating or inflating legitimate expenses;
  4. 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.

  1. 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;
  2. 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);
  3. 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;
  4. Require employees to attach to receipts additional proof that an expense is work-related (i.e. conference brochure) and not a form of entertainment;
  5. Establish a policy that requires supervisors/managers, payroll or HR personnel to review/approve every one of workers’ expense reports prior to reimbursements;
  6. Compare workers’ expenses to their work schedules, prior month and prior year expenses;
  7. Avoid reimbursing workers in cash;
  8. Consider using the IRS-recommended per diem rates for meals and mileage;
  9. Consider the use of corporate credit cards to track employee’s expense activities and compare them to expense reports;
  10. Verify mileage claims and require employees to detail claims of miles traveled by including exact addresses of locations;
  11. Conduct spot audits to detect anomalies or flag unverified expenses; and
  12. 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 rpollack@bpbcpa.com.

 

 

What Constitutes Best Evidence to Support Claims of Economic Damages? by Scott Bouchner, CMA, CVA, CFE, CIRA

Posted on June 11, 2018 by Scott Bouchner

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 info@bpbcpa.com.

 

Be on Alert to Avoid the Top-12 Tax-Related Scams by Joseph L. Saka, CPA/PFS

Posted on May 06, 2018 by Joseph Saka

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 info@bpbcpa.com.

Beware of Tax Refund Scam by Joseph L. Saka, CPA/PFS

Posted on March 19, 2018 by Joseph Saka

Tax season is unfortunately also the time of year that criminals step-up their efforts to swindle consumers for their own financial gain. In the latest twist on an old scheme, scammers are stealing taxpayer’s personal information to file fraudulent tax returns and have refunds electronically deposited into taxpayer’s actual bank accounts. Subsequently, these criminals pose as IRS agents or debt collectors and contact their victims demanding the return of the refunds erroneously deposited in taxpayers’ accounts. Often, criminals will use scare tactics, such as the threat of arrest, to trick victims into compliance.

While there is little that taxpayers can do to prevent this fraud from occurring, there are important steps they can take to resolve it as quickly as possible and avoid interest accruing on the erroneous refund.

Should taxpayers receive an unexpected direct deposit tax refund, they should first contact their accountants to communicate with the IRS then call the Automated Clearing House (ACH) department of the bank/financial institution to have the funds returned to the IRS. In most cases, taxpayers should also consider closing their accounts to prevent any further fraud.

If the fraudulent refund is in the form of a paper check, the IRS advises taxpayers to write “Void” in the endorsement section on the back of the check and mail it within 21 days to the IRS office in the city listed on the bottom of the check.

Finally, taxpayers should remember that the only way that the IRS will communicate with them is through notices sent via U.S. postal mail; at no time will the IRS contact them by telephone or email. Therefore, there is no reason taxpayer should ever share personal information, such as  Social Security number of bank account information, over the phone or via email.

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 firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

Taxpayers Beware: Summertime Tax Scams are on the Rise by Joseph L. Saka, CPA/PFS

Posted on August 01, 2017 by Joseph Saka

Tax-related scams are casting a dark cloud over the typically blue skies and sunshine-filled days of the summer months. During this time of easy living, people must remain vigilant against new and often aggressive schemes that can comprise their personal information and financial security and leave them as yet another victim of identity theft.

 

EFTPS Scam

In this new twist on an old scheme, scammers posing as IRS officials call taxpayers to say that because two certified letters about an outstanding tax bill were undeliverable, the taxpayer must make an immediate tax payment via a specific prepaid debit card or face arrest. Victims are told that the debit card is linked to the Electronic Federal Tax Payment System (EFTPS), which is a free service offered by the U.S. Department of Treasury that allows taxpayers to pay federal taxes online or by phone. The problem is that the debit card the scammers demand taxpayers purchase is, in reality, it is controlled entirely by the scammer.

 

To avoid falling victim to this scam, taxpayers should remember that the IRS will never call them to demand payment without giving them the opportunity to question or appeal the amount owed. In addition, the IRS will never threaten a taxpayer with arrest nor will it ask for a credit or debit card payment over the phone. Rather, all tax payments must be payable only to the U.S. Treasury.

 

“Robo-call” Message Scams

Taxpayers who receive a prerecorded message claiming to be from the IRS should know that the agency will never leave a voice-mail message demanding an immediate call back. Individuals fall victim to this scam when they call back and are threatened with arrest unless they make immediate payment by a specific prepaid debit card or by wire transfer.

 

Private Debt Collection Scams

Taxpayers should be on the lookout for scammers posing as private collection firms demanding payment of an outstanding tax liability. While it is true that the IRS has engaged private-sector collection agencies to recover a limited number of taxpayers’ overdue federal tax liabilities, taxpayers will first receive a notice from the IRS advising them of the debt and the name of the collection agency.

 

Scams Targeting People with Limited English Proficiency

Taxpayers who are not proficient in English may receive phone calls or emails in their native language from someone claiming to be from the IRS. The caller will tell victims that they owe the IRS money and threaten deportation or police arrest unless they make an immediate tax payment on a preloaded debit card, gift card or wire transfer.  Again, taxpayers must remember that the IRS will never call or email them about an outstanding tax liability, nor will the agency ever demand payment via debit card, credit card or wire transfer. The only acceptable method for paying taxes is doing so directly to the U.S. Department of the Treasury.

 

If a taxpayer believes that he or she owes taxes, it is important to remember the following points:

1.         The IRS’s primary method for contacting taxpayers is through regular U.S. Postal Mail.

2.         Never give out person information over the phone or via a link to a website.

3.         Taxpayers may call the IRS directly at 800-829-1040 to verify or debunk any purported tax liabilities and requests for payment

4.         Individuals may access their tax accounts, potential liabilities and options for payment online at IRS.gov, or they may request that their accountants obtain these transcripts on their behalf

 

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 consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

 

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