Social Fraud

Thought I’d take a break from tax topics to talk about a growing area of employee fraud --  social media related fraud.  A new survey by Robert Half shows that internal auditors at large companies list this subject as their top concern.  Worse yet, this topic gets priority based on a  combination of high inherent risk for fraud combined with an acknowledgement that companies aren’t paying attention to how and when social media is actually being utilized.

Not only are companies not aware of what is going on, the Robert Half report goes on to say that a set of best practices for monitoring social media use by employees doesn’t appear to exist.  Conversely, statistics indicate that best practices for circumventing company security to use social media are commonplace – a 2010 Trend Micro survey shows one in ten employees say they do this regularly.  In the same survey, half of the users said they disclosed confidential company information through a social media outlet.  The survey also showed unauthorized use of social media growing.  Interestingly, when Trend Micro talked about the impact of this with large companies, what they found was an increased incidence of fraud related to security breakdowns that weren’t intentional on the part of the original offender.  Apparently criminals target social media interactions associated with corporate computers to gain access to data that allows them to commit crimes against the organization.

This isn’t just a big business problem.  Small companies should confront this aggressively as soon as possible.   As with every other type of fraud prevention, you start with defining what the problem looks like for your company.  The next step is to engage your staff by making the risks clear to them.  A Globe Scan survey done last year showed 87% of employees thought they should be allowed to use social media at work.  Explaining why it’s a fraud related problem is a good starting point for limiting use.  You’ll also want to engage the people responsible for your tech security to get protection.  Presumably this will create a toolkit for working with employees to discuss acceptable and nonacceptable use of cloud and social media applications. 

Gartner consulting says by 2014 one in five people will use social media to the full exclusion of e-mail for communications.  That means you can’t eliminate the problem, you can just manage the risk. Starting sooner is your best bet for financial fraud prevention.

1099 More Ways to Have Tax Troubles

While most of my conversations about taxes at this point have to do with getting information about the return itself, an article in the Wall Street Journal reminded me of a change to returns this year that has big implications.  As indicated in this blog before, the IRS is falling ever deeper in love with third party reporting, and they are getting more serious about making sure it gets done.  The Service did back off on some of the more heinous aspects of making business owners reconcile the reporting they are getting from credit card companies (otherwise known as form 1099K).  Still, the reporting will be used to audit small businesses that accept payments via credit and debit cards.  What also hasn’t gone away is that if you pay for services with a credit card, and then have to issue a 1099, you need to subtract out what you put on the credit card.  Your vendor is already getting that income reported from the merchant bank that processed the transaction. Giving the IRS opportunity to double count income isn’t the best way to build business relationships.

This brings me to the matter of the 1099 Miscellaneous.

 

If you file taxes using a Schedule C, Schedule E, Form 1065 or Form 1120S there’s a question you have to answer for the first time this year asking if you did business with anyone who should have received a form 1099.  That would be anyone who you paid $600 or more to provide a service and they’re not incorporated.  Answer this question incorrectly, and if you get audited, you will face penalties, even though the form 1099 that you send has nothing to do with your gross income.  So your tax liability could be correct to the penny and you could still be in trouble with the IRS.  (Just when you thought you understood how bad this tax season was going to be!)  And the bad news doesn’t stop there.  Let me quote from the article.

In 2010 Congress stiffened the penalties on taxpayers who neglect to provide 1099 forms. The higher penalties took effect in 2011, and now the penalty for nonfiling is $100 per violation—$200, in most cases, because two forms are due, one to the IRS and one to the provider. The penalty for "intentional failure to file" is $250.

It’s a hassle to file these forms, as I know from personal experience filling them out.  However, this is a way for the government to raise more revenue without raising taxes.  That’s another way of saying it is a sure recipe for increased government action. 

Caveat Emptor -- Buyer Beware

As I can tell you from up close exposure, the tax code doesn’t get simpler each year.  If you are seeking out help with this project it is important to be careful.  The IRS (which right now is not on my list of favorite things!) did put out a helpful list of warning signs that the person who is offering tax assistance may not be legit. 

• No Preparer Tax identification number
  • In addition to a CPA license, I need to pay for one of these too.  At this point, they’re pretty easy to get, so a fraudster who doesn’t even bother to get one is both a lawbreaker and lazy.
• Not giving you a copy of the tax return to sign
  • You are responsible for what goes on the return, not your preparer.  Make sure you are familiar with what is on it.  Telling the IRS I didn’t look at my return will not help you avoid penalties.
• Promises related to refunds
  • No one should prepare taxes based on a percentage of your refund or promise you a bigger refund.  The only reason you get a big refund is that you overpaid your taxes during the year.  What you want in terms of tax preparation help is someone who helps you plan so you don’t give the IRS your money interest free for a year. 
• Tells you it’s OK to put false information on your tax return
  • The IRS doesn’t fight fair to begin with.  Don’t give them ammunition to put into the gun.  Be honest, and work with someone who can help you pay less in tax.  Tax avoidance is legal and encouraged.  Tax evasion is expensive and can involve jail time.

  

From my reading on this topic I would add a note to be skeptical of deductions that seem too good to be true.  Deductions and credits are usually designed so the more they could help you, the less they actually do.  An example of this kind of “advice” is a deduction of all your expenses – including personal items – because you have a home based business.  First of all you can’t take personal expenses for a business. Also, deductions for businesses get limited based on how much you invested in the business in the first place.  This is a perfect illustration of how the complexity of the system makes it easier to victimize people. 

While I’m not a fan of having to pay taxes, it is something to take seriously.  When the IRS decides you’ve done something wrong (even if you haven’t) it’s an enormous hassle.  If you’re going to spend time and money on tax preparation, it’s worth an extra amount of due diligence to think about what credentials your helper really has. 

Be Careful Out There

Each year the IRS releases its list of most common tax fraud schemes.  The theory is if they show you how unoriginal your tax cheating idea is, you won’t be tempted to try it.  Unfortunately the most common scams actually don’t involve cheating by the taxpayer – they involve fraud that hurts taxpayers. 

The first issue is identity theft.  Someone files a tax return in your name with fraudulent information that nets the criminal a refund.  When the IRS cracks the fraud on the return, they go after the innocent taxpayer who didn’t even know there was a problem.  The IRS says they have active cases against 105 people now in 23 states that involve about $1.4 billion dollars.  The IRS tries to give people a heads up when they get more than one tax return from the same person or if they find wages from an employer who isn’t on the taxpayer’s tax return.  The problem is growing so fast, the IRS has a web page set up to talk about how to handle it if you think you’re a victim.

Next on the list is a practice that I’ve encountered, and warned about previously.  Despite years of warnings, it’s still flourishing.  We had a client who got one of these e-mails last week.  Someone e-mails you telling you the IRS or EFTPS (the website where you file payroll taxes among other things) and says you have a problem and need to contact them right away.  Here’s the IRS advice on this topic.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Last, on the list of top scams that don’t involve active tax payer cheating is a fraudulent preparer.  Needless to say this is a topic that makes me more than a little emotional.  In fact I think it deserves a separate post.  In the meantime I’m going to make sure I’ve shredded any documents I have with someone’s social security number on it.

Miscellaneous Questions

I’ll be spending some time today working through expense sections of QuickBooks files that have titles like “ask my accountant” or “uncategorized expenses”.  Many of the items in those accounts won’t meet the criteria to be an expense for the taxpayer’s business, but they will be eligible for one of the more confusing personal deductions, known in the trade as “2% miscellaneous”. 

The 2% doesn’t refer to something small, as in “putting your 2-cents in”.  Instead, it’s a reference to the amount of expenses you need to have to start taking the deductions.  If the miscellaneous expenses are less than 2% of your adjusted gross income, then no deduction for you. Miscellaneous, on the other hand, means just what you think.  There is a diverse list of items  included as eligible for this deduction.  The IRS breaks the list into 3 categories:  unreimbursed employee expenses, tax preparation fees, and all other.   

Unreimbursed employee expenses are often misunderstood.  Key points to remember include that if you are not required to spend the money by your employer, you can’t get a deduction.  An example of this would be buying a computer used only for work that you can’t get done at the office -- but your employer didn’t ask you to do that.  If this applies to you, look for a new job rather than a new tax deduction.  Actually in this example you could do both because the search for a new job in the same field is deductible.

You can take a deduction if your employer partially reimburses your expenses.   Let’s say you get a travel allowance of $500, but your expenses were actually double that for a business trip.  You might be tempted to skip the hassle of getting the employer reimbursement and deduct the whole amount – it’ll help you hit the 2% threshold.  That would be a mistake.  To get the deduction, you need to ask for whatever reimbursement you can get and then report all the info on form 2106, Unreimbursed Employee expenses.

Some miscellaneous expenses aren’t subject to the 2% floor, so if you itemize, you can take them from the first dollar.  My favorite in this group is gambling losses that offset gambling winnings.  There’s tax policy in action, gamblers get the deduction first, but workers who spend their own money to meet employer goals have “eat” up to 2% of their AGI in expenses.  This makes me think it’s time to turn off my computer and head to Meadows.