Author Archive: Justine O'Sullivan

Dissecting the role of the forensic accountant in litigation

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When people hear the term “forensic science,” they usually think “CSI.” What comes to mind when you hear the term “forensic accounting”? Similar to forensic scientists offering opinions about scientific matters, forensic accountants may be called on to investigate and serve as financial experts in commercial litigation. Here’s how.

Who they are

Forensic accountants specialize in conducting fraud audits and investigations to detect irregularities and troubling trends, looking for both telltale and subtle signs of white collar crime. Certified fraud examiners (CFEs) are specially trained in fraud discovery, recognition, documentation and prevention. They’re also generally knowledgeable about human behavioral factors and motivations that contribute to the commission of fraud, such as the ability to rationalize fraudulent conduct.

Often, forensic accountants are retained to detect misrepresentations of financial data or to locate missing funds. It’s important to investigate fraud suspicions as early as possible to help mitigate potential losses.

What to expect

When you or your attorney engages a forensic accountant, you can expect the expert to work closely with you to tailor an investigation to the situation at hand. Depending on the type of fraud suspected, the investigation may be performed on a comprehensive, companywide or random, spot-check basis.

Forensic accountants work to determine the scope of the fraud, including its duration and participants. Investigations typically require extensive document review. In a case involving asset misappropriation, for example, experts might search for forged documents.

They also look for evidence of compliance — or noncompliance — with Generally Accepted Accounting Principles (GAAP). Of course, GAAP compliance doesn’t guarantee legitimate accounting, so an investigation might also focus on specific areas that wouldn’t necessarily be caught in an audit, such as the use of assets at the operational level. Are they being used as intended or for the benefit of an employee? Are all of the assets accounted for?

When to expand the scope

Special investigations also can be effective in uncovering high-level financial fraud. A board usually receives its financial and operational information from a company’s executives. Investigations enable board members to get deeper, more detailed information without going through management. Experts can interview individuals “in the trenches” and review raw data, and then communicate their findings directly to the board.

Fraud investigations might be used to monitor the activities of top executives — even if only for policy lapses. Management members often are given greater latitude and may be tempted to bend the rules. When this occurs, it can influence a company’s ethical environment and encourage other employees to disregard policies or commit fraud.

When to call

If you suspect a financial impropriety, contact us. We can help minimize fraud losses, preserve confidentiality and admissibility of evidence, and possibly even reduce litigation costs. Call us at 205-345-9898, or email us at info@covenantcpa.com.

© 2019 CovenantCPA

Estate planning for single parents requires special considerations

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Here’s a fast fact: The percentage of U.S. children who live with an unmarried parent has jumped from 13% in 1968 to 32% in 2017, according to Pew Research Center’s most recent poll.

While estate planning for single parents is similar to estate planning for families with two parents, when only one parent is involved, certain aspects demand your special attention.

5 questions to ask

Of course, parents want to provide for their children’s care and financial needs after they’re gone. If you’re a single parent, here are five questions you should ask:

1. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or unexpectedly die, your estate plan must designate a suitable, willing guardian to care for them.

2. What happens if I remarry? Will you need to provide for your new spouse as well as your children? Where will you get the resources to provide for your new spouse? What if you placed your life insurance policy in an irrevocable trust for your kids to avoid estate taxes on the proceeds? Further complications can arise if you and your new spouse have children together or if your spouse has children from a previous marriage.

3. What if I become incapacitated? As a single parent, it’s particularly important to include in your estate plan a living will, advance directive or health care power of attorney to specify your health care preferences in the event you become incapacitated and to designate someone to make medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances in the event you’re unable to do so.

4. Should I establish a trust for my children? Trust planning is one of the most effective ways to provide for your children. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees. You specify when and under what circumstances funds should be distributed to your kids. A trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.

5. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents don’t have a “backup” income in the event they can no longer work.

Review your estate plan

If you’ve recently become a single parent, it’s critical to review your estate plan. We’d be pleased to help you make any necessary revisions. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Prepare for the worst with a business turnaround strategy

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Many businesses have a life cycle that, as life cycles tend to do, concludes with a period of decline and failure. Often, the demise of a company is driven by internal factors — such as weak financial oversight, lack of management consensus or one-person rule.

External factors typically contribute, as well. These may include disruptive competitors; local, national or global economic changes; or a more restrictive regulatory environment.

But just because bad things happen doesn’t mean they have to happen to your company. To prepare for the worst, identify a business turnaround strategy that you can implement if a severe decline suddenly becomes imminent.

Warning signs

When a company is drifting toward serious trouble, there are usually warning signs. Examples include:

  • Serious deterioration in the accuracy or usage of financial measurements,
  • Poor results of key performance indicators — including working capital to assets, sales and retained earnings to assets, and book value to debt,
  • Adverse trends, such as lower margins, market share or working capital,
  • Rapid increase in debt and employee turnover, and
  • Drastic reduction in assessed business value.

Not every predicament that arises will threaten the very existence of your business. But when missteps and misfortune build up, the only thing that may save the company is a well-planned turnaround strategy.

5 stages of a turnaround

No two turnarounds are exactly alike, but they generally occur in five basic stages:

  1. Rapid assessment of the decline by external advisors,
  2. Re-evaluation of management and staffing,
  3. Emergency intervention to stabilize the business,
  4. Operational restoration to pursue or achieve profitability, and
  5. Full recovery and growth.

Each of these stages calls for a detailed action plan. Identify the advisors or even a dedicated turnaround consultant who can help you assess the damage and execute immediate moves. Prepare for the possibility that you’ll need to replace some managers and even lay off staff to reduce employment costs.

In the emergency intervention stage, a business does whatever is necessary to survive — including consolidating debt, closing locations and selling off assets. Next, restoring operations and pursuing profitability usually means scaling back to only those business segments that have achieved, or can achieve, decent gross margins.

Last, you’ll need to establish a baseline of profitability that equates to full recovery. From there, you can choose reasonable growth strategies that will move the company forward without leading it over another cliff.

In case of emergency

If your business is doing fine, there’s no need to create a minutely detailed turnaround plan. But, as part of your strategic planning efforts, it’s still a good idea to outline a general turnaround strategy to keep on hand in case of emergency. Our firm can help you devise either strategy. We can also assist you in generating financial statements and monitoring key performance indicators that help enable you to avoid crises altogether. 205-345-9898, info@covenantcpa.com.

© 2019 CovenantCPA

Casualty loss deductions: You can claim one only for a federally declared disaster

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Unforeseen disasters happen all the time and they may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act, eligible casualty loss victims could claim a deduction on their tax returns. But there are new restrictions that make these deductions much more difficult to take.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, or fire; an accident or act of vandalism; or even a terrorist attack.

Unfavorable change 

For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during 2019, there were presidential declarations of major disasters in parts of Iowa and Nebraska after severe storms and flooding. So victims there would be eligible for casualty loss deductions.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Special timing election 

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can help you get extra cash when you need it.

This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating personal losses

To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps:

  1. Subtract any insurance proceeds.
  2. Subtract $100 per casualty event.
  3. Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2019, they are $12,200 for single filers, $18,350 for heads of households, and $24,400 for married joint-filing couples.

So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.

We can help

These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. If you have disaster-related losses, we can help you navigate the complex rules. Call or email us today- 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

How entrepreneurs must treat expenses on their tax returns

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Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

  1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
  2. Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
  3. No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Preventing fraud in auto dealerships

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To prevent occupational fraud from cutting into your auto dealership’s profits and generating negative publicity, you need a strong internal controls system. And effective controls start with current and accurate financial statements.

It starts in accounting

One sign of weak internal controls is an accounting department that fails to generate a balance sheet and income statement until two or more weeks after month’s end. Accounting should post transactions daily, including new and used vehicle sales, repair orders, invoice payments, payroll and cash receipts.

By 1 p.m. on any given day, you should have access to real-time checkbook balances and other accounting information effective as of 5 p.m. the day before. That way, you might be able to catch the first signs of fraud and use the data to catch the perpetrator.

Tried and true methods

Complex computer passwords, background checks and security cameras are essential to preventing fraud. But sometimes these protections fall by the wayside. Periodically review your safeguards and ensure they’re being used. For example, require employees to change their passwords quarterly, conduct regular inventory counts, engage outside CPAs to perform audits and segregate accounting duties.

As a rule of thumb, employees who record and reconcile transactions should never have access to those assets (including being a signer on bank accounts). Give the segregation of duties a starring role in your internal controls program.

Real life examples

To see how such controls can reduce losses, consider this real-life scam. A parts manager stole $70,000 by selling his employer’s parts and pocketing the cash. The loss could have been reduced if the owner had performed random inventory counts throughout the year, rather than waiting for his CPA to physically verify inventories at year end.

In another case, a dealership caught its cashier stealing by voiding service orders and falsifying deposit slips. The cashier’s responsibilities included collecting cash, issuing receipts to customers, preparing the daily deposit slip and reconciling the daily cash report. A loss of $16,000 might have been prevented if the dealership had segregated these duties.

Another dealer learned that his general manager was wholesaling used cars at a loss to the dealership because he owned a 50% interest in the wholesaler. A better pre-employment screening process might have helped detect such conflicts of interest as well as any criminal history.

Be involved

We can help you bolster your dealership’s internal controls. But your involvement is essential to preventing fraud. Let employees know that you personally review bank statements, order test counts of inventory and examine adjusted journal entries. Knowing that you’re paying attention will discourage most thieves. Contact us for more at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

College financing may be an integral part of your estate plan

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The staggering cost of college makes it critical for families to plan carefully for this major expense, and in many cases grandparents want to play a role. As you examine the many financing options for your grandchildren, be sure to consider their impact on your estate plan.

Make direct payments

A simple, but effective, technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the college, they avoid gift and generation-skipping transfer (GST) tax without using up any of your $11.4 million gift or GST tax exemptions or your $15,000 annual gift tax exclusion.

A disadvantage of direct payments is that, if your grandchild is young, you have to wait until the student has tuition bills to pay. So there’s a risk that you’ll die before the funds are removed from your estate.

Draft a grantor trust

Trusts offer several important benefits. For example, a trust can be established for one grandchild or for multiple beneficiaries, and assets contributed to one, together with future appreciation, are removed from your taxable estate. In addition, the funds can be used for college expenses or for other purposes. Also, if the trust is structured as a “grantor trust” for income tax purposes, its income will be taxable to you, allowing the assets to grow tax-free for the benefit of the beneficiaries.

On the downside, for financial aid purposes a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available to him or her. So keep this in mind if your grandchild is hoping to qualify for financial aid.

Explore all of your options

Other college financing options include Sec. 529 college savings and prepaid tuition plans, savings bonds, retirement plan loans, Coverdell Education Savings Accounts, and various other tax-advantaged accounts. If you’d like to learn more about your options to help fund your grandchild’s education expenses, please contact us at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

Three questions you may have after you file your return

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Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now? 

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Question #2: Where’s my refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

Question #3: Can I still collect a refund if I forgot to report something?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time! 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA

Why executives pose the greatest occupational fraud risk

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In its 2018 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) reported that owners and executives accounted for only 19% of all fraud cases. Yet they caused a median loss of $850,000, vs. a median of $100,000 for rank-and-file employees.

Executive thieves get away with more because they have greater access to assets and can more easily override internal controls. Their schemes also tend to continue for longer periods before detection — an average of two years vs. one year for nonmanager employee schemes. So it’s critical to spot the signs of executive fraud and nab these high-placed thieves.

Greater authority = greater damage

Traditional preventive measures, such as background checks, may be ineffective when it comes to executive fraud because many of these perpetrators are first-time offenders. Fortunately, their schemes tend to raise red flags. Crooked executives often are reluctant to cooperate with internal investigations and outside auditors and may show disrespect for regulators. Sometimes, they offer unreasonable responses to reasonable questions or become agitated or annoyed when probed about financial discrepancies.

Often, their lifestyles betray them. A thieving executive may begin spending extravagantly on expensive cars and vacations. Or a formerly fiscally healthy individual may appear to be mired in debt and have credit problems. In some cases, the motivation for fraud is a substance abuse or gambling problem.

Vulnerabilities create opportunities

Weak internal controls make fraud easier for executives to perpetrate. Vulnerable organizations may have minimal or no segregation of duties, little external audit oversight, a lax or inexperienced accounting staff and excessive trust in key executives. Environments where all decisions are made by an individual or small group are also at higher risk. And companies in financial distress provide particularly fertile ground for fraud perpetrators.

Some executives commit fraud for what they believe is the benefit of the company. Financial weakness, out-of-control expenses, tax adjustments by the IRS, credit difficulties and pressure to meet budgets and earnings projections can all motivate an executive to do “whatever it takes” to prop up the company. When bottom-line results seem too good to be true, that just may be the case.

Tone at the top

Executive fraud can have devastating financial consequences and harm your company’s reputation with shareholders and the public. Also, it sets the ethical tone for the entire organization. Employees who know or suspect their superiors are dishonest are more likely to cut corners — or steal — themselves. So if you suspect fraud in your organization or need to bolster your internal controls, contact us at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA

Deducting business meal expenses under today’s tax rules

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In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

No more entertainment deductions

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Meal deductions still allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

  1. The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.
  2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.
  3. You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

Set up detailed recordkeeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.

Other considerations

What if you spend money on food and beverages at an entertainment event? The IRS clarified in guidance (Notice 2018-76) that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan ahead

As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. Your tax advisor can keep you up to speed on the issues and suggest strategies to get the biggest tax-saving bang for your business meal bucks. Contact us at 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA