Fraud: " You Need An External Set of Eyes"

Nobody wants to talk about Fraud. It’s embarrassing. But it is a crime of opportunity. It happens because your internal controls are weak, no one is watching, your internal accountant, bookkeeper or other employee may have a problem with debts, substance abuse, family problems. It happens. It’s part of the human condition. These problem themselves may not be crimes, but they can influence people to do what they typically may not consider. The FBI says, 80% of people are good people. They will never steal from you. About 10% steal out of some need or because they think they can get away with it. The other 10% will kill you for a piece of toast because that’s all they know. It’s sad but it’s part of life since ancient times.

            Recently, I was analyzing a client’s financial reports prepared by his new internal bookkeeper. As usual I made a number of inquiries and requested some additional reports and reconciliations. Some I got some I didn’t.  From experience, when the outside CPA asks for standard reports and doesn’t get them or the delivery is shrouded in mystery, it’s a bad sign. I reported my concerns to the business owners to put them on notice. Advised them to be mindful and pay close attention to make sure procedures were being followed. At the second period meeting again I asked for reports. Again, same response. I tried to see if there was something I could do to help. Provide support, diagnose a problem. I finally got a series of reports. Upon analysis I saw entries I knew could not be correct. The implications where very, very bad. I asked the bookkeeper to explain. Talk to me, tell me where I can help. How is this possible? The answers were fragmented and puzzling. I had no choice but to call the owner at home, late one night and ask questions, I never like to make.

After several months of reconstruction, we got lucky; the only fraud committed was a result of incompetence. It did however, cost the company money. But all the signs were there for embezzlement and theft. The bookkeeper had access to bank accounts and checks. The bookkeeper had multiple failed marriages, business failures, family issues, was under collection for debts. It was the classical profile of what the FBI has deemed a likely candidate to commit a white collar crime. It is the profile I see time and again in many theft and embezzlement cases. I have seen quite a few in Miami.

            Let’s be clear. Sometimes there is no way to prevent it. In the end as a business owner you have no choice but to trust. From years of experience, like my client above said, “thank god you ask all the questions. Thank god you know what to look for”. “Just the fact that you are there looking over his/her accounting function and you get involved”. I sit at his/her employees desk, drink some coffee ask questions, see how they do their work. That keeps people honest. Many times, it also makes the employees feel good someone cares about what they do and how they do it. They feel valued and that can make a big difference. It’s not just the numbers.

            Many of my smaller clients with 10 or fewer employees and $5 million or less in revenues. These clients are often at risk. They cannot afford top talent. There is little to no segregation of duties, and the owner operator is so busy, he’s not thinking accounting, finance, computer systems and internal controls. He’s thinking, how to make it through the day, bring in sales and keep the existing clients happy. That’s why you need those external set of eyes. 

Federal Income Tax Requirements for Foreigners

Without a doubt Miami has become an international metropolis. Anyone reading this article who lives in Miami will likely know someone who is trying to figure out what their responsibilities are for income tax filing at the end of this year. It’s critical to know that violating your income tax reporting responsibilities by someone who has been given residency may be regarded as “abandoning their resident status” by U.S. Citizen and Immigration Service. This indirectly says make sure you get good professional advice.

The application of U.S. tax law is not easy. An initial consultation with any tax professional will ask a whole variety of questions. Some of these questions will be:

(1)  What type of Visa do you have?

(2)  What is your purpose in the U.S.?

(3)  Where do you live?

(4)  How many days have you been in the U.S. in the past three years?

(5)  How do you make a living and support yourself?

(6)  What is your marital status?

(7)  Do you have a social security number or ITIN?

(8)  What is your tax home?

(9)  What country issued your Passport?

It’s very important that you be able to answer each question precisely and have documentation to support your answers. The trouble is, more often than not a foreigner’s Visa, or initial reason for coming to the U.S. and perhaps staying longer than expected becomes not only part of their journey, but now part of a tax advisor’s journey to find the right answers to tax compliance.

Are you a Resident or Non Resident?

The first question we need to address is what category of foreigner are you? Are you a “Resident” or a “Non- Resident” Please keep in mind this may not have anything to do with your Visa or intention.

Generally, “Resident” Aliens are treated as U.S. taxpayers and file form 1040.  If you have income from abroad, you are generally required to report “World Wide Income”. Good news is you get credit for taxes already paid in another country. If you are a “Non – Resident” you may need to file form 1040NR and you are generally taxed on U.S. Source Income. Even if you are deemed a “Resident Alien” there is an exception to being treated as a U.S. taxpayer if you can meet the conditions under the “Closer Connection Exception”. This generally means your true tax home is somewhere else. This is important for those foreigners who have a vacation home in the U.S., stay on average more than 183 days (discussed later), but really are on an extended vacation. (Many people in Miami these days buying nice condos who may not need to file)

Your “Residency Status” is determine by two tests. Either the (1) Green Card Test or (2) The Substantial Presence Test.

The Green Card Test is fairly simple. If you have been authorized and given the privilege to reside in the U.S., as an immigrant, by the U.S. Citizenship and Immigration Service (USCIS) then you generally meet this test. Your are in fact a resident.

The Substantial Presence Test, really is the catch all. This test states; if you have been in the United States at least 183 days in the past three years then, you are regarded as a “Resident”, if not you are a “Non-Resident” The issue lies in the calculation of the 183 days. Generally, its; All the days of the current year, plus 1/3 the days of the immediate prior year, plus 1/6 the days of the second preceding year. Get all those entry and exit Visa stamps, look through airline ticket purchases, recall your wonderful times traveling and start counting!

The important thing to note is that it does not matter if you applied for residency, have a green card or not. If you forgot to leave and stayed 183 days or more, you just vacationed your way into a new tax home.

All the tax issues, concerns and variables can be rather complicated. It’s possible “Tax Treaty” Provisions may apply for your country. Gathering your information first is key. Then call a qualified tax advisor and stay away from the tax return mills. Each person’s situation is different so every factor needs to be taken into account.

Retirement?.......Oh! That Really Long Vacation!

Let’s face it. All of us, hard working folks have so much going on that we tend to live for the here and now. When we make money, we pay our bills, we pay down debt. We leave a little aside for “disposable income” (i.e., restaurant meals, movies, vacation, hobbies, home improvement and of course the kids). Well…most of us.

When we stop and take a look back, what’s left? For many American’s their home, if they have one, is the only real savings they have, come retirement. Another chunk can come from any potential inheritance Mom & Dad might leave you.  Maybe you have a Whole Life insurance policy that has a cash surrender value. Maybe you have a little stashed in a savings account or in an IRA or employer 401K plan. Then you have some Social Security Benefits; not nearly enough to really sustain your current spending levels. Many government workers have it really good in that they get guaranteed defined benefits, typically a percentage of their ending or highest salary until death. Yep, these legacy costs make democracy very expensive. (That’s another story)

Now think of what your expenses will be. Healthcare costs are huge as you get old. Especially, if you have health problems. Insurance or Medicare will not cover it all. That wonderful house you paid off; now needs a new roof, plumbing work, a new kitchen and bathroom and new HVAC system. You need a new car. You have to pay real estate taxes and insurance for home and auto. You don’t have kids anymore but, hey now you have grandkids. Who could say no to those little rug rats? How about an occasional vacation? Have to do a few of those before you find yourself in a pair of senior Pampers!

All is not lost. Plan for that retirement as early as possible. Like right out of college. Forego some modest luxuries if you must today so that tomorrow you will have a little more. Count on the fact that we will have various economic cycles and that IRA’s and 401K plans as well as savings invested in mutual funds could loose significant values. (Like they did starting in 2008. A 40% loss in value was common) If you have a windfall year, try not to spend more, put some in reserve. Retirement accounts, and employer plans are a huge benefit during your working years. Not only will you save for your retirement but you will also save on income taxes at rates higher than they might be when you retire. It’s possible a $10K savings in one year really feels more like $7.5K when you consider tax savings. Then you have the employer match of many employer sponsored retirement plans. THAT’S FREE MONEY! Take it and run, you earned it. Over a 40 year period (if you start at age 25) saving $2,000 a year and increasing this amount by $500, every 5 years at 4.85% avg. ROI, will yield a savings of about $359K, not taking into account tax savings.  The stock market and hence mutual funds have a better rate of return on average for a balanced portfolio. Of course no one can really predict a down cycle.

There are options and choices to make now that can make a big difference in the long run. You do have to be mindful. You do have to make those choices. But the real key is start as early as possible. Talk to your tax advisor, your CPA. Put it all out and come up with a clear plan and a goal. Need help, call me.

Retirement, is a very ugly word. It suggests that you are disposed of. It says you are put aside. It says you are no longer useful. Nonsense!……me I’m going for a Really Long Vacation!

So you have an LLC with revenues:

LLC's, a.k.a.: "Limited Liability Companies"; have gained enormous popularity in the past 15 years. They are a creative legal entity that has tax characteristics of a chameleon. They are adaptive and can be taxed as S-Corps, C-Corps, Partnerships or disregarded as its own entity. So from a tax standpoint saying you have an LLC really tells your tax advisor next to nothing. What this also means is that you have to plan ahead. Our tax system has lots of alternative choices. But most importantly, now is the time of year you want to really see were you are at. Sit with a tax advisor and get a hold of your tax exposure. See what you can do to reduce your and perhaps your partners tax liability "before year end". What options and choices do you have? In some cases it's not just the income tax in your bracket. It is also the additional self employment tax which is another 15.3%. So, spending a little now on a good tax advisor can pay for itself in tax savings.

The overwhelming popularity of LLC's has a great following from small to mid sized enterprises and professional service and investment firms. Sometimes, small companies fear spending money on a qualified tax advisor. I know this is self serving, but really , you're doing yourself a dis-service. Small enterprises should steer clear from, "tax return mill companies", and hire a dedicated professional with the knowledge and the tools to educate you and get you on a defined path. In some cases a large tax law or accounting firm, with hefty fees may not be the way to go. A good relationship is however, a tremendous resource. It's a smart investment in your entrepreneurial development and there is no reason to go it alone or to try and imitate what your friends are telling you.

If you like this posting, or if you have other areas of interest, please feel free to comment or simply reach out.