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Detecting Fraud in Your Business

What do you call an accountant with specialized auditing and investigative skills? A forensic accountant who can help resolve disputes involving fraud and testify as an expert witness in a courtroom battle.

In an age where securities fraud, shareholder disputes, employee theft, insurance fraud, personal injury claims, and other criminal investigations are running rampant, forensic accountants are not just useful -- they're essential in the business world.

Here are just a few of the tasks that forensic accountants undertake for clients:

•   Investigate and analyze financial evidence to detect employee theft.
•   Conduct business investigations that involve funds tracing, asset identification and recovery.
•   Detect fraud in financial statements through forgery, collusion, missing documents and other factors.
•   Develop computer programs to help analyze and present evidence in court.
•   Issue reports, exhibits and collections of documents to assist in legal proceedings

Contact our office to learn more about forensic accounting. You may see it on a TV crime show, but this is a specialty that can also help your company in the real world.

Tax Season and the New Year

In many ways, tax season is similar to the New Year. How could that be? Tax season is full of anxiety and deadlines, whereas New Year's is full of parties and fun. The similarity is that, like New Year's, tax season is a time when many of us evaluate the last year and make resolutions for the year ahead. Although many of us dread tax season, it is a good time to focus on our financial goals.

At tax time we spend hours going through the financial details of the past year and vow that we are going to get better control of our financial situation. However, once our return is filed, we are so relieved that we forget the anguish gathering our financial records caused us. So, once again, we postpone our resolution to take control of our finances and start seeking guidance in how to manage our finances.

It doesn't have to be that way. This year, make a financial planning appointment. Even though there is no magic to the act of financial planning, the key is getting started. You need to have a plan in order to help you succeed. Make this the year you finally begin to map out your financial future. Then next year, the anguish you normally feel when gathering your tax information will be replaced with a wonderful sense of accomplishment.

IRS Provides Guidance on Next Year's Medicare Surtax

As Congress continues to argue about how to handle the approaching "fiscal cliff," taxpayers should be aware that there is one new tax taking effect next year that is not part of the tax breaks expiring at the end of this year.

Background: The "fiscal cliff" or "Taxmageddon" generally refers to a combination of upcoming spending cuts and tax breaks expiring on December 31, 2012. These tax breaks, which have been in place since 2003, include lower tax rates, lower dividend and capital gains rates, and more. If Congress does not act, these favorable tax rates expire and virtually all taxpayers will be affected.

Apart from those potential increases, a new 3.8 percent "Net Investment Income Tax" (also called the Medicare surtax) is scheduled to kick in on January 1, 2013. It is part of the healthcare law passed in 2010 (the Patient Protection and Affordable Care Act). It will only be imposed on certain high-income taxpayers.
Bottom line: Regardless of whether the expiring tax breaks are extended, the 3.8 percent Medicare surtax is likely to remain in place.

To clear up confusion about the details of the new tax, the IRS just released guidance and some answers to frequently asked questions. Here are edited excerpts:

Q. What is the Medicare surtax or Net Investment Income Tax?

A. The Net Investment Income Tax is imposed under the Internal Revenue Code and applies at a rate of  3.8 percent to certain net investment income of individuals, estates, and trusts with income above certain amounts.

Q. When does it take effect?

A. The Net Investment Income Tax goes into effect on January 1, 2013. It will affect income tax returns of individuals, estates, and trusts for their first tax year beginning on (or after) January 1, 2013. It will not affect income tax returns for the 2012 taxable year that will be filed in 2013.

Q. Who is subject to the Net Investment Income Tax?

A. Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following thresholds:

Income Threshold	Filing Status
$200,000	Single or head of household
$250,000	Married filing jointly
$125,000	Married filing separately
$200,000	Head of household (with qualifying person)
$250,000	Qualifying widow(er) with dependent child

Notes: These threshold amounts are not indexed for inflation. If you are exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have certain types of income and also have modified adjusted gross income over the applicable thresholds.

Q. What is included in net investment income?

A. In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (under IRC section 469). To calculate your net investment income, your investment income is reduced by certain expenses properly allocable to the income.

Q. What are some common types of income that are not net investment income?

A. Wages, unemployment compensation; operating income from a non-passive business, Social Security benefits, alimony, tax exempt interest, self employment income, Alaska Permanent Fund Dividends, and distributions from certain qualified plans.

Q. What kinds of gains are included in net investment income?

A. To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing net investment income:

• Gains from the sale of stocks, bonds, and mutual funds;
• Capital gain distributions from mutual funds;
• Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence); and
• Gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner).

Q. Can you provide some examples of how the Net Investment Income Tax is calculated?

A. Sure. Here are two examples to illustrate how the tax is calculated:

Example: Tom, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. His modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold for singles. Therefore, Tom is not subject to the Net Investment Income Tax. Example: Laura is a single filer with $180,000 of wages. She also received $90,000 from a passive partnership interest, which is considered net investment income. Laura's modified adjusted gross income is $270,000 ($180,000 plus $90,000. Her modified adjusted gross income exceeds the $200,000 threshold for single taxpayers by $70,000. Laura's net investment income is $90,000. The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Laura's modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (her net investment income). So Laura owes Net Investment Income Tax of $2,660 ($70,000 times 3.8 percent).

Q. Does this tax apply to gain on the sale of a personal residence?

A. It depends on the price of the residence, your income and other factors. The Net Investment Income Tax will not apply to any amount of gain that is excluded from gross income for regular income tax purposes. Current tax law exempts the first $250,000 for unmarried taxpayers ($500,000 for married joint filers) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes. Thus, this amount is exempt from the Net Investment Income Tax.

Example 1: Alan is single and earns $210,000 in wages. He sells his principal residence, which he has owned and resided in for the last 10 years, for $420,000. Alan's cost basis in the home is $200,000 so his realized gain on the sale is $220,000. Under current tax law, he can exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining net investment income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of Alan's home. Example 2: Brad and Connie are a married joint filing couple. They sell their principal residence, which they have owned and resided in for the last 10 years, for $1.3 million. The couple's cost basis in the home is $700,000 so their realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain minus the $500,000 home sale exclusion for married joint filers). Brad and Connie have $125,000 of other net investment income, which brings their total net investment income to $225,000. Their modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. Results: The couple is subject to Net Investment Income Tax on the lesser of $225,000 (total net investment income) or $50,000 (the amount the couple's modified adjusted gross income exceeds the $250,000 married threshold). Brad and Connie will owe Net Investment Income Tax of $1,900 ($50,000 times 3.8 percent). Example 3: Diane, a single filer, earns $45,000 in wages and sells her principal residence for $1 million. She has owned and resided in the place for the last decade. Diane's cost basis in the home is $600,000 so her realized gain on the sale is $400,000. The recognized gain subject to regular income tax is $150,000 ($400,000 realized gain less the $250,000 home sale exclusion for singles), which is also net investment income. Diane's modified adjusted gross income is $195,000. Since her modified adjusted gross income is below the single threshold amount of $200,000, Diane does not owe any Net Investment Income Tax.

Q. Does net investment income include interest, dividends, and capital gains of my children that I report on my tax return?

A. The amounts that are reported on your Form 1040 (on Form 8814, Parents Election to Report Child's Interest and Dividends) are included in calculating your net investment income. However, the calculation of your net investment income does not include amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and amounts attributable to Alaska Permanent Fund Dividends.

Q. Will I have to pay both the 3.8 percent Net Investment Income Tax and the additional 0.9 percent Medicare tax?

A. You may be subject to both taxes, but not on the same type of income. The 0.9 percent additional Medicare Tax applies to individuals' wages, compensation, and self-employment income over certain thresholds, but it does not apply to income items included in net investment income.

Q. Is the Net Investment Income Tax subject to the estimated tax provisions?

A. Yes. The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates, and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.

Q. Does the tax have to be withheld from wages?

A. No, but employees can request that additional income tax be withheld from their wages.

Q. Are there taxpayers who are not subject to the Net Investment Income Tax regardless of income?

A. Nonresident aliens are not subject to the tax.

Q. Will estates and trusts be subject to the Net Investment Income Tax?

A. Estates and trusts will be subject to the tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650). There are special computational rules for certain unique types of trusts, such charitable remainder trusts and electing small business trusts.
These answers provide some clarity to questions that many taxpayers have about the new Net Investment Income Tax (or Medicare surtax). Still have questions about your situation? Consult with your tax adviser.

New IRS Compliance Program Targeting Businesses

In an effort to help close the "tax gap," the IRS has launched a new compliance program targeting the underreporting of income by business taxpayers that receive Form 1099-K information returns from credit card companies and third-party transaction networks.

On its website, the IRS stated the program would involve letters and notices going out to taxpayers who may have underreported their gross receipts. If your business receives a Form 1099-K because it accepts payment cards from customers, you may receive one of these letters.

Answers to       Form 1099-K            Questions

Q. What constitutes the "gross amount" of reportable transactions? A. The "gross amount" of reportable transactions means the total dollar amount of aggregate transactions without regard to any credits, charge-backs, fees, cash equivalents, discounts, refunds or any other amounts. Q. When are Forms 1099-K due? A. Information reporting for payment card and third party network transactions are due to the IRS by February 28 (March 31, if filed electronically), of the year following the transactions.

Background: Under the Housing Assistance Tax Act of 2008, banks and other payment settlement entities (such as PayPal) must file the new Form 1099-K information with the IRS. Starting in 2011, Form 1099-K reports the gross amount of reportable transactions for the calendar year. Listed on the forms will be the names, addresses and taxpayer identification numbers of merchants and others accepting credit cards, debit cards, stored value (gift) cards and other third-party payments.

The purpose of the new requirement is to create a paper trail so that the IRS can compare a merchant's card transactions with income reported on the merchant's tax return. An IRS explanation about why the reporting is necessary states: "Third-party information reporting has been shown to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap," which is the difference between the amount of tax money owed and the amount collected.

Exactly how the new IRS 1099-K compliance program will work is not known yet since the tax agency has never had this type of information before. But since the IRS now has the gross amount of reportable payment card transactions reported on a merchant's Form 1099-K, it can match the amount against other information reported on merchants' tax returns.

This is not the typical IRS matching program since the amount on the 1099-K will not be a direct match to what is reported on a taxpayer's return. The IRS will be using the information gleaned from the 1099-K along with information on the tax return.

Who will receive letters? The IRS will send letters to taxpayers based on their returns and Forms 1099-K, Payment Card and Third Party Network Transactions, that show "an unusually high portion of receipts from card payments and other Form 1099-K reportable transactions," the IRS stated.

The IRS has posted five different letters on its website, which will be sent to businesses. The letters inform taxpayers that:

"Your gross receipts may be underreported. We received Form(s) 1099-K, Payment Card and Third Party Network Transactions, showing your total payments from Merchant Card and Third Party Network transactions. The information from these form(s) and your tax return show an unusually high portion of gross receipts from card payments and other Form 1099-K reportable transactions. Your type of business consistently has a much lower portion of gross receipts from card payments and other Form 1099-K reportable transactions, and a higher portion of gross receipts from other sources (e.g., cash and checks)."

Each of the letters asks taxpayers to review the Form 1099-K and their computation of gross receipts for your business as reported on the tax return in question. Taxpayers are instructed to make sure they "fully reported receipts from all sources, including card, cash and checks."

Depending on the type of letter received, taxpayers are given various instructions including:

• "If you don't find any inaccuracies in your review, no further action is required at this time."

• Within 30 days, fill out and return IRS Form 14420, Verification of Income, which is used "to explain why the portion of your gross receipts from card payments and other Form 1099-K reportable transactions may be higher than expected."

• "If you believe you filed your tax return correctly, please provide a written explanation telling us why the portion of your gross receipts from card payments and other 1099-K reportable transactions may be higher than expected."

Taxpayers are warned that "failure to respond may also result in a proposed assessment or further compliance action."

As with many other tax requirements, the new 1099-K compliance program makes it important to keep good records so you can respond to IRS requests for information. Consult with your tax adviser if you have questions about payment card reporting or receive a 1099-K letter.

Ohio Incumbent Workforce Training Voucher Program

Ohio Incumbent Workforce Training Voucher Program

Registration begins January 7^th, 2013

$20,000,000 available.  First come, first serve.

What is it:  A 50% tax credit based on employee "training" cost. The maximum credit is $4,000 per employee ($500,000 per employer for all employees).  Employees must be Ohio residents.

What "training" qualifies:  training opportunities that expand and improve employee's workforce skills and develop his or her opportunities for growth within the company are eligible.  Training may include: on-site or off-site training, classes at an accredited institution, training that leads to an industry certificate, improved efficiency training (Six Sigma), and upgrade of computer skills (Excel, Access, etc.). 

What "training" does NOT qualify:  Continuing education classes required for professional certification, soft skills, GED, profit oriented courses (Dale Carnegie), travel costs, etc.

What industries:  Training must be related to one of the "targeted industries" as defined by the state of Ohio.  Those industries include:  Advanced Manufacturing, Aerospace and Aviation, Automotive, BioHealth, Corporate Headquarters, Energy, Financial Services, Food Processing, Information Technology and Services, Polymers and Chemicals.  Please note that an employee in a retail or service function is not eligible.

When:  Training will have to start on or after February 7^th, 2013 and be completed by June 30, 2013. 

For questions or to receive more information contact:

Flagel Huber Flagel

www.fhf-cpa.com

937-299-3400 (Dayton)

513-774-0300 (Cincinnati)

or

Ohio Development Services Agency

http://development.ohio.gov/bs/bs_wtvp.htm

An Easy Resolution

It's a new year and you probably have a whole list of resolutions. You may have even had a chance to break one or two already.

Here's an easy one to keep: make an appointment with us to review your financial plan. Just take a moment while the idea is still fresh in your mind and give our office a call. We can schedule a convenient time for you, and the meeting will only take about an hour. Then you can cross it off your list and feel a sense of accomplishment.

Much like health checkups for you or vehicle maintenance checkups for your car, your investment portfolio needs financial checkups. It would be very disappointing to believe that you were making progress toward your financial goals only to find out too late that you were on the wrong track all along. Your financial goals are too important to take that kind of risk.

Please take advantage of our services and either call or click on the e-mail button below. Don't let this year get away from you.