Recently, the Association of Certified Fraud Examiners (ACFE) released its bi-annual “Report to the Nations”.  This comprehensive survey attempts to quantify and “expand the knowledge and understanding of the ways in which occupational fraud occurs and the financial impact this threat has on organizations around the world.”[1]

     “The 2014 edition of the report is based upon 1,483 cases of occupational fraud, as reported by the Certified Fraud Examiners who investigated them.”[2] The ACFE classifies fraud into three major categories:  asset misappropriation, corruption, and financial statement fraud.   Of the 1,483 cases studied the median loss caused by fraud was $145,000.  Although financial statement fraud was the most infrequent variety, it caused the greatest loss in dollar terms.  Asset misappropriation, anything from simple cash schemes to check kiting, was the most common type of fraud with the smallest dollar loss.  This type of fraud, however, tends to fall disproportionately on small to medium sized businesses who can least afford the loss and who are the least likely to recover their stolen property.  

     Interestingly enough, organizations with a tip hotline were the most likely to catch fraud schemes occurring and, once discovered, the fraud schemes tended to be less costly.  Conversely, external audit was the least likely method of detecting fraud.  This realization has been noted repeatedly in multiple ACFE reports from prior years.  Even after the renewed emphasis on fraud risk and audit procedures designed to mitigate that risk from the likes of Sarbanes-Oxley, SAS 99 (AU 316), and media scrutiny on the subject after recent well publicized corporate fraud scandals, the external audit function still falls far behind in detecting and identifying fraud. [3]

     As the economy continues to behave sporadically, there will be even more incentive for fraudsters to find ways to cheat the system.  If you operate a business concern, review the segregation of duties among your staff.  Project a “no tolerance” tone at the top and hold management accountable for internal control procedures.  If you have had turnover of personnel, ensure that  new staff are trained on their proper responsibilities.  No organization can completely remove the risk of fraud, but you can take steps to reduce that risk.  The ACFE has a handy fraud prevention checklist that any organization can use to identify weak controls and processes.  Call the Rodeheaver Group at 301-334-3127 and ask how we can help review and improve your internal procedures and keep you from being the next victim.

[1] Ratley, James. Letter from the President & CEO.  ACFE, 12 Aug 2014.  [2] Ibid     
[3] General facts and findings of The Report can be accessed at: http://www.acfe.com/rttn.aspx.  Retrieved 8/12/14.

 
 
     No provision of the Affordable Care Act (ACA) has caused more controversy than the dreaded individual mandate - and the associated penalty for failure to maintain minimum essential coverage.  What’s more, the calculation and enforcement of said penalty is still mired in controversy, and this is in the reporting year that many Americans may be subject to the penalty, no less!

     Several aspects of the penalty and how it is calculated, however, have been determined via issued regulation.  First, it should be pointed out that there is a rather long and growing list of exemptions to the mandate.   There are affordability, religious, and hardship exemptions to name just a few.  The specific regulations defining these exemptions remain largely untested and murky, at best.  For those taxpayers who do not maintain minimum essential coverage and are not covered by a specific exemption,  a penalty will be calculated and included as part of their 2014 Form 1040.  No taxpayer, however, will be subject to criminal penalty or prosecution for failure of timely payment.  “In addition, the IRS cannot file a notice of federal tax lien or levy property to collect an unpaid [ACA] penalty.”[1]  It should be pointed out, however, that federal tax liens arise automatically - known as a silent lien - when the IRS assesses a tax.  Therefore the ACA only restricts the IRS from filing the tax lien; it doesn’t actually prevent its creation.

     The amount of the penalty for any month is equal to the lesser of:
     1. the amount of the national average premium for qualified health plans that              offer a bronze-level of coverage...or
     2. the sum of the monthly penalty amounts for the tax year as defined by ACA,            where the monthly penalty amounts are the greater of:
         a. an applicable dollar amount per uninsured person...up to a maximum of                300% of the applicable amount, or
         b. an applicable percentage of income as defined by the ACA.
As of this writing, the ACA defines the annual penalty from point a above as:
     $95 for 2014,
     $325 for 2015,
     $695 for 2016, and
     $695 adjusted for inflation thereafter…
The applicable percentage of income (point b) indexes in the same fashion from 1% in 2014 to 2.5% in 2016.

     From this we can draw several conclusion about the penalty.  1)  The bronze level costs mentioned in point one will typically exceed the calculated penalty amount in point two.  Thus, given the determination between the two is defined as the lesser of, the monthly penalty calculation in point two will usually prevail.  Given this assumption, lower income taxpayers will likely fall under the penalty defined in point a - a set dollar amount per person limited to 300% of that dollar amount; while the penalty for relatively higher income taxpayers will simply be a set percentage of their income.

     Taxpayers will have to determine if the penalty, however calculated, will exceed their insurance costs.  As an example, for 2014 an uninsured individual with no dependants earning $50,000 in Maryland would be subject to a penalty of $399 (1% of income over annual filing threshold ).  Base level high deductible coverage for the same type of person currently ranges from $198-439 per month.  

     This obvious incentive to pay the penalty will diminish slightly over time as the annual penalty and applicable income percentages increase.  Also, Congress will be under enormous pressure to eliminate this disparity as revenue falls short of projections due to younger and healthier taxpayers, the very people expected to subsidize the rest of the insurable pool, opt to pay the penalty rather than buy overpriced insurance policies.

     It remains to be seen how these issues will be sorted out.  Call The Rodeheaver Group at 301-334-3127 to find out how we can help you navigate these and other tax issues.            


[1] “Affordable Care Act Analysis”.  Wolters Kluwer publication.  Section 205.  Individual Insurance Mandate.
 
 
     If your organization is self-insured and/or has a Health Reimbursement Account (HRA) plan or non-excepted Flexible Spending Account (FSA) plan, you are required to pay the new Patient Centered Outcomes Research Institute (PCORI) fee directly to the IRS.  This applies to any plan year ending after September 30, 2012 and before October 1, 2019.

     This PCORI fee will need to be paid by July 31 of each year.  It is reported with the filing of Form 720.

What is PCORI?

     The Patient Protection and Affordable Care Act imposes a new Patient-Centered Outcomes Research Institute (PCORI) fee on plan sponsors and issuers of individual and group policies.  For the first year the fee is $1 per average covered life per year; the second year the fee adjusts to $2 per average covered life; and then it will be further adjusted to reflect inflation in National Health Expenditures until it ends in 2019.

Plan end date
10/1/2012 through 9/30/2013
10/1/2013 through 9/30/2014
10/1/2014 through 9/30/2019
PCORI Fee per covered employee
$1
$2
Yet to be determined
Who pays the PCORI fee?

     The insurance carrier is responsible for paying the fee for fully-insured coverage.

     Self-funded plans (including HRAs) must report and pay directly to the IRS.  Also, employers that have fully-insured coverage with an HRA or non-excepted FSA must report and pay the PCORI fee for their HRA or FSA directly to the IRS for any employees participating in the offered HRA or FSA.

How to Calculate the PCORI fee:

     Employers may determine the average number of covered lives by using any of the following methods, but they must use the same method consistently for the duration of any year:

Actual Count: Count the total covered lives for each day of the plan year and divide by the number of days in the plan year.

Snapshot Dates:   Count the total number of covered lives on a single day in a quarter (or more than one day) and divide the total by the number of dates on which a count was made.  (The date or dates must be consistent for each quarter.)

Form 5500 Method:  Determine the average number of participants by combining the total number of participants at the beginning of the plan year with the total number of participants at the end of the plan year as reported on the Form 5500 and divide by 2.

Special counting rule for HRAs and FSAs:

     Plan sponsors are permitted to assume one covered life for each employee with an HRA or FSA.

The PCORI Fee generally applies to HRAs and FSAs in the following ways:
HRA integrated with self-funded medical plan

HRA integrated with fully insured medical plan

Stand-alone HRA limited in scope to dental and vision only

Other stand-alone HRA including retiree HRA

FSA limited in scope to dental and vision only

FSA with no employer contributions

FSA with employer contributions limited: lessor of employee contribution or $500

FSA with higher employer contributions than shown above

Health Savings Account (HSA)

The HRA and the plan are treated as one plan so no separate fee for HRA

PCORI Fee applies to the HRA and is payable by the employer.

No PCORI Fee applies


PCORI Fee applies and is payable by the employer

No PCORI Fee applies


No PCORI Fee applies

No PCORI Fee applies


PCORI Fee applies and is payable by the employer

Not a group health plan; no PCORI Fee applies

Form 720 Quarterly Federal Excise Tax Return and instructions can be obtained at www.irs.gov.  

For more information and help filing this form and any other compliance and tax issue, call The Rodeheaver Group at 301-334-3127.



 
 
     Due to both the market turmoil of recent years and the rapid advancement of communication and information technologies, non-traditional forms of investments, such as self-directed IRAs (SDIRA), have exploded in popularity.  Once the domain of only the most affluent of investors, self-directed IRAs are increasingly being marketed to the general public.  “This growth is likely to continue as baby boomers seek an investment home for their former employer’s 401(k) accounts and the general awareness of these investment vehicles continues to mature.”[1] 

     “Investments within SDIRAs frequently include real estate, closely held business entities, and private loans and can include any other investment that is not specifically prohibited by federal law…”[2]  While investors may find the flexibility of these arrangements appealing, many are unaware of their associated tax traps.  Investors often assume that income from an IRA is automatically tax exempt.  However, an SDIRA, like an IRA, is legally considered a trust and is taxed accordingly.   While investment income earned by an SDIRA is typically excluded from taxation, other forms of income are not given this preferential treatment.  “IRC 512 imposes a tax on income earned by a tax-exempt organization in a trade or business that is unrelated to the organization’s tax exempt purpose.”[3] That is, any ordinary income that the SDIRA may earn from a pass-through entity is considered unrelated and is subject to tax.  Further, since the SDIRA is considered a trust, the entity is taxed at far higher rates than corporations or individuals.  IRC 512 also taxes income from the acquisition of unrelated debt-financed property.  This often affects investors in real estate. While rents from real property are normally considered investment income and excluded from taxation, if the property was acquired with debt a pro-rata portion of the income earned thereon is subject to tax.

     “The above examples demonstrate some (but certainly not all) of the potential problems that clients could face if they decide to invest their retirement account in nontraditional assets.”[4]  Call The Rodeheaver Group today and find out how we can help you safely navigate these complex issues.



[1] Baker, Warren.  “Estate Planning Challenges of Self-Directed IRAs.”  Estate Planning Council of Seattle. 
[2] Baker, Warren.  “Self-Directed IRAs: A tax compliance black hole.”  Journal of Accountancy.  October 2013. 
[3] Baker, Warren.  “Self-Directed IRAs: A tax compliance black hole.”  Journal of Accountancy.  October 2013.
[4] Baker, Warren.  “Self-Directed IRAs: A tax compliance black hole.”  Journal of Accountancy.  October 2013.


 
 
     Welcome to The Rodeheaver Group’s new blog!  We want to become your source of timely financial information and, further, your go-to adviser on the ever-changing tax and regulatory landscape.   We offer tax, advisory, audit, valuation, and fraud prevention services.  Also, check out our new website and see real people delivering real value. 

     With the well publicized budget deficit issues facing the nation, the IRS is becoming more aggressive in its search to close the “tax gap”.  As Forbes magazine noted, “the Internal Revenue Service has increased the hours it spends auditing small businesses...by 30%, while reducing the time it spends auditing large corporations...by 33%.”[1] [italics added]  One area ripe for both taxpayer abuse and IRS inquiry is characterization of shareholder payments from  Sub-chapter S corporations.  Recent statistics suggest that Sub-S shareholders have figured this out.  “Over the past decade and a half...the salaries of Sub-S owners declined as a percentage of total income from 52% in 1995 to 39% in 2007…  During the same 12 year period, Sub-S income doubled, while salaries increased only 26%.”[2]

     Profits earned by an S-corporation are taxed as income at the individual shareholder level whether actually distributed or not.  S-corp payments that represent dividends escape Social Security and Medicare taxes.  Remuneration for services rendered, however, are considered wages and are taxed accordingly.  The issue facing the small business shareholder is how to properly characterize compensation between dividends and wages.  S-corp shareholders face the danger that the IRS will reclassify dividend distributions as wages subjecting them to both payroll taxes and substantial interest and penalties on their late payment.  Further, loans to shareholders from S-corps carry the same risk.  The IRS may claim that these loans are not at arms length and actually represent taxable income.

     Due to several recent high-profile court cases on this subject, the tax court has highlighted several key factors that determine reasonable compensation:

●     Training and experience;

●     Duties and responsibilities;

●     Time and effort devoted to the business;

●     Dividend history;

●     Payments to non-shareholder employees;

●     Timing and manner of paying bonuses to key people;

●     What comparable businesses pay for similar services;

●     Compensation agreements; and

●     The use of formula to determine compensation.[3]

     With the still unresolved budget issues and an increased IRS emphasis on enforcement, these collection matters are not going away soon.  Call the Rodeheaver Group and see how we can help you safely navigate these issues now before they become a problem in the future.


[1] Zerbe, Dean.  “IRS Audits Small Biz More, Big Guys Less”.  Forbes Magazine Online 4/11/10. 
[2] Sanders, Laura.  “The IRS Targets Income Tricks”.  WSJ Online 1/22/11. 
[3] Walters Kluwer.  “Tax Research Consultant v 402.40”  Anonymous Author.  Copyright 2013.