Employers: Be aware (or beware) of a harsh payroll tax penalty

If federal income tax and employment taxes (including Social Security) are withheld from employees’ paychecks and not handed over to the IRS, a harsh penalty can be imposed. To make matters worse, the penalty can be assessed personally against a “responsible individual.”

If a business makes payroll tax payments late, there are escalating penalties. And if an employer fails to make them, the IRS will crack down hard. With the “Trust Fund Recovery Penalty,” also known as the “100% Penalty,” the IRS can assess the entire unpaid amount against a responsible person who willfully fails to comply with the law.

Some business owners and executives facing a cash flow crunch may be tempted to dip into the payroll taxes withheld from employees. They may think, “I’ll send the money in later when it comes in from another source.” Bad idea!

No corporate protection

The corporate veil won’t shield corporate officers in these cases. Unlike some other liability protections that a corporation or limited liability company may have, business owners and executives can’t escape personal liability for payroll tax debts.

Once the IRS asserts the penalty, it can file a lien or take levy or seizure action against a responsible individual’s personal assets.

Who’s responsible?

The penalty can be assessed against a shareholder, owner, director, officer, or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:

  • Be responsible for collecting, accounting for, and paying over withheld federal taxes, and
  • Willfully fail to pay over those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.

The easiest way out of a delinquent payroll tax mess is to avoid getting into one in the first place. If you’re involved in a small or medium-size business, make sure the federal taxes that have been withheld from employees’ paychecks are paid over to the government on time. Don’t ever allow “borrowing” from withheld amounts.

Consider hiring an outside service to handle payroll duties. A good payroll service provider relieves you of the burden of paying employees, making the deductions, taking care of the tax payments and handling recordkeeping. Contact us for more information.

© 2019

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Thinking about moving to another state in retirement? Don’t forget about taxes

When you retire, you may consider moving to another state — say, for the weather or to be closer to your loved ones. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complicated than it initially appears to be.

Identify all applicable taxes

It may seem like a no-brainer to simply move to a state with no personal income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If the states you’re considering have an income tax, look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.

Watch out for state estate tax

The federal estate tax currently doesn’t apply to many people. For 2019, the federal estate tax exemption is $11.4 million ($22.8 million for a married couple). But some states levy estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish domicile

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

How do you establish domicile in a new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:

  • Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party),
  • Change your mailing address at the post office,
  • Change your address on passports, insurance policies, will or living trust documents, and other important documents,
  • Register to vote, get a driver’s license and register your vehicle in the new state, and
  • Open and use bank accounts in the new state and close accounts in the old one.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. We can help with these returns.

Make an informed choice

Before deciding where you want to live in retirement, do some research and contact us. We can help you avoid unpleasant tax surprises.

© 2019

2019 – 06/10 – Don’t mistake kickbacks for gifts

Kickbacks return a portion of the money exchanged in a business transaction as compensation for favorable treatment. They’re illegal, but you may have trouble identifying kickbacks because they’re often disguised as gifts, travel or entertainment. The main difference is the gift-giver’s intent. Your employees shouldn’t accept gifts offered to improperly influence business decisions or that give the impression they do. Tips from workers and vendors often reveal kickback schemes. Also watch out for lavish business entertainment, irregular purchasing behavior and unusual bid solicitation and submission processes.

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Conflicts of interest: When employees aren’t on your side

One of the governing principles of the employee/employer relationship is that employees have a fiduciary duty to act in their employer’s interests. An employee’s undisclosed conflict of interest can be a serious breach of this duty. In fact, when conflicts of interest exist, companies often suffer financial consequences.

Ignorance isn’t bliss

Here’s a fictional example of a common conflict of interest: Matt is the manager of a manufacturing company’s purchasing department. He’s also part owner of a business that sells supplies to the manufacturer — a fact Matt hasn’t disclosed to his employer. And, in fact, Matt has personally profited from the business’s lucrative long-term contract with his employer.

What makes this scenario a conflict of interest isn’t so much that Matt has profited from his position, but that his employer is ignorant of the relationship. When employers are informed about their workers’ outside business interests, they can act to exclude employees, vendors and customers from participation in certain transactions. Or they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. But it’s the employer’s, not the employee’s, decision to make.

Cut off at the pass

Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts — usually because they’re afraid it will jeopardize their jobs or they’re financially benefiting from them. These latter cases can be difficult to detect, which is why your company might fare better by playing offense.

For example, develop conflict of interest policies and communicate them to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical and possibly illegal. Don’t forget to state the consequences of nondisclosure of conflicts, such as immediate termination.

Disclosing all

To help ensure accurate statements, provide employees with a hotline to call if they:

  • Have general questions or concerns about the policy,
  • Don’t understand how the policy relates to their unique circumstances, or
  • Want to report someone who appears to have a conflict of interest.

Also protect your business from conflicted vendors and customers. Before entering into a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.

Maintain standards

Conflicts of interest aren’t always clear cut because what one employer considers a serious conflict might seem negligible to another. But in general, the best way to promote your business’s success is by holding all stakeholders to the highest ethical standards.

© 2019

Fraud du jour: Social Security phone scams


Despite the National Do Not Call registry and features such as caller ID, phone fraud is thriving in the mobile phone era. Using spoofed numbers — which appear to be connected to legitimate government offices and businesses or that resemble your own number — fraud perpetrators say anything and everything to try to steal your money.

Recently, scammers have posed as Social Security officials to steal from unsuspecting consumers. Since January 2018, the Federal Trade Commission has received more than 63,000 reports about this scam. Only 3% of reporting call recipients lost money, but the losses total $16.6 million.

Anatomy of a crime

Here’s how the Social Security scheme works: Criminals call from spoofed phone numbers and tell consumers that their Social Security number has been linked to a crime and has been “suspended.” The callers claim that the consumer’s bank accounts will be seized by the government unless they withdraw money and transfer the amount to gift cards. While the thief remains on the line, the consumer purchases the gift cards. Then the caller asks for the gift card numbers and PINs, supposedly for “safekeeping.” With that information, the fraudster uses the cards or sells them on the black market.

The same callers also usually ask consumers for their Social Security number for confirmation purposes. With this critical piece of personal information, crooks can steal someone’s identity.

Truth of the matter

The truth is that the Social Security Administration doesn’t suspend Social Security numbers, nor does it ask people for their numbers over the phone. And no government entity would ask for payment in gift cards. Criminals hope that you aren’t aware of these facts. They also use fear — of arrest, loss of savings and, in some cases, deportation — and a sense of urgency to get what they want.

Fortunately, you can avoid becoming snared in a Social Security phone scam by following some simple guidelines:

  • If you don’t recognize the number appearing on your caller ID, don’t answer the phone.
  • Install a spam call blocker (available in mobile app stores) and use it for any calls that seem suspicious.
  • If you inadvertently answer a spam call, hang up immediately.
  • Never provide personal information, including bank account or Social Security numbers, to anyone over the phone.
  • Report suspicious calls to ftccomplaintassistant.gov.

Businesses beware, too

Note that it’s not just consumers who might fall victim to phone fraud schemes. Fraudsters also target businesses to secure sensitive information such as bank account numbers, routing numbers and passwords. If you’re a business owner, educate employees about phone scams and implement fraud controls. Contact us for more information.

© 2019

Don’t mistake kickbacks for gifts

Kickbacks return a portion of the money exchanged in a business transaction as compensation for favorable treatment. They’re illegal in the United States and many other countries. But because kickbacks are often disguised as gifts, travel and entertainment, they can be hard to identify.

Intention of the gift-giver

Gifts, gratuities or courtesies of modest value associated with ordinary business practices are usually acceptable. The key consideration is the intention of the giver. Your employees shouldn’t accept any gift offered with the intent to improperly influence business decisions — or that would give the impression of compromising the employee’s ability to act in the best interests of the company.

The same integrity test should be applied in deciding whether to offer a gift to a customer or any other third party. You must take care to avoid not only an actual impropriety, but also the appearance of impropriety.

But defining what is proper or improper with a specific dollar amount can be difficult. Common sense often determines when a gift becomes extravagant or excessive. Professional organizations may provide their members with gift standards, and your employee handbook should set guidelines and spell out your policy.

Detection methods

Kickback schemes in progress often are uncovered when an employee or vendor reports it. So make sure your company operates a confidential fraud hotline. Without an eyewitness, you might look for a pattern of lavish business entertainment or irregular purchasing behavior. Watch for repeated instances of ordering materials at a time other than the optimal reorder point and consistently placing orders with the same vendor.

Failure to follow general bidding policies also signals the need for a closer look. And if costs of materials seem out of line, the cause may be kickbacks in general purchasing.

Bidding irregularities

Kickbacks sometimes sneak into the bidding process when employees accept money in return for advance information about bids. Irregularities in the bid solicitation and submission process — for example, tailoring requirements in solicitation documents to fit the products or capabilities of a single contractor — may be signs of a kickback scheme.

Other signals of possible trouble include prequalification procedures restricting competition and bypassing necessary review procedures. A foreshortened bid submission schedule might allow only those with advance information time to prepare proposals.

Spell out your policy

The line between an acceptable gift offered with integrity and a kickback given as an illegal inducement for favorable treatment can be thin. Contact us for assistance in detecting and preventing kickbacks.

© 2019

Is return fraud cutting into your store’s profits?

For brick-and-mortar retailers, return fraud can be a serious financial threat. There are several types of schemes. But when they’re successful, they all end the same way: Stores issue refunds that they shouldn’t have. Here’s what to look for and how to limit losses.

Myriad schemes

Return fraud perpetrators could be customers, employees or even a criminal gang working with employee accomplices. In perhaps the most common scheme, an individual steals merchandise, and then returns it and insists on a cash refund, despite the lack of a receipt. Or a criminal steals merchandise from one retailer and then returns it to another for a cash refund.

Some thieves do supply receipts — but they’re fake. The “customer” hands over an altered or completely counterfeit receipt that the original payment was made in cash. The retailer then issues a full cash refund.

Other return fraud schemes might involve:

Stolen cards. The thief makes a purchase using a stolen credit card. He or she then returns the merchandise, usually on the same day (before the actual cardholder disputes the charge). The goal is a full cash refund.

Damaged goods. Instead of returning merchandise in new, as-sold condition, customers return items that are worn, damaged or broken. They distract the employee processing the refund from closely scrutinizing the merchandise with conversation or other diversions.

Crooked workers. An employee discounts merchandise and sells it to an accomplice who subsequently returns it to the same employee for a refund at full price. Workers might also steal merchandise and then instruct their accomplices to return it without a receipt for a cash refund.

Reducing crime

You can reduce the incidence of return fraud by making it hard for thieves to get their hands on cash. Issue refunds only when they’re accompanied by an original receipt and only to credit cards. Scan receipts into your point of sale system to ensure they were produced by your store’s registers. If a purchase wasn’t made with a credit card — or if the customer doesn’t have the card on hand — refund it with a store credit. You may also want to ask the customer to produce identification.

To help limit employee-perpetrated return fraud, install security cameras, ensure strong management oversight and provide a confidential fraud reporting hotline. In addition, monitor the frequency and value of returns processed by individual cashiers and investigate employees with higher-than-average return numbers.

Walking a thin line

Although you don’t want to encourage crooks, you may think a generous return policy is essential to providing superior customer service. So that you don’t alienate legitimate customers, state your return policies clearly at every cash register and on every receipt. And contact us for help writing a policy that balances all your priorities.
© 2019