A significant law was recently passed that adds tax breaks and makes changes to employer-provided retirement plans. If your small business has a current plan for employees or if you’re thinking about adding one, you should familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019 as part of a larger spending bill. Here are three provisions of interest to small businesses.
- Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to receive better investment results, while allowing for less expensive and more efficient management services.
- There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
- There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of an existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.
These are only some of the retirement plan provisions in the SECURE Act. There have also been changes to the auto enrollment safe harbor cap, nondiscrimination rules, new rules that allow certain part-timers to participate in 401(k) plans, increased penalties for failing to file retirement plan returns and more. Contact us to learn more about your situation.
In 2018, businesses reported losing over $7 billion dollars to fraud schemes. Small businesses reported losing a median $200,000 due to fraud, while businesses with more than 100 employees reported $104,000 in loses due to fraud. This presents a big issue when it comes to small businesses and what can be done to prevent becoming a victim to fraud. This article will delve into what a fraudster looks like, the reasoning behind committing fraud, common frauds plaguing small businesses and prevention methods that could be put into place for a small business owner.
So, what does a fraudster look like you may ask? There is no way to answer that question because fraudsters take many forms. Fraud can be committed by your most trusted employee, your best friend, and even a relative. The fraud triangle is a tool used by many forensic accountants to determine why someone commits fraud. There are three elements that must be met for a fraud to occur. The first element that must be met is perceived unshareable financial need on the part of the fraudster. This could be unexpected medical bills, car maintenance, or simply just living paycheck to paycheck. The next element that must exist is perceived opportunity. This means that an employee feels that he or she can reasonably commit the fraud and not get caught. And lastly, an employee must be able to rationalize the fraud. This is as simple as saying “the company makes enough money,” or “I don’t get paid enough.” These three elements form the fraud triangle, and have been noted in every fraud case brought to light.
Small businesses encounter many challenges in day-to-day operation. Fraud can easily slip through the cracks. Some of the most common frauds to watch out for are payroll fraud, cash theft, online banking, and fake vendors or invoices. Due to the increasing reliance on technology, paychecks are directly deposited into the employees account without the owner ever signing off. This allows for a payroll preparer to alter his or her pay, click submit, and no one is the wiser. Another fraud plaguing mostly cash businesses is skimming, which is when an employee takes cash paid to the business and puts it directly in their pocket without the owner’s knowledge. This can create a cash flow vs. inventory problem, but it likely won’t be detected until it’s too late. Online banking allows funds to be transferred from the company account to other bank accounts. An employee with access to the bank account can easily send him or herself money from the company account, and without watchful oversight, the transfer would likely go undetected. Lastly, companies should spot check invoices being paid out. Anyone with a computer can put a fake logo on an invoice template and make it seem like a legitimate business expense. Know your vendors and know what products you are actually receiving versus what you are being invoiced for.
Though it may seem impossible for a small business to deter and detect fraud, there are internal controls that can be put in place to ensure that you are not the next victim of the 2,500 plus cases of fraud committed annually. One of the best internal controls in my opinion is the separation of duties. The person that approves invoices to be paid should not be the one writing the check to pay the vendor. Ideally a business should have a third person involved to sign the check before it is sent out. Another internal control is to create a control environment. Basically, promote ethical values and integrity within your business at all times. This could even include a way to discreetly report fraud as 40% of all reported frauds in 2018 were discovered because of an employee tip. A final internal control is an internal audit. Randomly select work done by employees with financial roles within your business to ensure accuracy and that company procedures are being followed.
One of the most important sayings I was taught throughout my tenure at Georgia Southern University (Go Eagles!) is “Trust but verify.” Trust that your employees are being honest and ethical, but verify by setting up internal controls and having appropriate checks and balances within your organization. Although you may think you know and fully trust your employees, you never know what their true ulterior motive may be.
All statistics taken from the 2018 Report to the Nations published by the Association of Certified Fraud Examiners. A copy is available for download at https://www.acfe.com/report-to-the-nations/2018/default.aspx.
T. Chase Matthews
Chase is a Certified Fraud Examiner with KRT, CPAs and is double jointed in his hands and arms.
Many business owners ask: How can I avoid an IRS audit? The good news is that the odds against being audited are in your favor. In fiscal year 2018, the IRS audited approximately 0.6% of individuals. Businesses, large corporations and high-income individuals are more likely to be audited but, overall, audit rates are historically low. There’s no 100% guarantee that you won’t be picked for an audit, because some tax returns are chosen randomly. However, completing your returns in a timely and accurate fashion with our firm certainly works in your favor. It also helps to know what might catch the attention of the IRS.
A variety of tax-return entries may raise red flags with the IRS and can lead to an audit. A few examples:
- Significant inconsistencies between previous years’ filings and your most current filing.
- Gross profit margin or expenses markedly different from those of other businesses in your industry.
- Miscalculated or unusually high deductions.
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them ― for example, auto and travel expense deductions. In addition, an owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can catch the IRS’s eye, especially if the business is structured as a corporation.
If you are selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call. Many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner, these are SCAMS. You can visit this link to our Facebook page https://www.facebook.com/KRTCPA/photos/a.311875905506380/2872721492755129/?type=3&theater for an example of scam letters.)
Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS chooses you for an audit:
- Ask questions so you can understand what the IRS is disputing (it’s not always crystal clear).
- Gather the specific documents and information needed.
- Respond to the auditor’s inquiries in the most expedient and effective manner.
- Don’t panic if you’re contacted by the IRS. Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one will happen in the first place.
As always, if you have any questions, contact us.