Dangerous W-2 Phishing Scam: Reporting Update

By: Anders Erickson, CISA, CISSP, CRISC

As we reported on March 7, 2017, the IRS has provided notice of a dangerous email scam that is impacting employers, including tax exempt entities. The scammer poses as an internal executive requesting employee Form W-2 and Social Security numbers. The IRS has established a process that will allow employers and payroll service providers to quickly report any data losses related to the W-2 scam. Read the IRS update, Form W-2/SSN Data Theft: Information for Businesses and Payroll Service Providers for more information. If notified in time, the IRS can take steps to prevent employees from being victimized by identity thieves filing fraudulent returns in their names. There also is information about how to report receiving the scam email even if you did not fall victim.

Eide Bailly has cyber security and computer forensic experts that can help organizations prevent or respond to these and other cyber threats.  Please contact your Eide Bailly representative or Eide Bailly’s Cyber Security Leader, Anders Erickson at 208.383.4731 or email aerickson@eidebailly.com for more information.

2016 Form 990 and Instructions Changes

By: Laurie Hanson

The Form 990 and its many schedules remained largely unchanged for tax year 2016. The changes can be summarized pretty quickly, and include the following:

  1. For returns that cannot be electronically filed, the IRS previously considered returns that were delivered via USPS, FedEx and UPS as timely filed if postmarked at least by the due date of the return. The IRS has added DHL Express to this listing. Whenever a return is mailed to the IRS, regardless of the service used, we encourage you to obtain and retain the receipt for proof of mailing. That way, if the IRS later assesses a penalty for late filing, you’ll have proof that the return was filed on time and will be able to easily have the penalties abated.
  2. For tax years beginning after 12/31/15, the first extension for Form 990 and 990-EZ will cover a six-month period. A second extension is no longer available. Previously, two three-month extensions were available. Form 990 is due 4 ½ months after year end. The extension makes the return due 10 ½ months after year end. Thus, the final filing due date with extensions remains unchanged.
  3. The publicly supported charity definition has been updated to include an agricultural research organization under Internal Revenue Code (IRC) 170(b)(1)(A)(ix). This only pertains to IRC 501(c)(3) organizations that are exempt as a public charity and operate as agricultural research organizations. In other words, it doesn’t affect most organizations.
  4. Goods or services with insubstantial value have been indexed for inflation. The value of items valued at $10.60 or less that bear the organization’s name or logo and are given to donors in exchange for a donation need not be disclosed to the donor.
  5. For Hospitals, a few minor changes have been made to Schedule H to better reflect compliance with the final regulations under 501(r)..
  6. Form 990-T has been updated to include a specific line for tax on hospitals that are not compliant with IRC 501(r) regulations. The tax is not new. Only the line on the form is new.

Beyond Form 990 itself, you may be interested in the following nonprofit related tax issues:

If your organization hires veterans, you may be eligible for a credit against the employer portion of social security tax on wages paid to all employees. The credit applies to qualified first-year wages paid to qualified veterans who began work for the organization after December 31, 2014 and before January 1, 2020. The qualified veteran must be performing services in activities related to the purpose or function constituting the basis of the organization’s tax exempt status under IRC 501. The credit is claimed on Form 5884-C.

If your organization has foreign bank accounts with an aggregate value exceeding $10,000 at any time during the calendar year, Form 114 FinCEN, Report of Foreign Bank and Financial Accounts (FBAR) is required to be filed by April 15. A six-month extension is available. Previously, this form was due June 30 with no extensions.

Please feel free to contact your Eide Bailly nonprofit tax advisor to discuss any of the above items.

Dangerous W-2 Phishing Scam Evolving, Targets Include Nonprofits

By: Anders Erickson, CISA, CISSP, CRISC

“This is one of the most dangerous email phishing scams we’ve seen in a long time. It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme,’’ said IRS Commissioner John Koskinen referring to the phishing scam resulting in theft of W-2 information across many industries including nonprofit organizations.

Cyber criminals are using spoofing techniques to disguise an email making it appear as if it is coming from an executive within the organization so that the recipient (usually in the payroll or HR department) feels compelled to respond. The cyber-criminal is asking for a list of employees with their W-2s and intend to use this information in order to fake a tax return and fraudulently collect an employee’s return before they have a chance to file themselves. Cyber criminals may also be asking to wire money as a part of this scam and continue to evolve their scams.

If you believe that your organization has been a victim of these types of scams you can take many steps at the organization level:

  • Report the W-2 thefts to the IRS immediately so that they can begin to help protecting the employees from tax-related identity theft. Forward to phishing@irs.gov and place “W2 Scam” in the subject line.
  • File a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.

If you are an employee who’s W-2 has been stolen:

  • You should review the recommended actions by the Federal Trade Commission at www.identitytheft.gov or the IRS at www.irs.gov/identitytheft.
  • File a Form 14039, Identity Theft Affidavit, if your tax return gets rejected because of a duplicate Social Security number and/or if instructed to do so by the IRS.

If your organization is lucky enough to have avoided such scams so far, there are measures to take to protect and prevent attacks ahead of time.

  • Consult cyber security experts about how to establish a culture of security at your organization
  • Enact policies and procedures safeguarding the handling of W-2s during tax season
  • Encourage your employees to be safe online and avoid to scam site fronting as Tax Return eServices sites.

Eide Bailly has cyber security and computer forensic experts that can help organizations prevent or respond to these and other cyber threats.  Please contact your Eide Bailly representative or Eide Bailly’s Cyber Security Leader, Anders Erickson at 208.383.4731 or email aerickson@eidebailly.com for more information.

Expense Reports – Best Practices for Fraud Avoidance

doug cashBy: Doug Cash, MBA, CFE, CFI, CFCI

Fraudulent expense reporting by employees continues to be a common threat to operations. A recent survey by the Association of Certified Fraud Examiners estimated the median loss from expense reimbursement fraud was $30,000 per year. This is a considerable amount of money for many NPOs!

As with most areas of internal controls, to prevent and/or detect this type of scheme, start with a solid, clear reimbursement policy and then review reimbursement requests to ensure the policy is being followed. Do you have to review 100%? Not likely. Reviewing on a sample basis, as long as the employees are aware this is happening, should be adequate to ensure the policy is being followed. By setting up this “perception of detection”, employees will be less likely to commit a fraud due to the increased chance of their misdeeds being uncovered.

Elements of a strong reimbursement policy include:

  • Timely reporting – reimbursement requests should be submitted within 30 days of the expense
  • Appropriate expenditures – the policy should be very clear as to expectations regarding reimbursement for alcoholic beverages, family members, expensive hotels and restaurants, excessive tipping
  • Proper documentation – if it is not feasible to require original receipts, have the employees responsible for retaining the original receipts so that they can be produced if a reimbursement request is chosen for review
  • Minimum receipt threshold – set a reasonable level, such as $25 or $50, below which a receipt is not required for reimbursement
  • Chargeback provisions – if undocumented expenses are found during the review process, have a clear policy regarding potential charge-back to the employee

We mentioned earlier that testing 100% of reimbursement requests may not be necessary, depending on the nature of your operations and available staff time for review. In addition to reviewing reimbursement requests in detail, which should always include all original receipts, you might consider running a report to evaluate and identify the employees having the most charges below the minimum threshold.

Prevention is always less expensive than detection and Eide Bailly can help protect your organization. Our forensic teams enjoy assisting with preventative measures including all areas of internal controls. Contact us today!

 

Functional Allocation of Expenses – How Difficult Could This Be?

By: Peggy Jennings, CPAPeggy Jennings

The allocation of expenses among program, management & general (M&G), and fundraising functions is sometimes a mysterious process, often left to chance or defaulted to SALY (same as last year), or, in certain unfortunate cases, is determined based on desired ratio outcomes. If done properly, the allocation methodologies can be as diverse as the nature of the expenses incurred.

For those wanting to “do things right,” why the confusion?

One reason is the sometimes over-generalization of the requirements, which themselves are rather sparse in the FASB Accounting Standards Codification (ASC). For example, the definition of program services found in the ASC is “The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the not-for-profit entity (NFP) exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs.” Little wonder that a question often heard is, “Aren’t all of our expenses incurred in fulfilling our mission?”

A more useful reference can be found in the AICPA Audit and Accounting Guide, Not-For-Profit Entities (Guide), which provides helpful guidance in Chapter 13, Expenses, Gains and Losses.

To learn more, read the full article here.

End-of-Year Donation Considerations

By Kyle Fritch  KyleFritch

As the end of the year approaches, many individuals and businesses will be planning their holiday and year-end giving. Charitable donations are an excellent way for donors to reduce their tax burdens while also supporting their communities and nonprofit organizations. Donors commonly have questions about the timing of contributions to ensure they receive a deduction for their charitable donation in the appropriate year. In addition, charities must provide the date that a contribution was received when providing acknowledgements to their donors. These rules are complicated, so care needs to be taken in evaluating these year-end donations.

Charitable contributions are deductible in the year the donation is made. A contribution is considered to be made on the date of delivery to the charity if the donor has irrevocably parted with ownership (possession and control) of the property. The date of delivery rules vary depending on the type of property contributed and how it is transmitted to the charity. Click here for some of the most common donation scenarios, along with the rules pertaining to each type of donation.

Private Foundations and Year-End Planning

anne-stollBy Anne Stoll

As 2016 comes to a close, it is important to set aside time in the midst of holiday preparations and planning for the New Year to ensure you have taken care of your private foundation. Here are a few key things to think about with respect to your foundation as the end of the year draws near.

First, have you made your required minimum distributions? Private non-operating foundations are required to distribute approximately 5% of the fair market value of their assets for exempt purposes every year. Failing to do so will result in an excise tax of 30% of the amount under-distributed, and will not allow the Foundation to take advantage of the 1% reduced tax rate for the next 5 years. If you are unsure if the foundation has required distributions remaining to make, review your most recently filed Form 990-PF and compare the amount of undistributed income calculated in Part XIII to the distributions that have already been paid in the current year. Be sure to make any remaining distributions by the end of the year.

Next consider if it is worth the effort to estimate the amount of distributions needed to qualify for the reduced tax rate of 1% vs the standard 2% tax rate. With a good projection of the average fair market value of your assets during the year, you can determine the level of distributions necessary to qualify for the 1% tax rate. This could allow you to distribute more money for your exempt purpose and take advantage of a reduction in taxes, thus leaving more money for the future.

Finally, review your net investment income so you will not have any surprises at year-end. Look especially at your capital gains/losses. Private foundations are unique in that capital losses can only be used to offset capital gains and are not allowed to be carried forward or back to other years. If you find that you have a net capital loss consider taking advantage of this loss by selling appreciated property. After determining if you will qualify for the 1% or 2% tax rate and looking at your total investment income, review the estimated quarterly payments you have made for the year. Use this time to adjust the final quarter payment if necessary in order to avoid underpayment penalties.

Taking a few minutes during this already busy time to do some year-end reviews can ensure a penalty free and happy new year!