How to stay compliant with out-of-state taxes and minimize penalties

States are hungry for revenue, which means nexus questionnaires that determine the connection required for a state to be able to levy a tax on a person or company are on the rise.

States send out these questionnaires after identifying potential non-filers. One of the ways they do this is by auditing in-state companies that do business with out-of-state vendors. In this environment, to be compliant and minimize your potential penalties, it’s important to stay proactive.

“It’s a matter of understanding your exposure,” says Deborah R. Kovachick, CPA, MT, director of tax at SS&G. “It really depends on the facts and circumstances of your unique company.”

Smart Business spoke with Kovachick about why nexus has become a hot topic and what to do about it.

How has the definition of nexus evolved?

Nexus used to require a physical presence in a state, such as owning or renting tangible property or having employees who performed services in the state. Today, not only are more companies conducting business on a multi-state basis, but taxes also may capture a broader range of activities.

In 1959, Congress enacted Public Law 86-272 to provide protection from state income tax for out-of-state sellers of tangible personal property whose activities in a state didn’t go beyond solicitation of sales. This law doesn’t apply to state gross receipts taxes, sales and use taxes or franchise taxes, so the nexus threshold is lower for these taxes.

What do Internet sales mean for nexus?

Internet sales have caused states to lose tax revenue from people who previously purchased products from in-state retailers and paid sales tax. At some point, federal legislation on Internet sales will even out the playing field, but it’s still stalled in Congress.

Today’s situation puts a spotlight on nexus and filing responsibility. It has caused some states to change tax statutes or how they interpret statutes to recapture lost revenue. For example, a company may have no other contact with a state, but if sales go over $500,000 or apportionment factors in that state are greater than 25 percent of total apportionment, nexus could be established.

Will states ever have uniform rules?

No, the country is just too vast, both geographically and culturally. The states and their constituents need and want to control how they generate tax revenue.

How can businesses stay in compliance?

When initiating business in a state or starting a new business line, a company must consider the ramifications on its state tax filing requirements.

As for old activities, there may be no statute of limitations. If no returns have been filed, states can go back to when a company started doing business there and assess tax, interest and penalties. The penalties can be severe — 25 percent or more in some states on top of the tax assessed — and interest can really add up.

Those at risk should consider investing in a nexus study to determine their exposures. This includes:

  • Businesses with a heavy concentration of sales in a state where they are not filing.
  • Companies providing services to clients and conducting activities in a state that go beyond the solicitation of sales of tangible personal property.
  • Owners who are considering selling, to see if eliminating or reducing exposure can provide a clean bill of health to potential buyers and prevent reductions in the business selling price. State tax exposures are a hot topic during due diligence.

How does a nexus study work?

Nexus studies start with fact gathering to understand where and how a company is conducting its business and the volume of business in various jurisdictions.

After tax experts determine where there are filing requirements, they can help calculate potential exposure — tax, interest and penalty — in each jurisdiction. Then, you can make an informed decision about whether or not to take action. If you decide to reduce or eliminate that exposure, a third-party can approach the state to minimize the look back period and generally get any penalty abated by negotiating a voluntary disclosure agreement with the state.

Only by being proactive and determining where you have nexus can you understand any tax exposure.

Insights Accounting & Consulting is brought to you by SS&G

How to review your mid-year financials to boost your paycheck, reduce taxes

Most taxpayers, when you get down to it, have similar tax returns year after year.

But some years, your situation may have changed and as a result, your tax position will be affected. For example, did you get married? Have you had a baby or adopted a child? Is a son or daughter now in college or perhaps you returned to college yourself?

If you have become accustomed to the idea of a big refund equating “bonus,” it may be time to understand what that means. “In short, you are loaning the government your money interest-free throughout the year, instead of having that money in each paycheck. Mid- year is a great time to look at how your withholding is shaping up,” says Jenna Staton, EA, Tax Manager at Skoda Minotti.

Smart Business spoke with Staton for some tips as to why it’s a good time to check your tax situation now to help position you favorably for the rest of the year.

What is the first step I should take when I review my mid-year tax situation?

Make sure you’re claiming the correct number of exemptions. Remember, the more exemptions you claim on your W-4, the less that is deducted from your paycheck. This is especially important for taxpayers who have been married or plan to get married in 2014. Even if you get married on Dec. 31, you’re deemed to be married all year.

The same is true for divorce situations. You might have had your withholding as ‘married;’ if you change to ‘single,’ your tax rate and bracket could change significantly.

If I have medical expenses, what should I keep in mind?

There is a medical expense threshold of 10 percent of your adjusted gross income. Meaning, if you make $100,000, you’d have to spend $10,000 in medical expenses out of pocket before you’d receive $1 of deductions. Most taxpayers do not qualify for a medical expense deduction.

However, at this point, you can look at the first half of the year medical expenses and group those together then look ahead at the remaining months; perhaps you need glasses or dental work — you want to get it all done within the calendar year because that’s when you may have a combined amount that provides the medical expense deduction.

Remember, you can’t deduct contributions to your Health Savings Account or your Flexible Spending Account.

What is important to remember about charitable donations?

People often donate their clothing and household items but don’t know what they should list as the value. I always send them to the Goodwill website. It’s a very good website that lists how much their items are worth.

What about contributions to a 401(k) account?

Generally, you make a pre-tax contribution through your company payroll of up to $17,500. Those age 50 and over may be able to contribute a catch-up contribution by adding $5,500 to their deposits this year, for a total limit of $23,000. This money will grow tax-free for retirement.

Can you give some advice about preparing for storm damage?

It’s always good to have pictures or videos of your personal belongings before a situation arises; you can use them to substantiate the value of the item. The more detail and documentation you have, the better.

Back up records electronically via CD, DVD, flash drive or external hard drive and store it and other pertinent paperwork at an alternate location such as a safety deposit box or the cloud. As far as important papers, IRS. gov stores prior tax returns if they become lost or damaged in a weather- related situation. 

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to achieve a lean finance department in your company

As successful companies grow over time, certain systems — particularly within the finance function — are often overlooked. As a result, multiple software applications are typically pieced together in order to extract and maintain data. Processes become redundant in order to get information into these various systems and precious time is wasted along the way.

Running a lean finance department requires stepping back and taking a fresh look every once in awhile.

“I often see software accounting packages being used to track the basic activities of the business,” says Steven E. Staugaitis, CPA, Director, Audit & Accounting at Kreischer Miller. “These packages are often accompanied by an excessive amount of spreadsheets to track various aspects of the business — from budgets and sales data to creating the monthly internal financial statements.”

Smart Business spoke with Staugaitis on the advantages of operating a lean finance department and how to accomplish it.

What do you look for in a lean finance department?

I want to observe six key elements: 1) The accuracy of the information being generated, 2) the timeliness of the information being prepared, 3) the effectiveness of the internal controls, 4) the overall quality of the reports themselves, 5) the efficiency of the technology that’s being used and 6) the overall sufficiency of the personnel within the department.

Can you provide some more detail?

The accuracy of the information has to do with the completeness of the information or, said another way, the number of adjustments that are being posted in any given period.

Timeliness involves the speed at which the department generates a set of internal financial statements. Well-run organizations will be able to close their books at the end of each month within five business days. But anywhere under two weeks is a pretty healthy indicator.

The internal control structure has a lot to do with how personnel are allocated within a department. In a smaller organization, some level of owner oversight or involvement is a good way to mitigate risk.

The quality of the reports really has to do with the type of information being provided on a monthly basis. Look for key performance indicators or other types of dashboard reporting in addition to a simple balance sheet and income statement.

The efficiency of the technology involves how well the business is using its systems and if it is making sufficient use of them.

The personnel aspect has to do with not only staffing levels, but also the overall quality of your people.

Where would you begin to improve this?

I usually suggest starting with the end users or the information recipients and understand what they need. It’s senseless to create reports no one ever uses just because that’s the way it has always been done.

Secondly, take a hard look at your existing technology to see if there are features or software modules that are not being used or are being used improperly. There may be some real opportunities to improve functionality without having to make major investments in a new system.

Lastly, take a close look at your personnel. Evaluate whether you have enough resources or need to make some changes.

What are some of the obvious places to find waste?

The area I tend to see the most waste in is often redundancy or duplication of efforts. So many businesses don’t really make effective use of their technology; specifically, I often see excessive use of spreadsheets in addition to accounting software to manage the finance side of the business.

At what point would you consider a finance department to be running lean?

I think you simply see it in the results of the business. Well-run departments are able to improve turnaround time of financial information and drive improvements throughout other aspects of the business. The only way to track improvements is to make them definable and measurable. Then you can compare your performance to yourself, your peers or other well-run companies. So where do you stand?

Insights Accounting & Consulting is brought to you by Kreischer Miller.

Benchmark your employee benefit plan by comparing survey trends

Employee benefit plan sponsors are going in the right direction. Employees are saving more, fiduciaries are trying to step up and everyone is working together to make the golden years really golden.

“That’s a good thing to see, and hopefully — barring another economic meltdown — we’ll all get there,” says Bertha Minnihan, an assurance partner and national practice leader of Employee Benefit Plan Services at Moss Adams LLP.

“Plan sponsors have realized administering benefit plans in today’s complex environment isn’t easy and there are consequences,” she says. “The employees are demanding more information, a solid plan and strong retirement vehicles, and I think employers are stepping up.”

Moss Adams recently conducted its 2013 Employee Benefit Plan Benchmarking Survey, covering Washington, Oregon, California, Arizona, New Mexico and Kansas, which features an in-depth look at 401(k) plans and other benefit plan trends. Areas covered included plan participation and performance, employee matching, investment options, loans, plan fiduciary, fee disclosure requirements and plan audits.

Smart Business spoke with Minnihan about the survey’s results.

What were the key findings from the survey?

There were several positive findings based on this survey, when compared to prior results. Participation in plans continues to grow with the economic recovery. About 36 percent of respondents said that their participation is between 80 to 100 percent.

Auto-enrollment is increasing; about 40 percent were offering auto-enrollment. Automatically enrolling employees at a certain percentage, usually 3 or 4 percent, which they can either opt out of or increase was utilized only by a few employers a couple of years ago. It’s a good way to show employees they can save for retirement.

The employer match is on the rise with 80 percent of plans offering it. During the recession, the matching contribution was one of the first things to go. The survey found 23 percent of those who eliminated the match reinstated it in 2013. Matching is a strong employee attraction tool in certain parts of the country like Silicon Valley.

In addition, plan fiduciaries are being more proactive, and fiduciary and governance awareness is increasing. This correlates to how often governance committees are dissecting investment fees, for example.

How else did the survey depict employees?

Employee education is evolving, and employees are becoming savvier. This is something industry experts have been telling employees for years. Use your education. Understand your investments. Maximize the match the company is offering, and participate — because you can’t build a nest egg if you don’t have a nest.

Why do you think companies have gotten better at fiduciary responsibilities?

Plan sponsors realize the retirement world has become complex. It’s becoming paperless with more investment options. In addition, there are more regulatory requirements from the Department of Labor (DOL) and IRS. Form 5500 is asking for more information, and the DOL has even started auditing the auditors. More oversight always funnels down to the plan sponsors as a result of the regulators and auditors who knock on their door with questions.

New fee disclosure requirements began in 2012, but the survey found only 54 percent of plan sponsors are fully prepared to comply with these disclosures. Why the lag?

The DOL wanted transparency so plan participants could see what they pay. Historically these fees were netted against the rate of return, the earnings the employee accrues, and they were never grossed up. The fee disclosures are becoming a part of business, it’s just rolling out slower than anticipated.

Many employers have competing priorities. There is a lot of reporting that goes on for the other kinds of plans a sponsor maintains, such as health and welfare plans. Others are still trying to get their arms around the requirements.

So far the fee disclosures haven’t created much change in investment behavior. Sponsors might start to drag their feet because after talking to their peers, they ask, ‘What does this really affect?’ But the DOL and IRS are asking about it when they audit plans. They want to know how sponsors are educating employees, and if they are providing the required fee disclosures in a timely matter. Plan sponsors will get there eventually.

Remember, your employee benefit plan is an important part of how you compensate your employees for their service — and it’s one you need to monitor carefully if you want to stay in compliance, avoid penalties and provide real value to your employees.

Insights Accounting & Consulting is brought to you by Moss Adams LLP

How to spot red flags of possible fraud in your finance department

Fraud in the finance function may take a variety of forms — financial statement fraud, misappropriation of assets, illegal acts, bribes, or violation of laws or regulations. There are many warning signs or red flags that indicate a pattern of fraud, and often these items are most visible to the finance department.

There are three elements that are needed when a fraud is committed: Motivation, rationalization and opportunity, says Richard Snyder, a director in Audit & Accounting at Kreischer Miller.

“Motivation and rationalization are driven by an individual or individuals, but opportunity is often created by the company. In many instances, stakeholders and executive management teams place a high deal of trust with individuals based on past experience, long-time working relationships and reputation,” Snyder says.

“An overreliance on certain key financial people, with reduced internal controls and oversight in place, may create the opportunity for fraud.”

Smart Business spoke with Snyder about signs that may indicate fraud is occurring.

What are the costs of fraud in an organization?

There are very real costs which impact organizations when fraud occurs, including:

  • Financial loss, hardship or bankruptcy.
  • Misstatement of financial statements.
  • Distrust of the organization by employees, customers and vendors.
  • Lost or reduced future sales.
  • Damage to an organization’s reputation and/or brand.
  • Damage to key relationships with service providers — bankers, insurance brokers and accountants.

There also are many indirect costs such as legal fees, audit costs, fines or penalties, and the lost time of executives and employees created by dealing with a crisis brought about by the fraud.

What are some of the red flags or warning signs that fraud is occurring?

According to a survey by the Association of Certified Fraud Examiners, the average length of time a fraud occurs is 18 months. Misappropriation of assets accounted for a majority of the frauds that occurred but were the least costly, while financial statement frauds were less common but caused the greatest amount of loss to an organization. There are many warning signs/red flags, including:

  • Significant and subjective judgment in estimates.
  • Earnings pressures related to banking covenants, bonuses or profit levels.
  • Unexpected areas of profitability.
  • Recurring negative cash flows during periods of earnings growth.
  • Revenue reported after period cutoffs.
  • Abnormal selection of accounting policies by management.
  • Omissions or inaccuracies in financial data.

Many times, the finance function will observe these warning signs before other individuals/departments within an organization due to their access to financial information. If the individual committing the fraud is a member of the finance team, however, the fraud may be more difficult to uncover.

How can organizations do a better job of preventing fraud?

Fraud prevention begins with a ‘tone from the top,’ starting with owners and stakeholders, the board of directors and the executive team. Their actions speak volumes to an organization’s employees that fraud will not be tolerated.

Continued oversight of financial results and follow-up on unexpected variances is vital. Establishing conflict of interest, code of conduct and whistleblower policies should be a priority if not currently in place and should be distributed to all employees.

Organizations should complete a periodic fraud risk assessment to identify areas of susceptibility and look at potential red flags and fraud indicators. Many organizations do not discuss fraud, but an open dialogue between management and employees is an excellent way to reinforce individual responsibilities, identify areas of fraud risk and brainstorm ways to improve the organization’s internal control.

A proactive approach to addressing fraud prevention may ultimately help an organization save time, money and embarrassment in the future.

Insights Accounting & Consulting is brought to you by Kreischer Miller

For business success, blend technical, specialized and development training

Some professions require technical education because of state and certification governing board rules. Others require training for niche specialties, like having in-house accountants learn about specific tax updates that affect your manufacturing operations.

Beyond those requirements, in order to attract and retain the best people and improve their skills, you should consider providing regular professional development for your workforce.

By looking at the full person and what he or she needs to succeed, you can create customized training that addresses areas like leadership, business writing or public speaking, says Barbara McDowell, M.Ed., learning manager at SS&G.

“I think anybody — if they’re in the business world — needs to stay abreast of education opportunities for their role,” McDowell says. “If a company is relying on its people to drive it forward, to innovate, to bring change, to not just keep the status quo but to be able to be flexible and move with the times, you need education.”

Smart Business spoke with McDowell about best practices for creating the right mix of professional development for your employees — and yourself.

Why should companies pay for and support continuing education?

Recently someone who has been in the same role for nearly 20 years asked how they would benefit from outside education. If you spend your entire career doing the same thing the same way, how do you even know what’s new and available to make your work more efficient?

It’s important for any company to identify the basics of what their people need to grow and then commit to providing it. Otherwise, you’re going to have people who are ‘stuck’ — they come in, check the boxes and do the work, but outside of their walls they don’t know what’s new and innovative.

How can you start finding the right mix of employee training?

Get an assessment of what skills need to be developed. A good time for this is during an annual review. You can develop a pre-questionnaire, and then use that for a discussion during the progress review itself.

Also, keep in mind that there may be more room for improvement than you think. For example, if you’re already a good presenter that doesn’t mean you shouldn’t hone and craft that skill.

What you do with this information will depend on the company’s size. Larger companies may have a training manager or HR department that can use resources like emails from industry associations to create individual learning plans. In other cases, CEOs might directly contact groups they belong to or service professionals for ideas.

It’s always a good idea for executives to reach out to their peers to ask what they do for their staff. You don’t have to reinvent the wheel, but it’s important to have some customization. In some cases, booking a class and then putting everybody into it based only on their title, not strengths and weaknesses, is a mistake.

What about using online versus in-person training?

In terms of training and development, e-learning is the future with its inherent flexibility. If you have offices in multiple states, you can’t follow the old model of bringing people in for physical classes. Even broadcasting training to remote offices can be tough to fit into people’s schedules.

However, it is hard to take an all-day class by watching your computer screen for eight hours. When possible, effective e-learning should be in shorter blocks.

How else can you ensure you provide the right education?

It’s a good idea to keep a log of quality classes or instructors. If you send someone to an outside conference or training, get feedback. How was the speaker and content? You might decide it makes sense to bring in a certain instructor.

Before you set up a class or book a speaker, look beyond survey or evaluation results. It’s beneficial to ask for the names of people who have taken a class with a specific instructor or companies who used them. Then, call them directly to ask: ‘If there was anything that you would want them to do differently, what would it have been?’ ●

Insights Accounting & Consulting is brought to you by SS&G

How to choose a firm to handle IRS Form 5500 filings

Danielle B. Gisondo, CPA, partner, Skoda Minotti

Danielle B. Gisondo, CPA, partner, Skoda Minotti

The Internal Revenue Service (IRS) requires companies to file a Form 5500 to provide information about their benefit plans. If the company has 100 or more eligible participants that also means the benefit plan has to be audited.

“The 5500 form is an informational return filed with the Department of Labor (DOL) on an annual basis. It includes not only plan-specific information but financial information, which is where the benefit audit comes in,” says Danielle B. Gisondo, CPA, a partner at Skoda Minotti.

Companies are required to have an independent accounting firm conduct the benefit plan audit. Smart Business spoke with Gisondo about the audit process and how to choose a firm for the work.

What should you look for in selecting an accounting firm?

Find a firm that has benefit plan experience. There are accounting firms that audit only one or two plans throughout the year, but you want someone with a wide variety of experience auditing plans. Some firms don’t have a specific department for these audits, doing them as part of the overall accounting and auditing practices. Firms that specialize in this arena have a separate department and dedicated professionals.

Ask how many plans the firm audits, and the size of those plans. Check for membership in the American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center. This ensures they have the required education and access to benchmarking and industry data that can be helpful for the audit work and throughout the audit process.

There are specific continuing professional education requirements from a benefit plan industry perspective, and the accounting is unique and definitely different than for a regular audit of a financial statement.

What do accountants look for in the audit?

They’re testing for contributions coming into the plan, making sure participants have proper amounts withheld from paychecks and money is deposited in a timely manner into the plan. Investment elections are reviewed; if contributions are to be deposited into five different mutual funds, accountants ensure money goes into the right funds.

Distributions also are tested, whether it’s money rolled over into a new plan or making sure a loan is repaid over the proper time period.

It’s really about testing samples of transactions into and out of the plan. Then financial statements are prepared for filing along with Form 5500.

Where do problems usually arise?

Many times it’s on the contributions side — a participant wanted 3 percent withheld but the plan sponsor or third-party administrator (TPA) withheld 5 percent. Some employers do not deposit employee withholdings on a timely basis with the trustee or custodian that handles the funds.

On the distribution side, there are situations where participants took out more money than they had vested in the plan and it didn’t get approved by the proper party at the TPA or plan sponsor.

What manpower commitment is required for the audit?

Depending on the company’s size, the firm will work with the human resources director or accounting department. If the accounting firm has a specific audit process, it should only require a few hours of pulling information together on the company’s part, while having someone available for questions when the audit work is being performed. Depending on the size of the plan, field work runs from one day to a week.

The entire process, starting with the request for information and ending with a completed financial statement, takes about four to six weeks.

Does the firm you use make a difference?

Both the IRS and DOL conduct independent plan checks, and could randomly look at completed 5500 filings and audits. If an accounting firm missed something — maybe the plan wasn’t compliant or didn’t have the proper amendments — those plans could be disqualified. Then all contributions going to the plan could be taxable, even though the plan is tax-exempt.

You definitely want a reputable accounting firm with experience doing benefit plan audit work; any mistakes could be costly.

Danielle B. Gisondo, CPA, is a partner at Skoda Minotti. Reach her at (440) 605-7132 or [email protected]

For more information or to have a confidential conversation with Dani, please call (440) 605-7132.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How to understand tax implications of doing business overseas

Richard J. Nelson, CPA, director, Tax Strategies, Kreischer Miller

Richard J. Nelson, CPA, director, Tax Strategies, Kreischer Miller

It used to be that only very large companies were doing business overseas. As more small and midsize companies enter the international marketplace, they must learn how to navigate tax laws related to conducting business in foreign countries.

“These tax laws are often broad and complex, and companies need to know how to minimize their combined taxes,” says Richard J. Nelson, CPA, director of Tax Strategies at Kreischer Miller.

Smart Business spoke with Nelson about what companies need to consider and how to manage the tax implications of doing business overseas.

What do companies need to consider in terms of taxes related to international business?

The first, and most important, decision is what to do regarding profits and cash from overseas operations. Are you planning to bring profits back to the United States right away or will you seek a deferral strategy that will leave cash and profits overseas for the time being? The answer to that question determines how overseas operations are structured.

A deferral structure is preferable when you want to keep profits offshore for a significant time and the foreign tax rate is lower than the U.S. tax rate. In order to defer U.S. tax, the foreign entity must be treated as a corporation for U.S. tax purposes. The goal is to move as much income as possible to this entity, and to defer U.S. tax until earnings are brought back here.

What problems do companies encounter with the deferral strategy?

Some pitfalls include matching of foreign tax credits, Subpart F rules and transfer pricing rules.

Proper planning is needed to ensure foreign taxes paid are credited to offset U.S. taxes. Subpart F rules, if applicable, make foreign profits taxable in the U.S., even if the earnings are not repatriated. Poor planning in these two areas could result in paying a higher overall effective tax rate on the same income.

Transfer pricing rules are designed to ensure that the transfer of goods from the U.S. company to the foreign company are priced fairly so the U.S. collects its fair share of taxes on the profit. If the Internal Revenue Service challenges your pricing, you could face significant penalties.

Does a non-deferral strategy pose pitfalls as well?

In a non-deferral strategy, the tax implications are not nearly as complicated. Generally, the foreign company is established as a ‘pass through’ entity, or you can check a box to have it treated as a disregarded entity or pass through entity. With this structure, the U.S. taxes the income of the foreign corporation and foreign tax credits are available to offset any U.S. tax on current profits. There are no additional U.S. taxes when the money is repatriated.

Under this scenario, you don’t need to be concerned about transfer pricing rules, at least from a U.S. perspective, or Subpart F rules. This structure provides the most flexibility and is well suited to U.S. companies that are S corporations with overseas operations.

Are there tax incentives for a U.S. company doing business overseas?

If you are selling products overseas that are manufactured in the U.S., you may be able to take advantage of an Interest-Charge Domestic International Sales Corporation (IC-DISC). You set up a separate corporation that makes an IC-DISC election and is, by law, exempt from federal income tax. A commission agreement is entered into between the related exporter and the IC-DISC. The related exporter pays the commission to the IC-DISC, which gets a 35 percent tax deduction. The IC-DISC then pays the commission to its shareholders, who are individuals, as a qualified dividend, which is taxed at 20 percent. The overall savings is 15 percent.

Can companies manage the various tax scenarios internally?

Because of the many complexities involved in doing business internationally, there is a lot of expertise required in planning a strategy to minimize the company’s overall effective tax rate. Seeking competent advice is crucial to avoid the many pitfalls that you may encounter when venturing overseas.

Richard J. Nelson, CPA, is a director, Tax Strategies, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

Learn more about tax strategies.

Insights Accounting & Consulting is brought to you by Kreischer Miller

How to monitor the security and compliance of your cloud providers

Christopher Kradjan, partner, Moss Adams LLP

Christopher Kradjan, partner, Moss Adams LLP

Looking to save money and focus on core competencies, business owners are turning to cloud solutions — where someone else hosts their systems and manages their infrastructure. However, by using a third party, companies can lose the transparency they previously had with respect to the security, operations and controls around the technology.

“It’s put a premium on doing due diligence on the provider upfront to set a baseline understanding of what the cloud providers are doing — and ongoing how they deliver their services,” says Christopher Kradjan, a partner at Moss Adams LLP.

Smart Business spoke with Kradjan about cloud services risks, as well as cloud provider audits that are setting industry benchmarks.

What are the concerns with receiving services from a cloud provider?

When businesses self-hosted, they could observe and directly control the systems to understand if the systems were performing as expected, making changes as necessary. Now, they lose a lot of that transparency working with a third party.

With the ongoing cloud-based operations, companies want to see inside the operations to track performance, such as the system’s security and availability, its functional processing integrity, and the practices around maintaining privacy and confidentiality of the data.

What do business owners need to consider before selecting a cloud provider?

First, look at your current methods of using technology to understand the costs, staffing and implications of how you are delivering services now. Then identify the new system’s requirements and how you want it delivered.

Properly screen vendors through the request for proposal and procurement process, including taking time for demonstrations. Once you’ve narrowed it down to finalists, do reference check references to ensure the systems will work as expected, both from a technical standpoint and being able to achieve your expected ROI.

There are large, well-known cloud providers, but more are small businesses in their startup phase or still building out market share. They lack sophisticated infrastructure, raising questions about their long-term financial viability. Also, if they are successful, their ownership could sell the business to another provider.

You want a reliable vendor with staying power, but in order to have a continuity of operations, contractually you need to know who owns the data and have exit strategies if the vendor sells or goes out of business.

How should you monitor cloud services?

You need a good vendor management program that looks at the risks associated with each vendor and benchmarks the complexity of the solutions to determine the level of monitoring required. The sophistication of the data, level of importance, what it’s automating and its criticality to the business drive backward what is implemented.

If a business takes the time to do this properly, it winds up stratifying cloud providers into very low risk all the way up to moderate and high-level impact to create monitoring systems accordingly. High-risk areas may require vetting with a due diligence questionnaire or site visit, as well as regular reports from the cloud provider.

How can external audits help in this space?

Companies often ask cloud providers for insight into their business, and providers are continually filling out questionnaires. Therefore, many cloud providers are using SOC 2 (Service Organization Controls) reports, which are based on standardized attestation standards that measure how well the cloud provider is providing its services. The examination can attest to the security, availability, processing integrity, confidentiality, and/or privacy of the system.

In addition, the Cloud Security Alliance (CSA), a leading organization that evaluates cloud providers, has developed the Cloud Control Matrix (CCM) as part of its best practices for examining cloud providers.

The SOC 2 report can be mapped against the CCM for double value —the value of the independent SOC 2 attestation report, coupled with the depth and questions from the CCM — to create a rigorous benchmark.

With the SOC 2 examination and/or CCM, cloud providers can give answers to customers, while differentiating themselves in the market. These examinations help business owners with their upfront due diligence and ongoing monitoring. It can even be used as a gating function with the cloud providers to assess their quality and dedication to strong business practices.

Christopher Kradjan is a partner at Moss Adams. Reach him at (206) 302-6511 or [email protected]

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How to find opportunities and mitigate risk with a second glance at your tax filings

Michelle Mahle, CPA, Director of Tax, SS&G

Michelle Mahle, CPA, Director of Tax, SS&G

Frank Taylor, CPA, Director, Tax, SS&G

Frank Taylor, CPA, Director, Tax, SS&G

Taxes are complicated, confusing and sometimes intimidating. Even though you might want to put everything on the shelf after getting through another filing season, a checkup could be in order.

“If your car is running fine, you shouldn’t wait until it breaks down to get it tuned up or have routine maintenance,” says Michelle Mahle, CPA, director of tax at SS&G.
There are valuable tax opportunities you may be missing. Certain tax positions or reporting could help your business mitigate risk.

“You have an opportunity to have somebody independent of what’s been done historically to come in with a fresh set of eyes,” she says.

Frank Taylor, CPA, director of tax at SS&G, says it comes down to how you feel about your current tax situation.

“If nothing else, you can get peace of mind that everything is being handled correctly,” Taylor says.

Smart Business spoke with Mahle and Taylor about how a third-party checkup of your tax filings might uncover new opportunities and tax savings strategies.

How do you know whether your tax returns need a second glance?

First, this goes beyond the scope of just federal tax returns. It could include international, state and municipal tax compliance, as well as personal property and sales and use tax filings. An independent party can look at your business and say, ‘We should see this, and that’s a concern because it’s generally required with the business you’re operating.’ A third-party checkup can help you mitigate risk and exposure to audit, provide insight on tax strategies, and avail opportunities to secure tax credits and incentives unique to your industry.

It comes down to whether you feel comfortable. Maybe you’re unhappy about the taxes that you just paid, feel like you may be missing opportunities or just hope your next filing season will be different. A second glance or opinion may provide the peace of mind you need to stay focused on growing your business.

What are some examples of opportunities businesses could be missing?

Just looking at the restaurant industry, for example, there are organizations overlooking routine benefits available to them. They might be missing out on FICA (Federal Insurance Contributions Act) tip and work opportunity tax credits. Owners, previously paying alternative minimum tax (AMT), have found that their AMT credit carry forwards were handled improperly and when corrected resulted in substantial refunds. Many companies continue to improperly capitalize assets, not taking full advantage of accelerated depreciation deductions.

Business owners in general tend to be intimidated by the Internal Revenue Service (IRS). When they are under audit or receive a notice, they just assume the IRS is right. The number of IRS audits taking place is increasing steadily. Always consult with your service provider to find out how much experience they have handling these types of matters so that you can be poised with good information and tax strategies to mitigate your risk and exposure.

What should you look for when going to an independent party for a tax filing review?

You want someone with experience, particularly in specialty tax niche areas. There are a lot of service providers who perform very good basic federal tax compliance services. If you are feeling like your business is no longer vanilla, however, basic service may not be enough for you. The way people do business today is very different than the way business was done five years ago. Even small companies have international exposure, and almost every business crosses state lines.

You want an independent party to have the depth and experience in both specialized areas of taxation and industries. You also want tax experts who stay on the cutting edge of legislative changes and developments, and who can identify tax saving strategies and refund opportunities. The right third party can provide a well-rounded second glance to any industry, for any circumstances, and could bring you real money in the form of refunds or credits as a result.

Michelle Mahle, CPA, is a director of tax at SS&G. Reach her at (440) 248-8787 or [email protected]

Frank Taylor, CPA is a director of tax at SS&G. Reach him at (440) 248-8787 or [email protected]

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