How immigration paperwork audit fines can catch employers by surprise

Kevin Smith, Partner, Crowe Horwath LLP

Think the odds of being fined for immigration law violations are slim to none? Think again. Even if every person working in your business is a legitimate U.S. citizen and/or eligible to work in the U.S., you can still run into trouble if you file immigration law paperwork with errors or omission or, worse, fail to file the papers at all.
Until recently, Form I-9 infractions have not been top of mind because it’s just a one-page form filled out during the new hire process. The odds of an ICE (U.S. Immigration and Customs Enforcement Agency) inspector showing up on your doorstep were miniscule. However, the risk has significantly increased over the last few years.
“This is the quickest and easiest employment law violation to find,” says Kevin W. Smith, a partner at Crowe Horwath LLP. “Inspections have been growing in number over the last three years, and it can cost up to $1,100 for each form containing an error.”
Smart Business learned more from Smith about how businesses can avoid having to pay for not having the proper immigration paperwork.

What should employers know about Form I-9?

In order to verify that all employees — citizens and noncitizens — are eligible to work in the United States, every employer needs to complete a simple two-sided, one-page form within the first three days of hire. It’s called a Form I-9, ‘Employee Eligibility Verification.’ The employer must be provided with the employment eligibility and identity document(s) by the employee, determine whether they reasonably appear to be genuine and record this information on the I-9. The form must be kept by the employer either for three years after the date of hire or for one year after employment is terminated, whichever is later.

Why should employers pay attention to this issue?

ICE was established in 2003 with the emphasis on finding and deporting illegal immigrants. Beginning in 2009, the emphasis has shifted to enforcing employer responsibility to ensure that new hires are eligible to work in the U.S. This has led to a record 2,196 notices of inspections to employers in fiscal 2010, surpassing the prior year’s record of 1,444, and more than quadrupling the 503 inspections in 2008. In 2010, judicial fines and fines for final orders, forfeitures and restitutions came to a total of $43,567,346.
Fines are levied regardless of whether illegal immigrants are found, as in the case of Abercrombie & Fitch stores being fined $1 million for a technologically deficient I-9 record-keeping system.

How does ICE investigate an employer if it suspects employees are working illegally there?

Once ICE begins an investigation, the agency will use confidential informants, cooperating witnesses and electronic surveillance. ICE may also visit the worksite or the homes of employees. ICE uses the following factors when determining criminal
liability: if there was a pre-existing immigration compliance program, how widespread the activity was, how high up the complicity of management was, timely voluntary disclosure of wrongdoing and cooperation in the investigation. One of the most
serious ICE violations concerns the harboring of persons in the country unlawfully.

What else do employers need to be concerned about regarding this issue?

In addition to strategically shifting from the focus of deporting illegal immigrants to holding employers accountable for noncompliance, ICE has changed its enforcement strategies in other ways:

■ Moving from high-profile, multisite raids to targeting a substantial number of small and medium-sized employers such as restaurants, construction companies and manufacturing plants.
■ Working closely with other government regulators — including the U.S. Department of Labor Wage and Hour Division, the Social Security Administration, the IRS, FBI and state counterparts — in ‘fusion centers’ that cross-train inspectors from other agencies to conduct I-9 audits.

How can employers defend violations and avoid noncompliance?

Businesses should be sure to have a comprehensive immigration compliance and ethics program in place, which comprises of established standards for detecting and preventing criminal conduct, screening of human resources processes, training regarding compliance and ethics for directors and employees, monitoring/auditing compliance programs and appropriate response to violations. Having a reasonable compliance program significantly improves the odds of reducing fines and criminal liability if an employer is found to be noncompliant.
Some other processes to consider:

■ Conduct a self-audit of your I-9 forms.
■ Keep I-9 forms separate from employee personnel files. Also, separate present and past employee forms.
■ Do not accept expired forms from new hires when completing the I-9 form.
■ Re-verify any expiring work authorization documents before they expire. Do not allow employees to work if they have expired documents.
■ Only accept documents from new hires that are on the List of Acceptable Documents and appear to be genuine.
■ If ICE shows up to conduct an audit, ask for a Notice of Inspection and know that you have three business days before you have to turn over your original I-9 forms.

By checking only 14 form attributes, our auditors have been able to consistently find missing or incorrect dates, signatures, IDs referenced and, worst of all, missing forms. Correcting these small errors can save employers from significant fines and even criminal charges.

Kevin W. Smith is a partner at Crowe Horwath LLP. Reach him at (214) 574-1008 or [email protected]

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What boards should know about social media

Jim Stempak, Principal, Crowe Horwath LLP

By now, most business leaders have recognized the opportunities social media offers in the areas of marketing, customer service, recruiting and relationship building. But not as many have weighed the rewards of social media use with the potential risks, including reputational, legal, employment and information security-related risk.

“Social networking is here to stay, and board members cannot simply ignore it,” says Jim Stempak, a principal at Crowe Horwath LLP. “For directors to perform their governance role effectively, they need to understand both the risks and the opportunities social media offers their organizations — and see that both are managed effectively.”

Smart Business spoke to Stempak about how to incorporate social media use into the governance framework to best protect and promote your business.

What are some of the risks businesses face when engaging in social media platforms?

The damage from a disgruntled current or former employee’s comments on Facebook, customer complaints on Twitter, or criticism of management on LinkedIn can be substantial and long-lasting.

An organization that uses social media for customer support (a channel in which they allow customers to post comments requesting assistance) opens itself up to new marketing and business opportunities, but needs to monitor these channels closely and timely. Customers can post criticism or derogatory comments about the business and its services and share negative comments with one another.

Businesses must also keep an eye on the social media activity of employees. Their voices can be as prominent as those of official company representatives. If employees post offensive or confusing content, customers might consider taking their business elsewhere.

What other ways can an employee’s use of social media harm operations?

While the acceptance of social media in the workplace can encourage talented candidates to seek out organizations that embrace this type of access, employees still need to understand that certain practices are exposing them and the company to risk. The explosion of social media in everyday life has generated public disclosure of a great amount of personal data. Malicious users can take advantage of information employees share and use it for social engineering attacks.

In addition, the human resources function needs to be made aware of the restrictions surrounding the use of social media channels to research and recruit new talent. Misuse of information found on social media sites to make hiring decisions could result in a claim of discrimination. Even though potential candidates post personal information on a public site, an expectation of privacy still exists in the hiring process regarding certain protected statuses, including disabilities, age, religion, etc.

Finally, employees must take extra care to understand the implication of the information they share with customers through these channels. While employee communication with the public and customers provides the means to build relationships and good will, if that communication includes confidential or sensitive information, a company could end up with a damaged reputation or even a violation of privacy laws and regulations.

How can leaders take advantage of the rewards and minimize the risks?

Having a robust corporate governance framework helps to clarify the role board members should play relative to social media, as well as address the complexity, interrelationships and variables that an organization must manage in order to strengthen governance over this area.

  • Board of directors and committees. In addition to being responsible for effective corporate governance, the board establishes the direction and values of an organization, oversees performance and protects shareholder interests. As part of overseeing performance, board members should understand the opportunities, as well as the risks, of social media use by the constituents of the organization.
  • Legal and regulatory. Labor practices are changing as a result of social media use in the workplace, and board members need to keep up with those changes to avoid exposure.
  • Business practices and ethics. The board needs to confirm that the social media policy the organization adopts is based on best practices and is enforced consistently. So that no stakeholders in the organization are neglected, a social media policy is best determined by a multidisciplinary team of senior representatives from human resources, legal, IT, marketing, public relations, risk management, compliance and other relevant functions. The resulting written policy needs to address the appropriate use of social media by employees at all levels and in all functions.
  • Disclosure and transparency. Shareholders need to be made aware of the risks associated with social networking and how the organization is managing them. Some public companies are now including social media as a risk factor in their annual reports.
  • Enterprise risk management. Before developing and implementing its social media policy, an organization should undertake an initial risk assessment that takes into account not only the likelihood of and potential damage from incidents resulting from social media use, but also the cost of opportunities lost as a result of social media not being used. Once the policy is in place, social media risk mitigation should be integrated into the organization’s everyday risk management processes.
  • Monitoring. After an organization implements its policy, it needs to monitor employee compliance. This requires periodic social media risk assessments, Internet and site monitoring, and control testing, all of which will show if internal controls need to be enhanced.
  • Communication. Communication holds together the various components of the governance framework and keeps the process improving over time. The board should ensure that the social media policy is communicated appropriately and relevant business practices and codes of conduct are addressed.

Jim Stempak is a principal in and leader of the Risk Consulting practice for the Crowe Horwath LLP Dallas office. Reach him at (214) 777-5203 or [email protected]

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How the new tangible asset regulations may affect your business’s accounting methods

Tom Tyler, Partner, Crowe Horwath LLP

Josh N. Wheeler, CPA, Crowe Horwath LLP

New rules regarding the capitalization and deduction of expenditures related to tangible property were issued by the Treasury Department in proposed and temporary form on December 23, 2011. All businesses with tangible assets will be affected by these regulations. These new rules attempt to guide taxpayers where previous proposed regulations were not successful. The new rules are effective for taxable years beginning on or after January 1, 2012.

Business leaders should begin a dialogue with their tax professionals sooner rather than later to determine how they might be affected. A review of company policies and procedures will be necessary to maintain tax compliance while minimizing increased administrative burdens.

Smart Business spoke with Josh N. Wheeler, CPA, and Tom Tyler, CPA, a partner with Crowe Horwath LLP, about what taxpayers need to know about the new Treasury regulations.

What is the purpose of the new regulations?

The regulations attempt to provide guidance so that a taxpayer can determine whether expenditures should be expensed, or capitalized and depreciated, for tax purposes. The new regulations apply to expenditures incurred to acquire, produce, repair and improve tangible real property, such as a building, and tangible personal property, such as a copy machine, for example.

What types of items are covered under the new regulations?

The tangible asset regulations cover the treatment of materials and supplies, routine maintenance, costs to improve property, dispositions of property, as well as costs incurred to acquire property, such as employee compensation and overhead costs.

How do the new regulations differ from the ‘old’ regulations?

In certain respects, the new regulations are the same as the old regulations and in other respects they deviate significantly from their predecessor.

One of the most significant differences between these regulations and previous version concerns how taxpayers determine if an improvement has been made to a unit of property. At the core of determining whether expenditures should be capitalized as an improvement, or expensed as a repair, is identifying the unit of property to which the expenditure relates.

The new regulations depart from the old regulations by requiring that taxpayers apply the improvement rules to separate building systems when determining whether expenditures should be expensed or capitalized. Those separate components include HVAC, plumbing and electrical systems; security, fire protection and alarm systems; gas distribution systems; and all escalators and elevators.

Having to apply the improvement rules in this way can increase the likelihood that expenditures will be required to be capitalized.

Another significant addition to the regulations is the treatment of property dispositions. The regulations allow, and in some cases require, a taxpayer to take a loss on the replacement of a component of a unit of property. Taxpayers will need to familiarize themselves with these rules in order to make certain they implement the regulations properly.

Will taxpayers apply the regulations in the same way?

Yes and no. All taxpayers are required to adopt and conform to the new regulations for tax years beginning on or after January 1, 2012. The regulations provide taxpayers many choices for adopting the new rules. What elections are made will depend on each taxpayer’s unique circumstances.

For example, nonincidental materials and supplies may be deducted when used or consumed. Alternatively, a taxpayer may elect to capitalize and depreciate them. Taxpayers who need to generate taxable income to use expiring net operating loss carryforwards might elect to capitalize and depreciate the materials and supplies over a number of years rather than expensing all amounts in the current year.

Another example includes taxpayers who have written accounting policies for expensing capital expenditures under a specified dollar threshold. The new regulations permit expensing for tax purposes consistent with the financial statements, but only for companies who have applicable financial statements. Furthermore, the total amount expensed may not exceed the greater of 0.1 percent of gross receipts determined under federal tax rules or 2 percent of the taxpayer’s total depreciation and amortization expense reported in its applicable financial statement. Not all taxpayers have an applicable financial statement and only those who do may adopt this method

What actions must companies take in order to comply with the new regulations?

As previously discussed, the regulations are effective for taxable years beginning on or after January 1, 2012. However, taxpayers cannot only focus on 2012 and beyond. To comply with the new regulations, taxpayers must assess policies and procedures implemented in prior years and conform those prior years to the new regulations. The result will require a positive or negative adjustment to taxable income.

The Treasury Department is expected to issue two revenue procedures that will provide taxpayers with specific procedures they must follow to obtain automatic consent to change their tax methods of accounting to conform to the regulations. This is typically done by filing form 3115, Application for Change in Accounting Method.

Taxpayers must consider the various elections, safe harbors and thresholds available in the regulations to select the most advantageous methods for their particular situation and to minimize administrative burdens going forward. It is imperative for taxpayers to begin an initial dialogue with their tax professionals to understand the impact of these regulations.

Josh N. Wheeler is a CPA with Crowe Horwath LLP in the Dallas office. He can be reached at (214) 777-5257 or [email protected] Tom Tyler, CPA, is a partner with Crowe Horwath LLP in the Dallas office. He can be reached at (214) 777-5250 or [email protected]

Knowing the tax implications of debt workouts

Josh Wheeler, CPA, Crowe Horwath LLP

Catherine Fox-Simpson, CPA, Partner, Crowe Horwath LLP

Businesses still struggle with the right mix of debt and equity to stay afloat in this economy. Where cash-flow problems cannot be resolved by equity infusions or simple refinances, debt workout options include loan modifications, partial or full loan forgiveness, foreclosures or repossessions, and debt-for-equity exchanges.

“Debt workouts are painful enough without worrying about the IRS,” says Josh N. Wheeler, CPA, at Crowe Horwath LLP. “Business owners should consult with their tax adviser when contemplating a course or a combination of courses.”

Smart Business spoke with Wheeler and Catherine Fox-Simpson, CPA, a partner with Crowe Horwath LLP, about what taxpayers need to know when restructuring debt.

How are debt workouts taxed?

The Internal Revenue Code explicitly includes cancellation of debt (COD) income as a component of gross income. Even though a taxpayer has not received cash or property in such instance, he or she has relief from a financial burden. Of course, the Treasury wants a cut of the action.

Foreclosures, deeds in lieu of foreclosure, repossessions and abandonments are taxable sales or exchanges of property. In all these cases, gain or loss is the difference between the amount realized and the adjusted basis of the property. Be aware, the amount realized depends on whether the debt is recourse or nonrecourse.

Taxpayers in an entity taxed as a partnership have another aspect of debt cancellation to worry about. In cases where partners do not share debt allocations proportionately to income allocations, capital gains may result for a partner whose net debt relief exceeds his or her basis in the entity.

Debt-for-equity exchanges may also result in COD income when the fair market value of company stock or partnership interest exchanged is less than the debt balance forgiven. In most cases, fair market value will not conveniently equal the balance forgiven. Prudent business leaders hire qualified appraisers to perform business valuations or asset appraisals.

When is COD income excludable from gross income?

There are a few instances when taxpayers may elect to exclude COD income from gross income. The following list includes times of financial hardship and types of debt.

  • Bankruptcy
  • Insolvency
  • Qualified farm indebtedness
  • Qualified real property business indebtedness
  • Qualified principal residence indebtedness

Income from a discharge of debt granted by a court or pursuant to a plan approved by a court in a bankruptcy  (title 11) case, where the taxpayer is under jurisdiction of the court, qualifies for exclusion from gross income.

Income from a discharge of debt while a taxpayer is insolvent qualifies for exclusion, but only to the extent of insolvency. The Internal Revenue Code defines insolvency as the excess of liabilities over the fair market value of assets immediately before the discharge. This assessment measures debt differently depending on whether the debt is recourse or nonrecourse.

Income resulting from discharge of indebtedness incurred with respect to farming activities qualifies for exclusion from gross income only if fifty percent or more of the entity’s gross receipts relate to farming for the three years prior to the year of discharge.

Income from discharge of indebtedness assumed or incurred prior to January 1, 1993 with respect to real property used in a trade or business qualifies for exclusion from gross income. COD income subsequent to the aforementioned date must relate to the acquisition, construction, or substantial improvement of real business property in order to qualify.

Lastly, income from a discharge of acquisition indebtedness secured by a taxpayer’s primary residence may qualify for exclusion from gross income up to $2,000,000. Taxpayers who elect to exclude income under this provision must reduce the property basis accordingly. This break does not apply to discharges occurring later than December 31, 2012.

Taxpayers who are neither bankrupt nor insolvent and who do not have the above qualified debts may still take advantage of purchase price adjustments under purchase money debt reductions. When the original seller agrees to reduce debt secured by property of the original purchaser, the reduction in debt may apply to the adjusted basis of secured property. In this scenario, the adjustment does not result in taxable income.

What tax attributes must be adjusted?

A lender may forgive debt, but the IRS won’t forget. Bankrupt or insolvent taxpayers and taxpayers with discharged qualified farm indebtedness who benefit from COD income exclusion rules must adjust certain tax attributes. This adjustment effectively defers taxable income instead of extinguishing it. An adjustment must be made to the following tax attributes in this order: Net operating losses, general business credits, minimum tax credits, capital loss carryovers, bases of depreciable property, passive activity loss and credit carryovers, and foreign tax credit carryovers.

Adjustments to loss carryovers and depreciable property bases are dollar for dollar of COD income excluded from gross income. On the other hand, the aforementioned credits are adjusted 33 1/3 cents per dollar excluded. Depending on the circumstances, a taxpayer may instead prefer to elect to apply any portion of this reduction to the adjusted bases of depreciable property.

Josh N. Wheeler is a CPA with Crowe Horwath LLP in the Dallas office. He can be reached at (214) 777-5257 or [email protected] Catherine Fox-Simpson, CPA, is a partner with Crowe Horwath LLP in the Dallas office. She can be reached at (214) 777-5213 or [email protected]

Mitigating risks to your business in an era of social networking

Paul Feather, Manager, Crowe Horwath LLP

Jim Stempak, Principal, Crowe Horwath LLP

While providing intriguing new business opportunities, social media channels also expose organizations to new risks. Social media channels represent far more than an intriguing business opportunity; they have become part of the fabric of social interactions for an increasing segment of the population. Rather than trying to put the social media genie back in the bottle, organizations should implement guidelines that are based on their risk assessment and promote the responsible use of social media.

“A set of guidelines stands not only to reduce the negative impact to the organization but also to reap the benefits of social media,” says Paul Feather, a manager in the Crowe Horwath LLP Dallas office. “By implementing guidelines based on a risk assessment, organizations can promote the responsible use of these powerful tools and reap their benefits.”

Smart Business learned more from Feather and Jim Stempak, principal at Crowe Horwath LLP, about how to properly monitor, manage and execute a social networking strategy.

What risks do businesses face in regard to their brand?

An organization’s employees, customers, and vendors can either be its greatest ambassadors or seriously undermine its brand and image. Organizations can’t control or change feedback on social networking sites — but they can be at greater risk if they fail to monitor it and respond in a timely manner when a response is appropriate.

An example of a company aware of this risk is Gap. In October 2010, the company changed its logo and promptly received negative feedback on social networking sites. Because Gap monitors such feedback, it was able to act quickly and change the logo back to the famous original.

Employees, with their insider knowledge and perspective, have the potential to cause even greater brand damage. In April 2009, Domino’s Pizza experienced the broad reach of social media after two employees posted a video on YouTube that showed them violating various health-code standards. By the time Domino’s realized it had a PR problem, millions of people had already seen the video and joined in discussions on Twitter.

Based on its presence on social media sites, an organization might also face reputational risks associated with managing its own message. An attempt to restrict negative commentary on an interactive site can draw more unwanted attention to an issue and create a public relations disaster.

How can social media present employee-related risks?

When hiring, HR might check candidates’ profiles on social media sites. But, even a site that is publicly available can expose information about a restricted class such as religion, race, age or sexual orientation, or information that is not accurate — a doctored photo, for example — and could lead an organization to make incorrect assumptions. Employers must also use care when terminating an employee due to something he or she posted on a social networking site, as there are laws that protect certain online activity under the National Labor Relations Act.

The social networking environment can often lead to a blurring of the line between personal and professional. When coworkers interact on sites like Twitter or Facebook, there is the potential that a coworker’s actions or personal opinions could be deemed offensive or inappropriate. Or, a boss’s personal views posted on a site could make the work environment uncomfortable for subordinates.

Perhaps the most harmful consequences to a business could come from information security risks. Employees can intentionally or inadvertently post confidential information about the company or a customer; individuals can post information such as passwords or user IDs that can leave them vulnerable to cyber attacks and theft; and viruses and other malware can make their way into company networks through social media sites.

How can businesses address these risks?

Engage a multidisciplinary team to document intended social media use, including HR’s use of social media for employee screening and cause for termination as well as employees’ activity, such as accessing sites on company devices, and the impact on productivity. Find out whether employees and supervisors are connected to one another and to customers on networking sites.

Assess the risk of social networking on company technology. Have you seen an impact on network connectivity due to social networking volume? Have you been affected by viruses originating from social media sites? What technology is available to monitor and manage social media use on the company network and mobile devices?

Once the risks to the company brand, technology and employment practices have been established, it’s vital to expand current policies and implement safeguards in regard to appropriate employee use. Define what type of social media use is acceptable during business hours and document standards about using social media relative to providing opinions about the organization; also define the consequences of noncompliance.

Expand anti-malware software to encompass attacks over social media channels, define how use of social media will be restricted and define the safeguards the organization will implement to detect social media-based malware and attacks.

Outline how marketing campaigns using social networks will be developed, approved and deployed to create a consistent messaging strategy. Also implement vendor management policies, including nondisclosure agreements and vendor contract standards; define how third-party organization with access to the organization’s data and assets will manage their employees on social networks.

Finally, provide social media policy training for all employees and create a system for monitoring social media channels. A new breed of software products and vendor services called social customer relationship management (CRM) tools helps organizations listen on public channels for social media chatter that affects their organization.

Paul Feather is a manager in the Crowe Horwath LLP Dallas office. Reach him at (214) 777-5230 or [email protected] Jim Stempak is a principal in the Crowe Horwath LLP Dallas office. Reach him at (214) 777-5203 or [email protected]

Why now is the time to take advantage of gift tax exemptions

Sally Day, Director, Crowe Horwath LLP

Estate planning opportunities abound for those who are paying attention. Now is the time to sit down with your estate planner to take advantage of tax law that likely will change in the coming year.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the applicable exclusion amount for the estate, gift, and generation-skipping transfer (GST) tax to $5 million from $3.5 million. If Congress doesn’t act, the gifting exemption goes down to $1 million per person on Jan. 1, 2013.

“Those who can benefit from this opportunity should act now before the rate changes,” says Sally Day, director, Crowe Horwath LLP. “This creates significant estate planning opportunities, which need to be acted on as soon as possible.”

Smart Business spoke to Day to learn more about how to take advantage of current estate planning opportunities.

What is the significance of this exemption?

This is a record-setting estate, gift and GST exemption.

Prior to Jan. 1, 2011, the exclusion available to each individual for estate tax purposes was $3.5 million, reduced by the portion of the exclusion previously used to offset lifetime gifts. Before 2011, however, an individual could only use up to $1 million of this exclusion against gifts during his or her lifetime. Therefore, any gifts in excess of $1 million would require that gift tax be paid (at the applicable rate of 45 percent in 2009 and 35 percent in 2010).

Beginning Jan. 1, 2011, the 2010 Tax Relief Act increased the estate tax exemption from $3.5 million to $5 million, but, more importantly, now allows an individual to use up to the full $5 million against gifts made during his or her lifetime. The practical effect of the new law is to allow individuals to gift an additional $4 million during 2011 or 2012 and not pay any gift tax on the gift.

It should be noted that all of these figures are in addition to the ability to gift up to $13,000 per recipient per year without being required to count those annual exclusion gifts toward the $5 million lifetime exclusion.

Why do individuals need to act now?

Unfortunately, the $5 million exclusion is only effective until Dec. 31, 2012. Therefore, individuals who have sufficient assets to provide securely for their living expenses and maintain their current lifestyle should consider making gifts now to use up their $5 million exemption — before the exclusion is reduced in the future. If Congress does nothing before the exemption expires on Jan. 1, 2013, today’s $5 million exclusion will drop back to $1 million, and this window of opportunity will be lost.

The taxable amount of gifts made is measured by the fair market value of the property on the date of the gift, so now is the perfect time to gift away assets that might have a lower fair market value in today’s economy, but have the potential for future growth, such as shares in a family-owned business, units in a family limited partnership, or real estate that has declined in value. After property has been gifted away, not only is the asset itself removed from the donor’s future taxable estate, but the donor is not subject to any additional estate or gift tax on subsequent appreciation on the property.

What does the current GST tax mean for taxpayers?

The 2010 Tax Relief Act also retroactively increased the GST exemption from $3.5 million in 2009 to $5 million for all of calendar year 2010 and through the end of 2012. The GST rate was zero in 2010 but is synchronized with the estate and gift tax rate of 35 percent for 2011 and 2012. Just like the estate and gift tax, the GST portion of the 2010 tax relief act will expire on Jan. 1, 2013, when the GST exemption will revert to $1 million and the GST tax rate will become 55 percent, unless new legislation is passed.

For taxpayers, this means that as they are making large gifts (as recommended above) they should not transfer the assets directly into the ownership of their children, since those assets will be taxed again at the child’s death. Instead, they should consider gifting property either to grandchildren (or other skip persons or more remote descendants) or into a trust that can benefit both the donors’ children and grandchildren without being taxed in the child’s estate.

By properly structuring GST transfers either directly to grandchildren or in trust for their eventual benefit, $5 million of assets can bypass or skip over potential taxation by the donor’s children’s estate.

With the exclusions high and the tax rates low, now is the ideal time for taxpayers to make transfers to their children and grandchildren or anyone else they wish to benefit. It is not known what will happen to the rates when the clock strikes midnight on Dec. 31, 2012, so take advantage of the opportunity while it exists.

Sally Day is a director with Crowe Horwath LLP in the Tampa, Fla., office. She can be reached at [email protected] or (863) 603-4810.

How businesses can take control of the opportunities that drive employees to commit fraud

Randy Cochran, Director, Crowe Horwath LLP

In today’s economy, companies should be doing everything they can to prevent or eliminate temptation on behalf of their employees. Many employees are truly struggling financially and putting food on the table is a basic need for all of them. Where will the money come from? Many will look to the most ready source of cash: their employer.

“Knowing what might provoke an employee, even an otherwise lawful, ‘good’ person, to blur the line between legal and illegal activity is the key to fighting fraud effectively,” says Randy Cochran, a director with Crowe Horwath LLP.

Smart Business spoke to Cochran about how businesses leaders can effectively limit any perceived or real opportunity for employees to commit fraud within their organization.

What drives employees to commit fraud?

Famed criminologist Donald R. Cressey first identified three elements — opportunity (including general knowledge and technical skill), pressure and rationalization — as the ‘fraud triangle’ to explain why people committed fraud. Cressey’s classic fraud triangle helps to explain many, but not all, situations.

Fraud is more likely to occur when someone has an incentive (pressure, like medical bills) to commit fraud, weak controls provide the opportunity for a person to do so, and the person is able to rationalize the fraudulent behavior.

Today’s fraudster is more independent-minded and armed with more information and access to corporate assets than was the perpetrator of Cressey’s era.

More technology, matrix organizations, performance-based pay and a corporate culture that celebrates wealth and fame have led to greater autonomy and authority to effect change across the organization. These differences support the need to expand the fraud triangle to a five-sided fraud pentagon, where an employee’s competence, or power to perform, and arrogance, or lack of conscience, are factored into the conditions generally present when fraud occurs.

How can a business address these driving factors?

With the changes to organizations listed above and employees’ increasing responsibilities in their respective roles, competence and arrogance are at an all-time high. Pressure is being generated both inside and outside the company at an ever-increasing rate. But of the five elements of fraud, the company has the greatest influence and control over opportunity. In fact, the company is almost entirely in control of the opportunity side of the triangle.

Opportunity for fraud to take place is marked on one end by controls — physical, logical, automated, manual, visual, etc. — and on the other end by management review, monitoring and reporting. Somewhere in the middle is separation of duties, reconciliations, internal audits, external audits, and all other means of checking the numbers on a regular, periodic and sometimes on a surprise basis. All of these control measures fall within the purview and responsibility of the company.

What common mistakes do businesses make when attempting to prevent fraud?

So let’s say all of the controls above are in place. The company contributes further to opportunity when the controls are not effectively implemented, executed and monitored. This is where most companies fall woefully short.

Controls that were effective for the way the company operated five years ago often become ‘false’ indicators of control due to system, process, procedural and organizational changes, and diversification of responsibility.

Many companies are doing such a poor job of managing opportunity that they unknowingly cause or contribute to many otherwise good people ‘going bad’ on the job. You need look no further than the Association of Certified Fraud Examiners (ACFE) 2010 Report to the Nation to see that this issue is supported by data from more than 1,800 actual cases of fraud. In the 2010 report, ACFE reported that ‘lack of controls, absence of management review, and override of existing controls were the three most commonly cited factors that allowed fraud schemes to succeed.’

What steps should companies take to limit the ‘opportunity’ for fraud to take place?

Companies should start with an enterprise-wide risk assessment.

Start with a control review. While the company may have wonderful controls in place, it may not be controlling its biggest, most common, or most obvious risks, or those unique to its business and/or industry.

In performing a risk assessment, there is a need for a common language or nomenclature, a process to identify and rate the risks, and the ability to determine mitigation strategies for the company’s chosen level of risk (risk profile). Management will want to invest the time necessary for thorough discussion of the risks and the rating, because this will drive the mitigation effort and investment.

With the risk assessment complete, compare the current controls in place to the risks that require mitigation and see where you stand. Obvious gaps will show up, which will require modification and/or redesign of your control environment, including new and specific control techniques.

Last, for companies of all sizes above 25 employees, implement a process by which employees, vendors and customers can access and report suspicious activity via a tip line. It may sound overly simple, but ACFE reports that occupational frauds are detected by tips more than any other means, including management review, internal audit and review of documentation. The tip line, and the awareness of its existence and use, is the primary way to limit the perception of opportunity in companies big and small.

Randy Cochran, CFE, is a director with Crowe Horwath LLP in the Dallas office. Reach him at [email protected] or (214) 574-1018.

How ownership transition planning helps ensure an owner’s graceful exit from the construction industry

Marc McKerley, Partner, construction services, Crowe Horwath LLP

The construction industry is second only to the restaurant industry in business failures. In fact, from 1990 to 1998, a period of relative strong economic activity, more than 91,000 construction businesses failed.

The grim odds faced by leaders in this industry often result from poor transition of management along with failure to see the risks inherent in the business.

Proactive management of ownership transition risk will help “ensure a graceful exit” and future business continuity, says Marc McKerley, partner, construction services at Crowe Horwath LLP.

Smart Business learned more from McKerley about managing the risk associated with ownership transition.

What risks are posed by an ownership transition in the construction businesses?

Succession planning can pose special challenges for construction companies. Risks are high, the entrepreneurial spirit thrives, and the owner’s financial and emotional attachment to the company is often very strong. Because of these ties, owners often put off succession planning, concentrating instead on today’s pressing issues. More forward-looking owners, however, will proactively plan for the next generation of ownership — to the benefit of everyone involved.

How can the transition be approached successfully?

While some construction companies are sold to private equity firms or strategic buyers, the more typical transition involves transferring ownership to an internal management team or members of the owner’s family. The first step in planning for such a transaction is to address some basic questions.

For the exiting owner: What type of retirement plans does he or she have in mind? What cash stream will be needed to support his or her lifestyle? Has the owner built wealth outside the business to help finance it?

For the buyers: What is the business worth? What kind of income does it generate? Will the transaction be affordable to the company?

Underlying both sets of questions is one fundamental fact: For any succession plan to work well, the company must be generating stable profits from operations.

How can owners address financing issues?

In most instances, a group of employees who plan to buy out the owner will not have enough personal wealth for an outright purchase. That leaves two sources to fund the sale: bank debt or owner financing.

Bank debt is often problematic because of surety constraints. Bonding companies are keenly interested in the company’s financial stability, and adding sizable bank debt to the balance sheet will create a high debt-to-equity ratio, making it difficult to obtain bonding for larger jobs.

Debt to a previous owner, on the other hand, is generally off the balance sheet. Owner financing raises other issues, however, such as how the transaction is structured, how long the payout period will be, and what level of control the exiting owner will retain.

Typical payout periods for owner-financed sales range between seven and 12 years, but clearly every transaction is different. The ‘right’ answer will be determined by an affordability analysis, which considers the company’s estimated profitability, its expected tax burden and other upcoming obligations. The payout must be quick enough to protect the departing owner, yet not so aggressive that it cripples the company or makes it unattractive to the buyers.

In almost every instance, the exiting owner will want to maintain some level of control during the payout period. This usually is accomplished by splitting the stock into voting and nonvoting shares. The retiring owner can then turn over majority ownership, but still retain all or most of the voting stock — and control of the company — until the payout is complete, which helps mitigate the risk of nonpayment. The alternatives are to simply liquidate the company — which would almost certainly provide a much lower return — or sell to an outside buyer, in which case the ultimate value is still predicated on retaining key members of the management team.

How can everyone’s interests be protected?

A carefully prepared purchase agreement is essential, and all parties to the transaction should consult closely with their legal and tax advisers. For the exiting owner, a key concern is enforcement, and the remedies that are available if the note isn’t paid. The new owners will want some flexibility in the payment schedule, so that a few bad months during an economic slowdown won’t cost them their ability to ultimately acquire full ownership.

All parties should work together to develop a detailed shareholder or ownership agreement that defines the new management policies and procedures. A well-crafted agreement not only ensures fairness, it also adds value and stability to the organization. The new owners will need to start considering how they will respond to unexpected contingencies, such as a disagreement among shareholders or the death of a shareholder.

As with any significant financial transaction, tax consequences must also be considered, as they can have a significant impact on both the seller and the purchasing shareholders.

How can businesses avoid common pitfalls?

In any business transition, owners can hang on too long or fail to delegate authority. Employees who enter into ownership may be risk averse. There may be a lack of trust between parties, or an unwillingness to negotiate.

However, with effective planning, careful consideration, and clear communication, ownership change in a construction business can be carried out as efficiently as any other complex project. The ultimate goal is for the exiting owner to enjoy the economic rewards he or she has earned, and for the buyers to feel they made a good transaction that will enable them to succeed on their own.

Marc McKerley is a partner in construction services at Crowe Horwath LLP in Dallas, Texas. He can be reached at (214) 574-1009 or [email protected]

How audit committees and executives should prepare for IFRS now

Wayne Williams, Partner, Crowe Horwath LLP

The change to IFRS (International Financial Reporting Standards) from U.S. GAAP (Generally Accepted Accounting Principles) has been looming on the horizon for years, leaving businesses unsure about whether they should make the switch sooner or later. But it’s finally time for audit committees and management teams to begin discussions to prepare for the far-reaching implications of the IFRS conversion.

The SEC has recommended a staged transition to implement IFRS reporting with a start in fiscal years ending on or after Dec. 15, 2015, for large, accelerated filers and subsequent years for accelerated filers and nonaccelerated filers, including smaller and mid-size reporting companies. This could result in an opening IFRS balance sheet of Jan. 1, 2013, for calendar-year reporting entities.

“It is important for audit committees to recognize not only that accounting differences between U.S. GAAP and IFRS could materially change a company’s operating results and shareholders’ equity, but also that IFRS requires much greater reliance on management’s judgment,” says Wayne Williams, a partner at Crowe Horwath LLP, specializing in audit and financial advisory.

Smart Business spoke to Williams about preparing for the transition to IFRS.

What should businesses first consider to make the transition?

Because IFRS includes fewer rules and less detailed guidance, it is critical that the audit committee and board members oversee and lead the transition through the conversion process. This will allow the audit committee to manage properly both stakeholder expectations and implementation costs.

When more than 7,000 European public companies converted from their local accounting principles to IFRS in 2005, they discovered that the conversion process requires anywhere from two to four years to execute well, from planning to full implementation.

Considering this time frame and the far-reaching aspects — and potential opportunities — of an IFRS conversion, now is the time for U.S. companies to 1) assess the potential impact of a requirement to report under IFRS, and 2) identify and, where possible, capitalize on the benefits of an eventual IFRS reporting mandate. Ideally, this process will include external auditors, as they will ultimately need to weigh in on the company’s IFRS financial statements, including the opening IFRS balance sheet.

What are the potential opportunities of an IFRS conversion?

IFRS is described as ‘principles-based’ as opposed to the more ‘rules-based’ U.S. GAAP and is more difficult to apply initially, since it offers few clear-cut answers to the accounting questions that inevitably arise. But this conceptual difference requires an increased focus on the proper definition of an organization’s accounting policies, which, in turn, will result in improved consistency and increased transparency of financial reporting. Businesses can tailor these policies to the unique circumstances of their business activities.

In addition, the use of a consistently applied global financial standard facilitates an apples-to-apples comparison when using financial data to make decisions. Such comparability benefits several parties, including:

• Banks that make loans across borders and operate internationally

• Vendors that sell on credit to buyers in other countries

• Credit rating agencies that operate internationally

• Entities considering long-term relationships with suppliers in other countries

• Private equity and VC firms that provide capital to businesses across borders

• Investors in businesses who are not involved in their day-to-day management

What additional responsibilities do executives and management teams face?

Now is the time for executives and audit committees to take a hard look at their company’s auditors to be sure they have the necessary knowledge and experience to guide the company through the process.

Management teams will need to make many critical assumptions and decisions during the conversion based on several factors: missing information and data needed to properly identify accounting differences, a lack of detailed guidance under the new basis of accounting, and potential errors in reporting under the old basis of accounting.

It’s also important to consider the accounting impact under both U.S. GAAP and IFRS of business transactions intended to take place between now and the anticipated date of the opening IFRS balance sheet to avoid any negative impact of those transactions when the financial statements are initially prepared and presented to the public under IFRS. Such transactions include major acquisitions and dispositions, new debt and lease agreements, and implementation of or revisions to employee stock ownership programs.

How should small and medium-size entities (SMEs) prepare?

The International Accounting Standards Board released ‘IFRS for SMEs,’ recognizing that users of private company financial statements have different needs than users of public company financial data. The standard comprises of about 230 pages (full IFRS runs about 2,800 pages) and is self-contained, meaning that it is not directly affected by any new or revised standards for full IFRS.

SMEs could enjoy some advantages from adopting the new standard, including simplified financial reporting. They should, however, take advantage of the training materials provided by the International Accounting Standards Board (IASB) before beginning the transition, and anticipate some hurdles, including cost of implementation.

Before making the decision to convert to IFRS for SMEs, companies should consult with their lenders and accounting advisers to determine how adoption of the standard would affect both their loan agreements and financial statements.

Wayne Williams is a partner at Crowe Horwath LLP who specializes in audit and financial advisory. Reach him at (214) 574-1017 or [email protected]

What businesses should know about the repeal of the new Form 1099 reporting requirements

Mike Pine, Senior Manager, Crowe Horwath LLP

In order to raise revenue without raising taxes, part of the Patient Protection and Affordable Care Act (PPACA) included some provisions that have had business owners up in arms since the act was signed into law last year.

Small businesses were facing mountains of paperwork, thanks to a requirement contained in the PPACA requiring them to submit Form 1099 to the IRS for all purchases of goods and services of more than $600 annually, regardless of what businesses were purchasing.

“With all the attention paid to this issue, businesses need to know the facts about the reporting requirement’s repeal, as this relates to most all businesses, including non-profits,” says Mike Pine, senior manager at Crowe Horwath LLP. “They should also be aware that there are still some penalties included in the PPACA relating to the repealed legislation that shouldn’t be ignored.”

Smart Business learned more from Pine about the repeal of the Form 1099 requirements in the PPACA and what it means for businesses.

What new reporting requirements were businesses facing with the PPACA?

Signed into law in March 2010, the ‘health care act’ contained a number of components that would have imposed a greater burden on businesses in terms of paperwork and cost. One of these mandates was the expanded Form 1099 reporting requirement, which was enacted as part of the Small Business Jobs Act of 2010, and was in addition to the 1099 reporting requirements imposed on taxpayers who receive rental income.

The additional rules included in the PPACA were going to require any business that made payments of $600 or more per year to any recipient, including payments made for property, to file Form 1099 for each recipient beginning after Dec. 31, 2011. Also, rules included in the Small Business Jobs Act would have required any business making payments of $600 or more to any service provider while earning rental income to file Form 1099 with the IRS and the service provider.

Naturally, businesses and members of the accounting community raised concerns about the additional time and effort that would be required of taxpayers if these requirements were enacted.

What does the repeal of the 1099 legislation mean for businesses?

In April of this year, the president signed legislation that repealed the new 1099 reporting requirements for payments made to corporations and for payments made for property. Basically, the 1099 reporting requirements are back to what they were before the PPACA and the Small Business Jobs Act, which most business are familiar with.

However, the increased penalties portions of the aforementioned legislation were not repealed, so the penalties are now much stiffer than they used to be.

Under the old rules, the penalties for failure to timely file a Form 1099 ranged from $15 to $50 per form, with an annual maximum ranging from $75,000 to $250,000, depending on how late the forms were filed. Under the new rules, the penalties per late filed Form 1099 range from $30 to $100 per form, with an annual maximum ranging from $250,000 to $1.5 million also depending on how late the forms are filed. In addition, the minimum penalty for each failure to file due to intentional disregard increased from $100 to $250.

The increase in the annual maximum should be a real concern to taxpayers. Some small businesses with average annual gross receipts of less than $5 million, however, may be able to take advantage of smaller annual maximum penalties ranging between $25,000 and $50,000.

How can businesses make sure they are avoiding undue taxes and penalties surrounding the PPACA and Small Business Jobs Act?

Because the penalties for failing to comply with these rules can get out of hand quickly, it is important that businesses either have a comprehensive understanding of these rules and procedures in place to ensure adherence to them or that they regularly consult with their CPA to do the same.

What else should business owners do to prepare for and/or mitigate risks associated with this issue?

Considering that taxpayers now face a maximum annual penalty of up to $1.5 million for late filing of Form 1099, this may be an area that businesses should revisit, especially if they have deemed in the past that the risk wasn’t material enough for them to make an investment in their compliance planning and adherence model. This is one of those areas in tax where it may save taxpayers a lot of money to spend the time and resources in advance to make sure they are in compliance of these rules rather than figure it out after it is too late and be stuck with a very large penalty due to Uncle Sam.

These are complex issues, and businesses should consult with a qualified CPA who is familiar with their industry and the steps they should take to avoid financial or filing burdens.

Mike Pine is a senior manager with Crowe Horwath LLP. Reach him at (214) 574-1042 or [email protected]