Friday, August 22, 2014

4 Catastrophes a Good Audit Trail Can Help You Avoid

Published on by Adam Bluemner

(See the original article here)


It’s been around since accountants ditched adding machines for Apple II’s. And it’s a feature that—when used correctly—can save your business from some truly nasty predicaments.

Ladies and gentlemen, reintroducing your old, but underappreciated friend: the humble accounting audit trail.

Of course, the idea behind the audit trail is simple, really. When you make an entry or change to your accounting records, your accounting software automatically logs the details for future reference. Who did what, when, how, and for how much? It’s the job of the audit trail to make sure that story is always accessible.

As straightforward as the audit trail is, maintaining and monitoring it properly can keep your business out of some complicated messes, including the following:

1. Fraud.


The Association of Certified Fraud Examiners estimates that 5% of organizational revenues are lost to fraud. That’s more than $3.5 trillion annually defrauded on a global basis. Brought down to the level of the individual organization, the average occupational fraud case amounts to $140,000 of lost revenue.

The audit trail is the fundamental business tool for both identifying and preventing fraud.

Fraud, of course, doesn’t just happen magically. It takes an accumulation of actions that will leave footprints. For instance, a common scheme involves entering a record into the AP ledger, printing a blank check, and then assigning a phony payee after the fraudster has made payment to themselves or someone else in on the scheme. This sort of fraud is relatively easy to detect—if there is an active audit trail being mainta)ined and monitored. A pattern where checks are cut and the payee is assigned afterwards is highly unusual and should stick out like a sore thumb in the audit trail.

The audit trail doesn’t just provide a mechanism for fraud detection, though. The presence of a carefully maintained and frequently monitored audit trail also acts as a powerful deterrant, in precisely the same way as a video monitor, alarm system, or any other visible security measure.

2. Investigation by the IRS.


Nobody likes the word audit much. But don’t confuse it with audit trail. An audit trail can actually be an important tool in helping you avoid an IRS tax audit.

Fundamentally, an IRS audit is about inquiring into the legitimacy of your records. In the same way that you can rely on the audit trail to make sure nobody is getting over on you, the IRS is interested in using it to determine the same thing. In fact, the IRS has even specially trained over 1,000 agents to be experts in the audit trails of particularly common small business software accounting programs like Sage 50 (Peachtree) and Quickbooks.

The Journal of Accountancy recommends that businesses always keep audit trails on. Here’s their logic:
Practitioners do not want the IRS to perceive that their client’s internal controls are weak. When the IRS requests records with associated audit trails, all of a taxpayer’s recording errors are exposed, and the agent can make conclusions based on entries that are reversed or corrected… If the IRS concludes that a taxpayer’s controls are weak, the IRS may expand the audit. Some practitioners have suggested that their clients turn off the audit trail indicator on QuickBooks. Regardless of the reason, that approach is not advisable, because it will immediately raise the audit agent’s suspicion.

3. Lending or funding rejections.


It’s not uncommon for lending institutions to want to review accounting records as a part of loan qualification process. Access to an audit trail report can help prevent lending rejections.

Most lending institutions will require a profit and loss statement for any business loan decisions—especially if credit is unestablished. In fact, the SBA.gov website lists a P&L statement as one of the main items on their loan application checklist.

Providing an audit trail increases a lending institution’s confidence both in the records themselves and the financial management capabilities of their stewards. In some cases, an audit trail may actually be a requirement, if a lender deems it necessary to complete a full financial audit of the records.

The relevance of audit trails can apply to other funding sources as well. Non-profits applying grants may need to provide audit trail logs to demonstrate the integrity of financial records and business investors doing due diligence may this data as well.

4.  Compliance infractions.


Infractions of compliance standards can lead to all sorts of negative business outcomes like lost contracts, penalties, and even fines. Audit trails can help to avoid these infractions.

The Defense Contract Audit Agency (DCAA) is an example of one organization that publishes compliance standards. Contractors working on defense contracts must meet some stringent requirements. While the DCAA standards are wide-ranging, two important focus areas have to do with timekeeping and cost allocations. Audit trails provide an important mechanism for contractors to demonstrate compliance in these areas. For instance, an audit trail can provide evidence that the hours billed for labor indeed are the hours that were worked and recorded and haven’t been tampered with.

The requirement for audit trails can even pop up in some potentially unexpected places when it comes to compliance standards. For instance, the HIPAA Act includes language mandating audit controls for health care providers, as organizations storing sensitive patient information are required to have “mechanisms to record and examine activity in informations systems that contain or use electronic protected helath information.” (HHS.gov)

Putting the audit trail to work for you


It’s easy to take the audit trail for granted.

But in order for the audit trail to help you avoid the messes list above, you need to make sure:
  • You have one.
  • It’s properly set up.
  • You, or somebody you trust, knows how to use it and checks it regularly.
You might assume that all new accounting software includes audit trail functionality. But there are, in fact, quite a few commercially available programs that lack it. Because audit trails record every action that creates or alters an accounting record, they produce an enormous amount of data. The additional data requires more server resources. For that reason, audit trails often aren’t included in many lower cost cloud solutions, where the provider is the software host and supplies the computing resources. (Note: More robust cloud solutions will include audit trail functionality.) But inexpensive cloud solutions are not the only software choices that can lack audit trails. Whether you are shopping for a SaaS or on-premise accounting system, it’s a feature whose presence you’ll always want to verify.

Even if your software offers audit trail functionality, it frequently will need to be configured. In some programs you may actually even need to specifically enable the audit trail. You may also want to adjust the amount of detail that is captured in each audit trail log record. Finally, it’s critical that only approved users have the ability to affect the audit trail. If unapproved users can turn the audit trail on and off, the only thing it may be providing is a false sense of security. Tapping your software support provider for best practices on audit trail configuration is never a bad idea. It can save you from a significant amount of grief later.

The audit trail gives you an important tool for detecting fraud, but it only works if you use it. Monitoring audit trails on a regular basis—with special attention paid to reviewing changed and deleted/voided records—is an easy way to improve your company’s financial security profile. A certified external audit provides an even higher degree of confidence in the integrity of your records, of course. But it also comes at an expense. Depending on your company’s risk profile, whether that is a warranted expense—and how often it’s warranted—will vary. But ultimately whether your auditing procedure is internal or external, one thing that remain constant is the benefit audit trails can provide toward safeguarding your finances.

Adam Bluemner is a Project Specialist Manager at Find Accounting Software. He and his colleagues have been helping businesses like yours find top field service software options since 1996.

Wednesday, August 6, 2014

Job Hunting Expenses



Many people change their job in the summer. If you look for a new job in the same line of work, you may be able to deduct some of your job hunting costs.

Here are some key tax facts you should know about if you search for a new job:
  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Work-Search Break.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You usually deduct your job search expenses on Schedule A, Itemized Deductions. You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.
For more on job hunting refer to Publication 529, Miscellaneous Deductions on IRS.gov. You can also call 800-TAX-FORM (800-829-3676) to get it by mail.

Additional IRS Resources:

Five Basic Tax Tips about Hobbies



Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:

1. Is it a Business or a Hobby?  A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions.  Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

5. Use IRS Free File.  Hobby rules can be complex and IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $58,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.

For more on these rules see Publication 535. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

Wednesday, July 23, 2014

Top Ten Tax Facts if You Sell Your Home



Do you know that if you sell your home and make a profit, the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.

1. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.

2. There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For details see Publication 523, Selling Your Home.

3. The most gain you can exclude is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.

4. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.

5. You must report the sale on your tax return if you can’t exclude all or part of the gain. And you must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.

6. Generally, you can exclude the gain from the sale of your main home only once every two years.

7. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.

8. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules see Publication 523.

9. If you sell your main home at a loss, you can’t deduct it.

10. After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.

Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

If you still need to do your 2013 taxes, use IRS e-file to prepare and file your tax return. The tax software will do most of the hard work for you. You can use IRS e-file through Oct. 15. If you file a paper return, you may use the worksheets in Publication 523 to help you file.

For more on the sale of a home see Publication 523 on IRS.gov. You can call 800-TAX-FORM (800-829-3676) to get it by mail.

Five Basic Tax Tips for New Businesses



If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Get all the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.

Additional IRS Resources: