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Jennifer

CPA | Principal

Maybe it’s the fact that she comes from a two-team family, but Jennifer thrives on difficulty.

Pete Miller
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The fraud triangle is the cornerstone to occupational fraud theory and illustrates the three elements that need to be in place for a perpetrator to successfully execute a fraud scheme. This concept, and its three major tenets, have been at the heart of fraud theory for over 40 years. Those three tenets are pressure, opportunity, and rationalization.

The Association of Certified Fraud Examiners has a very effective graphic that provides additional detail into the definition of these three areas. While the fraud triangle is well-recognized by fraud investigators, some argue that additional focal points are essential to this analysis and other shapes have emerged that merit further discussion.

The Fraud Diamond

Rationalization is not as intuitive as the pressure and opportunity. Pressure, the private financial need that may be cured by the fraud, and opportunity, the ability to carry out a fraud made possible by a break down in internal controls, are concepts that are easier to get your arms around. The Fraud Diamond seeks to further define and clarify the concept of rationalization.

As recently published by the ACFE and originally published by forensic accountant David T. Wolfe and professor Dana R. Hermanson (see the paper, The Fraud Diamond: Considering the Four Elements of Fraud), rationalizing wrongdoing remains a critical personal characteristic for fraudsters.

The Fraud Diamond extends thinking beyond rationalization to add a fourth model component — capability — that considers six other individual abilities and traits that are observable. These capability factors include:

  1. Having the right organizational position or function to take advantage of fraud opportunities.
  2. Having the appropriate expertise to take advantage of fraud opportunities.
  3. Having the confidence or ego to take advantage of fraud opportunities.
  4. Being able to coerce others to participate in fraudulent activities.
  5. Being able to deal with the stress associated with committing fraud.
  6. Being a good liar.

As organizations design fraud prevention programs, they certainly need to analyze the ability of individuals to “talk themselves into” a fraud, but the six points mentioned by Wolfe and Hermanson provide meaningful depth to that analysis. Anyone can talk themselves into doing the wrong thing in the right circumstances, but individuals with some or all of these six characteristics have a greater likelihood of committing fraud and may require additional safeguards.

© Clark Nuber PS and Focus on Fraud, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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U.S. Supreme Court Overturns Quill, Opens Door for States to Require Sales Tax Collection by Virtually All Remote Sellers

Although the Court’s choice to overturn 51 years of precedent was not altogether unexpected, it will nonetheless require businesses that sell on a multistate basis to make some impactful and immediate decisions on how to operate in the post-Quill world. A few thoughts on the Court’s June 21, 2018 decision in South Dakota v. Wayfair, and its impact (short-term and longer-term) on both remote sellers and consumers:

The Court threw out the old rule, but didn’t provide clear guidance on exactly when a seller must collect tax on remote sales.

The Court’s majority opinion held that its earlier decisions in National Bellas Hess v. Illinois (1967) and Quill v. North Dakota (1992) were wrongly decided, insofar as they provided that physical presence was a prerequisite for substantial nexus under the dormant Commerce Clause of the U.S. Constitution.  The Court found that these earlier decisions had resulted in an “online sales tax loophole” or “judicially created tax shelter” for remote sellers, which “creates rather than resolves market distortions.” Holding that “the physical presence rule is artificial in its entirety,” the Court had no trouble overturning it.  However, the decision provides no real guidance on what minimum level of activity or sales into a state would be sufficient to create substantial nexus and an obligation to collect tax post-Quill. The Court remanded the case to the South Dakota Supreme Court to determine whether the state’s law meets other constitutional requirements.  In remanding the case, the Court noted favorably that other constitutional concerns may be satisfied by the law’s sales and transaction thresholds, the bar on retroactive enforcement, and the adoption by South Dakota of certain uniformity and simplification provisions of the Streamlined Sales and Use Tax Agreement.

Congress could provide a new set of rules - but will it? 

Both the Court’s majority and dissenting opinions stress that Congress could create a new set of rules for sales tax collection on remote sales, if it chooses to act.  Acknowledging that its decision may create significant new compliance burdens on remote sellers, the majority points out that “Congress may legislate to address these problems if it deems it necessary and fit to do so.” The dissent is more pointed – although agreeing that Bellas Hess was wrongly decided, it argues that “Any alteration to [the physical presence rule] with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”  It remains to be seen whether and when Congress will act.

How will the states react?

A number of states have enacted laws in the past several years similar to the South Dakota law at issue in Wayfair, which requires sellers to collect tax if they make more than $100,000 of sales or have more than 200 sales transactions per year with customers there.  Although the South Dakota law bars retroactive assessments of uncollected sales tax, some of the similar laws in other states do not.  However, states will face their own administrative burdens in bringing a raft of remote sellers into their taxing systems rather quickly. Given the Court’s approving statements regarding the South Dakota law’s bar on retroactive enforcement, one would hope that most states will focus on getting remote sellers to collect and remit tax going forward rather than assessing uncollected tax for past periods.  Many of the states that have not yet enacted South Dakota-style laws will likely rush to do so; but, here again one hopes that the states will set a specific date on which remote sellers must begin to collect tax, rather than imposing retroactive liability for uncollected taxes.  It is important to note that there is nothing to prevent states from assessing tax for prior periods on sellers who had a physical presence inside their borders prior to the Wayfair decision.

How should remote sellers react?

This will obviously depend on many factors, including whether the seller has had any physical presence in states where it has not collected tax, what its sales volumes are in the various states, whether its products and services are even subject to sales tax in the states where its customers are located, and more.  Some remote sellers may want to consider registering and collecting tax in all states in which they make sales.  For others, a more cautious approach may be justified. Careful consideration should be given to whether liability exists for uncollected tax resulting from past in-state activities.  It is probably not advisable to register and begin collecting tax prospectively as prior periods will remain open for assessment.  Voluntary disclosure programs where the look-back period for uncollected tax is limited and penalties are waived are available in every state to address past exposure. The best strategy for coming into compliance may vary significantly from company to company based on the specific facts involved.  For those sellers that wish to register and begin collecting tax, consideration should be given to the cost of compliance.  Sales tax compliance software is available and may provide a cost-effective way to manage tax collection and filing returns.

How will consumers be impacted?

The immediate impact may be minimal.  Some of the largest remote sellers already collect tax in all or virtually all the states where they have customers.  And, as discussed above, it will likely take some time for the states to bring other remote sellers into compliance, and for those sellers to implement broad-based sales tax collection. In the long run, however, it is likely that consumers will be paying sales tax on most remote purchases that currently go untaxed. Although there may still be small seller exceptions and other provisions that allow some sales to escape taxation, the likelihood is that absent action by Congress to limit their authority, states will act aggressively to require tax collection on remote sales and sellers will eventually be brought into compliance.  The days of widespread tax-free buying from internet and catalog vendors are almost certainly a thing of the past. For more information on how the Wayfair decision may apply to your specific facts, contact any member of the Clark Nuber state and local tax team, or your own tax advisors. © Clark Nuber PS, 2018. All Rights Reserved

Three Key Tax Incentives for Manufacturers and Distributors under the Tax Cuts and Jobs Act

The three incentives that the TCJA allows for these types of companies are: using the cash method for tax purposes, treating inventory costs as non-incidental materials, and exempting them from the new interest expense limitation.

Using the Cash Method

Businesses may use the cash method for tax purposes, even though the business keeps its books and records on the accrual basis. Previously, businesses could not use the cash method if they had gross receipts over $10 million, maintained inventories, or were a C corporation or had a C corporation partner with gross receipts over $5 million. When using the cash method for tax purposes, income is recognized when the cash is received and expenses are deductible when they are paid.  The cash method provides a better matching of cash flow with taxes paid and more flexibility in tax planning. In the year the change is made, there is usually significant tax savings.  C corporations have the flat tax rate of 21%, so there may be some planning needed if the cash method creates a loss.  For S corporations, partnerships, and sole proprietorships, strategic planning can spread out the tax savings over two years by taking advantage of reducing taxes at higher tax rates.  As a business grows, the tax savings increase.  Changing to the cash method requires an Accounting Method Change (Form 3115).

Treating Inventories as Non-Incidental Materials

Businesses may treat inventories as non-incidental materials and supplies or conform to the method the business uses for financial statements or its books and records.  Under the previous law, businesses were required to capitalize materials, labor, overhead, and related general and administrative expenses (uniform capitalization) for tax purposes.  This change also requires an Accounting Method Change (Form 3115).

Exemption From the New Interest Expense Limitation

The TCJA added a new provision that limits the interest expense a business can deduct.  For 2018 through 2021, interest expense is deductible to the extent it is less than 30% of taxable income plus interest expense, depreciation, and amortization.  After 2021, interest expense is deductible to the extent it is less than 30% of taxable income plus interest expense only.  This interest expense limitation does not apply to small businesses. There are many other tax incentives available to manufacturers, distributors, and retailers, such as the Section 179 expense election up to $1 million and 100% bonus depreciation.  It is also important to consider what type of entity the business should use for tax purposes (C corporation, S corporation, LLC) with the different rate structures and limitations under the new tax law. Businesses should give careful consideration to planning with the TCJA.  There are many incentives that can result in significant tax savings.  Please contact your Clark Nuber professional or Rene Schaefer to understand how this new tax law can help you. © Clark Nuber PS, 2018. All Rights Reserved

Changes to the Qualified Improvement Property (QIP) Classification under the Tax Cut and Jobs Act

Where We Were…

Qualified Improvement Property (QIP) isn’t entirely new. The 2015 PATH Act created qualified improvement property, which is “any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service.” Excluded from QIP is any enlargement to the building, improvements to escalators or elevators and internal structural framework.  Under the 2015 PATH Act, QIP was eligible for bonus depreciation and depreciated over 39 years. In addition to QIP, there was also qualified leasehold improvement property, qualified retail improvement property and qualified restaurant improvement property. These types of qualified improvements were generally eligible for bonus depreciation and depreciated over 15 years. QIP opened up new doors for certain taxpayers who didn’t qualify under the three other improvement property types mentioned above. Companies who were leasing to related companies or who owned their own building could accelerate depreciation through bonus depreciation deductions on the improvements that qualified. QIP also removed the three-year wait period and no longer restricted the accelerated depreciation be limited to leased space; common spaces also qualified.

So What Changed with QIP?

Under the TCJA, the other three types of improvement property were removed and only the QIP classification was left for assets purchased after December 31, 2017. In removing the code sections related to the three previous types of improvement property (qualified leasehold, retail and restaurant), the TCJA neglected to also add in new code sections for QIP, which was interlinked with the old improvement property code sections. The short of it means that qualified improvement property is no longer eligible for bonus depreciation and is depreciated over 39 years. A House Ways and Means spokesperson has commented that Joint Explanatory statement reflects the intent of the House and Senate, and the error will be addressed with technical corrections. The TCJA did add that QIP is now eligible for Section 179 deduction, which is completely new for improvement property.

Next Steps

We are waiting for technical corrections to be made to match up the intention of the House and Senate to the laws for QIP, allowing the improvements to be depreciated over 15 years. In the meantime, we recommend that you work with your CPA to estimate your taxable income under the current law. If you were able to previously use a 15-year life and bonus depreciation on improvements, you should plan for the 2018 impact to taxable income under the current 39 year life/no bonus depreciation rule in case a technical correction is not made. Work with your CPA to identify other opportunities to reduce taxable income as appropriate. If you have any questions or would like more information, contact your Clark Number advisor or Jamie Witt. Jamie Witt is a senior manager in the Tax Services Group. © Clark Nuber PS, 2018. All Rights Reserved

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