The Southbourne Tax Group: Get richer this tax season in 10 easy ways millennials can maximize refunds and avoid costly mistakes

By now, you've probably heard people talking about tax season — or maybe you got the hint that you'll need to start filing your taxes soon, because of that complicated-looking W-2 form that arrived at your house.

It's only natural to want to procrastinate on filling out those ugly forms (1040-what?) or to feel intimidated or overwhelmed.

Not only do most millennials say they fear filing their taxes — more so than other generations — but young Americans are also scared to make a mistake on their taxes, and are less likely to seek professional guidance.

That might be especially true for you if this year is only your first (or second... or third...) time giving it a try without help from parents.

In fact, you should remember that tax time can be a happy time — especially if you are due for a big refund in the form of a check from the government.

Here are some pointers on what to look out for as you're doing your taxes, so you avoid mistakes and maximize any money due to you. And remember: When in doubt, you can always call the free tax help line that the IRS provides.

1. Know the deadlines — or pay the price

First and foremost, you simply must review a simple list (like this one from Mic) showing when taxes are due. Don't be off, even by a couple of days, or else you run the risk of paying a penalty for filing late.

You might want to circle April 18 on your calendar — as that’s the drop-dead deadline to file your taxes this year. And if you haven’t received your W-2 from your employer by Valentine’s Day, you might want to ring the IRS for help or to file an extension.

Speaking of extensions…

2.Don't make this common mistake regarding extensions

Time waits for no man, and apparently, neither does Uncle Sam.

There might be a reason why you choose to file for a tax extension (hopefully you get it!) that could give you six months of breathing room to get your ducks and tax paperwork in a row.

That, however, does not mean you get to simply shoot an IOU to the government, should you owe them. According to the IRS, "an extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due."

"It is a common misconception that if you file for an extension, your obligation to pay your tax bill is also delayed. This is not true!" Jacob Dayan, a partner and co-founder of Community Tax, a tax resolution and debt relief services company, reiterated to Mic. "If you don't pay your tax bill at the deadline you are delinquent, even if you've requested an extension for your return."

3.Beware tax-related identity theft

You might be dreaming about all the awesome things you plan to buy with the tax return you hope to get, and we hope you’re able to enjoy it!

But one common danger all millennials (and everyone, really) needs to look out for is tax-related identity theft. Believe it or not, there are cold-hearted people out there who are looking for opportunities to steal your Social Security number — in order to file a phony tax return and claim your bounty.

In 2016 alone, the IRS discovered thousands of fraudulent refunds and has been working on the double to reduce tax return fraud.

Alex Hamilton, a communications professional at the Identity Theft Resource Center, advises taxpayers to file as early as possible to help reduce the risk of tax-related identity theft. In addition, Hamilton told Mic, it's important to "regularly update your anti-virus software to protect you from a cyber-attack which can steal your personal data."

To prevent tax-related identity theft, the IRS also encourages tax filers to question suspicious emails and "threatening calls" from people posing as representatives of your bank — or even the IRS — and not to carry your Social Security card.

For more tips on how to protect yourself from tax-refund fraud, visit the IRS website.

4.Use student loans — to your advantage

Sadly, it feels like student loan debt is just a universal part of being a millennial.

But there's a silver lining: Millennials contending with student loans have the opportunity to deduct interest paid on student loans.

"Many millennials rush to get their taxes done online as soon as they get their W-2s and don’t wait for their 1098-Es from their student loan providers," Joseph Carpenito, a licensed financial advisor at Raymond James and founder of the financial site MyPlan2Day.com, explained to Mic. "[For] a young person with limited deductions, student loan interest may potentially be one of their largest deductions."

You can deduct up to $2,500 of student loan interest paid in a given year.

There are, however, income limits for this deduction, so be sure to check out tips for claiming the student loan interest deduction on the IRS website.

5.Make the most of small business tax perks if you work a side hustlev

Do you love moonlighting as a freelancer or someone who earns extra money doing what you love? Surprise!

The government might actually consider you to be a small business owner.

"Millennials are more involved in the 'gig economy' than other demographics, and many of them like the appeal of working for themselves in jobs like Uber drivers and delivery drivers," Max Robinson, an associate for Jumpstart, a research and experimentation tax credit specialist company, told Mic.

"However, these millennials need to realize that working in jobs like this classifies them as small business owners. This means they're eligible for certain deductions, like petrol expenses," Robinson added.

TL;DR: You might be owed cash back if you spent money on business expenses, so read up on what might count. Cha-ching!

6.Know what the 1099-MISC is for

As the IRS mentions on their website, you don’t have to have a business in order to report income as self-employed or an independent contractor on your taxes.

“In most cases, if you receive a form 1099-MISC it means you are considered self-employed by the government,” Crystal Stranger, president of the tax firm 1st Tax and author of The Small Business Tax Guide, told Mic.

“Not only does this mean you need to report your income and expenses on a Schedule C and pay self-employment (Social Security & Medicare) taxes on your net income, but also, in a lot of places, you will need to register with the city or state and may owe taxes or at least have a filing requirement on the local level," Stranger said. "Missing the local level filing can have bigger tax and penalty implications than making a mistake on your federal taxes.”

7.Use tax software to save time (and money)

Filing your taxes can be a truly overwhelming experience — especially if it’s your first time. It’s easy to feel stressed and worried you're not qualified to operate in the land of adulthood without a parent or guardian nearby.

But that doesn't mean you can't take care of business yourself.

"This may be your first time doing your own taxes, but you don’t have to take your taxes somewhere and pay hundreds of dollars to have them prepared," TurboTax Certified Public Accountant Lisa Greene-Lewis told Mic. "You most likely are one of the 60 million Americans who has a relatively straightforward tax return, so there is no reason to pay someone to do your taxes. You may even be able to file your federal taxes for free."

Companies like TurboTax, H&R Block, and even the IRS offer free tax-filing services to qualifying taxpayers that will not only make your life a little more hassle free, but also help keep some money in your pocket.

Just remember to make sure to report business expenses and other opportunities for deductions when the software prompts you. Speaking of which...

8.Dig deep for deductions

In a rush to get through your taxes as quickly — and with as few gray hairs — as possible, it becomes easy to skip over deductions that can help lower your tax bill. In fact, there are a number of overlooked tax deductions that some experts consider money left on the table.

“It’s easy to overlook the many ways you stay fabulous by helping others throughout the year,” Richard Lavina, CEO of Taxfyle, a personal and business tax filing app, told Mic.

The Southbourne Tax Group: Five things early tax filers need to know

Tax filing season begins Monday but some early filers face new hurdles, as crackdown on fraud continues.

Opening Day for the IRS is Monday.

That's when the Internal Revenue Service will start accepting electronically filed tax returns. We have until April 18 to file returns but many file earlier in the season, if they're expecting large refunds.

The tax filing deadline this year is Tuesday, April 18, instead of the traditional April 15, because of some quirks of the calendar. April 15 is a Saturday. But the deadline won't be shifted to Monday, April 17, because that is Emancipation Day, which is celebrated in Washington, D.C.

What do tax filers need to know this season?

1. Get an appointment if you want to talk to someone at IRS offices.

Don't expect to drop into an IRS office to get any help this tax season. All offices are appointment-only now.

If you need to visit an IRS Taxpayer Assistance Center in person, you must schedule a time by calling 844-545-5640 for the appointment hotline.

Taxpayers are asked to check IRS.gov for the days and hours of service, as well as the services offered at the location they plan to visit.

2. Beware of a new hurdle if you've used a special Individual Taxpayer Identification Number.

Some tax filers will be unable to file their federal tax returns if they do not update Individual Taxpayer Identification Numbers. Warning: Any ITIN that has not been used in the past three years will no longer work for filing that return.

On top of that, individual tax identification numbers that have middle digits of 78 or 79 also expired this year.

Tax filers in these situations must renew an Individual Taxpayer Identification Number as early as possible because they cannot file a tax return without one.

The super-sized headache? The IRS notes that it can take up to 11 weeks during the peak of the tax season to get that number from the time you send in a renewal application, known as Form W-7, for the IRS to process the application and notify you about your status.

Why the change? A new federal law to combat fraud included the requirement that certain Individual Taxpayer Identification Numbers expired on Jan. 1.

"Anyone filing a tax return with an expired ITIN could experience return processing and refund delay as well as denial of some tax benefits until the ITIN is renewed," the IRS said online in a statement.

These identification numbers often are used by people who have tax-filing or payment obligations under U.S. law but are not eligible for a Social Security number.

3. Some struggling families will face delays for their tax refunds.

The IRS notes that more than nine out of 10 refunds will be issued within less than 21 days, which is good news.

But tax filers who benefit from the Earned Income Tax Credit and the Additional Child Tax Credit should not expect their refunds until possibly the week of Feb. 27, even if they file as soon as this week.

The reason? Congress is cracking down on tax-return related fraud. The Protecting Americans from Tax Hikes Act mandated the IRS delay issuing tax refunds for returns claiming the EITC or the Additional Child Tax Credit until Feb. 15. The move is designed to give the IRS more time to detect fraud and prevent refunds from being issued to ID thieves who file fake tax returns using such credits.

But consumers who depend on the refund cash will face extra delays, given holidays and weekends.

Another thing to note: The IRS online "Where's My Refund" tool will not show an estimated date for many tax returns involving the special credits until after Feb. 15.

"So don't panic in late January and mid-February if you don't see a refund date on 'Where's My Refund.' That's just how the tool will operate given the special circumstances with the EITC and ACTC refunds," said IRS Commissioner John Koskinen in prepared remarks in early January.

4. Look out for high-cost, quick-cash on tax refund advances.

Tax filers might be tempted by refund anticipation loans that proclaim "no fee" will be charged. But Chi Chi Wu, staff attorney for the National Consumer Law Center, warns that in some cases, borrowers could face other higher fees for tax preparation or another product.

Advance loans are being heavily marketed this year by some firms, including H&R Block and Jackson Hewitt, in light of the new delays ahead for tax refunds for those who file those Earned Income Tax Credit and the Additional Child Tax Credit.

Jackson Hewitt is marketing for its Express Refund Advance, a loan of up to $1,300 that has no fees, a 0% annual percentage rate and no credit check. To get the loan, you will have to pay to file your taxes with Jackson Hewitt.

H&R Block began offering a tax-related loan for a limited time beginning Jan. 6. The H&R Block Refund Advance offers loans in the amounts of $500, $750, or $1,250 upfront for 0% interest.

The loan is loaded onto an H&R Block Emerald Prepaid MasterCard.

The amount of the advance will be deducted from tax refunds and reduce the amount that is paid directly to the taxpayer. Both Jackson Hewitt and H&R Block only offer the loans to customers who visit their offices and outlets; it's not available online.

5. Take a close look at that W-2 Form.

Some tax filers are going to discover that they have to deal with a "Form W-2 Verification Code."

About 50 million W-2 forms will include a 16-digit verification code that tax filers or preparers will need to add when prompted by tax software. About 2 million W-2s had such a code during the 2016 filing season.

The IRS anticipates that the verification code ultimately will be used on all W-2 forms in future years.

Again, we're looking at another hurdle to try to corral the crooks and prevent the filing of fake tax returns.

6. Remember, scam artists love tax season.

"We continue to ask the public to be vigilant because the scamming doesn't stop," said Luis D. Garcia, IRS spokesperson in Detroit.

The con artists pretending to be from the IRS might reach out via your e-mail in-box, your mailbox or even knock on your front door, Garcia said.

And the crooks are going after tax preparers, too.

Earlier in January, the IRS warned that cyber criminals were pretending to be tax filers who wanted help filing their returns.

The first e-mail says something like: "I need a preparer to file my taxes."

If the tax preparer responds, a second e-mail is sent that has either an embedded web address or contains a PDF attachment that has an embedded web address.

"The tax professional may think they are downloading a potential client's tax information or accessing a site with the potential client's tax information," the IRS warned.

"In reality, the cyber criminals are collecting the preparer's e-mail address and password and possibly other information."

Oddly enough, I even got one of these phishing e-mails last week. The language was stilted and off-kilter, which can be a warning sign.

It began "Hello, CPA," which I am not.

"I need a careful and experienced high quality accountant, to handle all matters of accounting including tax preparation, IRS problem resolution, and matters expected of a CPAs to handle for Individual and Small Business," the e-mail read.

"I don't need that stereo typically dull, introverted and boring accountants, I believe in the value of partnership in business relationships."

"Find attached is my tax documents."

Love that last line. I'd love to respond: Find this attachment for a way to learn how to diagram sentences and master subject-verb agreements.

But then again, we don't want the scammers to get even better at this game, do we? Best to kill and ignore all such phishing e-mails.

The Southbourne Tax Group: Tips to maximize your tax refund

The 2017 tax season began this month and local tax accountant, Jennifer Eubanks with Mcneel CPA is offering some tips for people who haven't filed for their refund yet.

"A lot of people that are self-employed don't look at taking the self-employed health insurance," says Eubanks, "With health insurance being so high you can take a deduction."

Another deduction Eubanks says people often miss out is their health savings account where you put money into the account but only use it to foot medical bills.

"You also get to take a deduction on your tax return for putting money into a health savings account," says Eubanks. "It's kind of like a retirement account except it is for medical expenses."

Meaning just like a 401k, the more you put in the less taxable income you have, increasing your refund.

Another tip is for parents that have kids in college, American opportunity tax credit is available.

"Anything that relates to school like books, tuition," says Eubanks. "Any kind of qualifying expenses for that, they can take that deduction so they need keep up with all the expenses they have while they're in school."

Eubanks says the IRS is cracking down on fraud this year delaying the release of earned income credit and additional child tax credit until mid Feb.

"Claiming children that are not supposed to be on their tax return so the IRS is looking into more of those earned income credit trying to eliminate a lot of fraud," says Eubanks.

When filing your taxes Eubanks says to keep all your receipts and expenses organized to make the filing process easier.

Employers have until Jan. 31 to send W-2 forms and tax returns have to be filed by April 18.

The Southbourne Tax Group: BBB Offers Tips on Filing Taxes, Avoiding Fraud

While all working citizens should have had their W-2 form delivered by now, it’s important for taxpayers to take time and use caution when selecting a tax preparer you can trust.

It’s important to avoid mistakes that could result in additional fees or even tax identity theft.

Unfortunately, identity theft is not the only thing to watch out for when enlisting the help of a tax preparer or tax software to file your taxes. BBB receives thousands of complaints from consumers against tax preparers every year.

In 2016, BBB received nearly 3,000 complaints against tax preparation businesses nationwide.

Common complaints state that the tax preparer made errors in their return which resulted in fines and fees. Other complaints allege customer service, billing and contract issues.

BBB offers the following advice when searching for a tax preparer:

* Look for credentials. Ideally, your tax preparer should either be a certified public accountant, a tax attorney or an enrolled agent. All three can represent you before the IRS in all matters, including an audit.

* Don’t fall for the promise of a big refund. Be wary of any tax preparation service promising larger refunds than the competition. Avoid any tax preparer who bases their fee on a percentage of the refund.

* Think about accessibility. Many tax preparation services only set up shop for the months leading up to the April 15 deadline. In case the IRS finds errors, or in case of an audit, make sure you are able to contact you tax preparer at any time of the year.

* Read the contract carefully. Read tax preparation service contracts closely to ensure you understand issues such as how much it is going to cost for the service, how the cost will be affected if preparation is more complicated and time consuming than expected and whether the tax preparer will represent you in the case of an audit.

* Ask around. Ask family, friends or co-workers for recommendations on filing your taxes, whether it’s through a CPA, tax preparation business or online tax service that allows you to file your own taxes. To find a BBB Accredited tax preparation business near you, go to bbb.org.

Tax season is also a busy time for identity thieves. Tax identity theft occurs when someone uses your Social Security number to get a tax refund, or a job.

According to the Federal Trade Commission (FTC), tax identity thieves get your personal information in a number of ways, including: going through your trash or mailbox; through emails asking for information, which appear to come from the IRS; employees at hospitals, nursing homes, banks and other businesses stealing data; and phony or dishonest tax preparers misusing confidential information or passing it along to identity thieves.

To lessen the chances of becoming a victim of tax identity theft, the FTC has the following advice, whether you choose to file your return yourself or use a tax preparer:

* File your tax return early. And do it before identity thieves have a chance to steal your information. Also, make sure your address is up-to-date so your W-2 doesn’t get lost in the mail or end up in the wrong hands.

* Use a secure Internet connection. If you file your return electronically, don’t use unsecure, publicly available Wi-Fi hotspots.

* Shred documents. This includes copies of your tax return, drafts or calculation sheets you no longer need. The IRS recommends that most people keep three years’ worth of tax returns in case of an audit. Keep hard copies and electronic files in a secure location.

* Check your credit report. To ensure your identity hasn’t been stolen or compromised, go to annualcreditreport.com to get your free credit report.

The Southbourne Tax Group: 3 Tips to Avoid Charity Tax Deduction Scams

Groups and individuals pretending to be charitable organizations are especially active around tax season, as they try to attract donations from Americans looking for a tax deduction. Unfortunately, its one of the “Dirty Dozen” Tax Scams for the 2017 filing season, according to the IRS.

"Fake charities set up by scam artists to steal your money or personal information are a recurring problem," said IRS Commissioner John Koskinen. "Taxpayers should take the time to research organizations before giving their hard-earned money.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire someone to prepare their taxes.

Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The IRS offers these basic tips to taxpayers making charitable donations:

1. Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity's EIN.
2. Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.
3. Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Fraudsters may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

To help disaster victims, the IRS encourages taxpayers to donate to recognized charities. Disaster victims can call the IRS toll-free disaster assistance telephone number (866-562-5227). Phone assistors will answer questions about tax relief or disaster-related tax issues.

Find legitimate and qualified charities with the Select Check search tool on IRS.gov. (EINs are frequently called federal tax identification numbers, which is the same as an EIN).

The Southbourne Tax Group: Six Strategies For Fraud Prevention In Your Business

Employee fraud is a significant problem faced by organizations of all types, sizes, locations and industries. While we would all like to believe our employees are loyal and working for the benefit of the organization (and most of them probably are), there are still many reasons why your employees may commit fraud and several ways in which they might do it. According to the 2014 Report to the Nation on Occupational Fraud and Abuse (copyright 2014 by the Association of Certified Fraud Examiners, Inc.), research shows that the typical organization loses 5% of its annual revenue each year due to employee fraud. Prevention and detection are crucial to reducing this loss. Every organization should have a plan in place as preventing fraud is much easier than recovering your losses after a fraud has been committed.

Types of Fraud

Fraud comes in many forms but can be broken down into three categories: asset misappropriation, corruption and financial statement fraud. Asset misappropriation, although least costly, made up 90% of all fraud cases studied. These are schemes in which an employee steals or exploits its organization’s resources. Examples of asset misappropriation are stealing cash before or after it’s been recorded, making a fictitious expense reimbursement claim and/or stealing non-cash assets of the organization.

Financial statement fraud comprised less than five percent of cases but caused the most median loss. These are schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.

Corruption fell in the middle and made up less than one-third of cases. Corruption schemes happen when employees use their influence in business transactions for their own benefit while violating their duty to the employer. Examples of corruption are bribery, extortion and conflict of interest.

Fraud Prevention

It is vital to an organization, large or small, to have a fraud prevention plan in place. The fraud cases studied in the ACFE 2014 Report revealed that the fraudulent activities studied lasted an average of 18 months before being detected. Imagine the type of loss your company could suffer with an employee committing fraud for a year and a half. Luckily, there are ways you can minimize fraud occurrences by implementing different procedures and controls.

1. Know Your Employees

Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. Observing and listening to employees can help you identify potential fraud risk. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you in to a risk. This can also reveal internal issues that need to be addressed. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead him or her to commit fraud as a way of revenge. Any attitude change should cause you to pay close attention to that employee. This may not only minimize a loss from fraud, but can make the organization a better, more efficient place with happier employees. Listening to employees may also reveal other clues. Consider an employee who has worked for your company for 15 years that is now working 65 hours a week instead of 40 because two co-workers were laid off. A discussion with the employee reveals that in addition to his new, heavier workload, his brother lost his job and his family has moved into the employee’s house. This could be a signal of a potential fraud risk. Very often and unfortunately, it’s the employee you least expect that commits the crime. It is imperative to know your employees and engage them in conversation.

2. Make Employees Aware/Set Up Reporting System

Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud. According to the ACFE 2014 Report, most occupational fraud (over 40%) is detected because of a tip. While most tips come from employees of the organization, other important sources of tips are customers, vendors, competitors and acquaintances of the fraudster. Since many employees are hesitant to report incidents to their employers, consider setting up an anonymous reporting system. Employees can report fraudulent activity through a website keeping their identity safe or by using a tip hotline.

3. Implement Internal Controls

Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce the risk of fraud from occurring. For example, a retail store has one cash register employee, one salesperson, and one manager. The cash and check register receipts should be tallied by one employee while another prepares the deposit slip and the third brings the deposit to the bank. This can help reveal any discrepancies in the collections.

Documentation is another internal control that can help reduce fraud. Consider the example above; if sales receipts and preparation of the bank deposit are documented in the books, the business owner can look at the documentation daily or weekly to verify that the receipts were deposited into the bank. In addition, make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers setup and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances. If you do not have an internal control process or fraud prevention program in place, then you should hire a professional with experience in this area. An expert will analyze the company’s policies and procedures, recommend appropriate programs and assist with implementation.

4. Monitor Vacation Balances

You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for a period of time. It is also a good idea to rotate employees to various jobs within a company. This may also reveal fraudulent activity as it allows a second employee to review the activities of the first.

5. Hire Experts

Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing antifraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations. 

6. Live the Corporate Culture

A positive work environment can prevent employee fraud and theft. There should be a clear organizational structure, written policies and procedures and fair employment practices. An open-door policy can also provide a great fraud prevention system as it gives employees open lines of communication with management. Business owners and senior management should lead by example and hold every employee accountable for their actions, regardless of position.

Fraud Detection

In addition to prevention strategies, you should also have detection methods in place and make them visible to the employees. According to Managing the Business Risk of Fraud: A Practical Guide, published by Association of Certified Fraud Examiners (ACFE), the visibility of these controls acts as one of the best deterrents to fraudulent behavior. It is important to continuously monitor and update your fraud detection strategies to ensure they are effective. Detection plans usually occur during the regularly scheduled business day. These plans take external information into consideration to link with internal data. The results of your fraud detection plans should enhance your prevention controls. It is important to document your fraud detection strategies including the individuals or teams responsible for each task. Once the final fraud detection plan has been finalized, all employees should be made aware of the plan and how it will be implemented. Communicating this to employees is a prevention method in itself. Knowing the company is watching and will take disciplinary action can hinder employees’ plans to commit fraud.

Conclusion

Those who are willing to commit fraud do not discriminate. It can happen in large or small companies across various industries and geographic locations. Occupational fraud can result in huge financial loss, legal costs, and ruined reputations that can ultimately lead to the downfall of an organization. Having the proper plans in place can significantly reduce fraudulent activities from occurring or cut losses if a fraud already occurred. Making the company policy known to employees is one of the best ways to deter fraudulent behavior. Following through with the policy and enforcing the noted steps and consequences when someone is caught is crucial to preventing fraud. The cost of trying to prevent fraud is less expensive to a business than the cost of the fraud that gets committed.

The Southbourne Tax Group: Detecting Financial Statement Fraud

Looking back at Enron, perhaps the company best known for committing accounting fraud, you can see the many methods that were utilized in order to fraudulently improve the appearance of its financial statements. Through the use of off balance sheet special purpose vehicles the firm continued to hide its liabilities and inflate its earnings. In 1999, limited partnerships were created for the purpose of purchasing Enron shares as a mean of improving performance of its stock. That year, the company returned 56% to its shareholders, which was followed by another 87% appreciation at the onset of the new millennium. As Enron's aggressive accounting practices and financial statement manipulation began to spiral out of control, the scandal was eventually uncovered by the Wall Street Journal. Shortly after, on December 2, 2001 Enron filed for Chapter 11 in what was the largest U.S. bankruptcy in history … only to be surpassed by WorldCom less than a year later.

Complex accounting fraud such as that practiced at Enron is usually extremely difficult for the average retail investor to discover. However, there are some basic red flags that help during the preliminary stages of the investigation. After all, the Enron fraud was not exposed by high paid Ivy League MBA holding Wall Street analysts, but by news reporters who used journal articles and public filings in their due diligence process. Despite passage of Sarbanes-Oxley, financial statement fraud remains too common an occurrence, often damaging people's retirement and educational savings. Being first on the scene to uncover a fraudulent company can be very lucrative from a short seller's perspective and can be rather beneficial to a skeptical investor who is weighing in the overall market sentiment. (After the infamous collapse of companies like Tyco, Enron and WorldCom, the government responded to try and prevent it from happening again.

What Is Financial Statement Fraud?

According to a study conducted by the Association of Certified Fraud Examiners (ACFE), fraudulent financial statement accounts for approximately 10% of incidents concerning white collar crime. Asset misappropriation and corruption tend to occur at a much greater frequency, yet the financial impact of these latter crimes is much less severe. ACFE defines fraud as "deception or misrepresentation that an individual or entity makes knowing that the misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party." Greed and work pressure are the most common factors pushing management to deceive investors and creditors.

Financial statement fraud can surface in many different forms, although once deceptive accounting practices are initiated, various systems of manipulation will be utilized to maintain the appearance of sustainability. Common approaches to artificially improving the appearance of the financials include: overstating revenues by recording future expected sales, understating expenses through such means as capitalizing operating expenses, inflating assets' net worth by knowingly failing to apply an appropriate depreciation schedule, hiding obligations off of the company's balance sheet and incorrect disclosure of related party transactions and structured finance deals. Another alternative to financial statement fraud involves cookie-jar accounting practices, a procedure by which a firm will understate revenues in one accounting period and maintain them as a reserve for future periods with worse performance. Such procedures remove the appearance of volatility from the operations.

Financial Statement Fraud Red Flags

Financial statement red flags provide a general overview of the warning signs investors should take note of. They do not necessarily indicate an undoubted occurrence of financial statement fraud, but merely signal that further in-depth research must be conducted to assess the validity of the corporate documents. Creditors would find such information useful to ensure that loans are not provided to firms operating with an elevated amount of risk. Investors, on the other hand, may want to take note of the following factors to discover new shorting opportunities. Government regulators, however, aim to catch and punish fraud to ensure the transparency and reliability of the financial markets.

Five basic types of financial statement fraud exist:

• fictitious sales
• improper expense recognition
• incorrect asset valuation
• hidden liabilities and
• unsuitable disclosures

Effectively spotting these fraudulent disclosures involves keeping an open eye for the most common financial statement fraud red flags:

• Accounting anomalies, such as growing revenues without a corresponding growth in cash flows. Sales are much easier to manipulate than cash flow but the two should move more or less in tandem over time.
• Consistent sales growth while established competitors are experiencing periods of weak performance. Note that this may be due to efficient business operations rather than fraudulent activity.
• A rapid and unexplainable rise in the number of day's sales in receivables in addition to growing inventories. This suggests obsolete goods for which the firm records fictitious future sales.
• A significant surge in the company's performance within the final reporting period of fiscal year. The company may be under immense pressure to meet analysts' expectations.
• The company maintains consistent gross profit margins while its industry is facing pricing pressure. This can potentially indicate failure to recognize expenses or aggressive revenue recognition.
• A large buildup of fixed assets. An unexpected accumulation of fixed assets can flag the usage of operating expense capitalization, rather than expense recognition.
• Depreciation methods and estimates of assets' useful life that do not correspond to the overall industry. An overstated life of an asset will decrease the annual depreciation expense.
• A weak system of internal control. Strong corporate governance and internal controls processes minimize the likelihood that financial statement fraud will go unnoticed.
• Outsized frequency of complex related-party or third-party transactions, many of which do not add tangible value (can be used to conceal debt off the balance sheet).
• The firm is on the brink of breaching their debt covenants. To avoid technical default, management may be forced to fraudulently adjust its leverage ratios.
• The auditor was replaced, resulting in a missed accounting period. Auditor replacement can signal a dysfunctional relationship while missed accounting period provides extra time to "fix" financials.
• A disproportionate amount of managements' compensation is derived from bonuses based on short term targets. This provides incentive to commit fraud.
• Something just feels off about the corporation's business model, financial statements or operations

Financial Statement Fraud Detection Methods

Spotting red flags can be extremely challenging as firms that are engaged in fraudulent activities will attempt to portray the image of financial stability and normal business operations. Vertical and horizontal financial statement analysis introduces a straightforward approach to fraud detection. Vertical analysis involves taking every item in the income statement as a percentage of revenue and comparing the year-over-year trends that could be a potential flag cause of concern. A similar approach can also be applied to the balance sheet, using total assets as the comparison benchmark, to monitor significant deviations from normal activity. Horizontal analysis implements a similar approach whereby rather than having an account serve as the point of reference, financial information is represented as a percentage of the base years' figures. Likewise, unexplainable variations in percentages can serve as a red flag requiring further analysis.

Comparative ratio analysis also allows analysts and auditors to spot discrepancies within the firm's financial statements. By analyzing ratios, information regarding day's sales in receivables, leverage multiples and other vital metrics can be determined and analyzed for inconsistencies. A mathematical approach, known as the Beneish Model, evaluates eight ratios to determine the likelihood of earnings manipulation. Asset quality, depreciation, gross margin, leverage and other variables are factored into the analysis. Combining the variables into the model, an M-score is calculated; a value greater than -2.22 warrants further investigation as the firm may be manipulating its earnings while an M-score less than -2.22 suggests that the company is not a manipulator Similar to most other ratio-related strategies, the full picture can only be accurately portrayed once the multiples are compared to the industry and to the specific firm's historical average. (Learn why this ratio may be a good alternative to the current, cash and quick ratios.

The Bottom Line

In the spring of 2000 financial fraud investigator Harry Markopolos approached the SEC, claiming that the wealth management business of Bernard Madoff was fraudulent. After modeling Madoff's portfolio, Markopolos realized that the consistent returns achieved by Madoff were impossible. For example, according to an interview with the Certified Fraud Investigator, he "concluded that for Madoff to execute the trading strategy he said he was using he would have had to buy more options on the Chicago Board Options Exchange than actually existed." Although, Markopolos' warnings went unnoticed, in 2009 Madoff was charged with operating a $65 billion Ponzi scheme.

Instances such as this are rare since fraudulent behavior is often caught before it has a chance to escalate to such levels. Having proper knowledge of the red flags to avoid companies indulging in unscrupulous accounting practices is a useful tool to ensure the safety of your investments.