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Member of Russell Bedford International, a global network of independent professional service firms.
As businesses are formed and as they grow, one question often asked by owners and chief financial officers is whether their companies would benefit from an audit. As you might have guessed, the answer depends on a number of factors specific to each company. Below is helpful information about audits to keep in mind as you decide whether or not an audit is right for your business.
Although audits, reviews, and compilations all involve a report on financial statements, an audit provides a higher level of assurance compared to a review or a compilation. Here’s what each consists of:
The most basic of the three, a compilation is when the accountant assists management in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications needed to the financial statements.
In a review engagement, the accountant performs analytical, inquiry, and other procedures to obtain limited assurance that no material modifications should be made to the financial statements.
An auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. In order to obtain this assurance, auditors are required to gain an understanding of an entity’s internal controls and fraud risk. During the audit, tests of balances and transactions through third-party confirmations, physical inspections, observations, and other procedures are performed. Due to its greater scope, an audit is higher in cost, but the benefit is that it is more thorough and provides a higher assurance of accuracy.
There are many reasons why a business may benefit from an audit. Here are a few examples:
As auditors gain an understanding of internal controls, they are required to communicate any weaknesses they identify to the company board and management. These auditor communications can be a valuable resource in helping management and ownership take action to establish or strengthen procedures that safeguard assets, reduce the risk of fraud, and improve the financial reporting process. As a result, the company will have more effective and efficient financial reporting and accounting processes, which may lead to even more operational efficiencies.
At Cray Kaiser, we recognize that every business has unique needs and considerations when it comes to audits. If you have questions about whether an audit may be right for your business, contact us today.
Click here to learn more about audits.
We recently shared what you should do if you receive notification of a tax audit (and why you should never take on the IRS alone!). But have you ever wondered what the odds are of your return being audited? This is somewhat of a mystery to taxpayers and unfortunately there is no concrete answer. Audits are generally selected at random, but there are a few things that may flag your return for an audit. Here are some considerations to keep in mind:
Before you panic when you check the mail and find a letter from the IRS, know that not all notices are audit notices. Taxpayers often receive notices about information on tax returns that does not agree with government tax records. These are known as computer-generated CP2000 notices. They generally cover the data mismatches of income and deductions on your tax returns when compared to the data the IRS receives via W-2s, 1099s, and 1098s. Most importantly, CP2000 notices are NOT audits.
There are other types of notices requesting additional information to allow for a deduction or simply to verify reported data. These are also NOT audits. If you ever receive a notice from the IRS and you’re not sure what it means, contact your tax advisor right away.
Overall, there has actually been a decrease in audit rates over the last few years. In 2018 there was a 7% drop in audit exam rates compared to 2017 for all tax returns.
The 2018 individual audit rate was just 0.59%, which means one out of every 170 returns filed was audited. 81% of those audits were correspondence exams and 19% were conducted in person at IRS offices or at the taxpayer’s business. In other words, only about one out of every 900 returns required in-person audit meetings.There were also less business return audits in 2018. The C corporation exam rate was 0.9% and exam rates for both partnerships and S corporations was only 0.2%.
As the IRS audit staff is reduced, fewer audits are being performed. However, with the increased application of computer-assisted audits and reviews, we believe audits will continue for taxpayers that are at high risk.There are many red flags that can increase your chance for an audit. Some are identified by IRS computer formulas while others are issue-focused compliance campaigns by IRS’s Large Business and International Divisions. Here are the most common audit triggers:
If you are concerned about your tax audit risk, we can review your situation and advise if we identify any potential red flags. Call Cray Kaiser if you would like a risk assessment or if you receive any tax notices that you are uncertain about.
According to the Association of Certified Fraud Examiners, nearly 30% of businesses are victims of payroll misconduct, with small businesses twice as likely to be affected than large businesses. Here are four payroll fraud schemes that every business should be aware of:
A ghost employee does not exist anywhere except in your payroll system. Typically, someone with access to your payroll creates a fake employee and assigns direct deposit information to a dummy account so they can secretly transfer the money into their own bank account.
Time stealing happens when employees add more time to their timecard than they actually worked. Sometimes multiple employees will work together to clock each other in earlier than when they arrive or later than when they depart for the day.
In an attempt to bump up a commission payment or attain a quota, sales employees may alter a sales contract to their benefit. A typical tactic used by a dishonest salesperson is to make a booked sale appear larger than it is and then slide a credit memo through the system in a later period. Companies with complicated commission calculations or weak controls in this area are the most vulnerable.
A popular scam, known as phishing, starts with a fraudster impersonating a company executive through email or over the phone asking an employee with access to payroll data to wire money or provide sensitive information. These imposters can make the correspondence look very real by using company logos, signatures and email addresses.
Being aware of these types of threats is a start, but you also need to know how to prevent and stop them. Here are some tips to reduce your company’s payroll fraud risk:
1. Create better internal controls – While most employees are trustworthy, giving too much control over your payroll to one person is not a good idea. Separating payroll duties and formalizing an approval process protects both your business and your employees.
2. Review payroll records – Designate someone outside of the payroll-processing department to periodically review the payroll records. Have them review names, pay rates and verify that the total payroll matches what was withdrawn from the business bank account.
3. Perform random internal audits – An internal audit is when you can really get into the details to look for potential payroll fraud. You can do an in-depth review of the whole payroll system or select a random sample of dates and employees. Keep the timing of the audit under wraps to prevent giving someone the chance to cover up their misdeeds.
Managing your business payroll is a daunting task by itself, and actively protecting against fraud adds additional complexity. If you need assistance creating internal controls to prevent payroll fraud schemes, please contact us today. You can also click here to learn about our Accounting Services.
We have great news for manufacturers in Illinois! There has been a longstanding sales tax exemption for machinery and equipment that is used primarily in the manufacturing of tangible personal property. However, until recently, the exemption did not apply to consumables, hand tools, safety apparel, or other supplies. Recent tax legislation has now expanded the manufacturing sales tax exemption in Illinois. For purchases made on or after July 1, 2019, any production-related, tangible personal property used or consumed in the manufacturing process qualifies for the sales tax exemption.
Here are a few examples of supplies that are included in this new tax law:
To receive the exemption, you must prepare Form ST-587, Exemption Certificate (for Manufacturing, Production Agriculture, and Coal and Aggregate Mining), and provide the certificate to the retailer selling the related tangible personal property.
For more information on the exemption, click here. If you have any questions about whether your company’s purchases qualify for this sales tax exemption, please don’t hesitate to contact Cray Kaiser today.
You certainly know that profit and cash flow are both important elements of a healthy business. But what’s the difference? And what can you do to achieve positive cash flow? Read our insights below, and be sure to contact Cray Kaiser if you have any questions.
Profit is defined as revenue minus expenses. It may also be referred to as net income. Cash flow, on the other hand, refers to the inflows and outflows of cash for a particular business. In other words, profit is how much money your business is making when all is accounted for, but cash flow is how much money you currently have access to.
For small businesses, positive cash flow is the goal. You want to generate more money than you’re spending. And while this sounds simple, plenty of profitable businesses run into problems. It can be challenging to balance regular expenses like salaries, rent and technology with irregular revenue. Your sales might be strong, but if cash is stuck in inventory or accounts receivable, you have a cash flow problem.
So, what can you do to manage it? Statements, along with balance sheets and income statements, help provide insights into a company’s finances. Unfortunately, many business owners do not access a cash flow statement and they only rely on the balance sheet and income statement to help manage their finances.
An income statement, also known as a Profit & Loss (P&L) report, shows the bigger picture of how much money your business makes and spends within a given time period. In other words, it summarizes how your business earned revenue, paid expenses, and arrived at its bottom line.
Income statements account for financial factors beyond cash flow, non-cash expenses such as depreciation, and allow you to observe your business’s longer-term trends in spending and earning. Your income statement can help you answer questions such as: How did my business perform last year? Where can I cut back on costs? Will lenders trust me to repay their financing?
A cash flow statement shows the incomings and outgoings of your business’s cash within a given time period. It provides the shorter-term information you need on a daily basis. Your statement can help you answer questions such as: Can I afford to pay my bills? Do I have enough cash for unexpected equipment repairs? Will I be able to fund payroll on time?
Cash flow statements typically divide cash by use:
Both types of statements present different, yet related, information. The full financial picture of your company is incomplete without understanding both.
Higher profits are a great objective, but meeting the cash needs of your business requires careful planning. Staying in the green can be difficult, especially for startups and small businesses. Here are a few suggestions for staying on top of your cash flow:
You can learn more about cash management methods here.
At Cray Kaiser, we know that understanding the importance of cash management is key to your business’s survival and success. If you need help, please don’t hesitate to call us today at 630-953-4900. You can also click here to learn about our Accounting Services.
As we officially enter the second half of the year, we’d like to remind you to perform a check-up on your payroll tax withholdings. You probably know that many taxpayers were surprised with either reduced refunds or higher taxes due when they filed their 2018 taxes. Why did this happen? Because their 2018 income tax withholding was not sufficient throughout the year.
While the tax reform that came out of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, the IRS has not yet revised Form W-4 to reflect major revisions that affect withholdings. The IRS plans to issue a revised Form W-4 for the 2020 tax year. As such, employers continue to use the pre-TCJA form which results in lower amounts withheld than the withholdings based on the new law.
The good news is that the IRS website has a tax withholding calculator where you can input your salary and withholdings to date, along with other criteria, to compute your estimated 2019 withholding. Using this tool and updating the W-4 you have on file with your employer can help you avoid any large tax surprises on your 2019 tax return. Alternatively, we can perform a detailed computation based on your 2018 return along with 2019 activity to help you come up with an accurate withholding amount for your specific tax situation. As always, Cray Kaiser is here should you have any questions or concerns about your payroll withholdings. Please don’t hesitate to contact us at 630-953-4900.
It’s another normal day at the office, until you receive a letter from the IRS. You’re being audited. What do you do now? The first thing you should do is call your tax advisor! While you might be up to navigating an audit on your own, there are many reasons why utilizing a professional’s help will make or break the outcome of your audit. Here’s why:
Seasoned IRS agents have seen your situation many times and know the rules better than you. On top of that, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.
When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, that’s when things get tricky. It may be possible to reconstruct some of your records, but generally the IRS wants your records to be contemporaneous. Your tax advisor can help you gather the information necessary to meet IRS standards, and avoid additional taxes (plus a possible 20% negligence penalty).
While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support from your advisor and concise, smart answers to their questions is the best approach to limiting further audit risk.
When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you want your point of view to be heard, get help right away to prepare a plan and manage the IRS deadlines. While you might think you have time to take this on, you don’t want to risk paying the price of a missed due date.
Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, you and your tax advisor can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.
While an audit is the last thing you want on your plate, we can help relieve the pressure. Call Cray Kaiser today if receive an audit letter and need support.
In Cray Kaiser’s first audio blog, CK Principal Deanna Salo shares the journey of a closely-held business as they craft their buy-sell agreement. When the owners of the company were looking to exit, they decided it was time to dust off their original buy-sell agreement from the 1980s. What followed was a two-year process of education, emotion, and collaboration, ending with the signing of their brand-new buy-sell agreement.
As Deanna tells the story of this business’ journey, she gives insights into why buy-sell agreements are so important, what timing might look like in the process, aha moments that business owners often experience, and common questions she’s asked about buy-sell agreements.
Click below to listen:
If you have questions about your company’s buy-sell agreement or would like assistance putting one together, please don’t hesitate to contact Cray Kaiser today.
It’s hard to believe that summer is in full swing and in just another few weeks we’ll be at the halfway point of 2019! The first quarter of the year focused on getting the financial reporting and tax returns filed for the previous year and the second quarter was spent getting the current year up-to-date. Before we knew it, we were transacting business as usual. Somehow those goals of cleaning up accounting records became long forgotten. But we’re here to remind you not to forget the importance of accounting clean up projects!
It’s vital to get your accounting cleaned up before the year-end activities kick in and this is the perfect time of year to do it. Below are a few accounting projects you may want to consider taking on over the next few months. In the end it will set you up for success come December.
When was the last time you reviewed your record retention policies? If you are like many organizations, you retain hard copies until space runs out, then you look to discard old items. However, this may subject you to added scrutiny when you are unable to produce key documents for your business. The IRS and AICPA have guidelines to help you in formulating your record retention policy. We recommend that you formalize your current policy utilizing both physical and electronic storage. Remember, the goal of record retention is to be able to retrieve key documents in a reasonable period of time and this should be considered as you formalize your policy.
Your accounting records should be locked down for the previous year so no additional changes can be made to the year-end balances. If not done already, you should request a copy of year-end adjusting journal entries and a trial balance report from your accountant. These adjustments need to be recorded in your accounting system and a process needs to be performed in which you are able to lock the period so that additional changes cannot be made. Depending on the accounting system you are using this may be as simple as setting a password for the file. Doing this will provide assurance that you are starting 2019 with accurate balances.
Each year certain adjusting journal entries are recorded such as depreciation/amortization, prepaid expenses, and certain accrual items. Many of these adjustments can be maintained throughout the year to normalize your operating results and to help you to forecast year-end results. Reviewing the year-end adjustments prepared by your staff or an outside accountant is one way of identifying potential standard journal entries to record throughout the year.
It’s always a good idea to take some time to review the chart of accounts you are using to summarize your financial reporting. Are there significant accounts that you have to dig into the details to understand the fluctuations from one period to another? If so, it may be time to create accounts or sub-accounts to appropriately track certain transactions so that you can easily monitor fluctuations.
Do you have accounts set up to handle the record keeping for the various stages of your operating processes? For instance, are you tracking raw materials, work in progress and finished goods? If not, you may want to consider adding accounts and journalizing the flow of the inventory process.
Now is a good time to take an inventory of your outstanding agreements and contracts to identify any key performance requirements that you must meet to stay in compliance with the established terms. Often times, bank financing has compliance requirements such as ratios and bank balance levels that must be met on a monthly, quarterly or annual basis. Do you have processes in place to monitor the compliance of these key performance requirements? Routinely performing a review of these requirements will allow you time to make any necessary corrective actions in the event the requirements will not be met.
By being proactive and keeping your accounting organized now, you’ll be in the best position possible when it comes to closing out the year and preparing for taxes next spring. If you have questions or would like assistance with any of these accounting clean up projects, please don’t hesitate to contact Cray Kaiser today!
Click here to learn about Cray Kaiser’s Accounting Services.
Major life changes are an exciting and emotional time. But with the positive changes, there can sometimes be challenges too. If you’re facing a change in your life in the near future, have you thought about what the tax implications might be? Below are four examples of life changes that can have complicated effects on taxes that come with them:
Whether it’s a new, exciting opportunity or the result of being laid off, a job change is going to affect your tax obligation. The termination of your previous job likely adds additional taxable income in the form of accrued vacation or a severance package. Review how your former employer handles tax withholdings, especially for big payouts. Your new job also brings new tax implications with a new salary, new benefits and possibly different taxing jurisdictions if you also move to a new location.
The extra money you earn when adding a second job or business also brings extra taxes. How much additional tax this second income creates depends on your specific situation. Employment status, type of business, and how it relates to your other tax activities need to be considered. The extra income alone can send you into a higher tax bracket.
Your retirement plans and timing of retirement plan distributions play a big role in how much tax you will pay on your retirement earnings. For example, with traditional IRAs, there are early withdrawal penalties before you reach age 59½ and required minimum distributions after reaching age 70½ years old. For Social Security, collecting benefits early means less in monthly benefits and potentially a higher tax obligation if you have additional earnings. Each source of retirement income has its own set of taxation rules which can create a very complicated tax environment.
When selling a house or other residential property, the first thing to determine is whether it’s your primary residence. If so, the IRS provides an exemption from tax for up to $250,000 ($500,000 for joint couples) of the gain realized from the sale of your home as long as you lived in it for at least two of the previous five years. Any gain above the exemption is subject to capital gains tax. If the property you are selling is not your primary residence, capital gains tax applies, and you also have to deal with other more complicated tax code issues.
We hope this helps you become more aware of how your tax situation might change in the future based on any decisions you make in your personal or professional life. Always remember to carefully weigh your options and speak with your accountant if you’re unsure about how a future decision will impact your taxes. Contact Cray Kaiser if you have any questions.
