Employees are usually reimbursed for work-related expenses. When you file or report these expenses, it’s important to make sure the numbers are as accurate as possible. Over-claiming expenses, turning in receipts for unused items, or even spending more than the allowed amount are common expense fraud offenses. Whether you’re an employer or employee, it’s important to understand what can be determined as reimbursement fraud to avoid mistakes and spot schemes as they occur.
What are examples of expense and reimbursement fraud?
A typo or honest mistake can be fixed, but ongoing fraudulent numbers can significantly hurt a company over time. Actual expense fraud is deliberate and usually a premediated attempt to inflate reimbursements. See some examples below:
Claims for items that weren’t purchased (office supplies, lunches, etc.)
Bills for canceled trips, such as hotel costs and travel tickets.
Bills for non-reimbursable expenses (anything that isn’t work-related or is done in leisure)
Separate mileage bills from employees who travel together
Inflated totals for any of the above expenses. For example, if an employee were to take a trip that costs $415.00, but the employee rounds up to $420.00 on the bill. This would be an act of expense fraud.
Employees often don’t associate these acts with fraud because the word “fraud” sounds so heinous. Poor judgement can easily become a case, so it’s important that companies have a clear expense policy. Expense policies are put into place to dissolve any confusion about protocols and procedures when dealing with company money.
The 4 Types of Expense Fraud
The above examples of expense and reimbursement fraud can be categorized into one of the four types outlined by the Association of Certified Fraud Examiners:
Mischaracterized expenses. This occurs when an employee mixes their personal expenses with business expenses.
Fictitious expenses occurs when the employee submits fake receipts.
Overstated expenses are inflated costs.
Multiple reimbursements occur when an employee submits multiple receipts for the same item.
How to avoid expense fraud in your company
It’s good to start with a clear and concise expense policy. Employees should be able to understand exactly what is expected when turning in reports and receipts.
Provide tools for employees to easily report expenses. Simplify the process with software, or similar resources to make reporting easy and accurate.
Consider your current system’s efficiency. Company cards or virtual transactions are easy to track.
Audit occasionally to encourage honest reporting.
Fair allowance rates can also prevent expense fraud. When your employees travel out of town, consider the rates of where they are and ensure the allowance can cover those expenses. Sometimes, an employee may consider expense fraud as a last resort.
Do you owe back taxes and want to regain compliance with the IRS?
Optima Tax Relief offers free consultations over the phone for tax debt assistance. Give us a call today at 800-536-0734.
If you’re facing financial hard times, your retirement funds begin to look like a good source of much-needed cash. In cases of dire emergency, you may indeed be able to make withdrawals from those funds before you reach retirement age. However, the potential short-term and long-term consequences can be severe. Nonetheless, if you must make an early withdrawal from an Individual Retirement Account (IRA) or 401(k), there are certain circumstances under which you can minimize the bite by Uncle Sam.
The COVID-19 pandemic and the 2020 CARES Act have made it easier for taxpayers to withdraw funds from their retirement accounts. Learn more about taking a CARES Act retirement withdrawal HERE.
3 Types of Retirement Funds
There are three primary types of tax-optimized retirement funds in the United States:
Traditional IRAs
Roth IRAs
401(k)s
Traditional IRAs
Traditional IRAs are drawn from pre-tax earnings. When you deposit funds in a traditional IRA, the taxes on those funds and your earnings are deferred until after you retire, presumably when your income is lower and you qualify for a lower tax bracket.
Roth IRAs
By contrast, Roth IRAs are drawn from post-tax earnings. Because you pay taxes on Roth IRA deposits upfront, you do not have to pay taxes on either the principal or the earnings, provided that your Roth IRA has been open for five years or longer and you are at least 59 ½ years old when you begin making withdrawals.
401(K)
401(k) funds are sponsored by your employer. You can invest either pre-tax earnings or post-tax earnings, with tax implications similar to those for a traditional or a Roth IRA. Many employers match their employees’ contributions dollar for dollar. The catch is that you can’t access your employer’s contributions to your 401 (k) until you are fully vested in the company, which translates to being employed for a certain length of time which varies but five years is common.
For what reasons can you withdraw from an IRA without penalty?
If you are younger than age 59½, taking withdrawals from either a traditional or Roth IRA or from a 401(k) will usually trigger a 10 percent tax penalty in addition to paying any income taxes that are due. However, there are exceptions that vary depending on whether you are withdrawing from a traditional or a Roth IRA or from a 401 (k). You can avoid tax penalties from withdrawing from a traditional IRA even if you are younger than age 59 ½ for the following reasons
Purchasing a first home.
Educational expenses for yourself or a family member.
Death or disability of a family member.
Covering unreimbursed medical expenses.
Purchasing health insurance coverage (only if you are not already covered).
To claim one of these exceptions, you will need to complete IRS Form 5329 along with your income tax returns the following year. Even if you avoid the penalty, you will still need to pay taxes on the money you withdraw. This means that you should withdraw enough to cover your needs, plus a little extra for taxes.
Is there a Roth IRA withdrawal penalty?
Yes, penalty-free early withdrawals for Roth IRAs apply to only two circumstances: first–time home purchase or death or disability of a family member. However, the penalty for early withdrawal from a Roth IRA only applies to earnings, since you have already paid taxes on the principal. You will also need to submit Form 5329 along with your tax return.
How do I avoid an early withdrawal penalty on 401(k) retirement funds??
It is possible to make early withdrawals from a 401(k). However, the IRS is especially harsh on early withdrawals from 401 (k) funds. You may make what are known as hardship withdrawals before age 59 ½ for the following reasons:
Purchase a first home.
Pay for college for yourself or a dependent.
Prevent foreclosure or eviction from your home.
Cover unreimbursed medical expenses for yourself or a dependent.
However, hardship withdrawals from a 401 (k) differ from hardship withdrawals from an IRA. You will be assessed a 10 percent penalty in addition to paying income taxes on your withdrawal. To avoid the 10 percent penalty on early withdrawals from a 401(k), you must fulfill one of the following circumstances.
Total disability.
Medical expenses that total more than 7.5 percent of your adjusted gross income (AGI).
Court order to give the money to a divorced spouse, child, or other dependents.
Permanent separation from your job (including voluntary termination) during or after the year you turn 55.
Permanent separation at any age with a plan for equal yearly distributions of your 401(k) (once you begin taking distributions, you must continue them until you reach age 59 ½ or for five years, whichever is longer).
A better option than a hardship withdrawal from your 401(k) may be to take a loan against the value of your 401(k) with an outside lender. The lender places a lien against your 401(k) which remains in place until you repay the loan. Your funds remain in your 401(k), safe from the reach of Uncle Sam. However, if you default on the loan, the lender will have the right to seize your 401(k) to collect payment.
Is it bad to withdraw from an IRA?
It should be clear that IRA and 401k withdrawal should be considered a last resort. Even if you avoid tax penalties, you are depleting the available funds available for your retirement so in this sense, it is a bad idea and if you can avoid it, you should. If you must borrow, borrow enough to cover your obligations plus taxes, and repay the funds as quickly as possible. After all, you are actually repaying yourself – and your future.
Need to speak with a licensed tax professional? Optima Tax Relief provides a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.
The IRS Offer in Compromise is the most sought-after tax debt resolution. It’s a settlement offer that can significantly reduce your tax liability. How do you know if you qualify? The IRS just announced new guidelines for its Fresh Start Program, which means you’re more likely to qualify now than ever before! CEO David King, and Lead Tax Attorney Philip Hwang discuss everything you need to know about the new guidelines.
As we approach 2022, Optima wants to wish you a happy holiday season and remind you to take advantage of this special time of year. The end of the year is the perfect time to organize your tax records and prepare to file! Optima CEO David King prompts thought-provoking topics as Lead Tax Attorney Philip Hwang provides comprehensive tips for year-end tax filing. Ensure your tax return is as accurate as possible and cement a successful tax season with this video guide from Optima Tax Relief!
On today’s episode of The Tax Show for People Who Owe, CEO David King highlights the difficulties of dealing with IRS Enforcement; otherwise known as Collections. Optima’s Lead Tax Attorney, Philip Hwang, shares his insight and offers “Tax Pro Tips” ranging from IRS authority, to what you can expect when you’re subjected to IRS collection actions. Tune in to learn what you should do if you’re facing a levy or awaiting an inevitable call from the IRS.
Optima Tax Relief is proud to announce that we have earned our second BBB Torch Award! This award puts the spotlight on businesses with exceptional dedication to integrity and ethical business practices.
The Torch Award is just the latest in the series of awards Optima has earned this year, including the Orange County Civic 50, Top Workplaces USA, and several Stevie Awards for best-in-class Consumer Service.
“The Torch Award, as well as the other awards we have been honored to receive this year, all stem from the uplifting, people-first culture that Optima is built upon,” said Kimberly Carson, Optima’s Director of Human Resources. “Having a supportive, nurturing environment, unified around always doing what is right, is what powers our success.”
You can read more about the Torch Award in the California Business Journal here.
Click here to read more quotes from our executives and learn about the work that Optima did to be a two-time recipient of the Torch Award.
Child tax credit has been a reliable source of additional income for families struggling through the pandemic. While there were plans to continue the monthly checks for at least another five years, it seems the program will be coming to an end in about one year.
Many small business owners are at risk of being assigned a Revenue Officer (RO). If a small business withholds taxes from their employees but fails to hand it over to the IRS, the IRS can assign an RO, garnish bank accounts and wages, seize property and real estate, and even show up at your place of business. Here are some helpful tips for small business owners if they are assigned an RO.
Optima Tax Relief is proud to announce that we have earned our second BBB Torch Award! This award puts the spotlight on businesses with exceptional dedication to integrity and ethical business practices. The Torch Award is just the latest in the series of awards Optima has earned this year, including the Orange County Civic 50, Top Workplaces USA, and several Stevie Awards for best-in-class Consumer Service.
It’s important to choose how you want your earnings to be taxed because the IRS will automatically treat your business as a partnership. This designation doesn’t fit if you’re a sole proprietor or prefer to file as a corporation. Once you choose your tax rules, you cannot change the designation again for five years, which is why you must choose wisely.
Many small business owners are at risk of being assigned a Revenue Officer (RO). If a small business withholds taxes from their employees but fails to hand it over to the IRS, the IRS can assign an RO, garnish bank accounts and wages, seize property and real estate, and even show up at your place of business. CEO David King and In-house Expert & Enrolled Agent Rosie Steele provide helpful tips on what small business owners should do if they are assigned an RO.
Senate recently passed President Joe Biden’s infrastructure bill, which includes a pilot program for vehicle mileage tax. This tax would charge drivers based on how many miles they drive in a year. The vehicle mileage fee will likely bring in revenue for transportation and future infrastructure projects.
Why is vehicle mileage tax is being enforced?
The goal of the mileage tax is to “test the feasibility of a road usage fee,” according to the infrastructure package. The bill goes on to say, “to conduct public education and outreach to increase public awareness regarding the need for user-based alternative revenue mechanisms for surface transportation programs.” In short, the tax will be used to raise money and perform outreach regarding transportation options.
When are you expected to pay vehicle mileage tax?
This tax may or may not be implemented, so you don’t have to worry just yet. During a pilot program, volunteers from all 50 states will test out the taxing system by reporting their miles. Driver and passenger miles will be tracked through data apps and GPS. This pilot program could take a while to be completed before a final decision is made.
Will a vehicle mileage tax replace gas tax?
It is uncertain now as to whether President Biden will implement mileage tax in addition to, or in place of gas tax.
Advantages and disadvantages
While drivers could be taxed based on how much they drive, rather than paying more for gas, the drivers may be concerned with privacy. Sharing your GPS data with the government can raise some red flags for some Americans, as well as prove to be a difficult feat to accomplish. There is also the possibility of rural drivers paying more because they drive further than urban and suburban drivers.
More information
As additional information is gathered on the infrastructure bill, we will share with our readers and clients. For now, it seems that there is a lot of uncertainty around whether vehicle mileage taxes will be taken into action in the near future.
For tax relief services and questions, call Optima at 800-536-0734 for a no-obligation consultation today.
Optima in-house Revenue Officer expert and Enrolled Agent Rosie Steele returns to The Tax Show to continue the RO discussion with CEO David King. You may have been assigned one, or you might be expecting to hear from one if you owe a large sum to the IRS. What is the role of an RO, and how much do they affect your tax case? Rosie and David will tell you everything you need to know about dealing with a Revenue Officer.
