Fraud Prevention for Not-for-Profit Organizations

October 25, 2023 by Andrea Davis

Former Finance Director of Non-Profit charged with embezzlement scheme with approximately five thousand dollars stolen for personal use. The Director abused her power and betrayed the employer’s trust by using the employer’s bank account to perpetrate fraudulent activities.

The risk of fraud in Not-for-Profit (NFP) organizations refers to the likelihood that deceptive or dishonest activities may occur within the organization, leading to financial losses, reputational damage, and harm to the overall mission of the organization as well as stakeholders. As fraud in NFPs takes various forms, including embezzlement, misappropriation of assets and financial statement manipulation among others, it is crucial that the necessary measures be taken to detect and prevent these actions.

Embezzlement: involves employees, volunteers, management or even board members diverting funds or assets for personal gain.
Misappropriation of assets: as the NFP relies on contributions, grants, and donations to fund their operations, the risk of fraud includes mishandling or misuse of funds, diverting them from their intended purposes. Of the cases studied according to The ACFE 2022 Report to the Nations, 86% had misappropriation of assets as the most common scheme but less costly with $100,000 median loss.
Financial Statement Fraud: is a significant fraud risk where financial statements are misrepresented which may involve activities such as inflating revenue, understating expenses, or concealing liabilities. According to ACFE 2022 Report to the Nations, this is found to be the least common scheme (found in 9% of the cases studied) but the costliest with $593,000 median loss.

Despite NFP organizations playing a crucial role/function in addressing various economic challenges in society, they are far from being immune to the threat of fraud. The vast majority of people who work for NFPs are loyal to the organization’s mission and champions in supporting the organization’s cause. However, due to efforts to minimize overhead costs, there can be lapses in internal control systems that provide the opportunity for employees or volunteers to perpetrate fraud. These facts, make it extremely important that the organization’s board and management maintain vigilant oversight of their organization financial processes and internal controls over operations and fund raising events.

Here are some reasons why fraud occurs in NFP Organizations

It is stated that trust plays a significant role in the operations of NFP organizations, and as such internal controls are often overlooked or are not in place at all. For example, lack of segregation of duties, management overriding controls by making decisions that benefit themselves or their associates rather than the organization and its missions. Management can authorize payments/reimbursements for their personal use or benefit. This abuse of power can cause significant harm to the organization as well as violate the trust of donors and the public. Furthermore, when management is dominated by a single person or a small group without compensating controls, it can create opportunities for fraud in the NFPs environment.
- Owners/executives who committed 23% of occupational fraud cause the largest loss – $337K, according to ACFE 2022 Report to the Nations. In addition, the level of authority affects the duration of the fraud, per ACFE report owners/executives tend to last 18 months as compared to managers and employees at 16 and 8, respectively.
Tight budgets and limited resources can make NFP organizations more susceptible to fraudulent activities and may result in insufficient internal controls making it easier for fraud to occur and go unnoticed.
Job insecurity can play a significant role in fraudulent activities that occur in NFPs. Employees who feel insecure about their job stability may be more susceptible to financial pressures and as such resort to fraudulent activities to maintain their financial well-being and secure their positions. Job security can also be used by management to manipulate, pressure, incentivize employees to commit fraud to protect their jobs or advance their career. In addition, employees may take advantage of weak controls to commit fraud to meet their needs.
Often more leniency is shown in the hiring process (no background checks conducted), hence past offenders of fraud can conduct their fraudulent acts at different organizations. Additionally, since NFPS often rely on numerous volunteers, they may not have a thorough screening or onboarding process due to their urgent need for assistance, without fully considering the potential consequences of fraud. This vulnerability is often apparent to volunteers and may ultimately lead to opportunities for fraud.
It is more prevalent for fraud to occur when procedures are rushed, not carefully reviewed, or not reviewed at all. As a result of having a close relationship with both a supervisor and a senior pastor, the financial activities of the associate pastor were never reviewed, which led him to embezzle $830,000 over a 6-year period (source: https://www.churchlawandtax.com/manage-finances/internal-controls/how-a-church-responded-when-a-trusted-minister-embezzled-funds/).
As one can imagine during economic crisis, people are more likely to commit fraud, and these are often first-time offenders. As NFP workers experience financial difficulties (e.g., trying to keep up with living expense inflation while donors experiencing financial difficulties may need to reduce contributions), it is more likely that employees (especially if they believe they are being underpaid) will commit fraud with the rationalization that they are owed this money.

It is imperative that NFPs develop and maintain robust internal controls, including segregation of duties, surprise audits, board oversight, and external audit of internal control over financial reporting, to name a few to deter, reduce and ultimately stop these fraudulent activities.

Fraud risk is not selective based on an organization size, revenue, or mission. The presence of anti-fraud controls directly impacts the duration and severity of fraud incidents.

Despite NFP organizations accounting for only 9% of fraud cases, their limited resources make the median loss devastating. According to Brotherhood Mutual Insurance, Christian churches alone could face $100 billion in financial fraud by 2025.

Key factors contributing to these unfortunate occurrences of fraud include a lack of internal controls, lack of job rotation, limited knowledge of the IRC (Internal Revenue Code), budget constraints, and reluctance to seek professional assistance. Robust internal controls, transparency, and continuous vigilance are crucial for NFP organizations to successfully navigate the complex landscape of fraud risk.

CLICK HERE to view, download, or print Managing Fraud Risk: A Checklist

Have questions?

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Darien) or email us at info@cironefriedberg.com.

New Rule Makes 529 College Saving Plans More Flexible

October 4, 2023 by Adam O'Feeney CPA

The 529 savings plan is a great way to fund future college expenses by saving over a long period of time. Some parents, however, hesitate to set up and fund this plan because of the unknowns. There is no guarantee that a child will attend college, or whether the funds will be needed if scholarships or other financial aid are obtained.

Section 126 of the SECURE 2.0 act of 2022 (part of the Consolidated Appropriations act of 2023) addresses some of these concerns with a special rule that allows distributions from 529 plans to a Roth IRA. Unused college savings can be transferred to a beneficiary’s retirement savings with no taxes or penalties, subject to certain limitations described below. The new distribution rule takes effect in 2024.

Let’s explore the benefits of this new rule by starting with an overview of how the 529 savings plan has worked up to this point.

How a 529 Plan Helps You Save for Future College Expenses

A 529 savings plan is a tax-advantaged investment account specifically designed to help individuals and families save money for education expenses, primarily for college. It offers several benefits that make it an attractive option for college savings.

Here’s how a 529 savings plan works and helps you save money for college:

Tax advantages. One of the key benefits of a 529 plan is its tax advantages. Although contributions to a 529 plan are not federally tax-deductible, the investment grows tax-free, meaning you won’t owe any taxes on the earnings as long as the funds are used for qualified education expenses. Additionally, some states offer state income tax deductions or credits for contributions made to their specific 529 plans.
Investment growth potential. A 529 plan typically offers a range of investment options, such as mutual funds or pre-allocated portfolios, allowing you to choose an investment strategy that aligns with your risk tolerance and time horizon. By investing your contributions, the plan has the potential to grow over time, helping you accumulate more funds for college expenses.
Flexible use of funds. The funds in a 529 plan can be used for a variety of qualified education expenses. While the primary purpose is to save for college, the funds can also be used for tuition, fees, books, supplies, and even room and board at eligible institutions. In 2017, the scope of 529 plans was expanded to include up to $10,000 per year per beneficiary for K-12 education expenses as well.
Control and ownership. With a 529 plan, you, as the account owner, retain control over the account and the funds. You can name a beneficiary, typically your child or yourself, and have the flexibility to change the beneficiary to another qualifying family member if needed. The account owner also has the authority to manage the investments and decide when and how to use the funds.
High contribution limits. 529 plans often have high contribution limits, allowing you to save substantial amounts over time. While the limits vary by state, they can reach several hundred thousand dollars per beneficiary in many cases. This enables you to save more comprehensively for college and potentially cover a significant portion, if not all, of the expenses.
Estate planning benefits. A 529 plan offers estate planning advantages, allowing you to remove funds from your taxable estate while still retaining control over the account. This can be particularly beneficial for grandparents or other family members who want to contribute to a child’s education while also reducing their own estate tax liabilities.

It’s worth noting that each state administers its own 529 plan(s). While many offer tax benefits to residents who participate in their state’s plan, you are not limited to choosing your own state’s plan. You can explore and select a plan from any state that best suits your needs and preferences.

As with any financial decision, it’s important to research and understand the specific details, rules, and limitations of the 529 plan you are considering, as they can vary between states and providers. Consulting with your CironeFriedberg tax advisor for personalized guidance based on your circumstances and goals

What happens if you don’t use all the funds in the 529 plan?

If you don’t use the funds in your 529 savings plan for qualified education expenses, there are a few options for what you can do with the money. Without the new 529-to-Roth IRA rule, here is what typically happens to the funds if they are not used for college.

Change the beneficiary. One option is to change the beneficiary of the 529 plan to another qualifying family member, e.g., siblings, parents, children, nieces, nephews, and even first cousins. By changing the beneficiary, you can transfer the funds to someone else who can use them for their education expenses without incurring taxes or penalties.
Maintain the funds for future educational use. If you anticipate using the funds for education in the future, you can leave the money in the 529 plan. There is no time limit for using the funds, and they can continue to grow tax-free. You can keep the account open and use the funds for yourself, your spouse, your children, or other eligible family members when the time comes.
Withdraw the funds and pay taxes and penalties. If you decide to not use the funds for education and don’t want to change the beneficiary, you can choose to withdraw the money. However, this option comes with potential tax implications. Any earnings withdrawn from the account that are not used for qualified education expenses may be subject to federal income taxes and a 10% federal penalty on the earnings portion. The contributions you made to the account are not subject to taxes or penalties since they were made with after-tax dollars.

It’s important to note that the specifics of tax and penalty rules may vary, so it’s advisable to consult your CironeFriedberg tax advisor for guidance tailored to your situation. Additionally, certain circumstances may exempt you from the 10% federal penalty on earnings, such as if the beneficiary receives a scholarship, attends a U.S. military academy, becomes disabled, or passes away. In these cases, you may still have to pay income taxes on the earnings portion but can avoid the penalty.

Remember to review the terms and conditions of your specific 529 plan to understand its rules regarding non-qualified withdrawals and any potential state tax implications as well.

Taking effect in 2024, the new 529-to-Roth IRA transfer rule will remove the impact of the unknown. The rule will provide a flexible path for saving for education and funding a financially secure retirement. However, this transfer must meet the requirements of the SECURE Act 2.0. the requirements are as follows:

The 529 plan must have been open for no less than 15 years with the beneficiary being the same as the Roth IRA owner.
Contributions made to the 529 plan, including the associated earnings, are not eligible for a tax-free transfer until after five (5) years.
The beneficiary of the 529 plan must be the owner of the Roth IRA.
The Roth IRA owner must have includable compensation in the year of the rollover at least equal to the amount of the rollover.
Transfers from a 529 plan to a Roth IRA are subject to Roth IRA annual contribution limits ($6,500 in 2023).
The 529 beneficiary may not roll over more than $35,000 from a 529 plan to a Roth IRA during his or her lifetime.

Have questions?

Amortizing Research and Experimentation Costs

March 7, 2023 by Jeffrey Silverberg CPA

Beginning in 2022, amendments made by the Tax Cuts and Jobs Act require taxpayers to amortize research and experimentation expenditures (R&E) over five years, or 15 years for foreign expenditures.

Prior to 2022, a taxpayer could elect to deduct research and experimental expenses, amortize them over a period of at least 60 months, or capitalize them to the related property. For both post-2021 and pre-2022 expenses, qualified research expenses must be incurred in connection with the taxpayer’s trade or business, and they must represent research and development costs in the experimental or laboratory sense. However, software developmental costs paid or incurred after 2021 are treated like other research expenses, and are no longer subject to the special rules that applied to such costs before 2022.

For post-2021 R&E expenditures, the amortization period begins at the mid-point of the tax year in which the expenditures are paid or incurred.

For pre-2022 expenditures, the elective amortization period began when benefits were first realized. For post-2021 R&E expenses, taxpayers must continue to amortize research or experimental expenditures for the five-year (or 15-year) period even if the related property is disposed of, retired, or abandoned during the amortization period. The disposition, retirement or abandonment does not accelerate the expense deduction.

For pre-2022 expenditures, the normal IRC §165 rules applied to research expenses. Thus, if the taxpayer had elected to amortize or capitalize the expenses, any expenses that had not yet been recovered were generally treated as a loss realized upon the disposition, retirement or abandonment.

The post-2021 switch to a five-year amortization period (15-years for foreign research) is a change in accounting method that is treated as initiated by taxpayers and made with the consent of the IRS. Thus, taxpayers do not have to file an accounting method change and no section 481(a) adjustment is required or allowed. Instead, the changes apply only on a cut-off basis to research or experimental expenditures paid or incurred in tax years beginning after December 31, 2021.

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The Importance of Tax Planning

January 25, 2023 by David Moseman

The purpose of tax planning before your fiscal year end is to minimize your tax liability. An experienced tax CPA will scrutinize your revenue, expenses and business processes to ensure that you are taking maximum advantage of all applicable opportunities to minimize your tax liability and take advantage of all tax savings programs. That is why tax planning is as important as preparing your tax return.

Careful tax planning is critical for business success in an unpredictable economy, like what we are currently experiencing. As we enter tax season, there are many factors to examine in preparing your individual tax return, too, including changes in marital status and welcoming children into your growing family. Owning a business or rental properties and various investments adds a layer of complexity of its own.

Are you sure your tax strategies are optimal for your personal situation?

The IRS is looking closely at cryptocurrency transactions. Will this affect you?

Tax planning is necessary for individuals facing the challenges of owning and managing a business and preserving and growing their wealth in a complex regulatory environment. Tax laws continually change and evolve. Our experienced tax CPAs stay up-to-date and informed about the latest tax changes. We work with many business owners to ensure that they can take advantage of any tax saving strategies available.

Once your tax returns are completed and filed, it is a good time to review their impact on your overall finances and business strategies with your CPA. So, as we end one tax season, we begin planning early in anticipation of the next. After all, the purpose of tax planning before your fiscal year end is to minimize your tax liability going forward.

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Partner J. Allen Kosowsky Speaks at Tax Fraud Conference

November 17, 2021 by Teri Pough

J. Allen Kosowsky, CPA and forensic accounting and litigation support practice leader at CironeFriedberg, LLP, will join the distinguished panel of experts at the 38th Annual American Bar Association (ABA) Institute on Criminal Tax Fraud and the 11th Annual National Institute on Tax Controversy, in Las Vegas, on December 8th.

Kosowsky has over 40 years of experience in business valuation, intellectual property valuation, and financial advisory, and provides expert investigative and litigation support to law firms. His many professional certifications and credentials include Certified Public Accountant (CPA), Certified Valuation Analyst (CVA), Accredited in Business Valuation Certification (ABV), Certified Fraud Examiner (CFE), and Certified in Financial Forensics (CFF).

Joining a panel with three others, Kosowsky will address the topic “Sensitive Audits: Ethical Considerations,” which explores issues including the ethical responsibilities accountants face when clients cannot answer questions posed by the IRS and assessing risks of criminal referral.

Tony Cirone, CironeFriedberg’s managing partner, says “Allen has an impressive amount of experience in forensic accounting and litigation support, and we are very pleased to see him share his expertise at this conference.” Commenting on the 2020 merger of Kosowsky’s practice into the Firm, he adds “Allen’s expertise combined with the growth of our valuation, forensic, and litigation support practice allow us to continue to expand our services by meeting the complex demand for this highly specialized group of services.”

At this annual ABA gathering of the criminal tax controversy and criminal tax defense bar, high-level government representatives, judges, corporate counsel, and private practitioners come together to share and learn about important information in areas of tax controversy, tax litigation, and criminal tax prosecutions and defense. Click here for information on this event.

About CironeFriedberg
CironeFriedberg is a leading regional CPA firm serving middle market, closely held and family-owned businesses, high-net-worth individuals and not-for-profit organizations in Fairfield and New Haven Counties, in Connecticut, and the neighboring New York counties of Duchess, Putnam, and Westchester. The growing firm provides a full range of tax, audit and accounting, and business advisory services from three offices in Danbury, Shelton and Stamford Connecticut. Learn more about us online.

Hurricane Ida Victims Get Tax Relief

November 7, 2021 by David Moseman

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual or public assistance. Currently, this includes the entire state of Louisiana and taxpayers in other Ida-impacted localities designated by FEMA. These other localities in neighboring states will automatically receive this relief.

Please refer to the current list of eligible localities reported on the IRS disaster relief page.

This tax relief postpones various filing and payment deadlines that occurred starting on August 26th. Individuals and businesses will have until January 3rd to file returns and pay taxes originally due during this period. Those who had a valid extension to file their 2020 return by October 15th now have until January 3rd.

However, because tax payments related to these 2020 returns were due on May 17, 2021, those payments are ineligible for relief.

The January deadline also applies to quarterly estimated income tax payments due on September 15th and the quarterly payroll and excise tax returns normally due on November 1st. It also applies to tax-exempt organizations, operating on a calendar-year basis, that had a valid extension due to run out on November 15th.

Businesses with valid extensions to file also have the additional time including, among others, calendar-year corporations whose 2020 extensions expire on October 15th.

Penalties on payroll and excise tax deposits due on or after August 26th and before September 10th will be abated if the deposits are made by September 10th.

The IRS will automatically provide filing and penalty relief to any taxpayer with an IRS address of record in the disaster area. If an affected taxpayer receives a late-filing or late-payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

Taxpayers qualifying for relief who live outside the disaster area should call the IRS at (866) 562-5227. This includes relief workers affiliated with a recognized government or philanthropic organization.

Fraud Prevention for Not-for-Profit Organizations

CLICK HERE to view, download, or print Managing Fraud Risk: A Checklist

Have questions?

New Rule Makes 529 College Saving Plans More Flexible

Have questions?

Amortizing Research and Experimentation Costs

Have Questions?

The Importance of Tax Planning

Have Questions?

Partner J. Allen Kosowsky Speaks at Tax Fraud Conference

Hurricane Ida Victims Get Tax Relief

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