EA Journal - January/February 2013

The Case Of The Sticky Fingers

Ruth Rowlette, EA 2012-12-21 17:22:56

NOTE: The following is an elaboration on a true-life situation, that is still in the process of being resolved. Unfortunately, it could happen to any of us, simply due to human nature and the nature of our business of handling sensitive taxpayer information. MAXWELL BLAND, EA, WAS CHECKING his office email on Sunday afternoon in late July. It being between part 1 and part 2 of tax-filing season, he was only working six and a half days a week instead of the usual seven. He opens an inquiry from a long-time client, Bette Furman. Bette is one of Maxwell's best clients and is always one of the first to provide him with a well-documented organizer, so her return never goes on extension, usually being filed before February 15. She tends to over-withhold on her W-4, so she is always due a nice refund of $3,000 to $4,000, despite repeated conversations that this is giving interest-free money to the government. Bette is inquiring about her refund that is normally direct deposited into her bank account approximately two weeks after e-filing. It has not yet appeared, and while Bette does not immediately need the cash, she is becoming concerned about the delay. Maxwell emails her back directions on how to check her refund on the IRS website, believing she has simply overlooked the deposit or received and spent it. Upon opening his office on Monday morning, Maxwell is surprised by a phone message from Bette asking him to call her immediately. He does and she tells him that the IRS website notes her refund was issued on March 3. She has double-checked her online bank records and her paper statements, and the deposit is not recorded. Bette has also called the bank's toll-free number to confirm receipt of the deposit, and they tell her the funds were never received. Maxwell has pulled his file information on Bette's case for the direct deposit and tells her that he has her bank account information with Bigg Bank, and the last four digits of the account number are 6789. Bette is shocked—she has never banked with Bigg Bank, preferring the local credit union that she has done business with for years. Maxwell reassures Bette that there is certainly some small mistake on his end, such as a data entry error, and he will immediately work to resolve the matter. Maxwell has three employees, one front office staff and two enrolled agents who work for him during filing season. The firm prepares approximately 1,000 personal returns every filing season, with the average refund being between $500-$1,000. The front office person has no access to client bank account information; however the enrolled agents working the files do have that information for input purposes, and once completed, they sign the returns as enrolled agents, but in the capacity as employees of Maxwell, not as independent contractors. Maxwell determines that Dean Johnson, one of his EA employees, prepared Bette's 2011 return, handling all input duties. He then pulls each and every return prepared so far by Dean for the 2011 filing season, sorting them into two piles, balance due versus refund. He reviews the refund returns and finds that for every return where there was a refund of less than $500, the refund is directed to Bigg Bank with the account number ending in 6789. Returns with refunds in excess of $500 are directed to a variety of bank accounts, with no particular pattern. Feeling sick to his stomach, Maxwell then pulls all returns prepared by Dean for the 2010 filing season, sorting them into two piles, as he did for the 2011 returns. Once again he finds all refunds less than $500 were directed to the same account at Bigg Bank. Apparently, sticky-fingered Dean was either excessively greedy or unbelievably sloppy when he entered Bette's bank account information because hers is the only large refund being directed to the Bigg Bank account. What Should Maxwell Do with This Information? Upon being presented with this set of circumstances, my first recommendation to Maxwell is that he should continue his investigation into returns prepared by Dean, reviewing 2008 and 2009 taxes as well, assuming Dean had been working at Maxwell's office for that length of time. Hard as it may be, he absolutely must not mention this investigation to anyone in his office. He needs to spreadsheet exactly which returns Dean prepared, which generated refunds, and where those refunds were possibly deposited. Any returns with refunds deposited into any repeated bank account number should be set aside. This will then show Maxwell the extent of the possible embezzlement and how much he will need to budget to return to clients (with interest) for any embezzlement actually incurred by Dean. He will also need this information to document any claim to his errors and omissions carrier, the civil suit he will be filing against Dean, and the eventual police report he will be filing for grand theft. I would also advise Maxwell to order from his business bank account the front and back of Dean's payroll checks during this time period to help in determining where Dean was banking on a regular basis. It will hardly be surprising if Dean was banking at Bigg Bank and had an account number ending in 6789. Once Maxwell has the greatest amount of information possible on the extent of the theft, he should make some random inquiries of the clients on that spreadsheet whom he suspects of not receiving their refunds. It may be that they had actually received the refunds, which would help to limit the extent of Maxwell's loss. It should also help to build a pattern of Dean's actions for the police report and the necessary civil suit. Maxwell's next action is to file a police report with the appropriate law enforcement agency, providing as much documentation as possible to support his case while being very careful to limit disclosure of clients' names and personal information, like Social Security numbers. Depending upon budget constraints and the amount of the theft, the agency may or may not do much; however, filing a police report will be excellent documentation of the loss and bolster Maxwell's case for insurance purposes. On the same day, Maxwell asks Dean to meet him at my office to discuss some developments on a "case" that Maxwell has been working where he needs input from Dean. Meeting at my office provides a neutral location for discussion of this matter and a third party to document the conversation. Once Dean is in my conference room, Maxwell steps out for a moment, calls his office, and instructs his front office person to gather Dean's personal belongings and place them in a box to be delivered to my office in the next hour. He returns to the conference room and first asks Dean for his keys to the office doors. Maxwell and I then confront Dean with the evidence that Maxwell has gathered and ask for an explanation. While we are having this discussion, Dean's box of personal belongings are delivered to my office. Dean finally admits to the theft but tries to explain that his wife has been ill, the credit card balances have been piling up due to her lost income, and he had not had a raise in three years. He felt he "deserved" this money, plus the amounts were so small the clients would not have missed them anyway. On this last point he is unfortunately correct. Maxwell discovered that most of the clients who had been embezzled from had not been keeping track of their money and did not realize they had never received their refunds, or they believed them to have been credited to the subsequent year's tax payment. This does not absolve Dean of any wrongdoing or Maxwell of the need to compensate the clients whose refunds Dean stole, but it does show how easy it is for such a plan to be carried out by someone with Dean's knowledge. Maxwell shows Dean the spreadsheet of the potentially embezzled amounts, plus interest, and asks how he (Dean) plans on repaying Maxwell those amounts. Dean replies that he has no funds available, will probably have to file bankruptcy, picks up his box of belongings, and stalks out of the office. As he exits, Maxwell provides Dean with a copy of the police report filed that morning so that Dean is fully aware of the extent to which Maxwell is willing to go to recover his losses. In What Capacity, If Any, Is Maxwell Responsible for the Stolen Funds? In the opinion of the author, Maxwell is responsible for 100 percent of the funds stolen by Dean, plus interest at the statutory rate that the client might have earned on those pilfered funds. Dean was Maxwell's employee and as the owner of the business, Maxwell has the ultimate responsibility for what his employees do in the commission of their duties. This is a prime reason why enrolled agents who have employees should be carrying errors and omission insurance. They should also be closely supervising their employees, even to the extent of performing random "audits" of their tax return preparation, even if they do not suspect any overt wrongdoing. The buck stops at Maxwell's desk, and he is going to have to dig into his own pocket and financial resources to make these clients whole. How Could Maxwell Have Prevented or at Least Limited the Losses to His Clients? No business is 100 percent theft proof. Front office people steal stamps, use the postage meter for personal use, or pilfer office supplies for their children's school supplies. Employees charge employers for hours they did not work, use company credit cards for personal expenses, etc. The only way to prevent this is to perform all business tasks yourself, which may be impossible for many small business owners. The best way to prevent or limit these losses is to hire carefully from the very beginning. Investigate potential employees by performing background checks, requiring credit reports, and even possibly drug tests. Inquire into why they left their former employment and then to the extent possible by law, confirm this with the former employer. Ask about their overall health, since poor health can often be a driver for excessive medical bills, which then lead people to need additional income and steal from their employer. The second thing to do is be aware of what is happening in the employee's personal life. If an employee buys a new Mercedes after years of driving an old pick-up truck, ask yourself how that could have been done on the salary you are paying. If the employee takes expensive vacations two or three times a year, inquire as to how those vacations are being funded. If you hear of a wage-earning spouse who suddenly becomes ill, you should inquire if the employee is experiencing financial difficulties. If you suddenly find the employee ducking out to take excessive calls on his or her personal cell phone or find creditors leaving excessive call-back messages on the business phone, it is time to have a serious talk with this employee. Basically, pay attention to the people in your office on a personal level. The employee may have a completely reasonable explanation, such as an inheritance, lottery winnings, or financials gifts from family, but it shows the Even after all these years of law pracemployee that you as the business owner are tice, I do believe that most employees are paying attention to the business side of your honest and will work hard for a decent business. This will often be sufficient to stop salary and benefits if the employer can any "sticky fingers" before they start. Even afford to pay those benefits. Most EA employers are very small firms, and the smallness can be a benefit in flexibility in arranging for work hours, time off for family emergencies, etc.—a benefit that for many employees cannot be measured in money. Pay attention to what is happening in your business, hire honest and reputable employees, and in most cases, you will not suffer Maxwell's fate. About the Author: Ruth A. Rowlette, EA, is a tax and bankruptcy attorney located in Sacramento, California, and a long-time contributor to various EA publications. She welcomes inquiries or reponses to this article via email at ruth@rowletteinc.com. To learn more on this topic, join this discussion on the NAEA webboard.

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