Audit

Article Dean Dorton

See updates for December 2024 here.

This article has been updated from the original version on September 17, 2024.

What is “Beneficial Ownership Information”? 

Beneficial Ownership Information (“BOI”) reporting is a federal law requirement that is estimated to impact more than 30 million businesses by December 31, 2024. In general, any entity, domestic or foreign, created by filing a document with a secretary of state (or equivalent state office) will be required to file a BOI report. Unlike many government requirements, BOI reporting targets small businesses.

If you are a small business owner, there is a significant likelihood that your business is subject to BOI reporting. BOI reports will not be filed with the IRS but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury. Penalties for willful noncompliance may result in criminal and civil penalties of $500 per day, up to $10,000, and up to two years of jail time.

Entities subject to BOI reporting requirements called “reporting companies,” must file reports identifying (1) the beneficial owners of the entity and, in some instances, (2) the individuals who have applied with specified governmental authorities to form the entity or register it to do business (“company applicants”).

What is a “reporting company?”

“Reporting companies” are companies required to file BOI reports. There are two types of reporting companies:

  • Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
  • Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

Reporting companies can include S corporations, disregarded entities, or certain legal entities formed and registered with a Tribal office or similar agency under Tribal law.

Does a reporting company include an entity that is not created by the filing of a document with the secretary of state or similar office?

No, an entity must file a document with the secretary of state or a similar office to be considered a reporting company. Examples could include certain domestic corporations, LLCs, or Homeowners Associations.

Who is a beneficial owner?

A beneficial owner is an individual who either directly or indirectly: (1) exercises substantial control over the reporting company or (2) owns or controls at least 25% of the reporting company’s ownership interests. Beneficial owners may own or control a reporting company through trusts or through a trust arrangement with a corporate trustee. For more information on beneficial owners, including the meaning of “substantial control” and “ownership interest,” we recommend reviewing the Frequently Asked Questions (“FAQs”) posted by FinCEN.

Who is a company applicant?

As an initial matter, only reporting companies created or registered on or after January 1, 2024, will need to report their company applicants. Up to two individuals could qualify as a company applicant: (1) the individual who directly files the document that creates or registers the company, and (2) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. Often, company applicants will be lawyers, law firms, or entity formation companies.

What type of information must be reported?

A reporting company will be required to report the following information about its beneficial owners and company applicants: the individual’s name, date of birth, address, and an identifying number from an acceptable identification document, such as a passport or U.S. driver’s license, as well as the name of the issuing state or jurisdiction. A copy of the identification document must also be provided.

Generally, BOI reports also must include the reporting company’s legal name, any trade names, the current street address of its principal place of business, its jurisdiction of formation or registration, and its tax identification number.

When do I have to report this information?

The deadlines for filing BOI reports depend on when the reporting company was created. The following chart illustrates the filing deadlines.

Creation or Registration Date of Company Filing Deadline
On or after January 1, 2024, but before January 1, 2025 Within 90 days of creation or registration
Before January 1, 2024 No later than January 1, 2025
On or after January 1, 2025 Within 30 days of creation or registration

What if there is a change in the information reported?

If there is any change to the information reported about the company or its beneficial owners, an updated report must be filed no later than 30 days after the date of the change. Likewise, if a BOI report is inaccurate, the company must correct it no later than 30 days after it becomes aware of the inaccuracy or has reason to know about it.

Is there an annual requirement to file a BOI report?

No. There is no annual reporting requirement. Reporting companies must file an initial BOI report and corrected or updated BOI reports as needed.

How will I file my BOI report?

BOI reports are filed electronically through this secure filing system on FinCEN’s website.

Does every company have to file, or are there exemptions?

There are 23 types of entities that are exempt from BOI reporting. Exempt entities include publicly traded companies meeting certain requirements, many nonprofits, and entities that qualify as a “large operating company.” Generally, a large operating company is an entity that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office in the U.S., and filed a federal income tax or information return in the U.S. for the previous year showing more than $5,000,000 in gross receipts or sales. More information on exemptions is available in FinCEN’s FAQs.

What are the criteria for the subsidiary exemption from the beneficial ownership information reporting requirement?

The entity’s ownership interests must be controlled or wholly owned, directly or indirectly, by certain exempt entities, such as governmental authorities, banks, credit unions, brokers or dealers in securities, insurance companies, accounting firms, public utilities, tax-exempt entities, or large operating companies. FinCEN’s FAQs provide more information on exemptions.

Who will have access to the BOI reports filed with FinCEN?

Federal, state, local, and Tribe officials and certain foreign officials who submit requests through a U.S. government agency will be permitted to obtain BOI for authorized national security, intelligence, and law enforcement activities. Financial institutions may also access BOI in certain circumstances. BOI reported to FinCEN will be stored in a secure, non-public database.

Where can I get more information?

In addition to its FAQs, FinCEN has issued a “Small Entity Compliance Guide.” The compliance guide, other resources, and reference materials are available on FinCEN’s website. Also, FinCEN has stated it will continue to provide guidance, information, and updates related to the BOI reporting requirements. Subscribe here to receive updates via email from FinCEN.

You have sole responsibility for your compliance with the CTA, including its BOI reporting requirements and the collection of relevant ownership and other information. Consider consulting with legal counsel if you have questions regarding the applicability of the CTA’s reporting requirements or the collection of relevant information.

Article Dean Dorton

Over time the IRS has struggled with how best to efficiently conduct audits of partnership income tax returns. Various approaches have been tried. Significant changes have now become effective.  Even though the first partnership tax returns for which the new audit rules will apply will be for 2018 tax returns, not due to be filed until 2019, partnerships will need to deal with a couple of important matters before their 2018 returns are filed.

First, the appointment of a Partnership Representative, a new position, is required. The Partnership Representative will serve as the audit contact and will have the authority to bind the partnership and its partners to audit adjustments. Given the power the Partnership Representative will have under the new rules, careful attention needs to be given regarding whom the partnership designates. The partnership may want to include procedures or contractual limitations on the power of the Partnership Representative in its partnership or operating agreement.

Certain partnerships will be able to elect to “opt-out” of the new rules.  A partnership will qualify for this election if the partnership has (1) 100 or fewer partners and (2) only partners who are individuals, corporations (including S corporations), and estates of deceased partners. Partnerships with trusts (even grantor trusts), other partnerships, or disregarded LLC’s as partners will not qualify for this election. The opt-out election out must be made annually on a timely filed tax return.  For partnerships qualifying to opt-out, we believe that will be the preferred course of action in most cases.

A partnership is required to either disclose the Partnership Representative or make the opt-out election on its 2018 partnership tax return. We strongly encourage persons who manage tax partnerships to address the new rules with their tax professionals before the upcoming tax filing season.

For more information on how Dean Dorton can help you with this, visit the link below:

Learn more

Matthew Smith, CPA, CFE
Tax Associate Director
msmith@deandorton.com • 859.425.7774

Article Dean Dorton

By: Crissy Fiscus

ITT Technical Institute is the latest school to close its doors after significant sanctions were placed upon the institution by the Department of Education (ED). ITT received a letter from the Department of Education on August 25, 2016 that outlined the sanctions including:

  • Increasing the line of credit to 40% Title IV funds received by the institution during its most recently completed fiscal year
  • Changing the method of payment to Heightened Cash Monitoring 2 (HCM2)
  • Notification and communication with the ED within 10 days of specifically identified financial and oversight events
  • Additional reporting requirements that required the school to provide information about operations, finances, and future plans
  • Additional operational requirements, which included that the school could not enroll new students that may receive federal student financial aid funds.

On September 5, 2016, just 11 days later, ITT announced that it would close its doors.

In reading the August 25, 2016 letter from the ED to ITT, I noticed that the very first sentence referenced prior communications from the ED from more than two years ago. In August 2014 ITT was cited by the ED for it late submission of annual compliance audited financial statements. As a result of this financial responsibility failure, ITT was permitted to continue participating in the Title IV program under a Provisional Program Participation Agreement for three award years. The letter went on to say that since August 2014 the ED had been actively monitoring ITT’s ongoing operations and finances.

Then in April 2016, the ED received notice from the Accrediting Council for Independent Colleges and Schools (ACICS) that ACICS had issued a directive to ITT asking the institution to prove why its accreditation should not be withdrawn. According to the ACICS Accreditation Criteria, this type of directive is issued when the Council determines that an institution is not in compliance, and is unlikely to become in compliance with the accreditation criteria. After much communication, including a hearing, another directive was issued by ACICS in August 2016, which continued to question ITT’s compliance with several accreditation standards:

  • Minimum eligibility requirements for compliance with all applicable laws and regulations
  • Requirements for student achievement, as measured by retention, placement, and licensure passage rate
  • Institutional integrity, a manifest in the efficiency and effectiveness of its overall administration of the institution
  • Financial stability, including having adequate revenues and assets to meet its responsibilities
  • Administrative capability, including overall management and record-keeping
  • ACICS admissions and recruitment standards
  • Federal and state student financial aid administration requirements

You will notice that I have bolded/highlighted several words throughout this article. Those words have very important meaning in the world of student financial aid, as they are the most common reasons the ED may place a school on a method of payment known as HCM1 or HCM2 (Heightened Cash Monitoring 1 or 2).

HCM1 requires the schools to make disbursements to students from its own funds, submit disbursement records to the Common Origination and Disbursement System, and then draw down the SFA funds. HCM1 is much less restrictive than HCM2.

HCM2 requires the school to disburse the money to the students and then submit a request for disbursement to the ED. The ED must approve the request before the funds will be disbursed to the school. Once on HCM2, very few schools survive – the cash flow squeeze is simply too much for them to overcome. I recently examined the list of schools which have been placed on HCM1 or HCM2 by the ED – 428 schools are on HCM1 and 65 schools are on HCM2. I also summarized the main reasons that schools were placed on HCM1 and HCM2:

Summary of top reasons schools are on HCM1:

  • Administrative capability – 17
  • Financial responsibility – 309
  • Audit late/missing – 84
  • Program review – severe findings – 1
  • Accreditation problems – 1
  • Other (CIO problems, eligibility) – 13

Summary of top reasons schools are on HCM2:

  • Administrative capability – 11
  • Financial responsibility – 6
  • Audit late/missing – 8
  • Program review – severe findings – 16
  • Accreditation problems – 12
  • Other (CIO problems, eligibility) –12

Go back and look at those bolded/highlighted words and compare them to the list of the top reasons that schools are placed on HCM1 or HCM2. As you can, see ITT had many of these issues for a period of years – beginning back in 2014, when the late audit captured the attention of the ED.

ITT is clearly not the first school that has closed due to being placed on HCM2 – honestly, very few schools survive that type of cash flow crunch. Compliance with the Department of Education’s requirements is not up to interpretation – it is absolutely required and the rules must be respected by those that wish to continue to award Title IV funds to their students. Understand the rules and create systems to make sure that they are followed. We make it our business to understand these rules and help schools to develop the policies and procedures to stay in compliance.

If your institution is interested in helping the ITT Tech students, the ED posted an electronic announcement with guidance, links, websites, and contact information surrounding the recent ITT closures.

If you would like to discuss further, contact your Dean Dorton advisor or Crissy Fiscus at cfiscus@deandorton.com.

Article Dean Dorton

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records
In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.“ (TC Memo 2016-158)

Case 2: Documents destroyed
In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to “undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared
Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

Article Dean Dorton

The short answer is: none. You need to hold on to all of your 2015 tax records for now. But this is a great time to take a look at your records for previous tax years and determine what you can purge.

The 3-year rule

At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss most records related to tax returns for 2012 and earlier years.

What to keep longer

You’ll need to hang on to certain records beyond the statute of limitations:

  • Keep tax returns themselves forever, so you can prove to the IRS that you actually filed. (There’s no statute of limitations for an audit if you didn’t file a return.)
  • For W-2 forms, consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
  • For records related to real estate or investments, keep documents as long as you own the asset, plus three years after you sell it and report the sale on your tax return.

Just a starting point

This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.

Article Dean Dorton

Increased attention and scrutiny from the public, government agencies, and financial institutions have placed a greater emphasis on accountability, transparency, and risk management for colleges and universities and their foundations. One of the first steps to addressing this increased scrutiny is by developing a strong audit committee as part of your board of directors.

Audit committees can contribute through facilitating:

  • Accurate and timely financial reporting
  • Strong internal control environment
  • Compliance with laws and regulations
  • Management of operating risks

According to a 2011 Association of Governing Boards of Universities and Colleges (AGB) Survey of Higher Education Governance, 65% of the boards of independent institutions and 45% of public institutions had a separate audit committee. A 2010 AGB survey found 70% of college and university foundations had a separate audit committee. The industry has obviously recognized the need for the committee and in this newsletter we will discuss the committee’s purpose and responsibilities, who should be a member of a strong audit committee, and some best practices for effective audit committees.

Purpose and Responsibilities

The audit committee’s purpose is to provide oversight of the institution’s financial practices and standards of conduct. In the execution of this purpose, the committee has the following responsibilities:

  • Understand and provide oversight of accounting practices and the financial reporting process
    • The committees of private institutions must be aware of Financial Accounting Standards Board (FASB) regulations
    • Public institutions’ committees must be cognizant of Governmental Accounting Standards Board (GASB) standards
  • Oversee the internal audit function
    • Review the internal audit plan on an annual basis
    • Internal auditor should report their findings directly to the board
  • Selection and oversight of the external auditor
    • Review the performance of the external auditor
    • Ensure the independence of the external auditor
  • Review the financial statements
    • Review should include “management discussion and analysis”
    • Compare results with prior years
    • Analyze revenue and expense trends
  • Risk management
    • Understand the risks (operational, strategic, financial, compliance, and reputational) facing the institution
    • Assess whether those risks will prevent the institution from fulfilling its strategic objectives
  • Compliance
    • Analyze the institution’s recognition of and reporting required under federal, state and local laws as well as contractual compliance

The depth and breadth of this list is further evidence of the need for a separate audit committee as part of the board of directors. The board as a whole simply would not have the resources to adequately carry out these responsibilities, whereas the smaller audit committee is dedicated to these six main objectives.

Composition and Structure

According to the Association of Governing Boards of Universities and Colleges (AGB), an audit committee generally has three to six members, but the exact number is dictated by the size of the organization. These members should serve staggered, multi-year terms (often three years) to promote continuity. Each member should have a general understanding of business and finance and be knowledgeable about key compliance issues and risks facing the institution. All members should also be independent of the institution. The institutions financial management team may attend meetings, but their role should be limited to that of a staff or support role. Ideally, the committee should include at least one member that is considered a financial expert. A financial expert should possess the following attributes:

  • Understand financial statements and accounting principles
  • Ability to apply these principles in relation to the review of accounting estimates, reserves, and accruals
  • Experience in the preparation and review of the financial statements
  • Understand internal controls and audit committee functions

Best Practices

Below is a list of audit committee best practices as outlined by the AGB:

  • Meet two to four times annually
  • Meet with the president, CFO, and internal auditor annually
  • Remain current with emerging accounting principles and practices
  • Review president’s expenses
  • Ensure management takes responsibility for the financial statements
  • Report to the board the following:
    • Technical issues uncovered
    • Legal environment, including any pending lawsuits
    • Compliance with regulations and contracts
    • Tax law changes that would affect the institution

Top Questions for the External Auditor, According to the AGB

  • How does the institution’s financial health compare to last year?
  • Did the auditor issue an “unmodified” opinion?
  • Were any internal control issues identified?
  • Were there any significant changes in accounting policies for this audit?
  • How comfortable is the auditor with management’s estimates?
  • Is there any evidence of fraud at the institution?
  • Were there any findings issued under a management letter?
  • Has any other auditing work been performed for the institution during the current year?
  • Are there any issues with management which the committee should be made aware?

 

Article written by Tom Smither, Supervisor of Assurance Services

Citations

Staisloff, Richard. “The Audit Committee”. AGB Effective Committee Series. 2011