Not all shell companies are dishonest. Despite their often-sinister reputation, these paper-only companies may be used legitimately to hold another business’s assets. Or they may be the “empty container” left after a company downsizes or is acquired. That said, some fraud perpetrators use shell companies to embezzle funds, evade taxes, dodge debts and commit other illegal acts.
For many businesses, the biggest threat posed by illegitimate shell companies is that unscrupulous employees will use them to perpetrate billing fraud. Here’s how to spot a shell scheme in your midst.
Employee-perpetrated shell company schemes take one of two forms. In the first, an employee sets up a shell company to send out — and collect on — fictitious bills. Perpetrators don’t have to send the bills for nonexistent goods and services to the company for which they work. But it’s easier, and can help them evade detection, if they do.
Consider, for example, an accounting staffer who knows that his company rarely scrutinizes invoices for less than $3,000. He applies for a “doing business as” (DBA) certificate from his state for a fictitious business and opens a business account at a local bank. Now he can bill his employer for services that cost less than $3,000 per invoice.
In the second type of scheme, an employee sets up a shell company to sell products to his or her employer at a marked-up price. Because the employee’s shell company has no overhead or expenses, the employee can pocket the proceeds.
Invoices contain clues
Shell company schemes can go undetected for a long time, particularly if the fraudsters are savvy enough to attempt to cover their tracks and don’t get too greedy. Most perpetrators, however, leave a paper trail of invoices that, when scrutinized, is suspicious.
For example, invoices may vaguely define their products or services, arrive more than once a month and show an increased number of purchases over time. Addresses are important. Fake companies usually use a post office box as a return address. But less clever (or more arrogant) thieves may use their actual home address.
Shell company scams work only if the crooked employee can pay the invoices or get the shell company authorized as a legitimate vendor. A quick credit check on a new vendor will reveal whether it has an operating history and deserves greater scrutiny. Job rotation, mandatory vacations and a strict separation of duties in critical areas, such as your accounting department, can help prevent financial losses from shell company schemes.
Contact us if you think an employee is committing fraud with a shell company. We can examine invoices and other records, interview suspects and witnesses, and review your internal controls to get to the bottom of any suspicions.
© 2020 Covenant CPA
When Dan received a large shipment of highlighter markers, he was confused. He didn’t remember ordering them — and he was the company’s sole office supplies buyer. Yet when he received an invoice for the markers a week later, he approved it for payment. After all, employees were already using the highlighters.
Dan fell for a typical office supply scam — and his company paid for the mistake. Here’s how to protect your business from this type of fraud.
Office supply scams typically begin as telemarketing fraud, with someone calling your business to obtain your street address and the name of an employee. Callers may ask for the person in charge, claim to need information to complete an order or pretend to verify an office machine’s serial number. The goal is to get a name that will lend legitimacy to bogus shipments and invoices.
The fraudster then attempts to perpetrate an office supply scheme, including one of the following:
Phony invoices. A supplier ships poor quality products and then, a week or two later, sends a pricey invoice. The delay is intentional: The fraudster hopes you won’t notice that the final price is much higher than you’d pay for better quality products. The person is also hoping you’ve used some of the products and feel obligated to pay for them.
Promotional items. Some pretenders offer to send you a promotional item. Before they hang up, however, they’ll mention in passing that they’re going to throw some ink cartridges in with the free coffee mug. What they don’t mention is that they’ll also throw in a bill for the ink.
Gift horses. A perpetrator sends a promotional item to an employee and follows up by sending unordered merchandise to you. When you receive the bill with the employee’s name on it, you question the employee. The scammer is hoping the employee will be so nervous about accepting the promotional item that you’ll end up believing the worker mistakenly ordered the merchandise.
Stop supply fraud
To keep your business safe from office supply fraud:
- Tell employees to transfer all telemarketing calls to one or two designated buyers.
- Provide buyers with procedures for documenting and approving purchases.
- Set up a system for generating purchase order or internal reference numbers.
- Instruct vendors to include those numbers on their shipment documents.
- When you receive merchandise, inspect it and verify that you ordered it and that the packing list matches the box’s contents.
If everything’s in order, receiving employees should send copies of the bills of lading to accounts payable for reconciliation with the order.
Know that you aren’t legally required to pay for anything you didn’t order. Unless there’s a legitimate mistake on an order, you may treat any unrequested merchandise as a gift and use it as you like. If suppliers hassle you, discuss the matter with your legal and accounting advisors.
© 2020 Covenant CPA
Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:
- Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
- Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
- Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.
- Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
- Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).
- Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.
Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next. Call us at 205-345-9898.
© 2018 Covenant CPA