October 2014 Edition of Indian Tribal Governments News
- Director’s message
- General Welfare Exclusions webcast
- Business Filer Notices
- Changes to the second “B” Notice process
- Internal controls help Tribes reduce fraud and abusive schemes
- Complying with payroll recordkeeping requirements
- Ten things to know about IRS Notices and Letters
- Report phishing
- ITG fights abuses and schemes against Tribes
- Outreach update
As promised, we are working hard to reach out to Tribes using virtual tools. In particular, we recently presented two webcasts last month; one on General Welfare Exclusions and another to help you with year end reconciliations. If you missed these events, you can view the recordings at the IRS Video Portal. The article below my message offers more information.
We plan to have more virtual events, so if you have ideas for topics, please send us an e-mail.
As always, if you have questions, comments or concerns, please don’t hesitate to contact us or your ITG Specialist.
One important note: As of the time this message was sent to be issued, the President had just signed into law the Tribal General Welfare Exclusion Act. Watch for additional communications on the implementation of that important new law in future messages.
Indian Tribal Governments Director
General Welfare Exclusions webcast and more at the IRS Video Portal
If you missed the ITG webcast, General Welfare Exclusions for Indian Tribal Governments on September 4, you can watch it at the IRS Video Portal.
You can also view and listen to recordings of past outreach events. The portal is divided into five sections: Individuals, Businesses, Tax Professionals, Governments, Non-Profits, and Español. You’ll find the most relevant recordings in the Governments section. And within that section you will find an area for Tribes.
Business Filer Notices
One of the ways we classify our notices is by the type of tax form they're about. We call notices we send about business-related tax forms such as Forms 941, Schedule B (Form 941), 1065, and 1120, business filer notices.
Changes to the second “B” Notice process
Beginning August 1, 2014, the Social Security Administration (SSA) stopped providing printouts of Social Security Numbers (SSN) for verification. This means a change in the way vendors prove their SSNs during the second “B” Notice process. Revenue Procedure 2014-43 and updated IRS Publication 1281 (see page13) explain the changes. Any Tribe or Tribal entity that is required to issue a second B Notice after August 1, 2014 must follow these new guidelines.
The “B” Notice process is used to avoid backup withholding on payments made to vendors. If there is a mismatch between the vendor’s name and the SSN, the IRS will send the payor a CP2100/2100A Notice informing them that they need to issue a first “B” Notice to the vendor. The notice includes a Form W-9, Request for Taxpayer Identification Number and Certification, for the vendor to fill out and return to the payor. If it still doesn’t match or the vendor doesn’t respond, the IRS will send the payor a second notice. If the IRS sends the payor a second CP2100/2100A notice within three years after the first, then the payor is required to send a second B Notice to the vendor. In the past, the vendor would prove to the payor that the number is correct by getting a printout of their SSN from the SSA.
The change is that the vendor must provide the payor a copy of their Social Security card; it should contain their correct name and Social Security Number. Payors may rely upon a Social Security card as being correct only if
- the name and SSN combination appearing on the card differ from the name and SSN combination appearing on the second B notice; or
- if there is a date appearing on the Social Security card that is no earlier than six months before the date of the second B notice.
If a vendor does not have a Social Security card, they must obtain a new or replacement card from the SSA. If the vendor’s name and SSN combination listed on the second B notice is not current or correct, they should update their records with the SSA and provide a copy of the updated Social Security card to the payor.
A payor who receives a copy of a vendor’s Social Security card meeting the requirements specified above will not be required to start backup withholding to that vendor. They may also stop backup withholding on reportable payments. Additionally, the payor must use the name and SSN combination provided to them on any future information returns with respect to the account.
If you have any questions, you may contact your assigned ITG Specialist for assistance.
Internal controls help Tribes reduce fraud and abusive schemes
Assessing internal control weaknesses and creating processes and procedures to strengthen controls will make the Tribe, its employees, members and business enterprises less vulnerable to fraud and abusive schemes.
Every day in the news there are reports of fraud, stolen information and new abusive schemes that hurt Indian Tribes, their employees, tribal members and their business enterprises. Putting a strong internal control system in place will make it harder for fraud and abusive schemes to occur.
BusinessDictionary.com defines internal controls as systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to do the following:
- Conduct its business in an orderly and efficient manner
- Safeguard its assets and resources
- Deter and detect errors, fraud, and theft
- Ensure accuracy and completeness of its accounting data
- Produce reliable and timely financial and management information
- Ensure adherence to its policies and plans
ITG would add to this definition, “Ensure reliability of reporting and compliance with applicable laws and regulations.”
Some tribes, especially smaller tribes, don’t believe they have the resources to create and implement strong internal controls. Sadly, many tribes, who don’t have internal controls in place, have lost millions of dollars to embezzlement, property theft, corruption, asset misappropriation, contractor fraud and improper payment schemes.
Anyone who does business with a tribe can commit fraud. Employees (including tribal officials) can be susceptible to bribery, kickbacks, asset misappropriation through billing schemes, shell company payments and personal purchases or diversion of employment tax deposits that should go to the IRS. Contractors may be involved in procurement or billing schemes. Outside companies may try to use tribes to avoid paying federal income taxes.
Although internal controls cannot guarantee that fraud will not happen, they do provide a measure of assurance for everyone in the organization, from the Tribal leaders to the employees of all Tribal entities. Internal controls in place and taken seriously will reduce the risk of fraud.
To put internal controls into place, there are two things that you should do:
- Do a risk assessment to identify weaknesses.
- Develop procedures, processes, policies and practices to strengthen those weaknesses.
Payroll and accounts payable are two accounting systems you should address.
For every payment, appropriation or expense, there should be more than one person involved in the transaction.
Payroll processes to consider during your risk assessment include:
- Adding new employees
- Items included or excluded from gross compensation
- Advances and/or loans
- Approval processes for travel and expense re-imbursement
- Accountable versus non-accountable travel reimbursement plans and its impact on Forms W-2
- Tip reporting
- Balancing Forms 941 (Employer’s Quarterly Federal Tax Return), W-2, and W-3 (Transmittal of Wage and Tax Statement) at year end
- Having checks and balances for all processes so that it would be difficult for someone to defraud the Tribe
Accounts Payable processes can include:
- Tribal credit cards – easily abused; generally little or no internal controls in place
- Determine authorized users
- Implement approval processes for purchases
- Require receipts for purchases
- Review credit card statements - by someone not involved in earlier steps
- Establish procedures for check requests
- More than one person approves, creates and signs the check
- Vendor Payments
- Secure taxpayer identification numbers (TINs) prior to the first payment to avoid backup withholding requirements – Form W-9
- Enter complete vendor related data into system and determine whether Form 1099-MISC, Miscellaneous Information Return is applicable prior to first payment.
Each tribal government operation may have different needs; however, payroll and accounts payable are two accounting systems that nearly every entity uses.
Complying with payroll recordkeeping requirements
Employers can increase their compliance and minimize audit risks by meeting the recordkeeping requirements of the Internal Revenue Code. Employers who withhold and pay federal income, Social Security and Medicare taxes must maintain certain records for each employee.
If you inaccurately compute payroll tax calculations and withholding, you can put the tribe at risk for examination corrections or a Combined Annual Wage Report (CAWR) analysis.
Listed below are the records employers must keep for at least four years after the due date of their employees’ personal income tax return (generally, April 15th) for the year in which the payment was made:
- The Employer Identification Number (EIN).
- Employee name, address, occupation and Social Security number.
- Total amount and date of each payment of compensation and any amount withheld for taxes or otherwise. This should include reported tips and the fair market value of non-cash payments.
- Amount of compensation subject to withholding for federal income, Social Security, and Medicare taxes, and the amount withheld for each tax.
- Pay period covered by each payment of compensation.
- The reason(s) why the total compensation and the taxable amount for each tax are different, if that is the case. For example, Tribal council members’ total compensation will be larger than taxable Social Security wages because amounts they are paid for their services as council members are exempt from employment tax.
- Employee’s Form W-4, Employee’s Withholding Allowance Certificate.
- Beginning and ending dates of the employee’s employment.
- Statements provided by the employee reporting tips received.
- Records of allocated tips.
- Information regarding wage continuation payments made to the employee by an employer or third party under an accident or health plan:
- including the beginning and ending dates of the period of absence from work;
- the amount and weekly rate of each payment (including payments made by third parties); and
- copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding From Sick Pay.
- Fringe benefits provided to the employee and any required substantiation.
- Adjustments or settlements of taxes (941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund; W-2C, Statement of Corrected Income and Tax Amounts; IRS notices of adjustments).
- Copies of returns filed (on paper or electronically), including forms 941, W-3, 6559, Copy A of Form W-2, and any Forms W-2 sent to employees but returned as undeliverable. Amounts and dates of tax deposits.
Ten things to know about IRS Notices and Letters
Each year, the IRS sends millions of notices and letters to taxpayers for a variety of reasons. Here are ten things to know in case one shows up in your mailbox.
Phishing is a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information.
The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. Read this article to find out more.
ITG fights abuses and schemes against Tribes
The ITG Abuse Detection and Prevention Team work with Tribes to help identify and stop financial abuses and schemes being promoted in Indian Country. If you are aware of highly suspect tax schemes, you can contact them at (503)265-3732 or e-mail. Read the July 2013 edition for more information. Note that the telephone number in the 2013 article has been changed to (503) 265-3732.
ITG co-present a workshop with the IRS Criminal Investigation (CI) division at the San Pablo Lytton Casino in San Pablo, Calif. The purpose was to educate management staff on what to do if criminal activity is detected; and the IRS Criminal Investigation division’s role. An ITG specialist moderated the event and addressed questions specific to Tribal entities.
Employment Tax and Gaming Workshops, Northern Quest Resort and Casino. The resort hosted the event on September 9 - 11. ITG presented this workshop to more than 20 participants each day, who represented more than 10 Tribes and organizations. Covered topics included hiring a new employee, what constitutes wages, quarterly reporting requirements, 3rd party sick pay, reporting of payments to vendors, mismatch notices and TIN Matching program. ITG disseminated copies of the new General Welfare Guidance as well as a handout called Payroll Resumption Emergency Procedures and Reporting Essentials (PREPARE), which explains what to do in the event that a finance person leaves with very little notice. ITG presents this workshop every September in the Spokane, Wash. area.