Embezzled funds

[DTS]

A longtime client emailed late last night to inform me that a paralegal that worked in her office embezzled approx. $90K. I will not know the particulars of all this until I meet with her, but she has asked me to take over the books for 2008 and going forward.

Right now, I am assuming income to the firm is from invoices, retainers and settlement escrow accts. Again, this is an assumption on my part for now.

Question: Once I find these missing funds, what is the proper journal posting until funds are repaid, if ever?

Any suggestions aside from the j/e you've learned from a past situation like this is greatly appreciated.

D

[ChEAr$]

possible solution

A longtime client emailed late last night to inform me that a paralegal that worked in her office embezzled approx. $90K. I will not know the particulars of all this until I meet with her, but she has asked me to take over the books for 2008 and going forward.

Right now, I am assuming income to the firm is from invoices, retainers and settlement escrow accts. Again, this is an assumption on my part for now.

Question: Once I find these missing funds, what is the proper journal posting until funds are repaid, if ever?

Any suggestions aside from the j/e you've learned from a past situation like this is greatly appreciated.

D

involves determining whether firm was on cash or accrual method.

If on the cash method and incoming checks were never recorded......

If on accrual method, it depends on whether or not the accounts receivable had been
duly credited and what happened to the funds.

Could be other reasons of course, like paying dummy invoices. Let us know how it
plays out. We can all learn from studying scams and rip offs.

[JG EA]

I'm sure an accounting pro will post and give you the correct answer, but what I would do is post the loss as a credit from the asset accounts the money was taken from and as a debit to Other Deductions. I do this so I won't automatically count the money as a regular deduction, but know that it will have special treatment on the tax return.

[ChEAr$]

Money money money

I'm sure an accounting pro will post and give you the correct answer, but what I would do is post the loss as a credit from the asset accounts the money was taken from and as a debit to Other Deductions. I do this so I won't automatically count the money as a regular deduction, but know that it will have special treatment on the tax return.

is never a "regular deduction". nor even a tax deduction.

This reminds me of a client last week with whom I was discussing the need for him to take
some salary from his S corporation in view of the profits this year. He was saying he didn't need the salary since his regular day job W2 would be over 100,000$ for 2008, AND that
he'd just gotten 8000$ check from the LLC of which he is also a member. Many people
confuse receipt of money/cash with income or paying money with a deduction.

I had to explain to him that it depended on what would be on the K1 from the LLC as to how much is taxable, and that a salary from his S corp would just replace profits from
that K1 on which he's going to pay income tax on anyway.

Now then, WHY are we talking tax on New year's day? a holiday? (grin

[DTS]

Now then, WHY are we talking tax on New year's day? a holiday? (grin

A dedicated enrolled agent should never rest. Always here to serve.

(grin

[BOB W]

A longtime client emailed late last night to inform me that a paralegal that worked in her office embezzled approx. $90K. I will not know the particulars of all this until I meet with her, but she has asked me to take over the books for 2008 and going forward.

Right now, I am assuming income to the firm is from invoices, retainers and settlement escrow accts. Again, this is an assumption on my part for now.

Question: Once I find these missing funds, what is the proper journal posting until funds are repaid, if ever?

Any suggestions aside from the j/e you've learned from a past situation like this is greatly appreciated.

D

When you get the particulars and are able to know a percise $ amount, just for spite (besides it is taxable income any way), issue that person a 1099 misc (other income). Plus followup with prosecution. Any repayment will have to be that person's problem on their tax return in the future.

You should research a thief loss for that type of business entity and how it effects net profits.

[Lion]

Interesting

You certainly do get a lot of very interesting clients, Dennis. But, then that's California. My economics professor said the country is slanted so all the nuts roll to California.

[JG EA]

is never a "regular deduction". nor even a tax deduction.

A little harsh?

To clarify what I meant: My point was that it is not a deduction, but requires special treatment (Theft Loss). Obviously if it was never in income it wouldn't be anything- is that your point? My point was to have it on the books in a place that won't get buried and overlooked at tax time. My post showed that I thought it was on the books.

[taxea]

JG EA...Under the circumstance that the employer "authorized" the advance I don't see how you can consider this a "theft loss". His recourse would be small claims court. taxea

[Zee]

JG EA...Under the circumstance that the employer "authorized" the advance I don't see how you can consider this a "theft loss". His recourse would be small claims court. taxea

I guess I'm missing something where was the "authorization" in the string?

Also, I don't understand the post, "money is never a deduction". Cash is an asset. If cash is stolen it is no longer an asset, the cash account should be credited. The debit should be to an expense account, "theft loss" might be an appropriate title. Of course, any anticipated recovery should also be recognized as a receivable. On the tax return, the theft loss should follow the IRS rules for recognition. So, there will be a book vs tax difference, no?

Post-note: I should also add the above assumes the cash was stolen somehow without recording it in the books. If, for example, the theft was hidden by recording a fictitious expense only a reclassification entry would be required (better describing the theft), the loss would have already been reflected in the books both in the fictitious expense account and cash.

[taxea]

Zee...don't ask me how but somehow my post that you questioned was a response to another post. Have no idea how it got in this discussion. taxea

[ChEAr$]

You've got it!

I guess I'm missing something where was the "authorization" in the string?

Also, I don't understand the post, "money is never a deduction". Cash is an asset. If cash is stolen it is no longer an asset, the cash account should be credited. The debit should be to an expense account, "theft loss" might be an appropriate title. Of course, any anticipated recovery should also be recognized as a receivable. On the tax return, the theft loss should follow the IRS rules for recognition. So, there will be a book vs tax difference, no?
.

With your explanation you've proven that "money is never a deduction", since the bookkeeping entry correctly re classifies it as appropriate; an expense.

If the tax return contains a balance sheet, as in entites meeting certain requirements, then there very well could be a difference to be reconciled unless the loss is fully deductible as ordinary and necessary before net profit/loss.

[Zee]

With your explanation you've proven that "money is never a deduction", since the bookkeeping entry correctly re classifies it as appropriate; an expense.

If the tax return contains a balance sheet, as in entites meeting certain requirements, then there very well could be a difference to be reconciled unless the loss is fully deductible as ordinary and necessary before net profit/loss.

Huh? I guess it's semantics. The "expense" was the loss of "money". IMHO, a statement that "money is never a deduction" is confusing, but it isn't worth debating.

[OtisMozzetti]

Even if "authorized", there could be embezzlement.

JG EA...Under the circumstance that the employer "authorized" the advance I don't see how you can consider this a "theft loss". His recourse would be small claims court. taxea

Embezzlement is one of the forms of theft, disguised theft by an employee or an inside person. Even if the employer made verbal or written "authorization" of the money payments, there could be embezzlement if the paralegal employee fabricated fake reasons behind the "authorizations" which the unknowing employer supposedly OK'd.