employee embezzlement

[spt]

Client discovered in 2009 an employee theft from 2005-2008. Corporate returns have not been filed for those years. We are in the process of gathering info to complete the returns. Employee destroyed all credit card stmts and bank stmts. Can theft expense deduction be taken in each year or all taken in 2009 and prepare a NOL carryback? Formal investigation is under way by FBI. We are told this could be a slow process but for client licensing requirements I need to file all returns due.

[Bees Knees]

TTB, page 4-22 says:

Casualty or theft losses are deductible in the year the casualty occurred
or the theft was discovered.

Thus, if the theft was discovered in 2009, the theft loss is deducted in 2009.

[Mo Sheets]

Just a thought....

If your client has a commericial business policy, there may be some coverage to reimburse them for embezzlement. Your client may want to check with their insurance agent to see if this is the case. Just a thought....

Mo

[spt]

theft

We have contacted the insurance company & they had a small policy. Ins co in the process of deciding if payment is one time amount or for each policy period. Thanks for the comments. It appears that this type of problem is on the rise. Several of the local CPAs that I have spoken with are having similar situations with their clients.

[Burke]

I am assuming the actual monetary loss can be determined accurately? Because the credit card statements and bank statements can be retrieved and duplicated.

[BHoffman]

Owner doesn't want to prosecute

Employee theft of cash, and the owner doesn't want to prosecute because this employee was a friend "down on his luck and putting him in jail won't get the money back". I do not believe the owner took any of this money as distributions. He left the employee/friend completely in charge of this operation. The owner has a large second business and devotes all of his time to that. He also blames himself for not paying attention.

The owner contributed cash to the business to the tune of around $180k. The missing funds were discovered by reconciling the POS sales information to the bank deposits. Off by around $$80k. Prior accountant simply let the amount build up in Quickbooks "Undeposited Funds" account. This occurred over the past two years, but was "discovered" in 2009.

Can the theft amount still be written off, even though the owner does not intend to pursue any legal action? This amount will surely stand out in the tax return, and without any real evidence that the employee took the money, and with the owners refusal to attempt prosecution, I think the better course of action might be to just treat it as though the owner took this as a distribution. The company has a very small profit without taking the theft write off.

What would you do?

[ChEAr$]

First, ask the burning question, is business reporting tax wise on the cash or
accrual basis?

[BHoffman]

Cash (un)wise.

Sales revenue is determined by what the POS (point of sale) reports show, not the bank deposits.

[veritas]

Similar circumstance

Employee theft of cash, and the owner doesn't want to prosecute because this employee was a friend "down on his luck and putting him in jail won't get the money back". I do not believe the owner took any of this money as distributions. He left the employee/friend completely in charge of this operation. The owner has a large second business and devotes all of his time to that. He also blames himself for not paying attention.

The owner contributed cash to the business to the tune of around $180k. The missing funds were discovered by reconciling the POS sales information to the bank deposits. Off by around $$80k. Prior accountant simply let the amount build up in Quickbooks "Undeposited Funds" account. This occurred over the past two years, but was "discovered" in 2009.

Can the theft amount still be written off, even though the owner does not intend to pursue any legal action? This amount will surely stand out in the tax return, and without any real evidence that the employee took the money, and with the owners refusal to attempt prosecution, I think the better course of action might be to just treat it as though the owner took this as a distribution. The company has a very small profit without taking the theft write off.

What would you do?

Years ago. The return was picked for audit. There was no police report and we were lucky to prevail. I would highly recommend you tell the client to file a police report.

[BHoffman]

Thanks. I have advised this, but client refuses.

So, I'm wondering whether to just push it all into clients drawing account as though he took the money as a repayment of shareholder loan or to write some or all of it off. He has lots of basis due to the money he had to lend to the company to cover payroll and other expenses. He is personally wealthy enough to take this hit. His "friend" is about 3 inches from going to jail over other bad things he's doing anyway. The client doesn't see any point in reporting anything to the police since it will not result in the recovery of any money. I've explained the tax implications - that he is in essence paying the thief's income tax, but he is still not willing to press any charges even if it means no deduction. He feels sorry for the guy, and has known him for many years - before the guy developed a very bad habit.

[veritas]

You could

take the loss and advise the client that he might not prevail without the police report. You could ask the thief to sign a statement with the understanding there will be immunity. Or you could show it as a draw for your client.

I think it is your client's choice.

[S T]

Taxable Income

I found this which is interesting.

In the crime of embezzlement there are tax implications for both the embezzler and the embezzled
Embezzled income is taxable to the person who does the embezzling (revenue ruling 61-185, 1961-2 CB 9; revenue ruling 65-254, 1965-2 CB 50; James v. United States James v. United States may refer to the following decisions of the Supreme Court of the United States:
James v. United States, 202 U.S , 366 US 213 (1961), Ct. D. 1863). The embezzled amount should be included in the embezzler's gross income in the year of the embezzlement. In addition, the embezzler/employee may be subject to self-employment taxes on the embezzled amount.

Sandy

[taxea]

Employee theft of cash, and the owner doesn't want to prosecute because this employee was a friend "down on his luck and putting him in jail won't get the money back". I do not believe the owner took any of this money as distributions. He left the employee/friend completely in charge of this operation. The owner has a large second business and devotes all of his time to that. He also blames himself for not paying attention.

The owner contributed cash to the business to the tune of around $180k. The missing funds were discovered by reconciling the POS sales information to the bank deposits. Off by around $$80k. Prior accountant simply let the amount build up in Quickbooks "Undeposited Funds" account. This occurred over the past two years, but was "discovered" in 2009.

Can the theft amount still be written off, even though the owner does not intend to pursue any legal action? This amount will surely stand out in the tax return, and without any real evidence that the employee took the money, and with the owners refusal to attempt prosecution, I think the better course of action might be to just treat it as though the owner took this as a distribution. The company has a very small profit without taking the theft write off.

What would you do?

How foolish of your client. If it was cash and he knows who took it doesn't he have to prove attempts to get the money back.
You client is enabling this "friend" to continue this type of activity. This is a felony. What kind of "friend" does this?
The employee should be procecuted and the client should ask for reimbursement as a court order.
Then if the client can show that the thief is insolvent he can take the loss and report any future payment as income on his future return/s.
And include what ST said too

[JON]

Cash business

if redo as due from the person does "sales tax" become an issue or was it already paid? If your client had everything in income and undeposited cash becomes the the theft loss. I think you need the police report. If the bank statements and credit card reports are gone there could be more problems then cash gone before the bank. You have to attempt to get all back from the insurance company first and then the balance not covered becomes the loss.

The rest of the loss and options are the owners. If he does not want to try to collect then he may have a problem. W-2 or 10099 him??? Who knows it that will work. If you do not get the max out of the insurance compnay and you do not have a police report - I think thast is an problem it audited you would never win.

[BHoffman]

I think the revenue and sales tax was correctly reported because that information came off the POS reports, not the bank deposits. Like I said, this is how the problem was discovered in the first place. Evidently, the thief wasn't smart. He rang up the sales on the cash register and then pocketed the cash. So, the sales showed up but not the money.

The client doesn't want to press any charges and that's his decision. He just wants to move on. I agree about the enabling, but this is not up to me. The thief has lost his home and his family due to his problems, and my client feels he has no chance of recovering any funds and doesn't feel that jail would be any more punishment than the friend is imposing upon himself.