Employers must take immediate action

The IRS issued an alert on March 1 to payroll and HR professionals about new phishing scheme involving W-2 information. Employers need to take immediate steps to confirm the security of their employees’ personal information.

The alert describes a scheme that has already claimed several victims. Payroll and human-resources officers have mistakenly emailed payroll data including W-2 forms that contain Social Security numbers and other personally identifiable information to cyber criminals who posed as company executives.

“This is a new twist on an old scheme using the cover of the tax season and W-2 filings to try tricking people into sharing personal data. Now the criminals are focusing their schemes on company payroll departments,” IRS Commissioner John Koskinen said. “If your CEO appears to be emailing you for a list of company employees, check it out before you respond. Everyone has a responsibility to remain diligent about confirming the identity of people requesting personal information about employees.”

The fraudulent email contains the name of the company CEO and requests a list of employees and information including Social Security numbers from a company payroll employee or outside HR service.

The IRS alert identified the following details included in these emails:

• Kindly send me the individual 2015 W-2 (pdf) and earnings summary of all W-2 forms of our company staff for a quick review.
• Can you send me the updated list of employees with full details (name, Social Security number, date of birth, home address, and salary).
• I want you to send me the list of W-2 copies of employees’ wage and tax statements for 2015, I need them in pdf file type, you can send it as an attachment. Kindly prepare the lists and email them to me ASAP.

Criminals use this information to file fraudulent tax returns for refunds or otherwise monetize the stolen data.

We recommend that every employer take immediate action to address this phishing variation known as “spoofing.” Employers should contact their outside human-resources professional to determine that security protocols are in place to avoid this cybercrime. In-house, you should conduct a review of data-protection policies, procedures, and technologies. Carnegie Mellon University’s list of best practices for mitigating cybercrime is a helpful resource. See http://www.cert.org/insider-threat/best-practices/index.cfm.

This review should be team-based including management, HR, IT, and legal counsel. Heightened awareness of everyone in the organization may be the first and best protection.          

Elizabeth A. Hartnett, Esq., CPA, is a partner at the Syracuse law firm, Mackenzie Hughes LLP. Her areas of expertise include family business entities, business tax and succession planning, pre-nuptial and post-nuptial agreements, fiduciary compliance, investment counsel, estate planning, fiduciary services and estate settlement. This viewpoint is drawn from the law firm’s Plain Talk blog.

If you are a manufacturer, bank, or economic-development organization (EDO), you need to know about Section 144 of the IRS Tax code: https://www.irs.gov/Tax-Exempt-Bonds/Section-144-Small-Issue-Bond-Defined-10000000-Limit-Manufacturing-Facility. This government-sponsored program is meant to help stimulate public and private investment from abroad and here locally. Manufacturers, assisted living, multi-unit, waste management, and other for-profit entities can take advantage of this tax-exempt financing.

Tax-exempt financing for manufacturers
Tax-exempt financing for manufacturers under Section 144 of the Internal Revenue Code can save borrowers nearly 35 percent on a loan through a bank. Tax-exempt financing is a broad term that also includes tax-exempt loans made by a bank or private lender to a private enterprise to finance the costs of capital projects. Tax-exempt financing is used for the purpose of investing in new facilities, production lines, machinery and equipment, and technological advancements that help bolster productivity and profit. When utilizing this program, a bank does not have to pay taxes to the federal government and in turn, can pass these savings on to the borrower, with an average savings of 35 percent.

Tax-exempt financing may be used to fund the following assets:

Land: Includes acquisition, site preparation, improvements, infrastructure development (e.g., water, sewer, & rail), and environmental testing.

Building: Includes acquisition, construction, rehabilitation, engineering, architectural, legal, and other related costs

Soft Costs: Includes legal, architectural, engineering, surveying, test boring, title insurance, appraisals, accounting, and financing costs for the project.

Equipment: Includes acquisition, delivery, and installation.

Company acquisition: The acquisition of a manufacturing company structured as an asset purchase can be financed with tax-exempt debt.

Helping foreign and domestic manufacturers expand and invest: Low-cost capital access remains the primary strength of tax-exempt financing. Across the United States, there are billions of dollars available every year for manufacturers to use to fund. However, most EDOs and banks are not aware of this unique way to help manufacturers get a lower rate.

Loan structure
Any loan structure can be used to accommodate a tax-exempt loan including a lease structure. Interest earned by the bank is exempt from federal and state income taxes. The bank, in turn, passes on a lower interest rate — typically, about 35 percent to 40 percent lower — to the borrower. This can translate into significant savings over the life of the loan. 

Who’s helping manufacturers
That’s the dilemma? No one is. Most capital-market bankers know about tax-exempt financing but aren’t talking to manufacturers about it. Why? Because capital-market bankers like larger loans ($30 million to $300 million), and by law, a tax-exempt loan to a manufacturer cannot exceed $10 million. On the other hand, most commercial lenders are very interested in loans of 

$10 million or less. Unfortunately, most commercial lenders are not aware that they can even offer a manufacturer a tax-exempt loan. The result is no one, neither the capital-market bankers nor the commercial lenders, is telling the manufacturers about the opportunities available with tax-exempt financing.

Why not an IDB?
Some of you may be asking, why not use an industrial development bond (IDB) to fund the debt? Bond-market transactions are actually more complicated and more costly than tax-exempt bank loans (TEBL). In a bond offering you have to pay:

• An underwriter
• A trustee
• A remarketing agent
• A letter-of-credit bank (annual fee)
• Upfront fees

The letter of credit cost alone can run 1.5 percent to 2 percent annually. That’s the same as a lender offering an interest rate 1.5 percent to 2 percent higher than their competitors. 

In a TEBL, you do not need an underwriter, a trustee, a remarketing agent, or a letter of credit bank. TEBLs are not as complicated as a bond deal since a TEBL is simply a commercial loan with a tax-exempt interest rate.

The math of a tax-exempt bank loan
On a traditional commercial loan, a bank charges, say, 4 percent interest on that loan. On a $1 million loan for one year, the bank earns $40,000 in interest (of course a regular loan would amortize over a much longer period, like 25 years). If it’s paying 35 percent in taxes, from that $40,000 it pays $14,000 in taxes and keeps $26,000.

With a TEBL, the bank doesn’t pay any income taxes on the interest it receives, so as long as it can still make that $26,000, the bank is just as happy. The manufacturer is much happier as it’s saving a lot of money. The interest rate the bank needs to charge on that $1 million to make $26,000 is, of course, 2.6 percent. 

And remember, that’s only for a single year — which would never be the case with a manufacturing loan like this. Over a typical 25-year loan period, a manufacturer that borrows $10 million is looking at roughly $2.7 million in savings.          

Mark Lesselroth is the principal of Brenner Business Development. Contact him at mark@brennerbd.com