Editor: Michael David Schulman, CPA/PFS
In 2007, roughly one in eight individuals in the United States was age 65 or older (Department of Health and Human Services, Administration on Aging, A Pro file of Older Americans: 2009, at 4). During the past decade, a new term, “senior fraud,” has come to the forefront in the media. It is also sometimes referred to as senior abuse. The abuse can take many forms: physical, emotional, or financial. While not specifically related to the issue of taxation, this is an area that can affect CPAs’ practices as they work with an aging client base. The purpose of this column is to explore the warning signs of senior fraud and to offer suggestions for identifying those signs and resources for guidance in handling such situations.
Some signs that tax advisers should watch for with their older clients include:
- Revisions of power of attorney docu ments. While a change in the responsible party does not necessarily indicate a problem, be sure the rationale for making the change is appropriate. This is particularly important in the United States today; the National Institute on Aging estimates that as many as 5.1 million Americans have Alzheimer’s disease, and as the population ages the number of people afflicted doubles for every five-year interval beyond age 65 (Department of Health and Human Services, National Institute on Aging, 2008 Progress Report on Alzheimer’s Disease5 (December 2009)).
- Changes in beneficiary designations on insurance contracts or other accounts, including IRAs and/or retirement plans. The principal reasons for making changes in these documents typically stem from significant events, such as a death, marriage, or birth. Once again, the adviser needs to be alert to these changes and, if possible, review them with the client to ensure the client is making the changes for the right reasons.
- Changes in bank or brokerage account titles to include others as joint owners or as signatories on the accounts.
- Increased ATM use for cash withdraw als. This is a much more difficult issue to handle unless the adviser is periodically reviewing the client’s various bank and brokerage statements. Sometimes the client’s bank may catch unusual withdrawals and bring them to the client’s or the adviser’s attention. Reviewing the client’s accounts and periodic statements is a billable service that will help protect older clients.
- Unexpected refinancing of a home mortgage or a change in ownership of real estate held by the client. Advisers can ask their older clients who are being encouraged to refinance their mortgages to allow the adviser to review the figures for them before they make any commitments. In addition to looking at cashflow issues, the adviser can also ask them why they are refinancing. This is especially important if they are refinancing more than they currently owe on their mortgage.
- Liquidations of CDs or annuity con tracts for no apparent reason, or the pur chase of new annuity contracts or life in surance policies. When clients suddenly decide to liquidate CDs, annuity contracts, or life insurance policies, it would be beneficial for the adviser to sit down with them to discuss the rationale for the changes. This is particularly a concern when clients have attended a “free meal” seminar and have been encouraged to liquidate their current holdings and reinvest the proceeds in new contracts. If the adviser is aware of such changes in clients’ financial affairs, he or she should endeavor to review the changes with them.
Rectifying the Problem
Earlier this year, Ohio’s attorney general’s office established an Elder Abuse Commission to improve education efforts, boost research, and raise public awareness of senior abuse issues. Its website contains a list of “Services for Seniors”, which provides numerous links to resources concerning senior abuse and information about how to report potential abuse. The office also offers a brochure titled “Elder Fraud,” which would be ideal for advisers to give clients when meeting with them. Additional information and resources (primarily for Ohio) can be found at the Proseniors website, which also contains senior-oriented legal hotlines for other states. Organizations such as the local Better Business Bureau will also have brochures that advisers can give clients. The best solution to the problem of senior fraud and financial abuse is to be forewarned. As their client bases age, advisers should make every effort to inform all their clients of the risks that either they or their aging parents may face.
If a client has been exploited financially and has suffered loss as a result, it is important to quantify the loss through investigation and analysis. Such losses should also be reported to the appropriate authorities, and insurance claims should be filed. Once the loss has been properly documented and the amount reasonably determined, the net amount of the loss should be taken as a casualty loss under the normal rules for casualty losses. The amount of the loss would be subject to the appropriate adjusted gross income limitations. The loss may be taken in the year the dollar value has been determined, with the caveat that any future restitution or insurance proceeds be reported as income to the extent of the deduction taken. Unfortunately, most homeowners’ policies will not cover any loss if clients have signed a power of attorney or other document that allows another person to handle their finances or access their accounts without the owner’s approval, even if there is a deemed criminal act. Losses due to theft or other illegal activity where the owner has not given discretionary authority to another individual may be eligible for claims.
The tax adviser should be able to demonstrate the following in order to claim the loss on Form 1040, U.S. Individual Income Tax Return:
- When the client discovered that the property was missing;
- That the property was stolen;
- That the client owned the property; and
- Whether a claim for reimbursement exists and whether there is a reasonable expectation for recovery of the loss (IRS Publication 547, Casualties, Disasters, and Thefts3 (2009)).
If there is subsequent recovery of any portion of the loss that has been deducted, it is recovered to the extent that the recovery exceeds the nondeductible portion of the loss up to the total amount of the deduction taken (IRS Publication 525, Tax able and Nontaxable Income 22 (2009)).
The AICPA has established PrimePlus/ ElderCare Services through the Personal Financial Planning division to provide PFP members with information and materials designed to allow practitioners to help older clients with their unique needs. The profession’s position of trust and integrity can allow the practitioner to offer a valuable service to this growing segment of U.S. communities.
Michael David Schulman is the owner of Schulman CPA, an Accountancy Professional Corporation, in New York, NY. Ralph Rolfe is the owner of Covenant Financial Concepts in Kettering, OH. For further information about this column, contact Mr. Rolfe at firstname.lastname@example.org.