Requirements for banks after reaching $500M asset threshold

Increased bank consolidation and considerable stimulus funds provided by governments in response to the COVID-19 pandemic have resulted in significant asset growth for community banks. Many banks have recently crossed or are nearing the $500MM asset threshold that subjects financial institutions to several new requirements. If your bank asset size is $500MM as of the first day of the fiscal year, you will be required to have the following (if not already required by applicable state laws):

  • Audited comparative financial statements with Independent Auditor’s Report thereon
  • Management report that contains:
    • A statement of management’s responsibilities for:
      • Preparing the annual financial statements
      • Establishing and maintaining an adequate internal control structure over financial reporting
    • An assessment by management of the Bank’s compliance with laws and regulations pertaining to insider loans and dividend restrictions during the year
  • Audit firm must be independent under SEC/ PCAOB independence standards
  • Majority of audit committee members must be outside directors that are independent of management
  • Part 363 Annual Report with the FDIC and primary regulator within 120 days after the bank’s fiscal year end
  • Management is required to prepare the financial statements, including disclosures, and tax accrual

Audited financial statements

Banks must have their audits completed within 120 days after the bank’s fiscal year end, unless the bank is publicly traded resulting in a 90-day or sooner requirement.

Auditor independence

Banks and their audit firm are required to follow SEC/ PCAOB independence standards including partner rotation every five years (unless firm is not subject to requirement), pre-approval of non-audit services and certain restrictions on banks hiring auditors from the engagement team. In connection with auditor independence, audit firms are not able to provide prohibited nonaudit services to the bank such as:

  • Bookkeeping,
  • Financial statement preparation (including tax accruals),
  • Valuations,
  • Outsourced internal audits,
  • Tax return preparation for individuals in a financial reporting oversight role (or their family members), and
  • Financial information systems design and implementation

Audit committee composition

Banks are required to have an audit committee to oversee financial reporting. Most of the audit committee members must be outside directors rather than members of management to avoid potential conflicts of interest. There should be direct communication between the audit committee and auditor.

How we can help

Maggart’s approach is tailored to your bank’s size and complexity. We will build relationships with your management team to develop a practical solution that can be scaled as you grow and your bank’s requirements change. We can help you with the following:

  • Financial statement preparation
  • Financial statement audits
  • Loan review services
  • Internal audits
  • Investment center review
  • Asset liability management assessments
  • Liquidity and funds management assessments
  • HUD audits
  • Risk assessment services
  • Outsourced accounting
  • Merger & Acquisition consulting
  • Process redesign and optimization plans
  • Policies and procedures development
  • Strategic planning
  • Information security assessments
  • Asset liability management assessments
  • Liquidity and funds management assessments
  • State collateral pool certifications

Why Maggart?

  • We take a hands-on approach in helping you planning (typically 18-24 months in advance) to ensure you meet the FDICIA requirements in a cost effective and efficient manner.
  • You will receive useful insights from a relationship-based firm with national firm expertise. Maggart has been providing services to banks ranging from small privately held community banks to publicly traded multi-billion-dollar institutions for over 40 years.
  • When applicable, we will provide documentation or equivalent in accordance with AICPA standards to your audit firm and other outside service providers to maximize efficiency and minimize staff disruption in meeting requirements.
  • You will be assigned a partner that is intimately involved in the relationship from day one. We won’t assign unsupervised inexperienced staff to you.

How to Prepare for an IRS Audit

The IRS recently announced it intends to hire thousands of new employees as part of a tax-enforcement push. This could mean an uptick in audits sometime soon, likely focused on wealthier individuals and business owners. (Some tax returns are chosen randomly as well.)

The best way to survive an IRS audit is to prepare for one in advance. On an ongoing basis, you should systematically maintain documentation (invoices, bills, canceled checks, receipts and other proof) for the items that you report on your tax return. Maintain and back up these records safely. With that said, it also helps to know what might catch the tax agency’s attention.

IRS Tax Audit Hot Spots

Certain types of tax-return entries are known to the IRS to involve inaccuracies, so they may lead to an audit. One example is significant inconsistencies between tax returns filed in the past and your most current tax return. If you miscalculate deductions or try to claim unusually high ones, your return could be flagged. And if you’re a business owner, gross profit margin or expenses markedly different from those of similar companies could subject you to an audit.

Certain types of deductions, such as auto and travel expense write-offs, may be questioned by the IRS because there are strict recordkeeping requirements involved. In addition, an owner-employee salary that’s inordinately higher or lower than those of similar and similarly located companies can catch the IRS’s eye, especially if the business is a corporation.

IRS Contact Methods

The IRS normally has three years within which to conduct an audit, and often an audit doesn’t begin until a year or more after you file a return. If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. If there’s no response to the letter, the agency may follow up with a call. Ignore unsolicited email messages about an audit. The IRS doesn’t contact people in this manner; these are scams.

Many audits simply request that you mail in documentation to support certain deductions that you’ve claimed. Others may ask you to provide receipts and other documents to a local IRS office. Only the harshest version, the field audit, requires you to meet personally with one or more IRS auditors.

Keep in mind that the tax agency won’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. You’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

How Maggart CPAs Can Help

If the IRS chooses you for an audit, Maggart’s CPAs can help you understand what the IRS is disputing (it’s not always clear) and then gather the documents and information needed. We can also help you respond to the auditor’s inquiries in the most expedient and effective manner.

Above all, don’t panic! Many audits are routine. By taking a meticulous, proactive approach to how you track, document and file your tax-related information, whether for an individual or business return, you’ll make an audit easier and even decrease the chances that one will happen in the first place.

Innocent Spouse Rules Offer Protection Under Some Circumstances

Does one spouse have to pay the tax resulting from a fabrication or omission by another spouse on a jointly filed tax return? It depends. If the spouse qualifies, he or she may be able to avoid personal tax liability under the “innocent spouse” rules.

Joint Filing Status

Generally, married taxpayers benefit overall by filing a joint tax return on the federal level. This is particularly the case when one spouse earns significantly more than the other. Filing jointly may also help the couple maximize certain income tax deductions and credits.

But joint filing status comes with a catch. Each spouse is “jointly and severally” responsible for any tax, interest and penalties attributable to the return. And this liability continues to apply even if the couple gets a divorce or one spouse dies. In other words, the IRS may try to collect the full amount due from one spouse, even if all the income reported on the joint return was earned by the other spouse.

Basic Rules

However, the tax law provides tax relief for an “innocent spouse.” Under these rules, one spouse may not be liable for any unpaid tax and penalties, despite having signed the joint return.

To determine eligibility for relief, the IRS imposes a set of common requirements. The spouses must have filed a joint return that has an understatement of tax, and that understatement must be attributable to one spouse’s erroneous items. For this purpose, “erroneous items” are defined as any deduction, credit or tax basis incorrectly stated on the return, as well as any income not reported.

From there, the other (“innocent”) spouse must establish that, at the time the joint return was signed, he or she didn’t know — or have reason to know — there was an understatement of tax. Finally, to qualify, the IRS needs to find that it would be unfair to hold one spouse liable for the understatement after considering all the facts and circumstances.

What Does the IRS Consider?

The IRS considers “all facts and circumstances” in determining whether it would be inequitable to hold an “innocent” spouse liable for taxes due on a jointly filed tax return. One factor that may increase the likelihood of relief is that the taxes owed are clearly attributable to one spouse or an ex-spouse who filled out the errant return.

If one spouse was deserted during the marriage, or suffered abuse, it may also improve the chances that innocent spouse relief will be granted. In some cases, the IRS may examine the couple’s situation to determine whether the spouse applying for relief knew about the erroneous items.

Additional Notes

For many years, innocent spouse relief had to be requested within two years after the IRS first began its collection activity against a taxpayer. But, in 2011, the IRS announced that it would no longer apply the two-year limit on collection activities.

In addition, by law, when one spouse applies for innocent spouse relief, the IRS must contact the other spouse or former spouse. There are no exceptions even for victims of spousal abuse or domestic violence.

Help Is Available

Historically, courts haven’t been particularly generous about upholding claims under the innocent spouse rules. State laws can also complicate matters. If you’re wondering whether you’d qualify for relief, please contact Maggart for help.