Help Protect Against 'Skimmer Fraud'
Every time you withdrawal cash from an automated teller machine (ATM), buy movie tickets
from a vending kiosk, or pump a tank of gas, you could become the next victim of "skimmer
fraud." This type of payment card data breach is becoming increasingly common, but there are
simple measures you can take to help protect yourself.
"Skimming has been described as one of the
most significant problems facing the credit
card industry, as it can happen anywhere a
credit card is accepted. The best way for
consumers to protect themselves from
skimming is by paying attention to the details
of credit card usage."
-- U.S. Secret Service
Skimmer Fraud Shopping List
Data skimming is relatively low-tech, requiring equipment
that's readily available from spy stores or online retailers.
For example, the equipment needed to pull off an ATM
skimmer scam may include:
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Plastic resin, rubber mold and paint to create an
ATM overlay,
Heavy-duty double sided tape to attach a resin
overlay;
3-D printer to make an overlay instead of using an
overlay mold,
Pinhole camera and cellphone battery to record
user PIN;
Skimming device to record data from the card's
magnetic stripe,
Anatomy of a Skimmer
Fraud
Unlike hacking and other forms
of data breach, skimmer frauds
involve installation of an
electronic device to "skim" data
from magnetic stripes on the
back of payment cards. There
are three types of devices used
to skim data:
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Computer to download card user data from
skimmer,
Blank card stock to create cloned cards,
Magnetic stripe reader-writer to add data to blank
cards,
Embosser to add customer name, account number,
and expiration data on blank cards, and
Card printer to add artwork to blank plastic cards.
Thieves may also build their own skimming devices with
components from a local electronics store.
1. Overlay devices, which may
be attached to ATMs, gas
station pumps or ticket vending kiosks;
2. Parasite devices that read data from point-of-sale terminals; and
3. Handheld skimmers that are used in restaurants, stores and when paying for at-home
services.
To illustrate how skimmer fraud works, consider ATM skimmers, which may be installed directly
on an ATM or on the doorway to a bank ATM where the customer swipes his or her card to gain
entry. Sometimes an entire false facade is added to the ATM. A pinhole camera is usually
installed above the keypad to simultaneously record the customer's personal identification
number (PIN).
Once a skimmer downloads payment card data, including any corresponding PINs, the thief
clones the cards. Later, the phony payment cards are used to withdraw funds or purchase goods
that are easily sold on the black market or online marketplaces.
Global Skimmer Fraud Report
In February, the Association of Certified Chartered Accountants USA (ACCA) and Pace
University released a comprehensive study of global skimmer fraud. It revealed that payment
card skimming has become increasingly prevalent as skimming devices have gotten smaller and
more sophisticated in terms of power, memory, communication and encryption. In other words,
technological improvements have made skimmers more effective and harder to detect.
For example, a decade ago thieves would typically "shoulder surf" or use large handheld video
cameras to obtain PINs from ATM customers. Now they can purchase pen-sized cameras
relatively inexpensively. Some even use wireless Bluetooth devices to retrieve data without
physically removing skimming devices.
Mounting Threat to American Consumers
Skimming fraud is increasing, especially in the United States. In fact, one-third of Americans
have noticed fraudulent charges appear on their credit or debit card statements, according to the
results of a poll released in January by Reuters and Ipsos, a global research firm. Many of these
data breaches result from skimming devices.
One reason skimmers target U.S. cardholders is that their cards don't contain global chips,
making them easier to skim and clone. Skimmer fraud is less common in countries that require
payment cards to contain global chip and PIN technology, such as the United Kingdom, Ireland
and Germany.
In addition, fraudsters that clone foreign cards that contain global chips often come to America to
cash out their fake cards. That's because U.S. machines don't recognize global chips, so less
work is required to clone foreign cards.
Another reason skimmer fraud is growing domestically is that the United States has more ATMs
than any other country -- and many of them are over ten years old and owned by independent
(non-bank) ATM providers. Each ATM may use slightly different technology and security
protocols.
Old machines put consumers at even greater risk for skimmer fraud. The ACCA/Pace University
study reports that 55 percent of ATMs haven't been equipped with anti-skimming solutions, down
from 60 percent in 2011 and 69 percent in 2010. Even scarier, thousands of older machines run
on Windows XP, which Microsoft plans to stop supporting in April 2014. Without any security
updates, ATMs that run on Windows XP could be especially vulnerable to skimmer fraud.
Help Safeguard Your Data
If you've never had personal data stolen, you're in the minority. More than 60 percent of
Americans have experienced at least one personal data breach, according to the Reuters/Ipsos
poll. Fortunately, you can take a few precautionary measures to stop skimmers from stealing
your payment card numbers:
Be selective about where you swipe your card. For example, pick local gas stations that ask
for ZIP codes before you pump gas. Be leery of older, urban ATMs that have loose or worn parts
and poor lighting. And opt for newer ATMs that have installed closed circuit television (CCTV)
cameras, which may deter thieves from installing skimmers.
Cover keypads when you enter PINs to conceal them. Watch for people who look over your
shoulder while entering your PIN at the ATM or into a POS terminal at a store.
Request restaurants and service providers -- such as plumbers and landscapers -- to use
handheld devices in your plain view. Otherwise, opportunistic employees may skim data behind
the scenes.
Ensure your card is only swiped once at a register. As noted by the U.S. Secret Service,
in some cases "a collusive store employee completes a valid sale, and then captures a second
(unauthorized) swipe covertly on a portable device before returning the card to the cardholder."
Monitor your account statements for unauthorized charges. Contact your card provider
immediately if you don't recognize a charge. Also double-check that banks and credit card
companies have your latest contact information, including your cellphone number.
Check every charge on your statements, not just the large ones. Some payment card frauds
charge small dollar amounts that cardholders won't notice. For example, a recent payment card
theft scam charged thousands of consumers $9.84 each, according to a fraud alert released by
the Better Business Bureau.
No End in Sight
Unlike in Europe, Canada and Mexico, there's been no mandate for the introduction of global
chips in U.S. payment cards. Introducing global chip technology in payment cards, ATMs and
point-of-sale terminals in the United States could substantially reduce the risk of skimmer fraud.
But it would also be expensive and time-consuming. In the meantime, it's up to you -- and the
companies that you choose to do business with -- to help prevent these attacks.
Another Alternative to GAAP for Private Companies
Reporting common control lease arrangements just got a little easier for certain private
companies. Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying
Variable Interest Entities Guidance to Common Control Leasing Arrangements, eliminates the
requirement to apply the variable interest entity (VIE) model when certain conditions are met.
Instead, the Financial Accounting Standards Board (FASB) believes disclosing the nature and
potential financial risks of these arrangements will provide stakeholders with sufficient
information.
Private companies that qualify for this alternate method could save significant time and costs
when complying with Generally Accepted Accounting
Principles (GAAP).
Who Is Affected?
Some private companies lease property from entities
owned by one or more of the same shareholders. For
example, it's common in family businesses for firstgeneration owners with high net worth to invest in
real estate and subsequently lease it back to secondgeneration owners. This arrangement gives the
company's owners the opportunity -- but not the
obligation -- to invest in real estate.
It also creates a stream of cash flow for owners nearing retirement without burdening younger
owners. And it establishes a separate entity for liability purposes. So, the assets of the operating
business may be protected from creditors if the lessor files for bankruptcy or from legal claims if
someone is injured on the property.
GAAP requires companies to consolidate financial reporting for any entities in which they have
controlling financial interests. Consolidating the financial results of commonly controlled lessees
and lessors can be complicated for financial statement preparers and confusing for financial
statement users, however.
Many private company financial statement users believe consolidation on the basis of VIE
guidance distorts a private company's financial results. The assets held by a lessor are generally
beyond the reach of the lessee's creditors, even in bankruptcy or other receivership. In fact,
lenders and other stakeholders often request a consolidating schedule that enables them to
reverse the effects of consolidating the lessor entity when they receive consolidated financial
statements.
What Has Changed?
The assessment of controlling financial interest is performed under either a voting interest model
or a variable interest entity (VIE) model. A VIE is an entity for which a controlling financial
interest is not based on a majority of voting rights. Instead, the company has a controlling
financial interest when it has:
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Power. The power to direct the activities that most significantly affect the economic
performance of the entity, and
Economic Interest. The obligation to absorb losses or the right to receive benefits of
the entity that could be potentially significant to the entity.
To determine which model applies, a company preparing financial statements must first
determine whether it has a variable interest in the entity being evaluated for consolidation and
whether that entity is a VIE.
When certain conditions are met, the new guidance allows a private company to elect not to
apply VIE guidance to a lessor under common control. Instead, the private company would make
certain disclosures about the lessor and the leasing arrangement.
Under the alternate method, the private company that leases the property (the lessee) must
disclose the amount and key terms of the liabilities reported by the lessor that expose the lessee
to providing financial support to the lessor (such as providing a guarantee or collateral for a loan
on the lessor's books). A lessee's footnotes also must disclose a qualitative description of any
circumstances that could require it to provide financial support to the lessor.
Who Is Eligible?
ASU 2014-07 provides a private company with the option not to apply VIE guidance to a lessor
when:
1. The lessee and the lessor are under common control;
2. The lessee has a leasing arrangement with the lessor.
3. Substantially all of the activity between the lessee and the lessor is related to the leasing
activities (including supporting leasing activities) between those two companies.
4. The lessee explicitly guarantees or provides collateral for any obligation of the lessor related
to the asset leased by the private company, then the principal amount of the obligation at
inception does not exceed the value of the asset leased by the private company from the lessor.
Companies that elect the alternate method must use it for all qualifying lease arrangements and
apply it retrospectively for all periods presented. The alternative does not apply to public
companies, not-for-profits and employee benefit plans.
Although the amendment is effective for annual periods beginning after December 15, 2014 -and interim periods within annual periods beginning after December 15, 2015 -- early application
is permitted, including periods for which financial statements haven't been issued. (So, you may
be eligible to use the alternate method for 2013 if you haven't issued your year-end financial
statements yet.)
The Big Picture
This simplified reporting option could make common control leasing arrangements more
attractive to private company investors as an alternate form of personal investment or an estate
planning tool. Lenders and other stakeholders will also appreciate simpler financial statements
that reserve discussions of these arrangements for the footnotes, rather than consolidating
financial results.
ASU 2014-07 is about more than reporting common control lease arrangements, however. It's
also symbolic of FASB's growing appreciation of the divergent needs of private companies
compared to public entities. FASB's Private Company Decision-Making Framework focuses on
user-relevance and cost-benefit considerations for private companies.
After soliciting feedback from private companies and their constituents, FASB has allowed
certain exceptions to GAAP's most complex requirements for private companies. Two ASUs
were also issued in January that offer exceptions for private firms that report goodwill and simple
interest rate swaps. More changes may be on the way. Stay tuned.
Stamp Out Tax Protesters at Your Company
Despite the fact that tax protestors are routinely penalized by the IRS and the courts, the number
of people who try to illegally avoid paying taxes seems to grow every year. You may even find
the discontent spilling over into the workplace.
It usually starts with a bogus Form W-4 filed with your payroll department. Watch out for tip-offs,
such as a faulty claim for tax-exempt status, entries for
an extraordinary number of withholding allowances or
other false or misleading information.
And if an employee delivers a ten-page manifesto as
to why withholding taxes violates the spirit of the U.S.
Constitution, you've got a tax protester on your hands.
Although it's good to be heads-up when you have a
malcontent on staff who might affect morale, the
actions you are required to take are now limited.
The Employer's Responsibility Has
Changed
Previously, employers who were presented with W-4s that seemed problematic were required to
automatically send those forms to the IRS so the agency could determine if the employees were
trying to dodge their federal income tax responsibilities. A change in federal payroll tax rules
eliminated this requirement back in 2005. Under the current rules, an employer is only required
to submit copies of Forms W-4 to the IRS when specifically told to do so in a written notice or in
published guidance that applies to all employers.
This employer-friendly change is not to suggest that the IRS is no longer concerned about
questionable W-4s. Instead of making the employer responsible for spotting these problems, the
IRS has developed a new procedure that uses information already reported on the employee's
Form W-2 to identify individuals who are likely to be out of compliance with federal income tax
withholding rules. If an employee is thought to have a serious under-withholding problem, the
IRS will notify the employer to withhold federal income tax from that employee's wages at an
appropriate rate. (IRS Information Release 2005-45)
As before, however, the IRS still has the power to issue a written notice to an employer that
requires submission of copies of Forms W-4 for specified employees. Also, the IRS can still
develop specific criteria for identifying Forms W-4 that must be submitted, and this can be done
either via a written notice to a specific employer or by published guidance that applies to all
employers.
If the IRS determines that a specific employee cannot claim more than a certain number of
withholding exemptions or should not be allowed to be completely exempt from withholding, the
employee (not the employer) must deal directly with the IRS by supplying a new W-4 and a
written statement that supports his or her claims. The employer is out of the loop. The employee
generally has 45 days to resolve the issue with the IRS before the employer is required to
implement withholding changes.
What Should You Do?
Make it clear to employees that your company follows the rules and regulations of the Internal
Revenue Code to the best of its ability. Create strict deadlines for filing W-4s to deter timing
scams. What if an employee does not give you a completed W-4? The IRS instructs employers
to withhold tax as if the employee is single, with no withholding allowances.
Be on the lookout: Phony but official-looking forms have been making the rounds among
employers. They include Form W-4T (Voluntary Withholding Agreement, Termination or
Withdrawal Form W-4 Agreement) and Form SSN (Citizen's Assertion of Legal Right to Withhold
Disclosure of SSN). If you come across either one, contact your tax adviser.
Don't Horse Around with Hobby Losses
The tax law is all about semantics. For instance, if you're legitimately trying to make a profit
in an endeavor, it may be classified as a "business" by the IRS. In that case, you can deduct the
full amount of expenses relating to the business operation. Typically, you might show losses in
the early years of ownership. These losses can be used to offset other income such as
investment earnings or wages from a full-time job (either yours, your spouse's, or both).
How the Tax Court
Has Ruled
Despite the success of
the equestrian interior
designer detailed in this
article, many taxpayers who
engage in horse-related
activities lose in Tax Court.
A few examples:
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The Tax Court ruled that a North Dakota
physician's Arabian horse breeding activity
was not carried on with a profit
objective.One reason: The taxpayer "did not
operate in a businesslike manner."
She failed to keep track of expenses on a
per-horse basis and did not prepare
financial projections to aid in evaluating the
economic performance of her activity. In
addition, the taxpayer engaged in limited
advertising, had an inadequate business
plan, and did not keep a separate bank
account for her horse breeding. Instead,
she paid horse-related and personal
expenses out of several personal accounts.
(Keating, TC Memo 2007-309)
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The Tax Court held that a Texas plastic
surgeon's horse ranch activities and his
medical practice were not interrelated
business activities. Therefore, he could not
deduct the losses from the ranch. The
taxpayer claimed that the publicity he
derived from playing polo and hosting social
gatherings helped him get patients for his
cosmetic surgery practice. (Wilkinson, TC
Memo 1996-39)
In another case, the Court refused to
aggregate a taxpayer's farming/polo activity
and his real estate law practice, despite the
taxpayer's position that one reason he
began playing polo was to meet clients for
his law firm. The Court concluded that the
farm was formed and operated as a
separate business, and the Court was not
convinced that the taxpayer began the polo
activity to generate legal business or that
the activity materially benefited his law
practice. (De Mendoza, TC Memo 1994314)
On the other hand, if the IRS treats the activity as a "hobby," the tax benefits are more limited.
Expenses can be deducted only up to the amount of the income received from the activity. Thus,
you can't claim an overall tax loss for the year.
To make matters worse, hobby expenses must be deducted as miscellaneous expenses.
Miscellaneous expenses are deductible only to the extent the annual total exceeds 2 percent of
your adjusted gross income. So you may derive little or no tax benefit from your losses.
How can you tell a "business" from a "hobby?" A number of factors must be considered. But in
general, an activity is treated as a business only if you're operating it with the actual intention of
turning a profit. The IRS and taxpayers regularly argue this issue in the courts (see right-hand
box) and the tax agency frequently wins.
However, one case involving a horsing enthusiast illustrates how taxpayers can be victorious.
Facts of the case: The taxpayer, a skilled equestrian from Florida, developed an interior design
business for horse barns, homes and other structures. She relied on her reputation and
exposure as a rider to promote the business. Virtually all of the taxpayer's clients were
equestrian-related contacts who depended on her knowledge and expertise to provide design
services related to horses.
Citing the fact that the taxpayer's clients were affluent individuals who were also involved in
horse activities, the Tax Court found that activities as an equestrian rider materially benefited her
interior design business. In other words, the two activities could be treated as one integrated
business. Her "success as an equestrian competitor creates goodwill that benefits her design
business," the Tax Court noted.
The court acknowledged that "keeping and maintaining horses is expensive" but added that the
taxpayer "does what is necessary to maintain her reputation in the equestrian world" but "does
not do so in an extravagant manner."
In addition, the court emphasized that the combined horse-design business was profitable in
each of the years at issue. The IRS argument that the activity was not engaged in for profit
neglected the fact that the "business was a success from the beginning..."
Result: The Court determined that the equestrian expenses were "ordinary and necessary" for
the operation, as well as reasonable in amount, so they could be deducted as business
expenses. (Topping, TC Memo 2007-92)
What About Your Situation? Weighing the Tax Factors
Determining whether a particular activity is a business or a hobby is an art, not a science.
Although there is no absolute test, the courts have traditionally relied on the following factors:
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The manner in which the taxpayer carries on the activity.
The expertise possessed by the taxpayer and any advisers.
The time and effort spent on the activity.
Any expectations the taxpayer has that assets used in the activity will appreciate in
value.
Prior success in carrying on other activities.
The history of income or losses with respect to the activity.
The amount of profits, if any, that are earned.
The financial status of the taxpayer.
Any elements of personal pleasure or recreation.
No single factor by itself is conclusive, but a preponderance of factors can tip the scales in your
favor or against you.
Showing a Profit
If you would like to turn an activity into a business, be aware that a tax presumption may be on
your side: If you show a profit in any three out of the last five consecutive years, the IRS will
generally presume that you're carrying on a business. This tax presumption is enhanced for an
activity involving the breeding, training, showing or racing of horses. In those cases, the activities
are presumed to be a business if you show a profit in two out of the last seven consecutive
years.
The IRS can rebut the tax law presumption by providing evidence that the activity is actually a
hobby.
Caution: You may fight an uphill battle if an activity involves entertainment or recreation. The IRS
tends to give less leeway to these types of endeavors. But keep in mind that the Tax Court
makes this point in many cases: A business will not be turned into a hobby merely because the
owner enjoys the activity.