Tax Scams to Watch Out For

Every year the IRS releases its list of the worst tax scams for the year. Each time the list changes slightly, but From February 1 through February 17, they highlight a new scam each day to allow consumers to be aware of what to expect. Here are a few that make the list each year:

  1. Identify Theft: This has become all too common in society. Someone steals a social security number and files a fraudulent tax return. While the IRS admits this is still a major problem, they are taking steps to correct this problem and are trying to catch the fraudulent before they are filed. There are more than 20 data points that are used to identify and verify tax information.
  2. Phone Scams: There has been many reports on the news about the IRS calling. They scammers tell the taxpayers that they own money and they will be deported, arrested or their license revoked if they do not pay. They have information on the victim and make the calls sound very official. The one piece of information people need to know to combat this scam is the IRS never calls to demand immediate payment. They only contact you in the form of bills or letters. You have to initiate the phone call, not them.
  3. Phishing: This scam is people looking for information. They are seeing if people will respond with personal or financial information. The IRS does not send out email about a bill or refund. If you receive one of these email then forward it to phishing@irs.gov and they will investigate the email. Don’t open attachments or download any documents because they may contain malware that will infect your computer.
  4. Return preparer fraud: This is a hard one to figure out. Each year people trust accountants to prepare their taxes and trust them with personal information. Each year people put their trust in the wrong preparer and lose their money. The IRS provides tips for taxpayers to help them choose a competent preparer, including checking their credentials, making sure the preparer is available after the filing season, and ensuring the refund is deposited into the taxpayer’s account not the preparers.
  5. Hiding Money or Income Offshore: The IRS is making a concentrated effort to enforce actions that discourage people from illegally hiding money offshore. There are legitimate reason for taxpayers to have money in other countries, but these accounts trigger reporting requirements. The IRS has heightened reporting requirements under the Foreign Account Tax Compliance Act, which went into effect in 2015, making it harder for taxpayers to conceal assets oversea.
  6. Inflated refund claims: Another scam is inflated refund claims, which unscrupulous preparers set up to lure unsuspecting taxpayers. Be aware of what tax credits you were eligible for in the past and know what you are eligible for now. If the amount seems outrageous, then it probably is. Taxpayers are responsible for their own tax return, regardless of who prepares it for them.
  7. Fake Charities: Legitimate charities give donors their employer identification number, which they can check the charities through the IRS website. Many fake charities have names that sound similar to real organizations. They may even have websites that look real. Fake charities multiply when there have been natural disaster. Do not contribute without checking first.
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Offering Penalty Relief for Overpayment

Recently the IRS has issued a notice that provides a form of relief this tax season for taxpayers who find out they received an overpayment of premium tax credits when they bought health care under the Affordable Care Act.

How can a person have a credit? When enrolling, a taxpayer can receive assistance in in paying premiums with a qualifying health plan. These premiums are paid through advance payments of the premium tax credit. The payments are paid directly to the insurance provider, and the amount of the advanced payment is determined by household income and family size for the coverage year. Taxpayers claim the premium tax credit on the income tax return for the taxable year of coverage determining the amount of credit is based on the information supplied on the tax return. So how does that leave a credit? If circumstances change during the taxable year, the result in the difference could cause an overage. [Read more…]

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IRS Does Not Provide Identity Theft PIN to All Victims

In the past, the IRS policy was to provide Identity Protection PINs to victims of identity theft, but according to a new government report, not all victims of tax-related identity theft are receiving these special PINs. The IP PINs allows the taxpayers to process their returns immediately and help prevent the misuse of taxpayers’ social security numbers on fraudulent returns.

In recent years, this program has been expanded, but there are still over 500,000 taxpayers who had an identity theft indicator on their tax account, that have not been issued an IP PIN. There have also been numerous errors resulting in 32,274 taxpayers not receiving their IP PINs in a timely manner. There were even cases where over 10,000 were issued to deceased taxpayers. There are many instances of inconsistencies in notices provided to victims. These include not providing adequate instructions on the importance of the PIN and the proper use the PIN on the tax return.

Tax return fraud is the biggest problem facing the Federal tax system. It is vital that the IRS fully utilize the tools available to them to help prevent the fraudulent activity. In 2014, there were 1.2 million IP PINs issued. When using the IP PINs, tax returns are processed in the same period that the general public would have theirs processed. This has been a big success for taxpayers who have been effected by fraud.

In a statement released by the IRS, the victims that have not received the IP PIN are one that still have suspicious activity on their account. The IRS has set very strict parameters before an IP PIN are issued. They are planning on expanding the issuing of IP PINs in the next few years to people that are eligible for them. This will be an added protection to taxpayers. They continue to find ways to prevent fraud from happening.

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Preparing for Tax-Time

It is still early to be thinking about tax time, but it is just around the corner. There is still plenty of things that you can do to prepare for the opening of tax season. It is better to start planning now then wait until the last minute. Below is a list of steps you can take to be better prepared to for tax time.

  1. Gather up work receipts: If you purchased any item for your job that your employer does not reimburse you for, that item is deductible. These items include but are not limited to uniforms, legal fees related to doing your job, licenses and regulatory fees, education that is required for employment, subscriptions to professional journals and magazines, medical exams required by your employer, etc. If you car self-employed you can also deduct  items such as computers, desks, manufacturing equipment, tools, advertising fees, electricity, gas, etc. It is important to save all your receipts and keep them in a safe place. Having them all in one location will help you find what you can deduct from your taxes that is work related.
  2. Save pictures, receipts or records of charitable donations: The holiday season is coming up shortly and it is also the time where many people chose to donate to organizations. One of the added benefits to donating to a charity is the ability to deduct the contributions on your taxes. Save all records of the donations. If donating a substantial amount or item to charity it is important to document that donation with a few pictures. Formal pictures are not required, but a picture is worth a thousand words. It will also substantiate your deduction to the IRS.
  3. Gather mortgage receipts: Even thought your mortgage company will provide you a 1099 detailing the interest you have paid on your house payment, it is important to keep the receipts to make sure that the bank is accurate while providing you will some sense of what the size of the deduction will be for the year.
  4. Proof of energy efficient goods: There is a deduction of 10% of the cost of the qualified energy efficient improvements. These improvements may include adding insulations, energy-efficient exterior windows and doors, and some roofs. The credit has a lifetime limit of $500, with $200 going towards windows. The qualifying residence must be the principal residence of the taxpayer and be located in the US. New construction and rental propertied do not apply to this deduction.
  5. Locating last year’s tax return: This is probably the most important step. Locating last year’s tax return allows you to review the return. This can provide you with a wealth of knowledge and valuable items that may need to be included on this year tax return. It can tell you tax loss carry forward information, withholding information, and information on how to treat certain income such as capital gains or traditional income.
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Overview of Net Investment Income Tax

Any non-corporate taxpayers, such as individuals, trusts, and estates, beginning in 2013 are subjected to a net investment income tax (NIIT). The NIIT is a 3.8% tax on income and gains made through investments as long as they have a net investment income and a modified adjusted gross income in excess of $200,000 for single individuals/heads of households and $250,000 for joint filers/surviving spouses. Only about 2%-3% of all taxpayers are subjected to NIIT.

Calculating Net Investment Income (NII)

Calculating NII is a two-step process. In the first step, taxpayers add together three categories: gross income from interest, dividends, annuities, royalties, and rents; gross income from trade or business in which the individual is passive; and the net gain from disposing of property. In step two, the individual subtracts deductions designated for the types of gross income and net gain. These deductions include but are not limited to, income derived from ordinary course of trade or business in which the individual is active, gains on properties held in a trade of business in which the individual is active. This is where professionals can help you determine if the income is from active or passive investments.

Not Subjected to NIIT

The following are items that are exempt from the NIIT:

  • Tax Exempt income
  • Wages, unemployment compensation, alimony, Social Security benefits, and income subjected to self-employment taxes
  • Gain from the sale of a principal residence
  • Distributions from tax-favored retirement plans

For high-income individuals, the tax system is not two-dimensional. Taxpayers are governed by income tax and NIIT. To have a better idea how this might affect you, contact us for more information.

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Tax Tips for Back-to-School

This can be an expensive time of year for anyone who is preparing to enroll children or themselves in school. There are so many things to buy and fees to pay, it is hard to manage the expenses unless you have taken the steps to counter the added expenses of school. When it comes to school, some tax-deductions can help ease the pain of paying for school.

First, this is first; some expenses that are not deductible. These include school uniforms, even if they are required, and the cost of private or parochial school tuition. Sorry to everyone who thought that by sending their child to a private school they would be able to deduct the tuition. Another non-deductible expense is moving cost for college. Since moving away for college is not moving for a job, it is not a deductible expense.

Now on to the good stuff, if you can separate your school tuition from any childcare component, then the cost can be deducted for any children up to age 13.This would include any before or after school programs.

Another large part of school is fundraising. The good news is that donations to the school are deductible, but when it comes to fundraising, it is limited. You can deduct your purchase from a fundraiser as a charitable donation, but you have to reduce the deduction by the fair market value of the produce you received in return for the donation.

School always has its expenses, but with a few extra steps and careful planning you can help reduce the expenses that come with this time of year.

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IRA Rollover Guidance

In the past rollovers were allowed on a IRA-to-IRA basis, but the IRS has announced that it will now follow the Tax Court’s decision to limit a taxpayers rollovers to one a year no matter how many IRA the taxpayers has. The rollover will now be ruled on an aggregate basis.

By applying the rule on an aggregate basis, the IRS also announced that the proposed regulations will be withdrawn and a new set of regulations will be issued concerning the change by the tax court. The IRS position will now reflect the changes made by the Tax Court in the Bobrow decision, limiting rollovers.

In Sec. 408(d)(3)(A)(i), the taxpayer is permitted to rollover funds in the taxpayer’s IRA tax-free as long as the amount distributed is paid into an IRA for the taxpayers benefit within 60 days. Sec. 408(d)(3)(B) limits the subject to one-rollover-per-year. In the Bobrow case, the Tax Court held the taxpayer responsible when they made more than one rollover from more than one account in a year. The first was tax deductible and the full amount of the second rollover was taxable.

With the new stance, the IRS has received comments about the rule. IRA trustees now required to change their procedures for making IRA rollovers. Because of these changes, the IRS will not apply the changes to rollovers made before January 1, 2015.

The last thing the IRS specified was that this does not affect the IRA owner’s ability to transfer funds from one IRA trustee to another because this is not considered a rollover. The transfers are not related to a one-a-year limit.

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Warning Signs of an Audit

We know that with tax season in full swing there is another side that will go unnoticed until April. Audits are a part of tax time, and they begin as soon as tax season is closed. Many of us don’t worry about how an audit might affect us. Is there a way to figure out if our tax return might trigger one of those red flags? Let’s look at some triggers that the IRS may find interesting.

There are typical risks that the IRS looks for when deciding if a return needs an audit. One of them is high income. If your income exceeds the $200,000 mark then you have a great chance of an audited. As the income become greater, then so does your chance of an audit. There is nothing more to it. You made so much money that you have earned the special right to a red flag.

Another part of the return that is scrutinized is deductions. The IRS tracks the average deduction taken by individuals in certain tax brackets. Anything above that average can trigger a flag. If you are deducting large items from charitable donations, etc., such as a house or sold off large amount of stock, then specific form are to be filled out and filed with your tax return. Any charitable donation exceeding $250 in one transaction requires paperwork from the charity or organization stating the specifics of the donation.

Another group that is targeted for audits is entrepreneurs. There is something about people running their own business that screams red flag to the IRS. If your business is run from home, the chances are even higher than if you own a place of business. Business expenses that are claimed too aggressively will also cause problems.

The last group is people that own a large amount of real estate. Anyone with a vacation home, especially if the house is rented out, can cause another red flag. Not all vacation home expenses can be deducted and the limitations need to be known.

Remember that lack of information can be just a harmful as too much information. Leaving unanswered questions will also cause problems.

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New List of Tax Scams

Every year there is a new fraud that is out to take people’s hard-earned money. People who want to make free money develop these schemes. They have various ways to contact individuals and solicit money from them. The IRS has created a list of twelve frauds that target people especially during tax time.

The list is:

  • Identity theft
  • Phishing
  • False Promises of Free Money from Inflated Refunds
  • Tax Return Preparer Fraud
  • Hiding Income Offshore
  • Charitable Organization Impersonation
  • False Income, Expenses, or Exemptions
  • Frivolous Argument
  • Falsely Claiming Zero Wage or Using a False Form 1099
  • Abusive Tax Structure
  • Misuse of Trusts

Each year, victims are scammed because the they ignore the warning signs. With the newest type of fraud that made the list is pervasive telephone scams. Many times the scams look or sound official, but remember that if the IRS is contacting you they will not ask for any part of your social security number, or even give you the last four digits.

The number one threat to taxpayers is identity theft. The fraudsters are not just trying to get your money, they want to use your information to steal from others. Many of the new scams are focusing their efforts on immigrants. They have threatened to arrest or deport the individual in they do not pay promptly.

Of you feel that you are a victim of a fraud contact the Service at 800-829-1040, the Treasury Inspector General for Tax Administration at 800-366-4484, and the Federal Trade Commission using the FTC Complaint Assistant at FTC.gov.

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New Guidelines for Appeals

The IRS established new guidelines for appeals, and the phase one of the new approach has been regarded as the Appeals Judicial Approach and Culture (AJAC) Project. The goal of this project is to improve both the internal and external customers’ perceptions of a fair, impartial, and independent Appeals office.

The new guidelines provide updated information on how appeal cases are handled during Collections Due Process (CDP), offers in compromise (OICs), and the Collections Appeals Program (CAP). Many of the changes had already taken place, but there are still more that will be incorporated within the next year. The most significant of these will be the general update to the Internal Revenue Manual (IRM). The new policy will be the following:

  • New issues are not to be raised by Appeals; and
  • Appeals will not raise new issues
  • Appeals also will not reopen an issue on which the taxpayer and the IRS agreement upon.

In the past, the Appeals could raise a new issue if there were substantial grounds and the impact on the tax liability was material. This does not stop the taxpayer from raising new issues, only the Appeals. Even though they may not raise new issues, they may consider alternative arguments or new arguments that support the parties’ positions.

This is not the only new guideline. The IRS has issued new guidelines for Collection Due Process and Equivalent Hearings, offers in compromise hearing, and Collections Appeals Programs. There are clarifications to procedures, and how the Appeals should examine the cases to determine an outcome.

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