IRS Announces Annual Tax Scams

Tax ScamsEach year the IRS announces a list of the “Dirty Dozen Tax Scams” its agents encounter most frequently. Highlighted here are seven of the most common.

Bullet Point Creating fake income. It has come to the attention of the IRS that some taxpayers are creating false income for the sole purpose of obtaining tax credits like the Earned Income Tax Credit. This false income can be in the form of a fake 1099-MISC or fictitious self-employment income. The penalties for this type of fraud can be severe.
Bullet Point Falsely padding deductions. Creating deductions and inflating dollar amounts of legitimate deductions is now on the IRS Dirty Dozen list. While it may seem a little thing to stretch the amounts, the increased reporting received by the IRS makes it easier for them to see these inflated deductions.
 Bullet Point Excessive business credits. This scam focuses on two commonly misused business credits: the fuel credit and the research credit. The fuel credit is usually only available for off-street vehicle use (typically for farming). While the research credit may seem straightforward, there are stringent qualifications and reporting requirements. Prior to using either of these credits, you should ask for a review of your situation.
Bullet Point Fake charities. After major disasters, many charitable givers are scammed into making donations to fake charities. This makes donations to them nondeductible. To protect against this, prior to donating funds make sure the charity is both legitimate and deemed a qualified charity by the IRS. Here is a link to the IRS tool to confirm charitable organizations. IRS Exempt Organizations List Check
Bullet Point Identity Theft. Identity theft tops the Dirty Dozen list every year. Thankfully, the IRS takes precautionary measures to curtail this out-of-control problem. In addition to limiting the number of direct deposits it will make to any single account, the IRS is working with states and tax preparation software vendors to put more controls in place. This includes some states requiring drivers license numbers on their tax forms, delays in early processing of tax refunds, internal tracking within software programs, and continual checking for heavy filing activity.
Bullet Point Phone scams. Phone calls from thieves representing themselves as IRS agents continue to get more sophisticated. The caller ID may show as coming from the IRS and the scam may involve numerous phone calls instead of a single contact. These thieves often have some of your personal information and try to intimidate their victims with threats of jail time, deportation or license revocation. Remember, never give information over the phone to someone claiming to be from the IRS.
Bullet Point Phishing. This recurring scam involves receiving fake emails and websites that look like the real deal. The IRS will not send you billing information or refund information via email. Do not click on any email link received from the IRS unless you requested it. Remember the IRS does not initiate contact through emails.

Know Your Audit Risk

Audit Risk Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared. Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention:

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.

Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.

Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.

Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.

Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.

Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.

Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.

Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.

Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.

Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

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Know Your Audit Risk

Audit Risk

Nearly every taxpayer can imagine a worst-case scenario where they run afoul of the IRS and are selected for an audit. Here are a few areas that tend to get unwanted audit attention and ideas to help you stay prepared.

Your audit risk is (probably) low. The first thing to remember is that the risk of having your tax return examined by the IRS is probably very low. The IRS audits less than 1 in 100 returns. If you are among the roughly 95 percent of Americans who make less than $200,000 a year, your chance of being audited is closer to 1 in 200. Audit chances rise dramatically the higher your income is above $200,000, according to the IRS annual Data Book.

Areas that get attention

Bullet Point Missing something. Aside from your income level, one of the biggest red flags for the IRS is a missing or incorrect tax form. Assume a copy of every official tax form you get also goes to the IRS.

Action: Create a list of all your expected tax forms. Check them off as you start to receive them over the next month or so. Immediately review the forms for accuracy. These include W-2s, 1099s, 1095s, 1098Ts and more.

Bullet Point Excessive deductions. Your risk of an audit increases when your tax return shows unusually high-value itemized deductions, such as charitable donations or losses from theft.

Action: A legitimate deduction should always be taken. If your itemized deductions are high, make sure your proof of these deductions is well documented.

Bullet Point Large charitable donations. Your chances of an audit increase if you take large deductions for donations to charity, especially “noncash” donations of property with unclear value.Action: Always remember to file a Form 8283 for any donation above $500 in value. If you are donating anything at that value or higher, it may be worth paying for an appraisal of the value of the property so you can defend your deduction.
Bullet Point Disparities with your ex. Your tax return may as well have a red siren attached to it if you and an ex-spouse are not on the same page on claiming dependents, child support or alimony.Action: Ensure you and your ex-spouse are consistent in how tax items are treated on your separate returns. If you have had problems with this in the past, a quick phone call could save headaches for both of you.
Bullet Point Business activity. IRS agents have a keen eye for small business reporting, typically done on a Schedule C. In particular, the agency is quick to review claimed business activities they perceive as being hobbies.Action: Maintain detailed business accounts and record significant time spent on your business activity in order to demonstrate both professionalism and a profit motivation.

Private Agencies to Start Collecting for IRS

Change Your Password

What you need to know

In late 2015 Congress required the IRS to turn over uncollected taxes it is no longer pursuing to outside collection agencies. The agencies are now selected and in early 2017 they will begin their collection efforts. This will impact all of us. Here is what you need to know.

Alert icon Turn up your scam alert. Rest assured the IRS identity scam epidemic is going to hit a new high as these scam artists now will try to impersonate collection agencies. Never pay a collection agency directly for any tax owed. Always send any payments directly to the IRS. If you do not think you owe money to the IRS, ask for help.
Agencies icon Four agencies have been authorized. Only four collection agencies have been authorized to collect unpaid taxes for the IRS. They are:
Conserve Fairport,
New York
Pioneer Horseheads,
New York
Performant Livemore,
California
CBE Group Cedar Falls,
Iowa
Notice icon You will receive written notice…twice. Before an outside agency calls you, the IRS will send two written notices to you and your representative about the transfer of the bill to an outside collection agency. Without these notices, you must assume any contact with a collection agency saying they represent the IRS is a scam.
Payment icon No payment to the agency. These collection agencies may not receive direct payment. You will be asked to use the IRS online payment system or to send your payment into the IRS. Payment is to be made to the U.S. Treasury and not to the collection agency.

Unfortunately, these agencies are going to begin their collection process right in the middle of this year’s tax filing season. So be prepared now and ask for help if you may be impacted by this change within the IRS.

Want to Deduct an Event Ticket?

Event stadium

Things to consider

As an employee, can you ever deduct the cost of a sporting event or other ticket on your expense report? Surprisingly, the answer can be yes, but only if you know and abide by the rules.

The accountable plan

If your employer uses accountable plan rules for reimbursing expenses, the IRS will not only provide the ability for you to be reimbursed by your employer for your qualified expenses, it will also allow your employer to deduct the expense on their corporate tax return. To be a qualified expense, three rules must be met:

Number 1 Expenses must be related to the duties and responsibilities of the employee for their employer.
Number 2 The expenses must be properly substantiated in a timely manner. This is usually within 30 to 60 days.
Number 3 Any excess reimbursements to the employee must be returned to the employer.

Applying the rules

To apply these expense deduction rules to a sporting event:

Checkmark There must be a business purpose for attending the event and
Checkmark an employee must accompany a prospective customer, a current customer or supplier to the event.

If you apply these rules, your employer can usually deduct 50% of the ticket cost and related expenses.

What can go wrong?

As you can imagine, the IRS looks closely at those who deduct entertainment as a qualified business expense. Here are some things to watch for:

Caution No customer or supplier is in attendance. Make sure you attend the event with your customer or the tickets are deemed a gift.
Caution The environment does not provide for a quiet place to conduct business. Do not try to deduct concert tickets or sporting events if you do not first meet in a quiet place prior to or after the event to conduct your business affairs.
Caution Over-charging the ticket price. You may only deduct the price of a ticket that is generally available to the public.
Caution Bringing friends. Generally you can include a spouse in the event, but other family members or unrelated guests can raise red flags.

As you can imagine, this area of expense deductibility is often the focus for the IRS during a review. If in doubt, please ask for help and clarification on the deductibility of this type of entertainment expense.

As always, should you have any questions or concerns regarding your situation please feel free to call.

The IRS is Not Always Right

Quotes from actual IRS correspondence received by clients:

“Our records show we received a 1040X…for the tax year listed above. We’re sorry but we cannot find it.”
“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken”.
“Payment is due on your account. Please submit payments on or before June 31st to avoid late payment penalties and interest.”

IRS mistakesIt’s pretty tough to pay a balance due of $0 on June 31st when June only has 30 days. The message should be clear. If you receive a notice from the IRS do not automatically assume it is correct and submit payment to make it go away. The same is true for any state notices. They are often in error. So what should you do?

Bullet Item Stay calm. Try not to overreact to the correspondence. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.
Bullet Item Open the envelope. You would be surprised at how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category try to remember that the first step in making the problem go away is to open the correspondence.
Bullet Item Careful review. Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.
Bullet Item Respond timely. The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.
Bullet Item Get help. You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.
Bullet Item Correct the IRS error. Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.
Bullet Item Certified mail is your friend. Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.
Bullet Item Don’t assume it will go away. Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.

The Chances of Being Audited

2015 audit statistics show continued changes

What are the Chances?

Every year the IRS publishes the statistics on the number of tax returns they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends:

Percent of Individual Tax Returns Audited

Fiscal Year Year 2015 2014 2013 2008
All Individual Tax Returns 0.84% 0.86% 0.96% 1.00 %
No Income (AGI) 3.78% 5.26% 6.04% 2.15%
Income under $25,000 1.01% .93% 1.00% .90%
$25,000 – 50,000 .50% .54% .62% .72%
$50,000 – 75,000 .47% .53% .60% .69%
$75,000 – 100,000 .49% .52% .58% .69%
$100,000 – 200,000 .64% .65% .77% .98%
$200,000 – 500,000 1.54% 1.75% 2.06% 1.92%
$500,000 – $1 million 3.81% 3.62% 3.79% 2.98%
$1 million – $5 million 8.42% 6.21% 9.02% 4.02%
$5 million – 10 million 19.44% 10.53% 15.98% 6.47%
$10 million and over 34.69% 16.22% 24.16% 9.77%
Note: These audit rates are stated as a percent of total tax returns in each Adjusted Gross Income (AGI) class as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year.

Source: IRS Data Books

Observations:

Point Overall, you have less than 1 out of 100 chance of being selected for an audit. The .84% audit rate is down .02% versus 2014.
Point The IRS is continuing its focus on returns with no AGI or negative income. This group’s 3.78% audit rate is down versus last year, but is still significantly higher than the 2.15% audit rate in 2008.
Point The IRS continues its focus on who pays the income tax. Those with incomes over $500,000 continue to have audit rates significantly higher than in 2008.
Point Over 1/3 of those with incomes over $10 million were faced with an audit.

Having good records
Your best defense in case of an audit is retaining adequate records for as long as you need them. This includes retaining copies of original tax returns and any supporting documentation. Please keep all receipts, statements and cancelled checks that support any tax return entry. Also retain legal documents, confirmation of asset purchases, asset sales, real estate transactions, mileage logs, and informational tax forms. Remember the IRS can audit your tax return for three years after the later of the filing date or when you filed your tax return. This time-frame is six years if your income is understated by more than 25%. Include any state record retention requirements as you review when it is safe to destroy old records. This can add one to two years to your recordkeeping requirements

Twelve Common Missing Tax Return Items

Large checkmark

Want your tax return filed quickly and without error? Then double-check this handy list of items that are often overlooked.

Hopefully, by knowing these commonly missed pieces of information you can prepare to have your tax filing experience be a smooth one.

Point Review and signing your e-file approval. The sooner you review and approve your tax return, the sooner it can be filed.
Point Having proof of health insurance. Most taxpayers should receive a Form 1095 that confirms you have health insurance for the year. Some employers have received approval to delay sending you this form, but you still must have proof of proper insurance.
Point Missing W-2 or 1099. Using last year’s tax return, make sure all prior W-2s and 1099′s are received and applied to your tax return.
Point Incorrect information on a W-2 or 1099. If you fail to confirm the accuracy of your tax forms, you will be faced with a choice. Either try to get the form corrected or delay filing your tax return.
Point Missing or invalid Social Security Number. E-filed tax returns will come to a screeching halt with a missing or invalid number.
Point Dependent Already Claimed. Your return cannot be filed if there is a conflict in this area.
Point Name mismatch. If recently married or divorced, make sure your last name on your tax return matches the one on file at Social Security.
Point Inconsistent information. Most tax programs will check a tax return for inconsistencies. When one occurs, they must be resolved prior to filing your tax return. An example might be you filing Married Filing Separate, while your ex-spouse files as Married Filing Joint or Single.
Point No information for a common deduction. If you claim a deduction you will need to provide support to document the claim.
Point Missing Cost information for transactions. Brokers will send you a statement of sales transactions. If you do not also provide your cost and purchase information, the tax return cannot be filed.
Point Missing K-1. As an owner of a partnership, Sub Chapter S or LLC, you will need to receive a Form K-1 that reports your share of the profit or loss from the business activity. Without this, you cannot file your tax return.
Point Forms with no explanation. If you receive a tax form, but have no explanation for the form, questions could arise. For instance, if you receive a retirement account distribution form it may be deemed income. If it is part of a qualified rollover, no tax is due. An explanation is required to file your information correctly.

A Dozen IRS Not so Fine Penalties

 

Tax penalties

Over the past few years the IRS has made the use of penalties and fines a more prevalent tool to encourage compliance among taxpayers. This “stick” approach is in direct contrast to the “voluntary” philosophy built within our tax system. Here are a dozen of the more common penalties and fees.

Hopefully, by being aware of these common IRS penalties you can make sure they never apply to you or anyone you know. Sometimes when faced with these penalties you can request an abatement of the fine if you are a first-time offender.

Icon S-Corporation and Partnership late filing fee. This $195 fine is due for any month or partial month you are late in filing this tax return. The fine is due even though no tax is usually owed on these flow-through tax returns.
Icon 1099 or W-2 late filing penalty. You are required to issue a 1099 for any vendor that has $600 or more of activity with your business. The filing due date is the end of February or the end of March if e-filed.
Icon Underpayment of tax. This penalty is applied when a taxpayer does not withhold enough of their pay to cover their tax liability. There is a safe harbor calculation that protects you from this penalty. The safe harbor is usually withholding enough to cover 100% of last year’s tax liability or 90% of the current year’s tax liability. Special rules apply for higher income taxpayers.
Icon Late filing fee for form 1040. The fine is 5% of the unpaid tax per month (or fraction of a month) up to 25%. If over 60 days past due, the penalty is the smaller of $135 or 100% of the unpaid tax.
Icon Failure to file correct information returns. Fine: $50 – $260 per form (usually Form 1099s)
Icon Failure to file a tax return.
Icon Failure to have adequate health insurance for the entire year.
Icon 25% Inaccuracy penalty. This penalty applies to things like inaccurate business mileage deductions for the self-employed or to non-cash contributions that have no documentation. The best defense is to keep an accurate mileage log and record of your donations.
Icon Failure to file foreign information returns. If you own property in a foreign country you must consider the need to file annual reporting to the IRS. The rules in this area are strict and the fines can be high as the IRS continues to crack down on the use of foreign accounts to avoid paying U.S. taxes.
Icon Potential 100% penalty for employer failure to pay withholding taxes. The IRS takes a strong stance on employers that fail to send in their employee’s Social Security, Medicare and Federal tax withholdings.
Icon Retirement Account Penalties. There is a 10% penalty for withdrawing funds from qualified retirement accounts like IRA’s and 401(k)s prior to age 59½. There is also a 6% penalty tax for excess contributions to any of these accounts until the excess amount is corrected.
Icon Fine for not taking Annual Minimum Distribution (AMD) from retirement Accounts. If you are age 70½ or older you must withdraw a minimum amount from your qualified retirement accounts each year. Failure to do so creates a potentially large penalty of 50% of the amount that should have been withdrawn.

IRS Now Required to Use Collection Agencies

Collection agency In a 1,300 page Transportation Bill signed into law in December, 2015, there are eight pages that require the IRS to assign unpaid tax bills to outside collection agencies. This means that third party companies will now be calling taxpayers as representatives of the IRS to collect unpaid taxes.

What you need to know

Icon What has changed. Prior to this bill, the IRS had the option, but not the requirement, to use other companies to try to collect past due tax bills. The IRS is now required to assign some of these unpaid taxes to outside companies for collection whether it is cost effective or not.
Icon Non-IRS companies may call you. If the IRS thinks you owe money and the statute of limitations for collection is approaching, you may have your tax bill assigned to a debt collector. This means you could receive phone calls and communication from a third party company that has your tax information.
Icon Your fraud alert senses should go up. This debt collector requirement may open the door to more tax fraud as thieves know they can falsely represent themselves as an agent of the IRS. Please be vigilant to this risk.
Icon The $900 million problem? The IRS acknowledges over $900 million in premium health care credits during 2014 will need to be repaid by taxpayers. There is the possibility of having some of this collection activity assigned to third party companies due to lack of IRS resources.
Icon There are rules. While the IRS may assign any unpaid debt to collection agencies, the “required transfer” of unpaid debts has specific rules. You may NOT be asked to pay tax bills from a third party debt collector if:

Check You are under age 18
Check The taxpayer is deceased
Check You are a victim of identity theft
Check You have an innocent spouse case
Check Your tax case is active within the IRS
Remember to be cautious if you are contacted by someone representing themselves as an agent of the IRS. When in doubt ask for help before providing any information.