What a busy tax season. I have a good year at my office.
Hopefully 2013 tax season will be a better one.
Peace out till the next training sessions.
T. Ngo, EA
Wednesday, April 18, 2012
Friday, March 2, 2012
IRS Caught $1.6B in Erroneous Homebuyer Tax Credits
The Internal Revenue Service disallowed nearly $1.6 billion in
erroneous First-Time Homebuyer Tax Credits, but could have flagged even
more, according to a new government report.
The report,
from the Treasury Inspector General for Tax Administration, found that
as of July 30, 2011, the IRS had processed more than 4.3 million claims
for the homebuyer credit totaling almost $30.4 billion. Qualified
taxpayers who purchased a home in 2008, 2009 or 2010 were able to take
advantage of the homebuyer credit and claim up to an $8,000 refundable
credit on their tax return. The homebuyer credit can function as an
interest-free loan or a fully refundable tax credit, depending on when
taxpayers purchased their homes.
TIGTA conducted the review because an earlier audit in September 2009 found that control weaknesses at the IRS were allowing taxpayers who most likely did not qualify for the homebuyer credit to receive potentially erroneous refunds, including minors. TIGTA wanted to determine whether the IRS has been adequately addressing questionable claims for the homebuyer credit since that earlier report was issued.
TIGTA found that while the IRS completed 495,592 homebuyer credit examinations, a large number of high-risk claims were not examined. In addition, many of the examinations conducted were unproductive.
Specifically, the IRS never ran some of the high-risk claims through its automated filters, which were designed to select claims for examination. The IRS’s methods for determining the highest-risk claims were also flawed, according to TIGTA.
During the course of the audit, though, TIGTA made recommendations that resulted in immediate IRS corrective actions. IRS management not only modified their methods of determining high-risk claims, they also shifted their examination resources to more productive cases.
“The purpose of these examinations is to ensure that only qualified taxpayers receive the Homebuyer Credit,” said TIGTA Inspector General J. Russell George in a statement. “Examining homebuyer credit claims that pose the greatest compliance risk is an effective use of limited IRS resources and avoids burdening compliant taxpayers with an examination.”
TIGTA also found that, in some instances, the IRS’s use of post-processing math error authority to disallow homebuyer credits that had previously been allowed denied specific rights to taxpayers that had been associated with the IRS’s deficiency processes. The IRS agreed with TIGTA’s findings and took steps to address the issue.
The Worker, Homeownership, and Business Assistance Act of 2009 extended the homebuyer tax credit and provided the IRS with tools to significantly enhance the agency’s ability to assess the validity of First-Time Homebuyer Tax Credit claims during processing and stop those that were found to be ineligible, the IRS noted in its response to the TIGTA report. “Primarily, a requirement was placed on taxpayers claiming the credit to provide documentary evidence of the home purchase, such as the closing or settlement statement,” wrote Peggy Bogadi, the commissioner of the IRS’s Wage and Investment Division. “The IRS was also given math error authority to deny the credit when documentation was missing or insufficient, or the taxpayer was found to be otherwise ineligible for claiming the credit. This allowed us at the time of processing, to detect and correct more erroneous claims and avoid diverting them for examination review. As with any new process, valuable lessons were learned as we implemented and refined our strategy for detecting and addressing questionable claims.”
TIGTA recommended that the IRS use updated examination results to make adjustments throughout the year. That would optimize the overall examination results, according to TIGTA, and ensure that all claims for the homebuyer credit are run against IRS automated examination filters so the highest risk cases would be selected for post-refund examinations.
The IRS agreed with TIGTA’s recommendations, but disagreed with one of the outcome measures discussed in the report. TIGTA contended, however, that the IRS did not consider pertinent data regarding its high percentage of no-change cases for pre-refund homebuyer credit examinations.
TIGTA conducted the review because an earlier audit in September 2009 found that control weaknesses at the IRS were allowing taxpayers who most likely did not qualify for the homebuyer credit to receive potentially erroneous refunds, including minors. TIGTA wanted to determine whether the IRS has been adequately addressing questionable claims for the homebuyer credit since that earlier report was issued.
TIGTA found that while the IRS completed 495,592 homebuyer credit examinations, a large number of high-risk claims were not examined. In addition, many of the examinations conducted were unproductive.
Specifically, the IRS never ran some of the high-risk claims through its automated filters, which were designed to select claims for examination. The IRS’s methods for determining the highest-risk claims were also flawed, according to TIGTA.
During the course of the audit, though, TIGTA made recommendations that resulted in immediate IRS corrective actions. IRS management not only modified their methods of determining high-risk claims, they also shifted their examination resources to more productive cases.
“The purpose of these examinations is to ensure that only qualified taxpayers receive the Homebuyer Credit,” said TIGTA Inspector General J. Russell George in a statement. “Examining homebuyer credit claims that pose the greatest compliance risk is an effective use of limited IRS resources and avoids burdening compliant taxpayers with an examination.”
TIGTA also found that, in some instances, the IRS’s use of post-processing math error authority to disallow homebuyer credits that had previously been allowed denied specific rights to taxpayers that had been associated with the IRS’s deficiency processes. The IRS agreed with TIGTA’s findings and took steps to address the issue.
The Worker, Homeownership, and Business Assistance Act of 2009 extended the homebuyer tax credit and provided the IRS with tools to significantly enhance the agency’s ability to assess the validity of First-Time Homebuyer Tax Credit claims during processing and stop those that were found to be ineligible, the IRS noted in its response to the TIGTA report. “Primarily, a requirement was placed on taxpayers claiming the credit to provide documentary evidence of the home purchase, such as the closing or settlement statement,” wrote Peggy Bogadi, the commissioner of the IRS’s Wage and Investment Division. “The IRS was also given math error authority to deny the credit when documentation was missing or insufficient, or the taxpayer was found to be otherwise ineligible for claiming the credit. This allowed us at the time of processing, to detect and correct more erroneous claims and avoid diverting them for examination review. As with any new process, valuable lessons were learned as we implemented and refined our strategy for detecting and addressing questionable claims.”
TIGTA recommended that the IRS use updated examination results to make adjustments throughout the year. That would optimize the overall examination results, according to TIGTA, and ensure that all claims for the homebuyer credit are run against IRS automated examination filters so the highest risk cases would be selected for post-refund examinations.
The IRS agreed with TIGTA’s recommendations, but disagreed with one of the outcome measures discussed in the report. TIGTA contended, however, that the IRS did not consider pertinent data regarding its high percentage of no-change cases for pre-refund homebuyer credit examinations.
IRS Releases the Dirty Dozen Tax Scams for 2012
The Internal Revenue Service today issued its annual
“Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution
during tax season to protect themselves against a wide range of schemes
ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.
The following is the Dirty Dozen tax scams for 2012:
Identity Theft
Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.
Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.
The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.
The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.
In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.
Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
Phishing
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.
Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.
In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.
Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.
At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
“Free Money” from the IRS & Tax Scams Involving Social Security
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.
Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.
There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000 penalty.
False/Inflated Income and Expenses
Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
False Form 1099 Refund Claims
In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
Disguised Corporate Ownership
Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.
The following is the Dirty Dozen tax scams for 2012:
Identity Theft
Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.
Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.
The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.
The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.
In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.
Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
Phishing
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.
Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.
In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.
Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:
- Do not sign the return or place a Preparer Tax identification Number on it.
- Do not give you a copy of your tax return.
- Promise larger than normal tax refunds.
- Charge a percentage of the refund amount as preparation fee.
- Require you to split the refund to pay the preparation fee.
- Add forms to the return you have never filed before.
- Encourage you to place false information on your return, such as false income, expenses and/or credits.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.
At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
“Free Money” from the IRS & Tax Scams Involving Social Security
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.
Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.
There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000 penalty.
False/Inflated Income and Expenses
Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
False Form 1099 Refund Claims
In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
Disguised Corporate Ownership
Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
Four Tax Credits that Can Boost your Refund
A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax
credits are refundable meaning if you are eligible and claim one, you
can get the rest of it in the form of a tax refund even after your tax
liability has been reduced to zero.
Here are four refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:
There are many other tax credits that may be available to you
depending on your facts and circumstances. Since many qualifications and
limitations apply to various tax credits, you should carefully check
your tax form instructions, the listed publications and additional
information available at www.irs.gov. IRS forms and publications are available on the IRS website at www.irs.gov and by calling 800-TAX-FORM (800-829-3676).
Links:
Here are four refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:
1. The Earned Income Tax Credit is
for people earning less than $49,078 from wages, self-employment or
farming. Millions of workers who saw their earnings drop in 2011 may
qualify for the first time. Income, age and the number of qualifying
children determine the amount of the credit, which can be up to $5,751.
Workers without children also may qualify. For more information, see IRS
Publication 596, Earned Income Credit.
2. The Child and Dependent Care Credit is
for expenses paid for the care of your qualifying children under age
13, or for a disabled spouse or dependent, while you work or look for
work. For more information, see IRS Publication 503, Child and Dependent
Care Expenses.
3. The Child Tax Credit is
for people who have a qualifying child. The maximum credit is $1,000
for each qualifying child. You can claim this credit in addition to the
Child and Dependent Care Credit. For more information on the Child Tax
Credit, see IRS Publication 972, Child Tax Credit.
4. The Retirement Savings Contributions Credit,
also known as the Saver’s Credit, is designed to help low-to-moderate
income workers save for retirement. You may qualify if your income is
below a certain limit and you contribute to an IRA or workplace
retirement plan, such as a 401(k) plan. The Saver’s Credit is available
in addition to any other tax savings that apply. For more information,
see IRS Publication 590, Individual Retirement Arrangements (IRAs).
Links:
- 1040 Central
- Publication 596, Earned Income Credit (EIC) (PDF 281K)
- Publication 972, Child Tax Credit (PDF 128K)
- Publication 503, Child and Dependent Care Expenses (PDF 167K)
- Saver's Credit
- Form 1040 Instructions (PDF 1,101K)
Tuesday, January 10, 2012
Ten Tips to Help You Choose a Tax Preparer
Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely. Even if a return is prepared by someone else, the taxpayer is legally responsible for what’s on it. So, it’s very important to choose your tax preparer carefully.
This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).
Here are ten tips to keep in mind when choosing a tax return preparer:
1. Check the preparer’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.
2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.
3. Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.
4. Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.
5. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
6. Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.
7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
8. Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
9. Make sure the preparer signs the form and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).
Source: www.irs.gov
Thursday, January 5, 2012
Taxpayers Warned of Changes for Tax Season
While 2011 ended without many
last-minute tax law changes aside from the payroll tax cut extension, taxpayers
should still be aware of a number of changes.
CCH principal federal tax analyst
Mark Luscombe highlighted several tax provisions that will affect the 2011 tax
filing season.
Provisions specific to individual
taxpayers include:
• First installment of taxes owed on
2010 Roth conversions.
Individuals who did a Roth conversion in 2010 and elected to spread the tax
payment over 2011 and 2012 will have to pay one-half of the tax owed on their
2011 income tax return. However, if a taxpayer took a distribution in 2011 from
their 2010 Roth conversion, they may be required to pay more to cover taxes on
the distributed amount. In addition, tax on any additional conversions done in
2011 will have to be included on the 2011 tax return.
• Changes to Form 1040. Changes affecting the 1040 include a new line (Line 59b)
for repayment of the First-Time Homebuyer Credit. The repayment installment can
be entered directly on Line 59b without the use of Form 5405 if the taxpayer
continued to own the home and use it as their main home throughout 2011. In
addition, there is no longer a line on the Form 1040 for the Making Work Pay
Credit, which expired at the end of 2010.
• Changes for investors in reporting
basis. Investors will see that Form 1099-B
has been revised to provide for their broker to report the basis of
transactions during the year. The IRS will check to see that this information
matches the basis reported on the taxpayer’s return. Additionally, these
transactions should now be reported on the new Form 8949, rather than directly
on Schedule D.
• Carryover basis on inherited
assets may be lower than expected for some.
Taxpayers who inherited assets where the estate elected to use the 2010 estate
tax repeal option will receive a Form 8939 in January or February from the
estate executor providing the basis information for those assets. Estates
that used the 2010 estate tax repeal option will use as the basis the basis of
the asset in the hands of the decedent, or carryover basis, unless a limited
stepped-up basis is allocated to that asset. This carryover basis is often
significantly less than the stepped-up basis – or the value of the asset at the
time of the decedent’s death.
“An heir of a 2010 estate using the
2010 estate tax repeal option who sold the asset before receiving the Form 8939
may be surprised at the amount of capital gain owed from the sale,” Luscombe
noted.
• New requirements for
reporting foreign assets. Foreign
Account Tax Compliance Act (FATCA) reporting requires foreign assets to be
reported if they have a total value of more than $50,000 ($100,000 if married
filing jointly). FATCA is broader than what is defined under the Report
of Foreign Bank and Financial Accounts, or FBAR. For example, FATCA includes
stock or securities issued by someone other than a U.S. “person,” any interest
in a foreign entity, and any financial instrument or contract that has an
issuer or counterparty other than a U.S. “person.” In addition to the
prior obligation to report FBAR accounts on Form TDF90-22.1, FATCA must now be
reported on a new Form 8938.
In addition, two tax changes broadly
affecting employers include:
• New W-2 reporting of
employer-sponsored health care coverage.
Although it is only optional for Form W-2s issued in 2012 (becoming mandatory
in 2013 under the health care reform legislation) some employees may receive
W-2s for 2011 that include a new code (DD) in Box 12 and amount for
employer-sponsored health care coverage. This provides the IRS with information
to determine if the employer and employee have complied with the health
insurance mandates of health care reform. However, as those mandates are not
yet in effect, this added information on the W-2 does not impact 2011 federal
tax return filing requirements.
• Employee retention credit. This credit related to 2010 hiring, however, it required
retaining the employee for at least 52 weeks to qualify for the credit, thereby
moving eligibility for the credit to 2011 tax returns. To qualify for the
credit, the employer must have paid wages in the last 26 weeks equal at least
to 80 percent of the wages for the first 26 weeks. The credit is claimed on
Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker’s
wages during the period.
In addition, taxpayers should know
about two new regulations affecting tax preparers for 2011:
• E-filing mandate. Starting with tax returns filed in 2012, tax preparers must
e-file if they are filing 11 or more returns. This is up from more than 100
returns for the last filing season. There are limited exceptions: clients may
in writing instruct their preparer that they want to opt out of e-filing; and a
preparer can apply to opt out due to hardship by notifying the IRS via Form
8944.
• Tax preparer exam. The IRS now requires paid tax preparers other than
attorneys, CPAs and enrolled agents, to take and pass an exam. These preparers
have until December 31, 2013 to pass the test.
Separately, the Internal Revenue
Service also highlighted a number of changes Wednesday:
Two extra days to file and pay. Taxpayers across the nation will have until Tuesday, April
17, 2012, to file their 2011 income tax returns and pay any taxes due.
Taxpayers have extra time because April 15 falls on Sunday, and Emancipation
Day, a holiday in the District of Columbia, is observed the following day on
Monday, April 16. By law, filing deadlines that fall on D.C. holidays are
extended to the next day that is not a Saturday, Sunday, or holiday.
The April 17 deadline applies to any
return or payment normally due on April 15. It also applies to the deadline for
requesting a tax-filing extension and for making 2011 IRA contributions.
Limited Nonbusiness Energy Property
Credit available in 2011. This
credit generally equals 10 percent (down from 30 percent the past two years) of
what a homeowner spends on eligible energy-saving improvements, up to a maximum
tax credit of $500 (down from the $1,500 combined limit that applied for 2009
and 2010). In addition, the energy standards are increased for most property;
windows, exterior doors and skylights, for example, must meet Energy Star
Program requirements.
Because of the way the credit is
figured, the IRS noted, in many cases, it may only be helpful to people who
make energy-saving home improvements for the first time in 2011. That’s because
homeowners must first subtract any nonbusiness energy property credits claimed
on their 2006, 2007, 2009 or 2010 returns before claiming this credit for 2011.
The cost of certain high-efficiency
heating and air conditioning systems, water heaters and stoves that burn
biomass all qualify, along with labor costs for installing these items. In
addition, the cost of energy-efficient windows and skylights, energy-efficient
doors, qualifying insulation and certain roofs also qualify for the credit, though
the cost of installing these items do not. See Form 5695 and its instructions
for details.
Standard mileage rates up in 2011. The standard mileage rate for business use of a car, van,
pick-up or panel truck is 51 cents a mile for miles driven during the
first six months of 2011 (January through June) and 55.5 cents a mile for
the rest of the year, up from 50 cents for 2010.
The rate for the cost of operating a
vehicle for medical reasons or as part of a deductible move is 19 cents a mile
from January through June and 23.5 cents a mile after that, up from 16.5 cents
per mile in 2010.
The rate for using a car to provide
services to charitable organizations is set by law and remains at 14 cents a
mile.
AMT exemption increased. For tax-year 2011, the alternative minimum tax exemption
increases to the following levels:
• $74,450 for a married couple
filing a joint return and qualifying widows and widowers, up from $72,450 in
2010.
• $37,225 for a married person filing separately, up from $36,225.
• $37,225 for a married person filing separately, up from $36,225.
• $48,450 for singles and heads of
household, up from $47,450.
Health insurance deduction for
self-employed people. In 2011, eligible self-employed
individuals and S corporation shareholders can use the self-employed health
insurance deduction to reduce their income tax liability. Eligible taxpayers
still claim this deduction on Form 1040 Line 29. Premiums paid for health
insurance covering the taxpayer, spouse and dependents generally qualify for
this deduction. In addition, premiums paid to cover an adult child under age 27
at the end of the year, also qualify, even if the child is not the taxpayer’s
dependent. However, the deduction from self-employment income for determining
self-employment tax, which was available only in tax-year 2010, no longer applies.
As before, the insurance plan must
be set up under the taxpayer’s business, and the taxpayer cannot be eligible to
participate in an employer-sponsored health plan. For details see Publication
17 and the instructions to Form 1040 (including a worksheet).
Change for HSAs and MSAs. Starting in 2011, the additional tax on distributions from
a health savings account (HSA), not used for qualified medical expenses,
increases from 10 percent to 20 percent. Report on Form 8889 . Similarly, the
additional tax on distributions from an Archer medical savings account (MSA),
not used for qualified medical expenses, rises from 15 percent to 20 percent.
Report them on Form 8853.
Source: www.accountingtoday.com
Wednesday, January 4, 2012
Filing season begins and FREE tax preparation is available
The filing season for
tax year 2011 is here. To get help with tax preparation and find out about
possible tax credits and deductions, you should take advantage of IRS sponsored
free volunteer tax preparation programs. The Volunteer Income Tax Assistance
and Tax Counseling for the Elderly programs are free for qualified people.
Qualifications for
free assistance:
VITA offers free tax preparation help for people with incomes of
$50,000 or less. With more than 5,000 VITA sites nationwide, the IRS continues
to expand its partnerships with nonprofit and community organizations
performing vital tax preparation services.
TCE provides free tax help to people who are age 60 and older,
specializing in questions about pensions and retirement unique to seniors. TCE
is operated by AARP and other community organizations that receive grants to
run these programs. With more than 6,000 TCE sites nationwide, you are sure to
find one close to you.
Both the VITA and TCE
programs provide free basic income tax return preparation to qualified
individuals in local communities. Trained and certified volunteers can inform
you about special tax credits for which you may qualify, such as the Earned
Income Tax Credit, Child Tax Credit, and Credit for the Elderly.
In addition to the
traditional face-to-face tax preparation services offered in previous years,
IRS is launching a service which is available at select VITA and TCE locations
for the upcoming filing season. Some sites will offer the opportunity for
qualified taxpayers to prepare and e-File their own returns, with the help of
an IRS-certified VITA/TCE volunteer, using popular, easy-to-use tax preparation
software. Whether you prefer to have a volunteer prepare your return or choose
to do it yourself with the help of a volunteer, these FREE services will give
you the help you need.
You can typically
find locations and hours for these volunteer tax preparation sites through city
hotlines and local community organizations. Beginning in February, you’ll be
able to search on www.irs.gov, keyword VITA, and find the VITA site
nearest you. You can also call the IRS toll-free at 1-800-906-9887.
To find a site
operated by AARP Tax-Aide, visit www.aarp.org or call 1-888-227-7669.
Note: April 17 is the
due date for filing individual tax returns, (April 15 falls on a Sunday and
Monday, April 16, is Emancipation Day, a federal holiday).
Source: www.irs.gov
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