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The Top 12 Tax Frauds

A look at the IRS “dirty dozen” list.

Have you heard of the “dirty dozen?” Each year, the IRS lists the top 12 recurring federal tax offenses – frauds, cheats, feints and schemes that ethically challenged taxpayers, tax preparers and crooks try to perpetrate. Watch for these scams in all seasons, not just tax season.

Identity theft. Casually discarded or displayed personal information is an open invitation to criminals. Even when we are vigilant, multiple firewalls and strong passwords can fail to protect us. The Government Accountability Office says fraudsters stole $5.8 billion in false refunds in 2013 and the Treasury Inspector General Tax Administration thinks the losses will hit $21 billion next year. The IRS says it is “making progress” fighting this problem.

Criminals posing as “tax professionals.” Each year, roughly 60% of taxpayers get help with their 1040s at tax preparation businesses. As the IRS notes, nearly all of these businesses are legitimate. Exceptions do exist, however. Sometimes a fraudster will rent a storefront with a mission of collecting SSNs and other personal information pursuant to claiming phony refunds.2

Unwarranted or excessive refunds. Annually, some taxpayers and tax preparers claim refunds that are embellished or wholly unjustified. A preparer may tout that it will get you a big refund but then claim a percentage of it. Worse yet, they may ask you to sign a blank return.2

Phishing. This is tax fraud via email. A scammer will send a message mimicking communication from the IRS or the Electronic Federal Tax Payment System (EFTPS). If you get an email like that, forward it to phishing@irs.gov. Neither the IRS nor the EFTPS has a policy of initiating contact with taxpayers through email.2

Threatening calls. Crooks will sometimes target elders or immigrants with phone scams, pretending to be the IRS or another federal agency. (Sometimes even the caller ID will suggest this.) They will assert that the other party owes thousands in back taxes. The only solution, they contend, is immediate payment through a pre-loaded debit card or a money order. The caller may even know the last four digits of their Social Security Number or volunteer what is supposedly an IRS employee badge number to make the con more believable. A follow-up call from “the DMV” or “the police” may be next. Such behavior can be reported to the Treasury Inspector General for Tax Administration at (800) 366-4484 or the IRS at (800) 829-1040.3

Sham charities. An old wisecrack says that you can make a lot of money running a non-profit organization. A specious charity may ask you for cash, your SSN, your banking information and more. If anything seems fishy, ask for visual proof of the organization’s tax-exempt status, and check it out further at irs.gov using the Exempt Organizations Select Check search box.2

Tax shelter schemes. Tax evasion is different from legal tax avoidance. Some unprincipled tax and estate “consultants” seem to confuse the two, much to the chagrin of their clients who run afoul of the IRS. Watch out for aggressively marketed “tax shelters” that seem too good to be true or sketchily detailed.2

Hiding taxable income. How many taxpayers file fraudulent 1099s? Enough for this ploy to make the IRS top 12 list for 2015. Any hint of bogus documentation to cut taxes or boost refunds becomes especially egregious when a paid preparer attempts it.2

Inventing income that was never earned to get credits. The IRS notes that some of the shadier tax prep services sometimes convince clients to try this. It is fairly easy to disprove.2

Stashing taxable income or money offshore. In recent years, the IRS has scrutinized taxpayers with undeclared foreign bank accounts and the financial organizations that have offered them. Its Offshore Voluntary Disclosure Program (OVDP) encourages taxpayers to quietly disclose such accounts and become compliant with IRS rules.2

Claiming unwarranted fuel tax credits. Few taxpayers can legitimately claim these, yet some try thanks to urging from third-party preparers. Most taxpayers don’t own farms, mining or fishing businesses or companies whose vehicles operate mostly on local roads.2

Frivolous arguments against income tax. Assorted seminar speakers and books claim that federal taxes are unconstitutional and that Americans have only an implied obligation to pay them. These arguments carry little weight in the courts and before the IRS. The IRS imposes a $5,000 fine for filing a frivolous return, and Section 1 of the Internal Revenue Code imposes income tax on all Americans, specifically 26 U.S.C. § 1 and 26 U.S.C. § 1(a). IRC Section 6072 establishes April 15 as the annual federal tax deadline.2,4

One thing to remember in light of this list: you are legally responsible for the content input into your 1040 form, even if a third party prepares it.2

Warmest Regards,

 april-signature

 

Citations.

1 – blog.credit.com/2015/03/the-solution-to-tax-id-theft-is-an-unpopular-one-slower-refunds-110478/ [3/5/15]

2 – irs.gov/uac/Newsroom/IRS-Completes-the-Dirty-Dozen-Tax-Scams-for-2015 [2/12/15]

3 – cleveland.com/business/index.ssf/2015/01/nearly_3000_people_in_us_have.html [1/23/15]

4 – docs.law.gwu.edu/facweb/jsiegel/Personal/taxes/JustNoLaw.htm [3/13/15]

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Getting a Jump on Tax Season

What should you bring to your preparer?

You can file your federal tax return starting January 20. IRS filing season will start right on time in 2015, and there is wisdom in filing your 1040 well before April 15. You can get it out of the way earlier, and if you e-file, you can put yourself in position for an earlier refund.1

What should you gather up for your CPA? If you want to save time and possibly money along with it, come to your preparer’s office ready with the appropriate paperwork. If you own a business, that list includes all W-2s and 1099-MISC forms you get from clients, any 1099-INT and K-1 forms displaying interest income, your Schedule C and P&L reports, and any and all paperwork you can round up detailing your expenses – your personal expenses too, not only business costs but also any tuition, medical and miscellaneous ones. If you have made charitable contributions worth itemizing, that paperwork needs to reach your preparer. The same goes for documents detailing mortgage interest, other forms of interest paid, and any tax already paid.2

If you have receipt management software, your CPA will love you for using it (beats getting a manila envelope, file folder or shoebox full of receipts to sort through). If a calamity or an accident destroyed a bunch of your business records, remember that the IRS may give you a break – but your CPA needs solid proof of the misfortune to try and make a case to the IRS and get you some leniency.

What are some things people too often forget to bring? Social Security numbers for new babies (and taxpayer-ID numbers and contact information for the nannies of those babies). Logs of unreimbursed mileage. Real estate stuff, too: closing letters related to a refi, receipts for real estate taxes (assuming they haven’t been paid through escrow).3

If you received any health insurance subsidies, you may want to wait until February. Did you pay for your own health insurance in 2014? Do you remember how you had to estimate your 2014 income when you applied for coverage? If you got a subsidy, it was based on that estimate, and an estimate is by definition inexact. Some taxpayers ended up earning more than the incomes they estimated to the exchanges, some less. That could mean one of two things: a big 2014 tax refund, or owing thousands more in taxes.4

If you pay for your own health coverage, the exchange at which you bought it should send you Form 1095-A by January 31. Form 1095-A will list how your household self-insures: who pays premiums, and the amount of any monthly subsidies. Your CPA can plug these details into Form 8962, which explains the breakdown on insurance, subsidies and income for your household to the IRS. If you were only self-insured for part of 2014, your CPA must note any subsidy payments by the month.4

Should you jump to a new CPA? If he or she is aloof, sloppy, or seems more like a file clerk than someone interested in minimizing your tax burden, maybe you should switch. There are some tax preparers who outsource their work to people overseas, and you probably don’t want that to happen to your return. We are early in 2015, and if you really have the itch to switch, consider taking your 2013 return to 2-3 candidates – not only to get a tax prep quote, but to see if they have insight on your situation that your current preparer lacks.5

In getting a jump on tax season, you can get that bothersome item off your to-do list sooner and focus on the more exciting parts of your career, business or life.

Warmest Regards,

 april-signature

       

Citations.

1 – forbes.com/sites/robertwood/2014/12/29/irs-announces-2014-tax-return-filing-opens-starting-january-20-2015/ [12/29/14]

2 – outright.com/blog/what-do-you-need-to-bring-to-your-accountant-at-tax-time/ [3/18/14]

3 – foxbusiness.com/personal-finance/2014/03/18/what-documents-should-take-to-tax-preparer/ [3/18/14]

4 – money.cnn.com/2015/01/02/pf/taxes/obamacare-income-tax-subsidies/ [1/2/15]

5 – dailyfinance.com/2014/12/25/hire-cpa-prepare-taxes/ [12/25/14]

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IRS Announces New IRA Rollover Limitation

A tax court ruling raises eyebrows & leads to a decision that may affect you.

What was once allowed is now prohibited. In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.1

This Tax Court opinion has prompted the IRS to tighten the IRA rollover rules. In the past, some clever taxpayers have effectively treated themselves to interest-free loans from their IRA funds by using multiple IRA accounts to sequence multiple 60-day rollover periods. In the court’s view, the Bobrows were exploiting this loophole, and the IRS is closing it.1,2

Starting in 2015, you are allowed one IRA-to-IRA rollover per 365 days – period. A subtle but important change has been made. Publication 590 has long stated that a taxpayer can generally only make one tax-free rollover of any part of a distribution from a single IRA to another IRA during a 12-month period. That didn’t preclude a taxpayer from making multiple IRA-to-IRA rollovers using multiple IRAs during such a timeframe.1,4

In response to Bobrow v. Commissioner, T.C. Memo 2014-21, the IRS issued Announcement 2014-15. Effective January 1, 2015, the once-a-year rollover restriction applies to all IRAs maintained by a taxpayer. So the tactic of making multiple IRA-to-IRA tax-free rollovers during a 12-month period is kaput.3,4

So beginning next year, you can only make a tax-free IRA-to-IRA rollover if you haven’t made one within the past 365 days.3

Don’t grumble just yet. If you want to move money between IRAs more than once next year, there is still a way you can do it. The new IRS rule change doesn’t apply to every type of IRA “rollover.”

The financial media uses the phrase “IRA rollover” pretty loosely. When you read a story about “IRA rollovers,” the term may refer to IRA-to-IRA rollovers, distributions from a workplace retirement plan going into an IRA, or a trustee-to-trustee transfer of IRA assets between financial firms in which the taxpayer never handles the money.

Here’s the good news. IRS Announcement 2014-15 states: “These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B).”3

In other words … the new restriction does not apply to trustee-to-trustee transfers. The IRS has clearly defined in the above language that it does not regard these transfers as rollovers. Some transition relief is also available: the IRS won’t apply the new limitation to any rollover involving an IRA distribution that happens prior to January 1, 2015.4

Some important questions beg for answers. As Bloomberg BNA notes, the new limitation actually muddies the waters a bit. Some taxpayers own both traditional and Roth IRAs; will they be allowed to take one distribution from their traditional IRA with the intention of a tax-free rollover and another distribution from their Roth IRA pursuant to a tax-free rollover within the same 12-month period? Could an IRA owner and his/her tax planner argue that a succession of linked IRA distributions pursuant to a single outcome substantively amount to a single distribution, citing the step transaction doctrine in defense?4

It is possible that further guidance from the IRS may emerge. Regardless of whether it does or not, IRA-to-IRA rollovers are about to be scrutinized more closely.

 Best Regards,

 april-signature

 

Citations.

1 – wealthmanagement.com/retirement-planning/seeing-double [2/4/14]

2 – marketwatch.com/story/new-ira-rollover-rule-coming-in-2015-2014-04-04 [4/4/14]

3 – irs.gov/pub/irs-drop/a-14-15.pdf [4/16/14]

4 – tinyurl.com/lnd86vs [4/24/14]

 

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Tax Perks of Year-End Charitable Gifting

Help the causes you care about & help your finances in the process.

An opportunity for you to give & save. As 2013 ends, you may be considering making one or more charitable gifts. In most instances, they are tax-deductible with benefits for the donor as well as the recipient.

As you make any charitable gift, keep three things in mind. One, the organization must be a qualified charity. An Internal Revenue Service letter certifies this status. Some charities post such letters on their websites; others don’t, but will produce one for you if there is any question in your mind. You can check up on a charity yourself at irs.gov, using the IRS Exempt Organizations Select Check. (For the record, the IRS considers churches, mosques, temples and others houses of worship de facto charities; they may not be on the Select Check list, but they are eligible to receive charitable gifts. If there is any question at all, simply ask.) 1,2

Two, remember that charitable contributions are only deductible if itemized on Form 1040, Schedule A (lines 16-19). They are deductible in the tax year that they are made.1,2

Three, you will want a receipt or some form of bank record – a credit card receipt, a canceled check – plainly denoting the name of the charity and the date and amount of the donation. You don’t have to file these receipts with your 1040, but you should have them in case of an audit. The IRS now requires written evidence of cash donations to charities, regardless of amount.1,2

How should you contribute? There are a few popular options.

You could make a cash gift. The potential tax savings depends on your tax bracket. For example, if you write a check for $10,000 to a qualified charity, you could save $3,500 in taxes if you are in the 35% bracket and $1,500 if you are in the 15% bracket.3   

Can you make a “cash” donation with a credit card? Of course – and as long as the charge is captured by the end of 2013, the donation is deductible for 2013. If you write a check dated in 2013 and mail it before January 1, that contribution will be deductible for 2013 even if it isn’t cashed until next year.2

You could donate appreciated stock. In this bull market, many investors hold stocks and funds with major unrealized gains in taxable accounts. If you have owned stock (or other appreciated assets) for more than a year, you can donate that stock to charity and take a deduction equal to its fair market value while avoiding the capital gains tax you would incur by selling it.2,4   

An example: you are in the 33% federal tax bracket, and instead of writing a $10,000 check to a charity, you gift $10,000 in appreciated stock you purchased years ago. Let’s say the fair market value is $10,000 and the cost basis is $2,000. Under this scenario, your gift offers you a route to $3,300 in income tax savings plus an opportunity to avoid $1,200 of capital gains tax and $304 of Medicare surtax on net investment income.3

An important note: if you gift property worth more than $5,000 to a qualified charity, you are required to get a qualified appraisal of that property’s fair market value. This applies to myriad forms of non-cash property, not just appreciated securities. You must also fill out Form 8283. (See irs.gov/taxtopics/tc506.html for additional requirements on non-cash charitable gifts.) 1,2

You could make a charitable IRA gift. To some traditional IRA owners, the annual Required Minimum Distribution is an annual financial nuisance – an unwanted chunk of taxable income. If you feel this way, and have put off your RMD until the last minute (more or less), you may have an alternative.

If you turned 70½ this year (or were already older than 70½ when 2013 started), there may still be time for you to arrange a charitable IRA rollover before the year ends. You may donate up to $100,000 of IRA assets to a qualified charity through a trustee-to-trustee transfer arranged by the IRA custodian. (That is, the money cannot pass through the donor’s hands.) The gifted assets must be transferred before the end of 2013. There is no resulting federal income tax deduction, but the distribution of IRA assets to charity can count toward the annual IRA withdrawal requirement and isn’t included in the donor’s adjusted gross income. Your IRA custodian must send you a 1099-R in January reporting the gift.5

Finally, some fine print. There are some limits to annual charitable gifting, especially if your charitable contributions exceed 20% of your adjusted gross income. Should that occur, you may find that you can only deduct cash contributions up to 50% of your AGI. Similarly, you may also only be able to deduct non-cash assets up to 30% of AGI and appreciated capital gains assets up to 20% of AGI. Should you exceed those limits, you can carry the deduction forward for up to five years. In addition, single filers with AGI above $250,000 and married joint filers with AGI above $300,000 face losing a portion of their itemized deductions in 2013.2,3

 

Warmest Regards,

  april-signature    

 

 

Citations.

1 – irs.gov/taxtopics/tc506.html [4/15/13]

2 – forbes.com/sites/kellyphillipserb/2013/11/01/making-your-gifts-count10-smart-tips-for-charitable-giving/ [11/1/13]

3 – wellsfargoadvisors.com/market-economy/financial-articles/estate-planning/charitable-giving-stock-cash.htm [12/12/13]

4 – cbsnews.com/news/when-making-charitable-donations-give-stock-not-cash/ [11/25/13]

5 – forbes.com/sites/deborahljacobs/2013/11/01/the-dollars-and-sense-of-giving-ira-assets-to-charity/ [11/1/13]