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Tips to Start Planning Next Year’s Tax Return

Tuesday, April 30th, 2013

originally posted on irs.gov – April 24, 2013

Tips to Start Planning Next Year’s Tax Return

For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are six things you can do now to make next April 15 easier.

1. Adjust your withholding. Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages. Use the IRS Withholding Calculator at IRS.gov to complete a new Form W-4, Employee’s Withholding Allowance Certificate.

2. Store your return in a safe place. Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year’s return.

3. Organize your records. Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Shop for a tax professional. If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you’re not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at IRS.gov.

5. Consider itemizing deductions. If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.

6. Keep up with changes. Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through IRS.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during the summer and tax filing season.

You can find forms and publications at IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).

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IRS Releases the Dirty Dozen Tax Scams for 2013

Tuesday, March 26th, 2013

IR-2013-33, March 26, 2013

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list 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.

“This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud,” said IRS Acting Commissioner Steven T. Miller. “The Dirty Dozen list shows that scams come in many forms during filing season. Don’t let a scam artist steal from you or talk you into doing something you will regret later.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012. The Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.

We know identity theft is a frustrating and complex process for victims.  The IRS has 3,000 people working on identity theft related cases – more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

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 their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

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 (DOJ) 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, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with 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 2012, 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 DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

“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 promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and 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 and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. 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 also 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.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits  a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

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 although they were not eligible. 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 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. 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.

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.

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.

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IRS Kicks Off 2013 Tax Season: Most Individual Returns Can Be Filed Now; Many Ways To Get Tax Help

Wednesday, January 30th, 2013

content issued as IRS Press Release January 30, 2013

WASHINGTON — The Internal Revenue Service today opened the 2013 filing season by announcing a variety of enhanced products and services to help taxpayers prepare and file their tax returns by the April 15 deadline.

New and expanded services for taxpayers this year include a redesigned IRS.gov web site that’s easier to navigate and improved service options, including more video-conferencing assistance sites and additional social media tools. In addition, the IRS has stepped up its enforcement efforts to protect taxpayers from refund fraud and identity theft.

The IRS began accepting and processing most individual tax returns today after updating forms and completing programming and testing of its processing systems to reflect the American Taxpayer Relief Act (ATRA) that Congress enacted on Jan. 2. The vast majority of taxpayers can file now, but the IRS is continuing to update its systems for some tax filers. The IRS will begin accepting tax returns from people claiming education credits in mid-February while taxpayers claiming depreciation deductions, energy credits and many business credits will be able to file in late February or early March. A full list of the affected forms is available on IRS.gov.

This year, taxpayers have until Monday, April 15, to file their 2012 tax returns and pay any tax due. The IRS expects to receive more than 147 million individual tax returns this year, with about 75 percent projected to receive a refund.

Last year for the first time, 80 percent of all individual returns were filed electronically. E-file, when combined with direct deposit, is the fastest way to get a refund. Last year, about three out of four refund filers selected direct deposit.

Assistance Options, Virtual Service Availability

The best way for taxpayers to get answers to their questions is by visiting IRS.gov. Last year, the website received a record 340 million visits, a 17 percent increase over 2011.

This year, the redesigned website makes it easier than ever for taxpayers to get to key forms and vital information. The front page also has links to redesigned pages to help with everything from refunds to specific tax issues as well as easy access to taxpayer-friendly videos on the IRS YouTube channel.

Through IRS.gov, taxpayers can access Free File, which provides options for free brand-name tax software or online Fillable Forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $57,000 or less can choose from about 15 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms.

People making $51,000 or less usually qualify for the Volunteer Income Tax Assistance program for free tax preparation and electronic filing. Tax Counseling for the Elderly, a similar community-based volunteer program, offers free tax help with priority assistance to people age 60 and older, specializing in questions about pensions and retirement issues. Information on these programs can be found at IRS.gov.

This year, the IRS is doubling the number of sites where taxpayers can get assistance through two-way video conferencing. During 2012, the program’s first year, about 14,000 taxpayers received assistance at 13 locations. Following a strong response to the virtual assistance program, the IRS plans to roll out 14 new sites. A list of the 27 available locations is on IRS.gov.

For tax law questions or account inquiries, taxpayers can also call the IRS toll-free number 800-829-1040 (7 a.m. to 7 p.m. local time) or visit a taxpayer assistance center. Taxpayers should check IRS.gov for the hours and services offered at the location they intend to visit.

Apps and Social Media

For the third year, the IRS will offer IRS2Go, its smartphone application, which enables taxpayers to check on the status of their tax refund and obtain helpful tax information. The IRS2Go app, available for Apple and Android users, has been downloaded more than 800,000 times and used by taxpayers millions of times.

More helpful information is available through IRS social media platforms, including:

  • YouTube, where viewers can watch more than 100 short, informative videos. They are available in English, Spanish, American Sign Language and other languages.
  • The IRS also has several twitter feeds available for taxpayers in English and Spanish at @IRSnews or @IRSenEspanol. And @IRStaxpros covers news for tax professionals.
  • For the 2013 filing season, the IRS has added Tumblr to its list of social media platforms. People who want tax information now have another way of accessing and sharing helpful tax tips, videos, podcasts and other information at www.internalrevenueservice.tumblr.com

The IRS only uses social media tools to share public information, not to answer personal tax or account questions. And the IRS reminds taxpayers to never post confidential information, such as a Social Security Number, on social media sites.

Check for a Refund

Even with the Jan. 30 opening of the tax season, the IRS expects to issue refunds within the usual timeframes. Last year, the IRS issued more than nine out of 10 refunds to taxpayers in less than 21 days, and it expects the same results in 2013.

After taxpayers file a return, they can track the status of the refund with the “Where’s My Refund?” tool available on the IRS.gov website. New this year, instead of an estimated date, “Where’s My Refund?” will give people an actual personalized refund date after the IRS processes the tax return and approves the refund.

Here are some tips for using “Where’s My Refund?”:

  • Initial information will generally be available within 24 hours after the IRS receives the taxpayer’s e-filed return or four weeks after mailing a paper return.
  • The system updates every 24 hours, usually overnight. There’s no need to check more than once a day.
  • “Where’s My Refund?” provides the most accurate and complete information that the IRS has about the refund, so there is no need to call the IRS unless the web tool says to do so.
  • To use the “Where’s My Refund?” tool, taxpayers need to have a copy of their tax return for reference. Taxpayers will need their Social Security Number, filing status and the exact dollar amount of the refund they are expecting.

Taxpayers should remember that while most tax refunds are issued within 21 days, some tax returns need additional time to be reviewed. As part of that effort, the IRS has put in place stronger security filters this filing season to protect against refund fraud and identity theft.

Identity Theft

Stopping identity theft and refund fraud is a top priority for the IRS, and the agency’s work on identity theft and refund fraud continues to grow. For the 2013 filing season, the IRS has expanded these efforts to better protect taxpayers, help victims and detect refund fraud before it occurs.

The effort includes stronger screening filters for incoming tax returns, increased IRS Criminal Investigation activity and expanded partnerships with local law-enforcement officials and financial institutions. More information is available in IRS Fact Sheet 2013-2.

By late 2012, the IRS assigned more than 3,000 IRS employees — more than double the number from 2011 — to work on identity theft-related issues. IRS employees are working to prevent refund fraud, investigate identity theft-related crimes and help taxpayers who have been victimized by identity thieves. In addition, the IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

For more information, see the special identity theft section on IRS.gov.

IRS YouTube Videos:
Do It Yourself Free Tax Preparation:  English | ASL

When Will I Get My Refund?:  English | ASL

IRS Social Media:  English

Podcast:
Do It Yourself Free Tax Preparation

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Ten Tax Tips for Individuals Selling Their Home

Thursday, August 16th, 2012

Originally posted in the IRS Summertime Tax Tip Newsletter on August 6, 2012

The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with this calculation.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Big tip: Ohio waitress gets tax refund check for nearly half million; laughs and gives it back

Monday, June 4th, 2012

originally posted on WashingtonPost.com on June 2, 2012

If only it was a tip.

Veteran Cleveland waitress Ginny Hopkins grabbed her mail on her way to work and found a federal tax refund check for nearly $435,000. She “laughed out loud,” then took the check with her to Johnny’s Downtown Restaurant to show around.

She enjoyed the speculation for a couple days about what she could do with the apparent windfall. Her granddaughters were thinking tickets to see the popular boy band One Direction. She had other ideas.

“Grandma hasn’t had a vacation in 28 years,” she said. “I would have gone to Hawaii.”

It was all in fun. On Thursday, she said, she instead went to the Internal Revenue Service office in Cleveland with the check.

“I’m here to give you a half million dollars,” she recounted telling employees. She said she had to show them a photo ID.

“Like anybody would walk in and just give them a big check,” she said. She said the IRS employees politely told her the mistake would be investigated internally. A message was left Saturday at the IRS office.

A waitress for 40 years, she wouldn’t say how much she earned last year, but laughed and replied: “Not enough to warrant a refund like that.”

She said she had originally filed her return in January with her son’s help, but an electronic filing glitch caused information on her return to get deleted. She filed an amended return in April, claiming a $754 refund.

She still hasn’t gotten that. She said the IRS folks gave her information for checking on the status of her refund.

She said next year, she’ll file her return requesting direct deposit of her refund.

Hopkins, who spoke by telephone Saturday before heading to her job for her sixth day of work in the week, said she wasn’t sure what she would do if another $434,712 suddenly showed up in her bank account next year.

“I’d have to start balancing my checkbook a lot better, I can tell you that,” she said.

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Top 10 Payroll Mistakes Companies Make

Monday, June 4th, 2012

originally posted on AccountingToday.com on June 4, 2012

Keeping your clients from running afoul of IRS rules around payroll taxes will help them avoid stiff penalties.

Common Mistakes That Lead to Employment Tax Liability and Penalty Exposure

The Internal Revenue Service is focused on closing the tax gap. One way it hopes to do so is by collecting under-withheld employment taxes. As part of the Employment Tax Research Project (ETRP) launched in 2010, the IRS is reviewing the payroll practices of 6,000 employers in four main areas: worker misclassification, fringe benefits, executive compensation and payroll taxes. Once the research project is complete, the IRS will identify areas in which compliance errors routinely occur and focus audits on those issues. Companies not selected as part of the research project should look at their payroll practices and make any necessary corrections before the IRS comes knocking. We have already observed the IRS paying a lot more attention to employment tax issues and pursuing penalties with a diligence we have not previously witnessed in this area. Because we are seeing an expanded audit scope and depth of diligence by the IRS, we’ve put together a list of common payroll mistakes we’ve seen companies make. We recommend that companies, at a minimum, look at these issues:

1. Classification of Employees as Independent Contractors

Workers are generally classified as either employees or independent contractors. Getting this classification right is a big deal. Depending on the classification, how compensation gets reported to the IRS is different (Form W-2 vs. Form 1099). Whether the worker is entitled to benefits (like medical insurance coverage, retirement plan benefits and grants of equity compensation) can hinge on the worker’s status as an employee. Whether a worker is subject to federal income tax and employment tax withholding is also contingent on status. If there has been an improper classification, the Voluntary Classification Settlement Program (VCSP) allows eligible employers to voluntarily reclassify workers as employees on a prospective basis and get into compliance by paying 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.

2. Failure to Subject Vendor Payments to Backup Withholding

If a company issues a payment to a vendor without first obtaining a Form W-9, the payment could be subject to mandatory backup withholding at a 28 percent rate. Even when it is later determined that the vendor is not subject to backup withholding (for example, the vendor is later determined to be a corporation), if the company did not obtain a Form W-9 prior to issuing payment, there may still be an issue: on audit, the IRS has pursued the collection of a failure-to-deposit penalty on the amount that should have been withheld—because at the time of payment, the company did not know that the vendor payment was exempt from backup withholding.

3. Failure to Issue Form 1099s

A Form 1099 must generally be issued to vendors, including independent contractors, who provide more than $600 in services. Some entities, such as corporations, are not required to be issued a Form 1099. If a company fails to timely furnish a Form 1099, it can be subject to penalties.

4. Not Including the Fair Market Value of Gift Cards, Prizes and Awards in Employees’ Income

For federal income tax purposes, most prizes and awards are considered taxable fringe benefits subject to federal income and employment tax withholding. Gift cards are the equivalent of cash and should always be included in taxable wages regardless of amount. Certain items can be excluded from wages if they are de minimis in nature. However, cash equivalents are never de minimis.

5. Failing to Timely Deposit Withheld Taxes

Generally, a company is required to deposit taxes on a monthly or semi-weekly basis. When taxes reach certain amounts, they must be deposited the next business day. If a company doesn’t timely deposit these taxes, the company may be subject to late deposit penalties and interest. Penalty rates range from 2 to 15 percent, depending on how late the deposit is.

6. Failure to Timely Deposit Withholding Taxes on Vested Restricted Stock and Exercise of Stock Options

When an individual exercises stock options, employment taxes should be deposited within one day of the settlement date. The settlement date should not be more than three days after the date of exercise. However, when an employee is granted restricted stock, he or she generally recognizes income upon vesting. Income and employment taxes are required to be withheld on the fair market value of the shares less any amount the employee paid for such shares on that date. The income and employment taxes may be required to be deposited the next business day.

7. Incorrectly Excluding Expense Reimbursements from Reportable Wages

Whether expense reimbursements can be excluded from an employee’s wages depends on whether he or she is reimbursed pursuant to an accountable plan. An accountable plan is generally one under which expenses are reimbursed only if there is a business connection to the expenditure, there is an adequate accounting of the expenditure and any excess reimbursements are returned to the employer. If expenses are reimbursed under a policy or plan that does not meet these requirements, they must be included in taxable wages.

8. Failure to Include Nonqualified Deferred Compensation in Executives’ Incomes

If nonqualified deferred compensation plans have not been amended to comply with Internal Revenue Code Section 409A or have provisions that do not comply with 409A, the executives could have an income recognition event prior to the payment of the deferred amounts and could be subject to an excise tax. The Service has also established a correction program where taxpayers can obtain some relief with respect to certain operational failures. Only certain types of failures are eligible for correction, but taking advantage of this program can reduce the total amount of income inclusion and excise taxes.

9. Not Including the Appropriate Value of Taxable Fringe Benefits in Employees’ Income

Taxable fringe benefits can also include spousal travel, company-provided automobiles, country club dues and housing benefits. How a company values these fringe benefits for purposes of income and employment tax reporting and withholding can be a complicated issue. For example, there are three valuation methods for calculating the value of personal use of company-provided vehicles. Is your company calculating this correctly?

10. Excluding Travel and Commuting Expense Reimbursements from Employees’ Income.

Most of the time, travel and commuting expenses are not taxable income to an employee. However, if what started out as a short-term assignment is extended beyond a year, or if an employee is traveling to a permanent work site that is not in the same place as his or her permanent residence, those company-provided travel and commuting benefits may need to be included in the employee’s income.

While this list is not exhaustive, it provides a jumping off point for determining how well your company is doing. Companies should conduct a compliance review while they still have a chance to fix what’s wrong without having to negotiate penalties and interest with an IRS auditor at the same time.


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Tax Help for Small Businesses and Self-Employed

Friday, January 28th, 2011

The IRS Small Business and Self-Employed Tax Center at http://www.irs.gov/smallbiz offers extensive resources and online tools designed to help small businesses and self-employed persons.

The IRS Small Business and Self-Employed Tax Center on the IRS website offers the following resources:

  • Small business forms and publications
  • Employer Identification Number online application
  • Employment tax information – federal income tax, Social Security and Medicare taxes, FUTA and self-employment tax
  • Tax-related news that could affect your business
  • Small business educational events
  • IRS videos for small businesses
  • A-Z Index for Business – find information fast using the A-Z listing

The site provides important tax information available for all stages of owning a business. Whether you’re starting, operating or closing a business, visit http://irs.gov/smallbiz for all your federal income tax information.

Other resources available on the IRS website include a virtual small business tax workshop, video and audio presentations, a guide to IRS audits, and a tax calendar designed for small business taxpayers.

The IRS Video Portal:

Tax Questions?  Learn about tax topics through video and audio presentations on the IRS Video Portal.  The video portal contains archived versions of live panel discussions, archived webinars, video clips, and audio archives of national phone forums.

IRS Audits Video Series:

“Your Guide to an IRS Audit” takes the viewer through the steps of an audit from notification to closing. The video series is composed of scenarios that demonstrate the stages of each type of audit: correspondence, office and field. The scenarios address issues that are common to audits of small businesses.

Virtual Small Business Tax Workshop:

The IRS Virtual Small Business Tax Workshop is an interactive resource to help small business owners learn about their federal tax rights and responsibilities. The workshop contains nine stand-alone lessons that can be selected and viewed in any sequence. The workshop is available online 24 hours a day, seven days a week from any computer. It can also be ordered on CD.

Tax Calendar for Small Business Taxpayers:

The Tax Calendar for Small Businesses and Self-Employed – Publication 1518 – is available online or as a printable PDF file. This 12-month calendar is filled with information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. Each page highlights different tax issues and tips that may be relevant to small-business owners, with room on each month to add notes, state tax dates or business appointments.   You can also download the tax events into your calendar or subscribe to the tax calendar events.  The calendar provides the small business owner with a ready resource for meeting their tax obligations.

Links:

2011 IRS Tax Calendar for Small Business and Self Employed  (PDF – English)  (PDF – Spanish)

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Points to Keep in Mind When Choosing A Tax Preparer

Friday, January 14th, 2011

If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. Most return preparers are professional, honest and provide excellent service to their clients.

Here are a few points to keep in mind when choosing someone else to prepare your return:

1.     Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics. New regulations require all paid tax return preparers including attorneys, CPAs and enrolled agents to apply for a Preparer Tax Identification Number — even if they already have one — before preparing any federal tax returns in 2011.

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 Professional Responsibility for enrolled agents.

3.     Find out 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.

4.     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.

5.     Provide all records and receipts needed to prepare your return. Most 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.

6.     Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

7.     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.

8.     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.

You can report abusive tax preparers and suspected tax fraud to the IRS on Form 3949-A, Information Referral or by sending a letter to Internal Revenue Service, Fresno, CA 93888. Download Form 3949-A from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

Links:The Office of Professional Responsibility (OPR)

Where Do You Report Suspected Fraud Activity?

 Form 3949-A Information Referral (PDF 94K)

 

YouTube Videos:
Choosing A Tax Preparer  (English) |  Text of video

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Top 10 Tax Time Tips

Thursday, January 13th, 2011

It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.

1. Start gathering your records Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.

2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.

3. Use Free File: Let Free File do the hard work for you with brand-name tax software or online fillable forms. It’s available exclusively at http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there’s Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.

4. Try IRS e-file: After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers – 99 million people – used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.

5. Consider other filing options There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.

6. Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.

7. Visit the IRS website again and again The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.

8. Remember this number: 17 Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.

9. Review! Review! Review! Don’t rush. We all make mistakes when we rush. Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.

10. Don’t panic! If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040.

Links:
• Forms and Publications
• E-filing
• 1040 Central

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Employee vs. Independent Contractor – Seven Tips for Business Owners

Tuesday, August 24th, 2010

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

  • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

3. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.

6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

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