Posts Tagged ‘tax payers’

Tax Season Unleashes Cyberscams

Thursday, March 20th, 2014

Originally Posted on CNN Money

As if tax season isn’t stressful enough, cybercriminals are also out in full force, looking to unleash attacks against unsuspecting small businesses.

Cybercrooks often use current events to disguise their attacks, said Kevin Haley, director of Symantec Security Response.

In 2011, for example, the royal wedding triggered a huge spike in spamming emails. Similarly, the annual tax filing season creates a perfect storm for cyberschemes.

“Not only do criminals exploit its anxiety and fear factor, but the tax season also gives them the opportunity to generate a variety of social engineering tricks,” Haley said.

These typically take the form of (fraudulent) tax-themed messages from the IRS that are actually phishing scams and ransomware.

Related: Most dangerous cyberattacks against small businesses

Small businesses are targeted more than large firms because they’re more vulnerable and the schemes are more lucrative.

“Large companies are better protected,” said Haley. “Cybercriminals know that smaller firms are more lax with their security and probably keep more money in their bank accounts.”

Alex Watson, director of security research at Websense Security Labs, said his firm has tracked a sharp increase in tax-related cyberscams this year against businesses.

“We’re seeing about 100,000 IRS-themed email scams circulating every two weeks in the U.S.,” said Watson. “They started in late December and it’s going strong now.”

Related: Cybercrime’s easiest prey: Small business

Here are the three most dangerous cyberattacks:

Financial Trojans: This type of attack uses names of popular tax-prep programs like Turbotax. Haley said targets receive an email with an attachment disguised as an important tax document from Turbotax.

“In most cases, the attachment looks like a spreadsheet or a document file,” he said.

If you open it, it launches malware on to your computer or phone. Once it’s installed, the malware allows scammers to steal login information and bank account credentials.

Tax-themed phishing scams: Haley said these scams use HTML files that capture personal data and company information and then send it to a server controlled by the cybercrooks.

In its annual list of “Dirty Dozen” tax scams, the IRS highlighted this particular attack, which is carried out through a fraudulent email or website.

The IRS emphasized that it never uses email to request personal or financial information.

IRS-disguised ramsonware: This attack mimics a Cryptolocker threat, meaning the virus seizes control of your computer files and threatens to erase them unless you pay a ransom.

During tax season, Haley said the Cryptolocker virus is disguised in an email that purports to have important tax-related information.

“This is a particularly vicious attack,” he said. “It will not only lock your personal files but also encrypt them and hold them for ransom.”

Some businesses feel they have no choice but to pay, he said.

Want to outsmart the cybercriminals? Regularly back up important files or encrypt sensitive data, Haley said.

There are other steps small businesses can take to protect themselves from cyberscams.

Good security software is a must, said Haley, as is password protection. Just don’t use the same password everywhere! Also, be very careful about clicking on links in an email.

Finally: “Be suspicious,” Haley said. “Scammers are quite good at making emails and links look legitimate. Know that the email ‘from’ the IRS will never be from the IRS.” To top of page

What do I need to know about the Health Care Law for my 2013 Tax Return?

Tuesday, March 18th, 2014

Originally shared via the IRS Tax Tips Mailing List

For most people, the Affordable Care Act has no effect on their 2013 federal income tax return. For example, you will not report health care coverage under the individual shared responsibility provision or claim the premium tax credit until you file your 2014 return in 2015.

However, for some people, a few provisions may affect your 2013 tax return, such as increases in the itemized medical deduction threshold, the additional Medicare tax and the net investment income tax.

Here are some additional tips:

Filing Requirement: If you do not have a tax filing requirement, you do not need to file a 2013 federal tax return to establish eligibility or qualify for financial assistance, including advance payments of the premium tax credit to purchase health insurance coverage through a Health Insurance Marketplace. Learn more at HealthCare.gov.

W-2 Reporting of Employer Coverage: The value of health care coverage reported by your employer in box 12 and identified by Code DD on your Form W-2 is not taxable. Learn more.

Information available about other tax provisions in the health care law: More information is available on IRS.gov regarding the following tax provisions: Premium Rebate for Medical Loss Ratio, Health Flexible Spending Arrangements, and Health Saving Accounts.

More Information

Find out more tax-related provisions of the health care law at IRS.gov/aca.

Find out more about the Health Insurance Marketplace at HealthCare.gov.

Taxpayers Plan to Use Tax Refunds for Necessary Expenses

Thursday, February 27th, 2014

Originally Published in Accounting Today

About 52 percent of Americans intend to spend their annual tax refund on necessary expenses such as loans, credit cards and other household expenses, while another 30 percent plan to put the money into savings and only 8 percent plan to invest the tax refund money, according to a new survey.

The survey, released Tuesday by the financial services firm Edward Jones, contrasts with a similar survey released Monday by TD Ameritrade, which found greater interest in investing tax refunds, at least among the investors who were polled (see Many Plan to Invest Their Tax Refunds).

The Edward Jones survey polled over 1,000 taxpayers in general. It found that the respondents between the ages of 55 and 64 are most likely to save their refund (43 percent). Respondents who are just a few years younger had a much different opinion, with only 25 percent of those between 45 and 54 years of age planning to save their tax refunds. The survey’s youngest respondents, those between the ages of 18 and 34, are most likely to spend their refund checks on “fun” things such as clothes, entertainment and restaurants (12 percent). This compares to just 5 percent of those 65 and older who would do the same.

Household income has the most influence on the decision to save, spend or invest a tax refund in 2014. Survey respondents with the lowest household income (those making less than $35,000 a year) are the most likely to spend their tax refund on necessary expenses (61 percent). This compares to just over one-third (37 percent) of those with the highest household income ($100,000 or more). The wealthiest respondents are not the most likely to invest their refunds, the survey found. Instead, those with household incomes between $50,000 and $75,000 were the most likely to invest the tax refund money.

In general, households with children are the most likely to spend their tax refunds on everyday expenses, and those with older children are even more likely. Following that point, Americans with no children are the most likely (10 percent) to spend their tax refund on something “fun,” whereas only 1 percent of those with children ages 13 to 17 are willing to splurge.

Americans living in the Northeast are the most likely to invest their tax refunds (11 percent). Those who live in the West are the most likely simply to save their tax refunds (35 percent).

Cities with highest (and lowest) taxes

Monday, February 24th, 2014

Originally Published on Yahoo!

Although a little late this year, due largely to the federal government’s 17-day shutdown in 2013, tax season is here. And, according to a new report, what you owe in taxes could be largely determined by where you live.

The report, released by the Office of Revenue Analysis of the government of the District of Columbia, reviewed the estimated property, sales, auto and income taxes for a hypothetical family at various income levels in 2012 in the largest city within each state. City tax burdens vary widely. A family of three earning $75,000 in Cheyenne, Wyoming, paid just $3,475, or 4.6% of its income, in state and local taxes. In Bridgeport, Connecticut, a family of three earning $75,000 paid $16,333, or 21.8% of its income — a total that does not even include federal taxes.

ALSO READ: Ten U.S. Cities Where Violent Crime Is Soaring

Not surprisingly, tax rates influence overall tax burdens significantly. This is especially true for property taxes. Seven of the cities with the highest tax burdens also had among the 10-highest property tax rates, according to the Office of Revenue Analysis. Homeowners in Columbus, Ohio, which had the fifth-highest tax burden in the nation, paid an effective rate of $3.57 for every $100 in home value, the highest such rate in the U.S.

Lori Metcalf, fiscal analyst at the Office of Revenue Analysis, noted in an interview with 24/7 Wall St. that property taxes tended to comprise a higher share of state and local tax burdens. Because of this, “the trend that you see in the property tax should be reflected in the overall burden.”

Another tax that is often important in determining overall tax burden is the income tax. This is especially true for cities with the lowest tax burdens, seven of which are located in states that do not have an income tax. Only one of the five cities with the lowest tax burdens, Billings, Montana, is not located in a state that has no income tax.

Yet the relationship between income taxes and higher tax burdens is not as straightforward. To highlight this, Metcalf noted that higher incomes families usually live in higher-value homes. “This means that when you pay income taxes you’ll have a larger deduction because you’ll have a larger property tax based on a more expensive home and a larger mortgage interest deduction,” Metcalf explained. As a result of this deduction, homeowners’ income tax burdens are often reduced, obscuring the relationship between income taxes and overall tax burdens.

ALSO READ: America’s Fastest Growing (and Shrinking) Economies

Several factors not reviewed by the Office of Revenue Analysis, whose study focused primarily on the characteristics of tax systems, may play a role in determining tax burdens. One such potential factor is unemployment. In many cities with low tax burdens, the unemployment rate was also very low. Sioux Falls, South Dakota, and Billings, Montana, had among the lowest unemployment rates in the nation in 2012. At the other end of the spectrum, Detroit, Michigan and Providence, Rhode Island had both hefty tax burdens and high unemployment.

A number of the cities with the lowest tax burdens were located in states that are considerably less densely populated, such as Alaska, Wyoming, and South Dakota. Even some of the cities themselves are in less densely populated metro areas. Birmingham, Alabama, had one of the lowest tax burdens in the U.S. and was located in the the least densely populated metro area of any reviewed. By comparison, many of the cities with high tax burdens are located in more densely populated parts of the country, such as the Northeast.

While this falls outside the scope of the report, it is possible that the reason areas with low population density have lower tax burdens is because the cost of running these cities is less. Local governments with fewer residents can spend less on government services. As a result, the government does not have to make as much in taxes.

Several low tax burden cities were also located in states that had a relative abundance of fossil fuels, including oil, natural gas, and coal. Houston, Texas, is located in the nation’s top state for oil and natural gas production. Cheyenne is the largest city in Wyoming, which accounts for a large portion of the nation’s coal output. A 2012 study by the National Conference of State Legislators found that Alaska, Montana, and Wyoming, all of which have cities with low tax burdens, relied on taxing oil and gas activity for much of their revenue.

Based on the Office of Revenue Analysis’ report: “Tax Rates and Tax Burdens in the District of Columbia — A Nationwide Comparison,” 24/7 Wall St. reviewed the cities where a hypothetical family of three in different income brackets had the highest and the lowest combined tax burdens. To calculate tax burden, the report identified four different types of taxes: income, property, automobile, and sales. The report examined tax systems in the largest city in each state, as well as in Washington, D.C. All estimates are for the 2012 fiscal year. Median housing value and median income data used by the report to determine property value are for metro areas. When two cities were located within the same metro area, county level data was used. 24/7 Wall St. also reviewed income figures for these areas from the U.S. Census Bureau, as well as area unemployment rates as of 2012 from the Bureau of Labor Statistics.

Cities Paying the Highest Taxes:

5. Columbus, Ohio Taxes for family earning $25,000: $2,953 (17th lowest) Taxes for family earning $150,000: $22,333 (6th highest) Unemployment rate: 6.1%

A family of three earning $25,000 a year in Columbus faced only an 11.8% tax burden, lower than more than half of all cities reviewed. However, tax burdens for families with higher earnings were among the highest in the nation. This is due in large part to the city’s real estate taxes. Although the housing values in the city were not especially high, lower than the average for cities reviewed, residents faced especially high property taxes. At 3.57%, Columbus had the highest effective property tax rate of any city.

4. Baltimore, Md. Taxes for family earning $25,000: $2,950 (16th lowest) Taxes for family earning $150,000: $24,747 (4th highest) Unemployment rate: 7.2%

Baltimore area residents are fairly well-off compared with most of the country — median household income was nearly $67,000 in 2012, among the nation’s highest. Baltimore’s property tax burden is especially high. Families of three earning $150,000 paid $13,772 in property taxes in 2012. Families earning $25,000 had no income tax burden, but those earning $150,000 paid more than 5% of their income in state and local income taxes alone, the sixth-highest percentage of any city reviewed.

ALSO READ: States With the Best (and Worst) Schools

3. Milwaukee, Wisc. Taxes for family earning $25,000: $3,245 (26th highest) Taxes for family earning $150,000: $26,296 (2nd highest) Unemployment rate: 7.4%

Like a number of other cities with high tax load, Milwaukee residents faced especially high property tax burdens. The effective property tax rate in the city was 3%, higher than all but a few regions reviewed. Also driving up taxes were the especially high income tax burdens in the city. The state used a graduated income tax system, meaning tax rates are higher for families that earn more, although Milwaukee had no local income taxes.In 2013, the state reformed its tax code, lowering the highest rate as well as the number of overall tax brackets. Wisconsin Governor Scott Walker recently pushed the state assembly to cut both property taxes and and the income tax rate for the state’s lowest tax bracket.

2. Philadelphia, Pa. Taxes for family earning $25,000: $3,794 (7th highest) Taxes for family earning $150,000: $25,317 (3rd highest) Unemployment rate: 8.6%

Philadelphia’s poorer families were subject to a much higher tax burden than those in most other large cities. A family of three earning $25,000 in 2012 paid $788 in income taxes that year, more than all but one other large city. The city’s property tax burden was also considerably high for most income levels that year. A family whose earnings fell into the $100,000 tax bracket, for example, paid more than $11,806 in property taxes in 2012, second-most among large cities. After a new property tax valuation system was implemented and some residents’ tax assessments more than tripled, the city introduced a “gentrification relief program” at the end of 2013. Fuel was also heavily taxed in 2012, with gasoline costing an additional 31 cents per gallon due to state taxes, which were among the highest in the U.S.

1. Bridgeport, Conn. Taxes for family earning $25,000: $4,001 (4th highest) Taxes for family earning $150,000: $33,208 (the highest) Unemployment rate: 7.8%

No large U.S. city had a higher tax burden than Bridgeport, where a family of three earning $150,000 a year paid more than 22% of its income in state and local taxes. However, the metro area, which includes affluent Fairfield county, is wealthier than much of the U.S. and was used to calculate home values and property burdens by the Office of Revenue Analysis. More than 20% of households had an annual income of at least $200,000, more than any other metro area reviewed. The city’s high tax burden was due in large part to property taxes, as the area had both high home values and high effective property tax rates. Also propelling the city to the top of the list were Connecticut’s relatively high income tax burden of 5.2% on families earning $150,000 per year as well a high tax burden for car owners.

Click here for the full list of cities paying the highest taxes.

Cities Paying the Least in Taxes:

5. Sioux Falls, S.D. Taxes for family earning $25,000: $2,772 (10th lowest) Taxes for family earning $150,000: $9,425 (3rd lowest) Unemployment rate: 4.1%

The low tax burden in Sioux Falls is partly due to the absence of a state income tax. However, city also had low tax burdens in other categories measured. Families in the area with higher incomes had lower tax burdens than families with lower incomes. This was due to the state’s tax structure, which was criticized by the Institute on Taxation & Economic Policy, a think tank that supports a progressive tax code, for being too reliant on low-income residents. However, even Sioux Falls’ lowest income residents faced a relatively low tax burden.

4. Anchorage, Alaska Taxes for family earning $25,000: $2,366 (4th lowest) Taxes for family earning $150,000: $9,790 (4th lowest) Unemployment rate: 6.0%

Automobile tax burdens in Anchorage were consistently low across all levels of income. Like most American cities, Anchorage did not have a local gasoline tax in 2012, and the state’s gasoline tax of 8 cents per gallon that year was the lowest in the nation. The city also had no excise or personal property tax that it charged to car owners. Sales tax burdens were also considerably lower than in other large cities — families in every tax bracket paid less than $200 in sales taxes in 2012. The median income of city residents was more than $71,000 in 2012, one of the highest nationwide. Alaska, however, taxed none of this income because it is one of few states without any income tax.

ALSO READ: The 10 Most Hated Companies in America

3. Billings, MT Taxes for family earning $25,000: $2,347 (3rd lowest) Taxes for family earning $150,000: $10,668 (7th lowest) Unemployment rate: 4.4%

Billings families faced some of the lowest sales and property tax burdens in the nation. Montana did not have a general sales tax in 2012. Helping to keep property taxes low, Billings levied real estate taxes on only a small portion of a home’s value, and residents also paid a relatively low effective property tax rate. Billings had one of the nation’s lowest jobless rates as of December as well. Just 4.4% of people in the workforce were unemployed in 2012, and the State has benefitted from the nearby Bakken Shale oil boom. Montana taxes oil and gas production, which can alleviate the tax loads residents face.

2. Las Vegas, Nev. Taxes for family earning $25,000: $3,260 (24th highest) Taxes for family earning $150,000: $8,314 (2nd lowest) Unemployment rate: 11.2%

Unlike most cities with low tax burdens, Las Vegas had an exceptionally high unemployment rate of 11.2% in 2012, nearly the worst compared with other large cities. The median income was also lower than $50,000 that year, less than median incomes in most urban areas. Overall, property taxes were low in 2012. A family earning $150,000 paid slightly more than $5,000 that year in property taxes, one of the lowest amounts nationwide.

1. Cheyenne, Wyo. Taxes for family earning $25,000: $2,476 (5th lowest) Taxes for family earning $150,000: $6,307 (the lowest) Unemployment rate: 6.1%

Cheyenne had the lowest tax burden of any state in the nation, and not only because Wyoming had no state income tax. The total sales tax rate of just 6.0% in Cheyenne, which was lower than in most comparable cities, contributed to the the low sales tax burden in the city. Wyoming residents also paid just 14 cents in state taxes per gallon on gas, one of the lowest rates in the U.S. and a major reason why tax burdens on car ownership were towards the low-end. Additionally, Cheyenne’s effective property tax rate of 0.67% was among the lowest in the nation. Low tax rates on families in the city and the state may be tied to Wyoming’s energy industry. The state is the nation’s largest producer of coal, as well as a sizable producer of oil and natural gas, and taxes from these industries help the state fill its coffers.

Click here for the full list of cities paying the least in taxes.

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.

IRS Expands Help to Struggling Taxpayers

Saturday, March 10th, 2012

From – AccountingToday.com

The Internal Revenue Service is expanding its Fresh Start initiative to help more unemployed and financially stressed taxpayers with installment agreements and relief from failure-to-file penalties.

Under the new Fresh Start provisions, which expanded on an effort that the IRS began in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS said Wednesday it is doubling the dollar threshold for taxpayers eligible for installment agreements to help more people qualify for the program.

“We have an obligation to work with taxpayers who are struggling to make ends meet,” said IRS Commissioner Doug Shulman in a statement. ”This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.”

To assist those taxpayers who are most in need, the IRS will grant a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. However, the request for an extension of time to pay will result in relief from the failure-to-pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two taxpayer categories: wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year; and self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

The penalty relief is also subject to certain income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly, or not exceed $100,000 if he or she files as single or head of household. The penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers who meet those eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov/form1127.

The failure-to-pay penalty is generally half of 1 percent per month, with an upper limit of 25 percent. Under the newly expanded Fresh Start relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS noted that it is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Even with the new penalty relief becoming available, the IRS is strongly encouraging taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, with a 25 percent cap.

Installment Agreements
The new Fresh Start provisions will also provide more taxpayers with the ability to use streamlined installment agreements to catch up on their back taxes.

Effective immediately, the new threshold for using an installment agreement without having to supply the IRS with a financial statement has increased from $25,000 to $50,000, to reduce taxpayer burden.

Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS to stretch out the payment over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.

Taxpayers who are seeking installment agreements of over $50,000 will still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of this payment option.

An installment agreement is an option for those who cannot pay their entire tax bills by the due date. While the penalties are reduced, interest continues to accrue on the outstanding balance. To qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.

Taxpayers can set up an installment agreement with the IRS by going to the On-line Payment Agreement page on IRS.gov and following the instructions.

These changes supplement a number of efforts to help struggling taxpayers, including the “Fresh Start” program announced last year. Input from the Internal Revenue Service Advisory Council and the IRS National Taxpayer Advocate’s office contributed to the formulation of the Fresh Start program. The initiative includes a variety of changes to help individuals and businesses pay back taxes more easily and with less burden, including the issuance of fewer tax liens.

“Our goal is to help people meet their obligations and get back on their feet financially,” said Shulman.

Offers in Compromise
Under the first round of Fresh Start last year, the IRS expanded a new streamlined Offer in Compromise program to cover a larger group of struggling taxpayers. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The IRS said it recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations. For example, the IRS now has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.

Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS noted that it examines the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series “Owe Taxes? Understanding IRS Collection Efforts”, is available on the IRS Web site. For more information please see, IRS Expands Help to Struggling Taxpayers at AccountingToday.com.

Berkshire Tax Return Could be One for the Record Books

Monday, February 27th, 2012

From – AccountingToday.com

Berkshire Hathaway chairman Warren Buffett hinted in his annual letter to shareholders that the holding company’s nearly 18,000-page tax return may merit the attention of the Guinness Book of World Records.

Referring to the people who work with the operating managers, he noted, “Equally important, however, are the 23 men and women who work with me at our corporate office (all on one floor, which is the way we intend to keep it!). This group efficiently deals with a multitude of SEC and other regulatory requirements and files a 17,839-page Federal income tax return—hello, Guinness!—as well as state and foreign returns.”

Even at that length, though, Berkshire’s tax return would be dwarfed by General Electric’s, which reportedly runs about 57,000 pages, so it probably won’t end up in the record books, for this year at least.

Buffett’s tax policies have generated considerable attention in the past year after he wrote a New York Times editorial calling for changes in the Tax Code to tax the “super-rich” at a higher rate to ensure they don’t pay a lower tax rate than their secretaries (see Buffett Says Tax Code is ‘Coddling the Super-Rich’). The editorial led to the “so-called” Buffett Rule, which President Obama cited in his State of the Union address and included in his 2013 budget plan. However, Buffett has also been criticized for the disputes that his company has gotten into with the Internal Revenue Service over the back taxes that the IRS says it owes.

“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future,” Buffett wrote in his shareholder letter Saturday. “At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power—after taxes have been paid on nominal gains—in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” For more information please see Berkshire Tax Return Could be One for the Record Books on AccountingToday.com.

IRS Has $1 Billion for People Who Have Not Filed a 2008 Income Tax Return

Friday, February 24th, 2012

From – IRS Newswire


WASHINGTON — Refunds totaling more than $1 billion may be waiting for one million people who did not file a federal income tax return for 2008, the Internal Revenue Service announced today. However, to collect the money, a return for 2008 must be filed with the IRS no later than Tuesday, April 17, 2012.

The IRS estimates that half of these potential 2008 refunds are $637 or more.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.

For 2008 returns, the window closes on April 17, 2012. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2008 refund that their checks may be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2008. Some people, especially those who did not receive an economic stimulus payment in 2008, may qualify for the Recovery Rebate Credit. In addition, many low-and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2008 were:

  • $38,646 ($41,646 if married filing jointly) for those with two or more qualifying children,
  • $33,995 ($36,995 if married filing jointly) for people with one qualifying child, and
  • $12,880 ($15,880 if married filing jointly) for those with no qualifying children.

For more information, visit the EITC Home Page on IRS.gov.

Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 800-TAX-FORM (800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2008, 2009 or 2010 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering it on IRS.gov, filing Form 4506-T, or by calling 800-908-9946.

Individuals Who Did Not File a 2008 Return with a Potential Refund

State

Individuals

Median

Potential

Refund

Total

Potential

Refunds ($000)*

Alabama

18,400

$641

$15,738

Alaska

5,800

$641

$5,952

Arizona

29,000

$558

$24,913

Arkansas

9,600

$620

$8,152

California

122,500

$595

$112,201

Colorado

20,500

$589

$18,909

Connecticut

12,500

$697

$13,893

Delaware

4,200

$644

$3,784

District of Columbia

4,000

$642

$3,791

Florida

70,400

$650

$66,974

Georgia

35,800

$581

$30,661

Hawaii

7,600

$714

$8,307

Idaho

4,700

$541

$3,878

Illinois

40,800

$692

$40,712

Indiana

21,800

$664

$19,590

Iowa

10,600

$658

$9,295

Kansas

11,500

$631

$10,084

Kentucky

12,300

$640

$10,501

Louisiana

20,500

$662

$18,859

Maine

4,000

$579

$3,248

Maryland

24,600

$641

$22,591

Massachusetts

23,900

$699

$22,957

Michigan

33,300

$660

$30,903

Minnesota

15,200

$584

$12,772

Mississippi

9,900

$591

$8,254

Missouri

21,600

$593

$18,213

Montana

3,600

$599

$3,192

Nebraska

5,100

$623

$4,371

Nevada

14,500

$619

$13,381

New Hampshire

4,300

$733

$4,518

New Jersey

31,300

$716

$31,185

New Mexico

8,000

$611

$7,420

New York

60,300

$686

$61,240

North Carolina

30,800

$558

$24,997

North Dakota

2,000

$625

$1,895

Ohio

36,400

$622

$31,018

Oklahoma

16,800

$620

$14,787

Oregon

18,500

$527

$14,819

Pennsylvania

38,700

$695

$35,565

Rhode Island

3,400

$674

$3,040

South Carolina

12,200

$547

$10,158

South Dakota

2,300

$669

$2,234

Tennessee

18,400

$626

$16,130

Texas

96,200

$689

$97,057

Utah

7,800

$536

$6,676

Vermont

1,700

$647

$1,410

Virginia

30,800

$624

$28,670

Washington

29,900

$705

$32,138

West Virginia

4,300

$687

$4,068

Wisconsin

14,100

$592

$11,885

Wyoming

2,600

$773

$2,919

Grand Total

1,089,000

$637

$1,009,905

*Excluding the Earned Income Tax Credit and other credits.

For more information please see IRS Has $1 Billion for People Who Have Not Filed a 2008 Income Tax Return at IRS.gov

‘Taxmageddon’ looms at end of payroll tax holiday

Monday, February 20th, 2012

From – Washingtonpost.com

With Congress voting last week to extend the payroll tax holiday, 160 million workers will be spared an immediate tax hike. But the move leaves them facing an even bigger hit in January, when the holiday ends and the payroll tax joins a long list of levies already set to sharply and abruptly go up.

On Dec. 31, the George W. Bush-era tax cuts are scheduled to expire, raising rates on investment income, estates and gifts, and earnings at all levels. Overnight, the marriage penalty for joint filers will spring back to life, the value of the child credit will drop from $1,000 to $500, and the rate everyone pays on the first $8,700 of wages will jump from 10 percent to 15 percent.

The Social Security payroll tax will pop back up to 6.2 percent from 4.2 percent under the deal approved Friday by Congress. And new Medicare taxes enacted as part of President Obama’s health-care initiative will for the first time strike high-income households.

The potential shock to the nation’s pocketbook is so enormous, congressional aides have dubbed it “Taxmageddon.” Some economists say it could push the fragile U.S. economy back into recession, particularly if automatic cuts to federal agencies, also set for January, are permitted to take effect.

Obama and congressional Republicans say they hope to avert the coming blow, which stands to suck roughly $500 billion out of the economy in 2013. But both sides are bracing for another epic showdown in the weeks after the November election, as Democrats prepare to use Taxmageddon to break the partisan impasse over taxes that has blocked action on an array of issues, from modernizing the nation’s infrastructure to taming the national debt.

“I see the framework of a big agreement in the lame-duck [congressional session] to finally put this divisiveness behind us,” said Rep. Richard E. Neal (D-Mass.), a senior member of the tax-writing House Ways and Means Committee. “Obama’s going to have great leverage to get something done.”

Since they took control of the House last year, congressional Republicans have needed nothing from Obama. They were the holdouts, demanding big cuts in federal spending in exchange for helping Obama keep the government open and raise the legal limit on government borrowing, known as the debt ceiling.

But in December, deadlock will cut the other way. Republicans need Obama if they want to prevent one of the biggest tax increases in U.S. history — nearly $5 trillion over the next decade, by official estimates — and block deep cuts to the Pentagon that could be triggered as part of last summer’s debt-ceiling accord.

The tax shock is set to occur after the Nov. 6 election but before the new Congress — and potentially a new president — take office two months later. While the outcome of the contest is likely to color the tax debate, Obama will either be freshly reelected or on his way out and, therefore, free to play hardball with Congress.

White House officials say Obama will not sign another full extension of the Bush tax cuts, as he did in December 2010. Obama is demanding a partial extension that would preserve the cuts for middle-class taxpayers but permit rates to rise on household income over $250,000.

“The president has made clear that he will veto any bill that extends the Bush-era tax rates for the wealthiest 2 percent of individuals,” White House spokeswoman Amy Brundage said. “We will continue to fight for tax relief for the middle class and those trying to get in it, while insisting on a policy that asks the wealthiest individuals to pay their fair share.”

Many Republicans and outside analysts say they doubt Obama would make good on his veto threat. Allowing all of the Bush tax cuts to expire would harm middle-class taxpayers, along with the wealthy, and carry grave risks for the economy.

“My forecast is that tax rates are not going to rise for everyone on January 1, 2013,” said Mark Zandi, chief economist for Moody’s Analytics, who predicted that Taxmageddon, combined with the cuts from the debt-ceiling deal, would slash economic growth by nearly three percentage points next year. “That would be pretty difficult for the economy to overcome.”

Still, Democratic spines may be stiffened by polls showing broad support for their latest tax strategy, which emphasizes higher taxes for millionaires rather than the merely well-off. A recent Washington Post-ABC News poll found that 72 percent of Americans support raising taxes on people with incomes over $1 million a year, in line with Obama’s call for a “Buffett Rule” that would require those families to pay an effective tax rate of at least 30 percent.

“The tax issue, for the first time in decades, has flipped so Democrats actually have the high ground,” said Sen. Charles E. Schumer (N.Y.), the No. 3 Senate Democrat and the man who came up with the idea of raising the income threshold. “Most Americans share our belief that, while the middle class should not pay an increase in taxes, the wealthiest among us should.”

He said Senate Democrats plan to press that advantage in the coming months, staging numerous votes on issues of tax “fairness.” Republican reluctance to target the rich is their “Achilles’ heel” politically, he said.

Schumer predicted that before November, Republicans would drop their opposition to tax increases for millionaires. “Politically, it’s going to be very harmful to say, ‘I’m not for something like the Buffett Rule, when even 60 percent of Republicans are for it,” he said.

Many Republicans maintain that they would never raise taxes on a group the GOP views as small-business owners and “job creators.” Besides, Republican strategists said, they are likely to have bargaining chips of their own in December.

For instance, without congressional action, nearly 30 million families will have to pay the alternative minimum tax, which adds thousands of dollars to the average tax bill, in April 2013. Congress typically protects those people through annual adjustments, and the latest “AMT patch” expired in December.

Another potential GOP tactical advantage: the debt ceiling. Treasury Secretary Timothy F. Geithner acknowledged in congressional testimony last week that Obama may need Congress to raise the legal limit on borrowing, now set at $16.4 trillion, before the end of the year.

“This idea that they hold all the cards? They don’t,” said a senior Republican Senate aide. “We’ve got more leverage than these crowing Democrats like to think.”

Then there’s the matter of the election itself. With control of both chambers of Congress and the White House all potentially in play Nov. 6, the voters could upend Democrats’ best-laid plans. If Republicans claim the White House and the Senate after an election waged in part over tax policy, demoralized Democrats might agree to extend all the Bush cuts without a fight.

“It depends on who’s president,” said Sen. Orrin G. Hatch (Utah), the senior Republican on the Senate Finance Committee. If Obama is reelected and Democrats hold the Senate, he said, “it makes it much more difficult” for Republicans to press for a full extension.

While some Republicans are ready to man the tax barricades, among others the GOP’s anti-tax orthodoxy is starting to crack. Forty Republicans in the House and 32 in the Senate have endorsed the concept of a grand bargain to tackle the national debt, which would require Republicans to raise taxes and Democrats to accept cuts in federal health and retirement benefits. With Obama continuing to call for a grand bargain, that group is working with Democrats behind the scenes to draft a plan able to win bipartisan support.

Meanwhile, House Armed Services Committee Chairman Howard “Buck” McKeon (R-Calif.) has said he would take higher taxes over defense cuts. And during unsuccessful debt-reduction talks last year, Sen. Patrick J. Toomey (R-Pa.), one of the Senate’s most ardent conservatives, drafted a plan that would have included $300 billion in new revenue over a decade.

“I think one of the reasons that you saw Pat Toomey offer what he did is a realization that we’re going to have a $5 trillion tax increase at the end of the year,” said Sen. Bob Corker (R-Tenn.). “Hopefully, this year we’ll actually do something constructive and work out something that’s sensible over the long haul.”

For more information please see Taxageddon looms at end of payroll tax holiday at the Washingtonpost.com

New IRS tax gap numbers highlight future audit areas

Monday, February 20th, 2012
From – Beyond415.com

The IRS’ recently released tax gap study, which measures data from 2006 returns, shows that the tax gap has increased from $345 billion dollars a year in 2001 to $450 billion in 2006. The majority of the tax gap (83%) can be attributed to underreporting, which includes understating income and overstating deductions. The IRS has several tools to narrow the underreporting tax gap, including pre-refund notices and return rejections, underreporter inquiries and, most significantly, audits.

The IRS will focus its limited audit resources in the following areas, which have the highest rates of misreporting.

On Jan. 26, the IRS also modified its online payment arrangement (OPA) application at IRS.gov to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.

Information reporting and disclosures

The IRS continues to use tax return disclosures and third-party information to better select taxpayers for audit. Specifically, look for the IRS to use information to address the following issues:

  • Misreporting stock basis: The IRS issued regulations under a new law that will require stock brokers and mutual fund companies to report basis and other information for most stock purchased in 2011 and all stock purchased in 2012 and later. Form 1099-B will report the information to investors and the IRS. The IRS will use the underreporter notice program and audits to correct perceived misreporting in this area.
  • Underreporting business income: Form 1099-K reporting is now required for recipients of payment card transactions or payments through third-party network arrangements, such as PayPal. The IRS expects to receive more than 56 million Forms 1099-K in 2012 that it can match against filed and unfiled tax returns.
  • Uncertain tax position reporting for large corporations: In 2011, certain large corporations were required to start disclosing an uncertain tax position (UTP) on their 2010 tax returns. A UTP is generally defined as a stance on a tax return in which the corporation sets aside a reserve to either pay the higher amount of tax later or litigate the matter in the future. The transparency in reporting a UTP allows the IRS to better select returns for audit.
  • Offshore tax disclosure compliance: The IRS and the Department of Justice are continuing to press foreign financial institutions, especially Swiss banks, to disclose US account holders. The IRS has embarked on its third voluntary disclosure program to allow taxpayers to disclose foreign assets and income.
  • Worker classification: The IRS is conducting a three-year National Research Program study of employment tax noncompliance. The tax gap study concluded that 17% of the tax gap can be attributed to underreporting and underpayment of employment taxes. The main issue is proper worker classification – that is, independent contractor or employee. The IRS knows there is noncompliance in this area. In fact, employment tax audits have a change rate of more than 86%. The IRS has a strategic motivation for reclassifying workers as independent contractors: Form W-2 recipients are 99% compliant, whereas the misreporting percentage of independent contractors and small business owners is 43%.

Small businesses

According to the IRS, small business underreporting makes up 40% of the tax gap, or about $179 billion a year. With a limited budget for 2012, the IRS will continue to focus on this area.

  • Cash-based businesses: Taxpayers who do not receive information statements, such as many small cash-based businesses, are the most noncompliant. An IRS study showed that information reporting and fear of an audit were important factors contributing to voluntary compliance, ranking directly after a taxpayer’s personal integrity. The IRS will continue to focus on retail, web and service businesses in audits to find unreported income.
  • Deduction of S corporation and partnership losses: In 2009, the Government Accountability Office (GAO) reported that 68% of all S corporation returns misreported at least one item. However, more alarming to the IRS were inaccurate S corporation losses taken on shareholder tax returns. The losses were most often inaccurate because of insufficient basis to deduct the loss. The average error per return was $21,600. Because more than 90% of all S corporations use a paid preparer, look for the IRS to leverage tax preparers to correct this misreporting and deter noncompliance by proposing preparer penalties in this area.
  • S corporation shareholder compensation: The same 2009 GAO study also concluded that S corporation shareholders are underpaying themselves to avoid employment taxes on wages. About 13% of S corporations are paying inadequate wage compensation and making payments in the form of distributions that are not subject to self-employment tax (unlike partnership distributions). The median misreporting adjustment for underpaid shareholder compensation was $20,127 – a loss of about $1.5 billion a year in unreported employment taxes. The IRS has already shown an interest in examining more 2011 S corporation returns.

For more information please see New IRS tax gap numbers highlight future audit areas at Beyond415.com