IRS Phone Scams and Email Phishing

scam

For many U.S. residents, nothing is more frightening than hearing from the IRS.  We seem to all suffer from an irrational fear that “the government” is going to take our money, our freedom, and maybe even our 1st born child.

Scammers know just how to exploit this fear which is why their scams are so successful.  By playing on your emotions, they can trick even a sophisticated mark.  Here are a few ways to determine if you are being scammed:

  1. You got an email from IRS:  NO YOU DIDN’T!  The IRS DOES NOT EVER use email to communicate with taxpayers.  ANY email purporting to be from IRS is a scam.  The IRS is strictly forbidden from using email to communicate with taxpayers, primarily due to privacy reasons.
  2. You got a phone call from IRS: VERY UNLIKELY!  While the IRS may try to contact you by telephone, this will only occur after you have ignored many, many IRS notices bombarding your mailbox.  ALL initial communications from IRS come via the mail.  Always hang up the call, never respond or give out any information about yourself, and immediately call the Treasury Inspector General to report the call:  1-800-366-4484.
  3. You got a text from IRS: NEVER!  The IRS does not use texting as a form of communication.

If you have been scammed or are worried that the caller has obtained personal information, contact the Federal Trade Commission at FTC.gov and initiate a complaint.  Be sure to save your evidence:  caller id, voice mail messages and email messages so that you can include this in your complaint.  You should also contact law enforcement and notify your CPA firm.

One thing you should always do is open any mail that seems to be from the IRS and respond appropriately.  If you suspect the IRS correspondence is a scam, forward it to your CPA, and if you don’t have a CPA, contact the IRS at 1-800-829-1040.

Here is a link to IRS’ latest phone scam alert:  http://www.irs.gov/uac/Newsroom/IRS-Repeats-Warning-about-Phone-Scams

 

IRS 1099-K Notices: has IRS noticed you?

higas-sos-fly-fishing-fly

Remember those pesky 1099-K forms you received earlier this year?  Well, even though IRS gave up on “matching” the income reported on those forms into your business or personal tax returns, they have undertaken something much worse:  a fishing expedition with your name on the bait.

IRS is now sending out four different types of 1099-K notices called “Letters”:

Letter 5035 – a letter hinting that you “may have” underreported your income with no response required.  A shot across the bow.

Letter 5036 – a letter that does more than hint that you have underreported your income – it provides dollar amounts showing that an unusually high percent of your income came from credit cards and 3rd party payers, and demanding a written response in 30 days explaining why you should not file an amended return and which describes your internal controls and cash receipts procedures and other reasons why a high percentage of total gross receipts comes from credit card transactions.

Letter 5039 – a letter which makes the same assertions as Letter 5036 and requires the taxpayer to complete Form 14420 within 30 days to explain why your income reflects an unusually high percentage of credit card and other 3rd party transactions reported on 1099-K.

Letter 5043 – a letter which alleges that compared to others in your industry, you have underreported your income, citing specific percentages and dollar amounts, and demanding a written response within 30 days explaining why you should not file an amended return and which describes your internal controls and cash receipts procedures and other reasons why a high percentage of total gross receipts comes from credit card transactions.

The response-required letters go to the Tax Examiner section of the IRS, so that should give you a clue that if your response is unsatisfactory it is highly likely that an audit will be initiated.

I have a number of concerns about these notices, but my primary one has to do with the fact that the taxpayer is not being notified of an audit.  These 1099-K Letters are an end run around IRS’ obligations to properly inform taxpayers of their rights and duties during an examination, which includes the right to representation.  Taxpayers may blithely respond, or perhaps even ignore these notices without realizing the implications.

Secondly, IRS makes bald-faced assertions in Letter 5043 which allege specific amounts of unreported income, using statistics which are not cited, and which are supposedly based on the industry code used on the tax return.  As we know, these codes are very broad and somewhat outdated, so that your business may be nothing at all like another business using the same catch-all code.  And, where do their statistics come from?  Are they 10 years old or 1 year old?  Knowing how understaffed IRS is, I am going to guess that the statistics used are not recent.

Finally, the whole idea of 1099-K reporting was to tap the underground economy.  That is a very good goal and one that I fully support.  Unfortunately, these 1099-K letters do no such thing.  Instead of matching 1099-K’s into tax returns, the IRS is going after legitimate businesses whose cash receipts model may not fit their idea of the norm.  This approach will have no impact whatsoever on the multitude of eBay sellers, construction contractors, and others who make up a chunk of the underground economy in the U.S.  We need IRS to go back to the drawing board to re-think the 1099-K matching process and come up with a solution that meets the public policy objective from which this requirement originated.

 

 

Mission Impossible? Last Minute Tax Planning for 2013

mission impossible

While the concept of “tax extenders” is debated by economists and policy wonks, the real fact is that certain provisions of our tax code have for years been written with a self-destruct code imbedded in them.  The reasons for this vary, but the main one is that a budget cannot be balanced without plugging in “sunset” dates for some of these more generous provisions of the code – known as “tax expenditures”.

One example of a tax expenditure is the Section 179 “expensing” provision that allows businesses to deduct, rather than depreciate equipment purchases up to a certain threshold.  In 2013, this threshold is, generally, $500,000, but drops to a mere $25,000 in 2014.  The purpose for the high immediate expensing was to give “small” businesses a tax benefit for investing in equipment, providing in theory a stimulating effect on the economy.

If you are in the mood to do last minute tax planning, here is a brief list of some of the more popular 2013 expiring provisions:

Business Provisions:

  • Section 179 deduction – drops to $25,000 from $500,000 after 2103.
  • 50% bonus depreciation – no longer available after 2013 except for certain long-period property and aircraft.
  • Qualified Leasehold Improvements – depreciable life goes to 39 years in 2014, from 15 years.
  • Section 179 deduction for certain qualified real property – the 179 deduction of up to $250,000 for qualified leasehold improvements, restaurant property, and retail property is gone after 2013.
  • Research credit – expires after 2013.

Individual provisions:

  • Direct charitable contributions from an IRA – no longer permitted after 2013.
  • Sales tax deduction – no longer available after 2013.
  • Tuition and fees deduction – expires after 2013.
  • Cancellation of Debt – the exclusion of up to $2 million of COD income from a qualified principal residence is no longer available after 2013.

Of course, Congress could still act in early January to restore some or all of the expiring provisions, as it might do with the unemployment benefits that have now also expired for the long-term unemployed.  To be on the safe side, though, if any of these provision affect you or your business, this might be a good day to do a little shopping.

And remember that each of these provisions, very briefly summarized above, are actually quite complex, so it’s a good idea to check with your tax professional before taking action to make sure that you qualify for the deductions in question.

AICPA Requests IRS Clarification in Wake of DOMA Ruling

gaymarriage

The AICPA recently submitted a 5 page letter to the IRS Chief Compliance Officer, requesting clarification and additional guidance for same sex couples attempting to navigate the SCOTUS DOMA ruling.

Among the many issues raised are questions about Registered Domestic Partners and Civil Unions.  Some states, such as Oregon, have statutes which state that this status is the full equivalent of marriage.  While Oregon is not specifically mentioned in the AICPA’s letter, several examples of possible confusion are given:  Vermont permits both same sex marriages and civil unions.  Are these both marriages for IRS purposes?  And, Connecticut automatically considers prior civil unions as marriages.  Does this mean that such couples are married in IRS’ eyes?

Another interesting wrinkle for Oregon couples is the fact that there are currently same sex couples who were actually married in Oregon during the brief time that Multnomah County issues such marriage licenses – back in 2004.  Does that mean that these couples have actually been married all along under IRS’ interpretation of the DOMA ruling?

There are a total of 17 income tax and estate tax issues raised by the AICPA, which points to the complexity of the issues involved and the confusion that both same sex couples and their advisors are experiencing.  Among these issues are when, whether and how each member of a couple should file amended returns.  If one amends, is the other required to?  And, if IRS audits one member of the couple does that mean they will then require a change to their filing status?

Another interesting issue is whether same sex couples can file Form 706, United States Estate Tax Return, late to claim portability, and if so, can they go beyond the normal statute of limitations?  And, what about gift tax returns filed by same sex couples who are now considered married?  Can prior filed Forms 709 be amended, and how far back can you go?

These are great questions raised by the AICPA, and I only hope that IRS can address them in a timely way, which may be difficult given their recent budget cuts and the extra work load they have related to the Affordable Care Act and other new tax legislation.

Marriage Equality in the Aftermath of the DOMA Ruling

franlebowitz

“Why do gay people want to get married and be in the military, which are the two worst things about being straight?”Fran Lebowitz

But, we do.

One day after the SCOTUS ruling overturning Section 3 of federal DOMA, the IRS issued this statement:  “We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.”

One day later, the Office of Personnel Management (OPM) issued its memorandum describing how the ruling will affect federal employees with respect to health, dental, life and long-term care insurance, federal retirement benefits, and flexible spending accounts.  These federal benefits were extended to all “legally married” same sex couples.  Later, the OPM clarified that the “state of celebration” rule would govern how to determine the “legality” of a marriage.

You may notice I am using quotes.  Yes, I am intending to be sarcastic.  I know that the debate about “gay marriage” is an artifice.  “Legal marriage” is a societal construct with religious underpinnings.  And, in this country it is a doorway to special federal and state tax and legal benefits not available to those who have not entered through its portals.  Hence, there is institutionalized discrimination against those adults who our society has said cannot legally marry.  The Supreme Court did not strike down DOMA in full, however, but chose to invalidate only Section 3, leaving the federal government with a very big mess on its hands, and allowing states to continue with their institutionalized discrimination against gay couples.

In the days which have ticked away since the DOMA ruling, the IRS has said nothing further, leaving the experts to speculate on the political quagmire which IRS must slog through as it grapples with the complex issues which have arisen in the wake of the SCOTUS ruling.

In addition to trying to conclude WHO is legally married, IRS must also determine whether that status could change merely because the couple decides to move, or perhaps work elsewhere.  Not only that, IRS must consider WHEN to begin acknowledging such legal marriages.  Is it 2013?  Is it when the couple got married?  Is it when they moved to a state that acknowledged their marriage as legal?  Is it for all the open tax years?

This is perhaps why we have heard nothing further from IRS.  They have a lot on their plates right now recovering from the faux Tea Party targeting scandal and dealing with high level staffing changes as well as threatened budget cuts.

Meanwhile,  the Lambda website page on the SCOTUS DOMA ruling contains some helpful guidance.

Corrected Broker 1099s: ‘Tis Better to Extend than to Amend

Bridge_Wallpaper_by_tonvanalebeekWith the advent of IRS’ new 1099-B matching rules requiring brokerage firms to report “covered” and “non-covered” securities beginning in 2011, a new standard industry practice has developed:  corrected 1099s from brokers received long after the April 15th deadline has passed.

If you are an investor, you are now experiencing the headaches and hassles of dealing with these corrected forms.  One problem is that you have no way of knowing whether or not the 1099s you have in hand now will end up being the final ones for the year.

For this, and other important reasons, we recommend that our investor clients simply extend their returns each year, which allows another 6 months to receive and process the corrected forms.

By extending your tax returns, you’ll also solve a few other problems as well:  extensions are, by far, less costly to prepare than are amended tax returns.  Amended returns must be prepared by hand at both the federal and state level, and they require special attachments that are specifically labeled.  They are also “hand-processed” by IRS and require more people-power on their end as well.  Extensions can be e-filed with IRS, and most states accept IRS’ extension, so there’s no action required except to pay any tax due.

By filing an extension, you help to reduce the problem of “tax season compression” – especially bad this year due to the late start caused by Congress’ fiscal cliff debacle.  With less time to prepare returns, and data changing even as the returns are being processed, the risk of errors and omissions increases dramatically.  Even good CPA firms with great reputations may find themselves cutting corners in the quality control department in order to meet a client’s demand that the returns be completed by the deadline.

Another good reason to extend your tax returns is that sometimes taxpayers will receive an unexpected K-1.  This can happen if your broker decides to invest in publicly traded partnerships, or in private equity investments.  You’ll get a K-1 even if you only owned the units for a brief period of time during the year.  And,  receiving even a small inheritance from a distant relative can trigger a K-1 form from the estate that you don’t even know you are going to receive…until you receive it.

Since partnerships, estates and trusts can all file extensions, this delays the arrival of any related K-1s.  Estates of decedents are not required to select a calendar year end, so their filing deadlines can occur anytime throughout a year.

Some of our clients are reluctant to extend their returns because they have heard that this increases their risk of audit.  Nothing could be further from the truth.  There is absolutely no relationship between returns selected for audits and whether or not an extension was filed.  What CAN trigger an audit, however, is the filing of an amended return.  Since those are looked at by human beings at the IRS, and not by computers, there’s more of a chance that something will catch the eye of the person processing the amended returns.

So, not only will you save tax preparation fees by extending your returns, you’ll be making a smart move to lower the risk of errors and omissions on the originally filed return, and you’ll be eliminating the need to file an amended return if corrected 1099s or surprise K-1s arrive after the April 15th deadline.

Heading Toward Tax Season

xena110708As filing season approaches for the 2012 tax year, I am presenting here a few selected tax tips and updates that are often overlooked by traditional tax sources, hopefully brief enough to not induce boredom but complete enough to give you some valuable information:

The 1099 Matching Nightmare Continues

  • 1099-MISC:  Don’t forget to EXCLUDE payments to vendors made with credit cards from your total 1099-MISC payments.  Those payments will get reported to vendors on Form 1099-K.  If you do get 1099s that are wrong, ask the payer to correct the 1099.  If that is a pain, then report the full amount on your tax return, and then back out the erroneous portion somewhere on your expense lines.  And, make sure you can document why the 1099 you received is wrong.
  • 1099-K:  Even though IRS claims it is not now or ever going to match 1099-K payments into your tax returns, there’s a reason you are getting a 1099-K and that is to tap the underground economy by making sure that all businesses are reporting their gross income.  If you report less gross income than is shown on your Form 1099-K you will be subject to IRS inquiry, for which they have developed new notices related to Form 1099-K.  Be sure to provide all Forms 1099-K to your tax preparer so that they can help you avoid receiving these notices.
  • 1099-B:  If you receive broker 1099s related to your investments, you are by now used to receiving corrected 1099s, often long after you have filed your returns.  Due to new basis matching requirements, you will need to seriously consider whether you are better off extending your tax returns while you wait for all the corrections to come through, rather than having to amend your returns later for the corrections, or having to respond to IRS notices.  IRS plans to match all 1099-B reporting on the new Form 8949, first developed in 2011.  There are now 6 different ways to report capital gains and losses, and there are 21 different codes to use when reporting.  Due to the extra time involved, investors should seriously consider consolidating their brokerage accounts in order to save on accounting fees at tax time.

Charitable Contribution Receipts Must Contain Required Language       

Even if you have a “contemporaneous” receipt (one that you have in hand at the time you file your tax returns), it may be defective and result in the complete disallowance of your charitable deductions.  It MUST contain required language concerning whether or not the donor received any goods or services in exchange for a contribution.  If it doesn’t your contribution deduction will be disallowed in full.

W-2 Reminders to include HSA payments and Health Insurance Premiums

Don’t forget to include ALL H.S.A. payments on the W-2 Form, Box 12, not just payments made by employees through a cafeteria plan.  The purpose of this is to make sure that taxpayers are not contributing beyond the maximum amounts allowed in 2012 to their H.S.A. plans.

For 2012, you don’t have to report the value of health insurance premiums on the W-2s if you issue fewer than 251 W-2s.  If issue more than 250 W-2s, you must report the value of the health insurance premiums on Form W-2.  The reporting is “informational only” and is not subject to income or payroll taxes.

City of Portland Business Tax Rental Property Exemption Is Gone, Gone, Gone

If you own a few rental properties in Portland, but have no other business activities you may be blissfully unaware of the long reach of the City of Portland Business Tax.  Beginning in 2012, the City successfully changed its tax code to include ALL rental activity, not just owners with over 9 rental units within the City.  Don’t panic yet:  there’s a new exemption of $20,000 in gross income with 1 or 2 rentals, but you still have to file a special new Form to receive your exemption.  More info is available at the City’s website.  Remember that the City of Portland has its own special version of taxation without representation:  the gross receipts exemption means gross receipts EVERWHERE, including rentals you own in other states and capital gains on ANYTHING except securities, and includes all activities of your spouse if you file jointly, even if your spouse does not live in the City or have any business interests or activities there.

City of Portland School Arts Tax – You owe the City $35

This was the infamous Measure proposed by Mayor Adams which even arts and education groups such as Stand for Children opposed, mainly because only about ½ of the revenue raised will go to fund arts teachers for our public schools.  It did pass, however, so beginning in 2012 a new form is required of EVERY CITY RESIDENT AGE 18 AND OVER, accompanied by a $35 payment, or an exemption request for those below the poverty level.  The City of Portland is administering the tax, and the filing form has not even been developed yet.  However, the city has designated this link which will go live when the forms are ready:   http://www.artstax.net