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February

Facing the Tax Challenges of Self-Employment

Today’s technology makes self-employment easier than ever. But if you work for yourself, you’ll face some distinctive challenges when it comes to your taxes. Here are some important steps to take:

 

Learn your liability. Self-employed individuals are liable for self-employment tax, which means they must pay both the employee and employer portions of FICA taxes. The good news is that you may deduct the employer portion of these taxes. Plus, you might be able to make significantly larger retirement contributions than you would as an employee.

 

However, you’ll likely be required to make quarterly estimated tax payments, because income taxes aren’t withheld from your self-employment income as they are from wages. If you fail to fully make these payments, you could face an unexpectedly high tax bill and underpayment penalties.

 

Distinguish what’s deductible. Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” Basically, these are costs that are commonly incurred by businesses similar to yours and readily justifiable as needed to run your operations.

 

The tax agency stipulates, “An expense does not have to be indispensable to be considered necessary.” But pushing this grey area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, accounting fees, equipment, supplies, legal expenses and business-related software.

 

Don’t forget your home office! You may deduct many direct expenses (such as business-only phone and data lines, as well as office supplies) and indirect expenses (such as real estate taxes and maintenance) associated with your home office. The tax break for indirect expenses is based on just how much of your home is used for business purposes, which you can generally determine by either measuring the square footage of your workspace as a percentage of the home’s total area or using a fraction based on the number of rooms.

 

The IRS typically looks at two questions to determine whether a taxpayer qualifies for the home office deduction:

1. Is the specific area of the home that’s used for business purposes used only for business purposes, not personal ones?

2. Is the space used regularly and continuously for business?

 

If you can answer in the affirmative to these questions, you’ll likely qualify. But please contact our firm for specific assistance with the home office deduction or any other aspect of filing your taxes as a self-employed individual.

 

 

 

Phaseouts and Reductions: A Tax-Filing Reminder

As tax-filing season gets into full swing, there are many details to remember. One subject to keep in mind — especially if you’ve seen your income rise recently — is whether you’ll be able to reap the full value of tax breaks that you’ve claimed previously.

 

What could change? If your adjusted gross income (AGI) exceeds the applicable threshold, your personal exemptions will begin to be phased out and your itemized deductions reduced. For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (joint filer) and $155,650 (married filing separately). These are up from the 2015 thresholds, which were $258,250 (single), $284,050 (head of household), $309,900 (joint filer) and $154,950 (married filing separately).

 

The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately). Meanwhile, the itemized deduction limitation reduces otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). It doesn’t apply, however, to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.

 

If your AGI is close to the threshold, AGI-reduction strategies (such as making retirement plan and Health Savings Account contributions) may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate or defer deductible expenses. Please contact our firm for specific strategies tailored to your situation

 

 

 

Fake Charities on the IRS “Dirty Dozen” List of Tax Scams for 2017

WASHINGTON — The Internal Revenue Service today warned taxpayers about groups masquerading as charitable organizations to attract donations from unsuspecting contributors, one of the “Dirty Dozen” Tax Scams for the 2017 filing season.

 

"Fake charities set up by scam artists to steal your money or personal information are a recurring problem," said IRS Commissioner John Koskinen. "Taxpayers should take the time to research organizations before giving their hard-earned money.”

 

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire someone to prepare their taxes.

 

Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

 

The IRS offers these basic tips to taxpayers making charitable donations:

  • 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. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity's EIN.
  • Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.
  • 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.

 

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud involves 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.

 

Fraudsters 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.

 

To help disaster victims, the IRS encourages taxpayers to donate to recognized charities. Disaster victims can call the IRS toll-free disaster assistance telephone number (866-562-5227). Phone assistors will answer questions about tax relief or disaster-related tax issues.

 

Find legitimate and qualified charities with the Select Check search tool on IRS.gov. (EINs are frequently called federal tax identification numbers, which is the same as an EIN).

 

 

 

Falsely Inflating Refund Claims on the IRS “Dirty Dozen” List of Tax Scams for 2017

WASHINGTON — The Internal Revenue Service today warned taxpayers to be alert to unscrupulous tax return preparers touting inflated tax refunds. This scam remains on the annual list of tax scams known as the “Dirty Dozen” for 2017.

 

"Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you've never been able to claim before," said IRS Commissioner John Koskinen. "If it sounds too good to be true, it probably is."

 

The “Dirty Dozen,” an annual list compiled by the IRS, outlines common scams that taxpayers may encounter. These schemes peak during filing season as people prepare their returns or hire others to help with their taxes.

 

Scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

 

Scam artists pose as tax preparers during tax time, luring victims by promising large federal tax refunds. They use flyers, advertisements, phony storefronts or word of mouth to attract victims. They may make presentations through community groups or churches.

 

Scammers frequently prey on people who do not have a filing requirement, such as those with low-income or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

 

Con artists dupe people into making claims for fictitious rebates, benefits or tax credits. Or they file a false return in their client’s name, and the client never knows that a refund was paid.

 

Scam artists may also victimize those with a filing requirement and due a refund. They do this by promising larger refunds based on fake Social Security benefits and false claims for education credits or the Earned Income Tax Credit (EITC), among others.

 

Falsely Claiming Zero Wages

Filing a phony information return, such as a Form 1099 or W-2, is an illegal way to lower the amount of taxes owed. The use of self-prepared, “corrected” or otherwise bogus forms that improperly report taxable income as zero is illegal. So is an attempt to submit a statement rebutting wages and taxes reported by a third-party payer to the IRS.

 

Some people also attempt fraud using 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.

 

Taxpayers should resist the temptation to participate in any variations of this scheme. The IRS is aware of this scam and the courts have consistently rejected attempts to use this tax dodge. Perpetrators receive significant penalties, imprisonment or both. Simply filing this type of return may result in a $5,000 penalty.

 

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security, veterans or low-income housing benefits. The loss of benefits comes as a result of false claims being filed with the IRS that provided incorrect income amounts.

 

Choose Tax Preparers Wisely

Honest tax preparers provide their customers a copy of the tax return they’ve prepared. Scam victims frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before paying victims, a practice not used by legitimate tax preparers.

 

The IRS reminds taxpayers that they are legally responsible for what’s on their return even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers can help protect themselves by doing a little homework before choosing a tax preparer. Start with the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help taxpayers find a tax return preparer with the right qualifications. The Directory is a searchable and sortable listing of preparers registered with the IRS. It includes the name, city, state and zip code of:

  • Attorneys
  • CPAs
  • Enrolled Agents
  • Enrolled Retirement Plan Agents
  • Enrolled Actuaries
  • Annual Filing Season Program participants

 

Also check the preparer’s history.  Ask the Better Business Bureau about disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory

 

To find more tips on choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS preparer directory or learning how to submit a complaint regarding a tax return preparer visit www.irs.gov/chooseataxpro

 

 

 

Five Things to Know About the Child Tax Credit

The Child Tax Credit is a tax credit that may save taxpayers up to $1,000 for each eligible qualifying child. Taxpayers should make sure they qualify before they claim it. Here are five facts from the IRS on the Child Tax Credit:

 

1. Qualifications. For the Child Tax Credit, a qualifying child must pass several tests:

  • Age. The child must have been under age 17 on Dec. 31, 2016.
  • Relationship. The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother or half-sister. The child may be a descendant of any of these individuals. A qualifying child could also include grandchildren, nieces or nephews. Taxpayers would always treat an adopted child as their own child. An adopted child includes a child lawfully placed with them for legal adoption.
  • Support. The child must have not provided more than half of their own support for the year.
  • Dependent. The child must be a dependent that a taxpayer claims on their federal tax return.
  • Joint return. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
  • Citizenship. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  • Residence. In most cases, the child must have lived with the taxpayer for more than half of 2016.

 

The IRS Interactive Tax Assistant tool – Is My Child a Qualifying Child for the Child Tax Credit? – helps taxpayers determine if a child is a qualifying child for the Child Tax Credit.

 

2. Limitations. The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate a taxpayer’s credit depending on their filing status and income.

 

3. Additional Child Tax Credit.  If a taxpayer qualifies and gets less than the full Child Tax Credit, they could receive a refund, even if they owe no tax, with the Additional Child Tax Credit.

Because of a new tax-law change, the IRS cannot issue refunds before Feb. 15 for tax returns that claim the Earned Income Tax Credit (EITC) or the ACTC. This applies to the entire refund, even the portion not associated with these credits. The IRS will begin to release EITC/ACTC refunds starting Feb. 15. However, the IRS expects these refunds to be available in bank accounts or debit cards at the earliest, during the week of Feb. 27. This will happen as long as there are no processing issues with the tax return and the taxpayer chose direct deposit. Read more about refund timing for early EITC/ACTC filers.

 

4. Schedule 8812. If a taxpayer qualifies to claim the Child Tax Credit, they need to check to see if they must complete and attach Schedule 8812, Child Tax Credit, with their tax return. Taxpayers can visit IRS.gov to view, download or print IRS tax forms anytime.

 

5. IRS E-file. The easiest way to claim the Child Tax Credit is with IRS E-file. This system is safe, accurate and easy to use. Taxpayers can also use IRS Free File to prepare and e-file their taxes for free. Go to IRS.gov/filing to learn more.

 

All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

 

 

 

Trump's Mexico tax would hammer companies in $580B market

- Matt Townsend

(Bloomberg) When White House press secretary Sean Spicer floated the idea of paying for a border wall with a 20 percent tax on Mexican imports, beer went flat.

 

Shares of Victor, New York-based Constellation Brands Inc. began falling Thursday: The company generates about 70 percent of its profit from importing Mexican brands like Corona and Modelo, and investors feared it would get hammered by the new tax. Constellation is far from alone in facing a reckoning if taxes or tariffs are imposed. U.S. companies that would suffer range from automakers like General Motors Co. to retailers such as Wal-Mart Stores Inc. and Kroger Co. and even medical-device producers like Medtronic Plc.

 

Hostilities between President Donald Trump and his counterpart, Enrique Pena Nieto of Mexico, could derail $584 billion in trade between the border nations. The relationship has made supply chains densely interconnected. American-made materials and parts make up 40 percent of the products Mexico exports to the U.S. Meanwhile, Mexico is America’s second-largest export market and third-largest supplier of imported goods.

“Because the economies are so far integrated, the industries that would be impacted are extremely broad,” said Caitlin Webber, a trade analyst for Bloomberg Intelligence. “It’s hard to think of a U.S. sector that wouldn’t be touched if there was a full-scale trade war with Mexico. It would really wreak havoc on the economy.”

 

Tax Balloon

The Mexican president scrapped his trip to Washington after Trump said he’d follow through on pledges to rewrite the North American Free Trade Agreement and charge Mexico to build a border wall. Spicer then responded by saying the U.S. could impose a 20 percent tax on all Mexican imports—a notion he later said was just one idea to finance the wall. Separately, congressional Republicans have been pushing a tax on all U.S. imports as part of their efforts at rewriting the corporate code.

 

Trump could likely impose a temporary tariff on his own authority, but would need Congress to impose what is known as an adjustable border tax on imported goods, according to Webber. Mexico would undoubtedly retaliate with its own tariffs and could revoke NAFTA benefits for U.S. exporters, she said.

 

Mexican Weekend

An estimated one-third of goods imported from Mexico last year were sold at U.S. retailers, according to the Trade Partnership consulting firm in Washington.

 

The pain of a trade war would spread to many facets of American life. Imagine sitting in a deck chair on the patio you built over the weekend, drinking a nice margarita. You’re wearing Bermuda shorts. Mexico helped at every turn:

Home Depot Inc., which sells pavers and landscaping gear, has sourcing operations in Mexico, and in 2015, the U.S. imported $10.7 billion in furniture. The price of your tequila would likely be higher. From 2010 to 2015, consumption of the spirit rose 30 percent by volume in the U.S., more than any other alcohol category except cognac, according to Euromonitor International. That spurred the world’s largest distillers, Diageo and Pernod Ricard, to increase investment in Mexico. Those fashionable shorts? The nation in 2015 imported $3.7 billion worth of apparel and accessories from Mexico.

 

But the relationship goes much further than this. Mexican imports also include oil, cars and lots of medical equipment. Medtronic alone has almost 1 million square feet of manufacturing space in the country for making products to treat cardiovascular disease. Spokesman Fernando Vivanco said the company was monitoring the dispute.

 

Trump has said America’s southern neighbor has taken advantage by not addressing trade deficits and border security, and sending undocumented immigrants who commit crimes and dilute the labor markets. Only a physical barrier—paid for by Mexico—can solve the problem, he has said. But U.S. shoppers would ultimately foot the bill for the wall, according to the National Retail Federation, an industry lobbying group.

 

Won’t Pay?

“The notion that Mexico is going to pay for this is wrong,” said David French, a senior vice president for the group. “This is going to be paid for by American consumers. A tariff is a just a tax on consumers. Americans are already paying billions of dollars in tariffs, and this is just going to result in one more price increase.”

 

Retailers’ exposure to increased import taxes is now being considered by investors, said Mike Balkin, an investor in small-cap stocks at William Blair Investment Management LLC.

“There are so many things companies are trying to deal with, and it’s just one more,” Balkin said.

 

 

 

 

Ten things you need to know about passport restrictions on delinquent taxpayers

By Jim Buttonow

In late 2015, Congress passed the Fixing America’s Surface Transportation Act, a law that, among other things, helps the IRS collect larger tax debts. Included in the FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.

 

The law was effective on the day Congress passed it, but given the complexity of implementing it, the IRS needed time to work out the details. Now, the IRS is ready to start the program in late March.

 

For most people, the passport restrictions remain a mystery, largely because Treasury regulations haven’t been published that explain how the IRS will conduct the program. Recently, the IRS provided some early indications of how it will administer the program. The IRS hasn’t updated its Internal Revenue Manual, and the State Department hasn’t provided any information on specific passport rules. The IRS promises more information in the next few months.

Here are the 10 most pressing questions and answers about the upcoming passport restrictions.


1. What is the new passport-restriction program (IRC Section 7345)?

IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can deny, revoke, or limit use of the individuals’ passports until they get into good standing with the IRS.

 

2. Why did Congress create passport restrictions?

In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.

 

The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.

 

3. Who is affected?

The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.

 

Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:

  • A lien filed, and all administrative remedies for lien relief have lapsed or been denied; or,
  •  
  • A levy issued.

 

There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:
 

· People who are in an IRS installment agreement to pay their taxes. Based on IRS data, most taxpayers affected by passport restrictions will avoid or release the restrictions by establishing installment agreements with the IRS to pay their tax bills. In 2015, taxpayers established almost 3 million installment agreements.

 

Right now, it’s unclear whether the IRS will allow other types of agreements to release taxpayers from passport restrictions. Two other arrangements the IRS could allow include deferred payment because of economic hardship (called currently not collectible, or CNC, status), or partial-pay installment agreements

 

But it’s unclear whether the IRS will count people in these agreements as being in good standing, because the agreements don’t cover the entire tax bill. It’s also unclear whether the IRS will allow taxpayers to get back into good standing with extension-to-pay agreements, which give taxpayers 60 or 120 days to pay their tax bills in full. If the IRS does allow extensions-to-pay to release taxpayers from seriously delinquent tax debt status, this could mean a simple fix to passport restrictions.

Remember that Section 7345 and the IRS have not specifically stated whether CNC status, partial-pay installment agreements, or extensions to pay count as exceptions for taxpayers who would otherwise be considered individuals with seriously delinquent tax debt. We should expect more clarity about these options in the near future.

 

· People who have settled their debt through an offer in compromise or Justice Department agreement. Taxpayers who may qualify and can pay an offer in compromise settlement should consider applying now to get the process started before passport restrictions start in March. However, this won’t be a common exception; in 2015, taxpayers submitted about 67,000 offers in compromise, and the IRS approved only 27,417.

 

· People who appeal a levy through an IRS collection due process hearing. Congress wants to allow taxpayers to finish appealing their cases before the government imposes passport restrictions. As such, taxpayers who are arguing a levy action through a CDP hearing won’t be certified as individuals with seriously delinquent tax debt until their hearings are completed.

 

Levies are normally triggered after taxpayers receive a final notice of intent to levy (usually, IRS letter LT11 or L1058). Taxpayers must file for a CDP hearing within 30 days of receiving this notice. CDP hearings are an effective last step for taxpayers who want to get in good standing with the IRS by establishing a payment agreement or contesting the taxes and penalties.

 

· People who request innocent spouse relief (Form 8857). This won’t be a common exception. The most recent IRS data from 2003 to 2006 shows that taxpayers file only a few thousand Forms 8857 annually, to get relief from a joint tax debt.

Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.


4. What will happen to the person who owes seriously delinquent tax debt?

Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department.

 

The State Department then has the authority to deny issuance or renewal of a passport, or fully restrict or limit its use. The State Department will notify the taxpayer in a separate letter about the passport restrictions.

 

Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.

 

However, when taxpayers are applying for or renewing a passport, the FAST Act requires the State Department to deny the passport to any individual with seriously delinquent tax debt. Per the IRS Web site, before denying the issuance of a passport, the State Department will hold the passport application for 90 days to allow the taxpayer to:

  • Resolve any erroneous certification issues;
  • Pay the tax debt in full; or,
  • Establish a payment alternative with the IRS

 

Taxpayers won’t get a similar grace period for resolving the debt before the State Department revokes a passport.


5. How can taxpayers get their passport restrictions lifted?

To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.

 

After taxpayers get into good standing, the IRS will send the decertification list to the State Department, which then lifts the passport restrictions. The IRS will also reverse the certification within 30 days.


6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS.

 

Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).

 

Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer.


7. Can taxpayers appeal their seriously delinquent tax debt certification?

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.

 

Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent.

 

For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.


8. What if taxpayers don’t think they owe the tax?

Here, taxpayers are in a pickle, because time is of the essence. For example, if the IRS assessed tax on an unfiled return (that is, the IRS filed a return for the taxpayer, called a substitute for return), or through a completed audit or underreporter inquiry, there’s not much the taxpayer can do to quickly contest the tax assessment and remove the seriously delinquent tax debt certification. Filing an original return or contesting the tax through IRS administrative options or courts may take a long time.

 

To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.

 

Again, recent IRS changes to installment agreements for people who owe between $50,000 and $100,000 may also help. These rules streamline the process to set up an installment agreement and would help cut down on the wait time to get passport restrictions lifted.


9. Is there an expedited process to remove passport restrictions?

Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. After the service removes an individual’s certification, the IRS must notify the State Department within 30 days to release passport restrictions. If the tax debt is determined to be erroneous, the IRS has an undefined “reasonable time” to notify the State Department. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.


10. What can a seriously delinquent tax debtor do to avoid passport restrictions?

Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.


Next steps for taxpayers affected by passport restrictions

Owing taxes without being in an arrangement with the IRS to pay them has bad consequences for any taxpayer. That’s why all taxpayers, regardless of passport restrictions, should arrange to pay their unpaid balances.

 

Starting in March, taxpayers who think that they may be subject to passport restrictions because of tax debt can call the National Passport Information Center at (877) 487-2778.

 

And taxpayers who want to avoid or remove passport restrictions should contact a tax professional or call the IRS to set up an agreement on their balances right away: (855) 519-4965 for domestic calls, (267) 941-1004 for international calls.

Stay tuned for more information from the IRS on passport restrictions in the next couple months.

 

Jim Buttonow, CPA/CITP, directs product development for H&R Block’Tax Audit & Tax Notice Services and supports H&R Block Expat Tax ServicesHe has more than 29 years of experience in IRS practice and procedure.

 

 

 

Here are some reasons to make an IRA contribution now rather than waiting until the deadline.

It can pay to save in an IRA. There are tax benefits, and your money has a chance to grow. While the deadline for a 2016 traditional or Roth IRA contribution is the same as the tax-filing deadline—April 17, 2017—you don't have to wait until the deadline to contribute. Here are some reasons to make a contribution now.

 

1. Put your money to work.

Eligible taxpayers can contribute up to $5,500 to a traditional or Roth IRA, or $6,500 if they have reached age 50, for 2016. It’s a significant amount of money, but think about how much it could grow to over time.

 

Consider this: If you’re age 35 and invest the maximum $5,500 2016 IRA contribution for growth, that one contribution could grow to almost $59,000 35 years later. If you’re age 50 or older, you can contribute $6,500, which could grow to more than $69,000 35 years later.1 We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.

 

The age you start investing in an IRA matters: It's never too late, but earlier is better. The chart below shows just that. Even if you start saving early and then stop after 10 years, you may still have more money than if you started later and contributed many more years.

Starting early makes a difference

 

2. You don’t have to wait until you have the full contribution.

The $5,500 IRA contribution limit may seem like a significant sum of money, particularly for young people trying to save for the first time.

 

The good news is that you don’t have to make it all at once. You can automate your IRA contributions and have money deposited to your IRA weekly, biweekly, or monthly—or on whatever schedule works for you. Making many small contributions to the account may be easier than doing one big one.

 

3. Get a tax break.

IRAs offer some appealing tax advantages. There are basically two types of IRAs, the traditional and the Roth, and they each have different tax advantages and eligibility rules.

 

Contributions to a traditional IRA may be deductible for the year the contribution is made. There are no income limits for being eligible for a tax deduction, unless you or your spouse participate in a workplace savings plan like a 401(k) or 403(b).  Deductibility is then phased out at higher incomes.2 Earnings can grow tax free. Taxes are then paid when withdrawals are taken from the account—typically in retirement. There's no escaping taxes with a traditional IRA: At age 70½, minimum withdrawals are mandatory.

 

On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no deductions. Contributions to a Roth IRA are subject to income limits.3 Like a traditonal IRA, earnings can grow tax free. But unlike the traditional IRA, withdrawals from a Roth IRA are also tax free, and there are no mandatory withdrawals.4

 

As long as you are eligible, you can have either a traditional or a Roth IRA, or both.

 

What’s the right choice for you? For many people, the answer comes down to this question: Do you think you’ll be better off paying taxes now or later? If, like many young people, you think your tax rate is lower now than it will be in retirement, a Roth IRA can be the smarter choice.

 

Need help deciding? Use our Roth vs. traditional IRA evaluator.

 

4. You may think you can’t have an IRA, but make sure.

There are some common myths about IRAs—especially about who can and who can't contribute.

 

Myth: I need to have a job to contribute to an IRA.

Reality: Not necessarily. A nonworking spouse, as long as his or her spouse has taxable income up to the contribution limit of $5,500 for 2016, or $6,500 for over 50, can contribute to a Roth or traditional IRA. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to an IRA.

 

Myth: I have a 401(k) or a 403(b) at work, so I cannot have an IRA.

Reality: You can, with some caveats. For instance, if you or your spouse contributes to a retirement plan—like a 401(k) or 403(b)—at work, your traditional IRA contribution may not be deductible based on your modified adjusted gross income (MAGI).2 But you can still make a nondeductible, after-tax contribution and reap the potential rewards of tax-free growth within the account. You can contribute to a Roth IRA, even if you have contributed to your workplace retirement account, as long as you meet the income eligibility requirements.3

 

Myth: Children cannot have an IRA.

Reality: An adult can open a Fidelity Roth IRA for Kids for a child under the age of 18 with income, including earnings from typical kid jobs such as babysitting or mowing lawns.5

An adult needs to open and maintain control of the account. When the child reaches the age of majority, which varies by state, the account can be transferred to his or her control.

 

Make a contribution

Your situation dictates your strategy. But one thing applies to all: the power of contributing early. Pick your IRA and get your contribution in and invested as soon as possible to take advantage of the tax-free compounding power of IRAs.

 

 

 

Tax Court confirms whistleblowers’ $17.8M award

By Roger Russell

The Tax Court held that a husband and wife who supplied information to the Internal Revenue Service were entitled to a full 24 percent of the “collected proceeds,” including a criminal fine and civil forfeitures to the government, not just tax restitution.

 

The U.S. Tax CourtMatthew Bisanz

 

The case, Whistleblower 21276-13W v. Commissioner, 147 TC 4, was decided last August, but the Tax Court has just denied the IRS’s Motion for Reconsideration, directing it to pay $17,791,706 to the couple.

White Paper Can you afford not to invest?

 

The final decision keeps in place the landmark victory for whistleblowers by the Tax Court encompassing a broad definition of “collected proceeds” and holding that whistleblowers should receive an award based on all the dollars collected by the government due to the information they provide.

 

“The IRS Chief Counsel’s office emptied the in-basket in making arguments for the Motion for Reconsideration, including the availability of funds for award payments, to no avail,” said Dean Zerbe, a partner at Zerbe, Fingeret, Frank & Jadav, PC and lead counsel in the case. “While I appreciate that Counsel wanted to defend its own corner, at the end of the day the Tax Court wasn’t buying what IRS Counsel was selling. This decision gives Treasury Secretary nominee [Steven] Mnuchin and the new administration an opportunity to embrace the Tax Court’s final ruling and show that it supports the IRS whistleblower program and is serious about going after big time tax cheats.”

 

Stephen M. Kohn, of Kohn, Kohn and Colapinto and co-counsel for the case as well as executive director of the National Whistleblower Center, stated, “Senator Grassley, the champion of the IRS whistleblower program raised in questions to Secretary of Treasury nominee Mr. Steve Mnuchin before the Senate Finance committee the issue of ‘collected proceeds’—which is at the center of this important Tax Court win for whistleblowers. Mr. Munchin assured the senator that he supported the IRS whistleblower program and would review the narrow interpretation of ‘collected proceeds.’”

 

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.

 

 

Seven reasons to start your taxes early

Tax season is upon us with tax forms arriving in inboxes and mailboxes. Tackling your 2016 tax return may be a dreaded chore (because of complexity or the prospect of owing additional tax) or a welcome event (because you are due a refund). Either way, getting started early may help make your tax-filing season less stressful and potentially save you some money.

 

Beginning your tax preparation now may help you avoid surprises, give you more time to gather your documents, reduce your taxable income, and even protect you from identity theft.

Here are seven reasons to get a start on your 2016 tax return now.

 

1.

Protect yourself from identity theft.

Filing your tax return as soon as possible is one of the best ways to guard against becoming a victim of tax-related identity theft. For the scheme to be successful, a criminal files a fraudulent return and collects a refund in your name before you do. If you file your legitimate return before a crook tried to file one for you, the fraudulent return is rejected.

That doesn’t mean you should submit an incomplete return, cautions Gil Charney, director at The Tax Institute at H&R Block. “Your goal should be to file as early as possible without compromising the completeness or integrity of your tax return, which could cause other problems,” he notes.

If you haven’t received the necessary tax documents from an employer, financial institution, charity, or some other source, be proactive and ask for them. On the other hand, if you owe a payment with your return and you need time to raise the money, Charney points out that you can file your return early and instruct the Internal Revenue Service to deduct the amount from your bank account or debit card, or charge your credit card, at any time right up until the filing deadline. (The deadline is April 18, 2017, for your 2016 taxes because of a District of Columbia holiday.)

 

2.

Lower your taxable income.

You have several options for potentially reducing your taxable income with a contribution to a tax-advantaged account up until the tax deadline. The sooner you make a contribution, however, the sooner you’ll be able to invest your contribution and give that money the chance to grow tax free.

One opportunity available to many taxpayers is a contribution to a traditional IRA. A traditional IRA contribution can reduce taxable income and, in turn, 2016 taxes for those eligible for the tax deduction.1 The tax-deductible contribution limit for the 2016 tax year is $5,500. For those who are age 50 and over, the limit is $6,500.

It isn’t necessary to have a job to have a traditional IRA. A nonworking spouse, as long as his or her spouse has taxable income up to the contribution limit, can contribute to a Roth or traditional IRA. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to a traditional IRA.

Self-employed individuals and freelancers can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if they have a full-time job as an employee. Those who earn money freelancing or running a small business on the side could take advantage of the potential tax benefits from your side gig. With a SEP IRA contributions may be tax deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For 2016, the contribution limit is 25% of pre-tax income (20% for the self-employed) or $53,000, whichever is lower. The deadline for 2016 contributions is the tax deadline—April 18, 2017.

 

3.

Review your 2015 tax return.

Looking back at your 2015 tax return can give you a great head start on what you’ll need in order to prepare your return for 2016. You can see which financial institutions should be sending you tax documents, which charities you might have contributed to, and which deductions you might again be eligible to claim.

Here’s another benefit to taking time to review your 2015 return: If you spot an error, you can file an amended return and possibly get back some money you thought was long gone.

 

4.

Take into account significant life events.

Got married? Had a child? Divorced? Retired? Bought a new home? All of these and many others can have a significant impact on your tax return. Be prepared for the effects they might have on your tax liability and how you file your return. Newly married couples, for example, are typically better off filing a joint tax return, but there are circumstances, such as one spouse owing back taxes or having large medical bills, when filing separately may make sense.

 

5.

Make a checklist.

After reviewing last year’s return and any significant life events from 2016, make a checklist of items you need to prepare before filing your return. By starting early, you’ll give yourself time to compile all the information you need and to explore potential tax-saving deductions and strategies. H&R Block offers a checklist as well as an option to create a customized list.

 

6.

Avoid "sticker shock."

The last thing you want is to get to the bottom line and see an unexpected large balance owed to the IRS. If you wait until the last minute to prepare your taxes, you may not have time to raise the cash for the payment. Filing for an extension won’t help. You still have to pay what you owe by the filing deadline or face a penalty and interest.

H&R Block’s Charney notes that last-minute surprises may become more common as larger numbers of Americans earn self-employment income from things such as driving for a ride-sharing service, renting out a room in their home, or performing consulting services. People engaged in these types of income-producing activities are required to pay estimated taxes throughout the year. If you’re new to self-employment and failed to make quarterly payments, you’ll probably need time to plan for any additional taxes due.

 

7.

Catch errors in tax documents.

Tax preparation software is great at filling out forms and calculating your tax liability, but it doesn’t always spot reporting errors in tax documents sent to you. Unless you catch them yourself, they could significantly impact your tax bill.

For example, suppose you received money from a lawsuit settlement or a sweepstakes prize in 2016 and it was reported on a Form 1099-MISC. The amount should appear in Box 3, “Other income,” but if the issuer mistakenly placed it in Box 7, “Nonemployee compensation,” it would be considered self-employment income and subject to an additional 15.3% self-employment tax. Another example is Box 7 on Form 1099-R, which may contain a letter or number code as well as a check box for IRA, SEP, or SIMPLE distributions. The entries can make a difference in how you report the distribution and whether it’s taxed.

If you can’t determine on your own what the proper entries should be on the forms you receive, you should consult a tax professional.

Start as soon as you can.

By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may find the process less anxiety producing and may discover some opportunities to lower your tax bill.

 

 

 

Ten ways to stop financial elder fraud

Take action to help prevent financial elder fraud.

 

Last year, Mike Conner,* age 57, a chief marketing officer for a health care technology firm in Chicago, offered to help his 86-year-old father with taxes.

 

While visiting his father in Dallas, Conner had noticed that his father, a retired aerospace engineer, had letters on his desk from the Internal Revenue Service related to an unfiled 2014 tax return.

 

His father had an explanation. He was a widower who had remarried a year earlier, and the couple was splitting their time between his home in Dallas and her home outside Phoenix. “He was thrown by how to handle their new marital status and different state residencies, so he had simply done nothing,” says Conner.

 

Conner figured he would ask his own accountant to lend a hand, and that it would be a fairly straightforward task. It hasn't been. As Conner and his father sorted through online documents (bank accounts, brokerage accounts, and credit card statements) to get the information needed to file Conner’s father’s past taxes, Conner made a startling discovery.

 

“Over the course of the previous 18 months, my father got suckered into signing up for 94 financial and investment newsletters from advisory services, totaling $56,000 in ‘subscription fees,’ which he paid for with his credit cards,” says Conner. “His retirement portfolio is worth around $500,000.”

 

Conner’s first reaction was “absolute outrage,” he says. “My dad always hated doing stupid things. I had to force myself to realize this wasn’t a matter of consciously doing something stupid.”

 

By all accounts, it’s a case of elder financial abuse. Although not outright theft, 51 of the newsletters that could be traced came from one financial firm and its seven sister companies. “I don’t think they broke laws,” says Conner. “If you met my dad today, you would say, boy, I hope I’m as sharp and on top of things as he is at that age, but, in fact, he has lost executive processing skills.”

 

Conner’s father’s financial chaos is one increasingly shared by adult children across the country. Helping older family members manage their money can be awkward, but it’s often inevitable.

 

Six in 10 older adults worry about having to burden their family with helping to manage the older adults’ finances, according to Fidelity research1, but 8 in 10 children actually want to be involved, says Suzanne Schmitt, vice president for family engagement at Fidelity Investments. Moreover, keeping mom and dad in their home and safe from fraud and elder abuse were adult children’s number one and two concerns, she says.

 

“Financial elder fraud can happen to anyone, and, in fact, folks who have a higher level of education and obtain more wealth are actually more vulnerable,” says Schmitt. “This is not something that just happens to people who don’t have trusted advisors in their lives. It happens to everyone, and the shame that people typically feel is universal.”

 

In retrospect, Conner grasps what happened. Part of it was his father’s romantic desire to show off to his new wife with vacations and dinners out. He was worried that he needed more income to do so and believed investing would bump up his bank account.

 

It was also his dad’s personality. “He is one of these very meticulous people who measures a dozen times before he cuts once,” says Conner. “When I was growing up, he always bought a lot of tools for house projects, but he had way more tools than accomplished projects. I think that’s why he became susceptible to all the financial tools salespeople who came down the pike.”

 

Conner didn't want to embarrass his dad but asked him point-blank, “Are you acting on any of this advice?” The answer: “Well…I want to...” Conner took a breath and explained, as calmly as he could, “Dad, you are not going to begin trading options at age 85.”

 

While each of us will face a different scenario—and it might not be a parent but rather an aunt or uncle whose financial safety is at stake—there are 10 steps to take now before a crisis develops:

 

1.

Begin the family conversation.

“It doesn't have to be all about aging issues,” says E. Elizabeth Loewy, the former founding chief of the Elder Abuse Unit in the New York County District Attorney's Office, and general counsel and senior vice president for industry relations at EverSafe, an online account monitoring service. “It is really about just talking. Start with your own situation. You might say, ‘I want an extra set of eyes on my financial accounts. Would you mind getting alerts if something happens? I can do the same for you.’ You make it a two-way street.”

“As hard as it is to talk about this, and we all know talking about money is not easy, it is much easier than not,” says Conner. “Would you rather talk about it when the money is gone? Or would you rather talk about it when there is still an opportunity to do something about it?”

It does require diplomacy. “I try to be gentle and kind in all this,” he says. “I never judge dad, ever. There were times, however, when I wanted to say, ‘Dad, what were you thinking?’ But you cannot do that. I need him to be a willing participant and not to fight us on this.”

Read Viewpoints: “The power of planning together

 

2.

Create a family financial management plan.

You’re not going to sit down “in one fell swoop and have a plan in place,” says Schmitt. “Start with the bare bones.” In case of emergency, who are your parents’ financial professionals and trusted advisers? You should have access to your parents’ lawyer, accountant, financial planner, and broker. Do you have contact information for a neighbor or someone who sees your parents regularly and whom you can reach out to for a gut check, if you have concerns? With financial fraud and abuse, often when someone is being solicited to purchase things, suddenly the UPS truck is regularly pulling up where it didn't use to, or packages are piling up. These are visual cues that there is a change in behavior and that can indicate a problem.

 

3.

Know what key documents have been completed.

Getting organized begins with knowing what has and hasn’t been done, says Schmitt. For instance, to plan for a time when someone might decline cognitively, a financial (durable) power of attorney (POA) should be granted to someone who is comfortable dealing with investing and other money matters. Conner’s father, for instance, gave POAs to both Conner and his sister.

Ask questions: Do you have a will? When did you create it? Is it still current? “Then build on that,” advises Schmitt. Do an inventory on insurance policies. “Lots of people buy polices that can sit for years and years and are easy enough to get forgotten,” she says. Ask whether your parents have designated beneficiaries on bank accounts, investment accounts, and insurance policies. Do they have a health care proxy? Living will? Where are all these documents stored?

Tip: Here’s a list of the important documents you will need: a will, a living will, separate durable POAs for health care and financial decision making, deeds, insurance policies, investment accounts, bank accounts, income statements, retirement accounts, all outstanding loan documents, and current bills. Read Viewpoints: “Five ways to protect what's yours.”

 

4.

Be alert to changes in financial accounts.

There is no flashing red light when someone starts to lose financial capability. “The heart of the matter is we should all be on the lookout and start to lay tracks to prevent it,” counsels Schmitt.

People are always surprised when it happens to someone in their family, says Loewy. Yet, according to the SIFMAOpens in a new window. Senior Investor Protection Resource Center, one in five seniors (age 65 and older) have been victimized by financial fraud, and seniors lose at least $2.9 billion annually to financial exploitation. Interestingly, the Center reports that family members, friends, and caregivers commit more than half of the crimes. “Financial fraud usually happens over time, and so many bells should have gone off, but no one is paying attention,” Schmitt says.

Conner, for instance, was aware for about two and a half years that his father subscribed to a few investor newsletters, before Conner discovered the magnitude of the charges. It had started after his parents’ financial adviser of more than two decades retired. “Dad didn’t have much rapport with the younger associate now handling his account. Then a friend came along bragging about this great thing he was doing in his portfolio, and dad decided he could do better,” recalls Conner.

“He began talking with me about how he was thinking of buying individual stocks, so there were the beginnings of lines of communication between my dad and me. I should have asked more probing questions, but I was very busy with life and work. I was also running up against how far you push with a parent. I didn’t say ‘show me what you are doing’ or ‘knock it off.’”

Then, too, Conner and his two siblings always thought it was their father who was responsible for financial management in their family. After all, he paid the bills. But, in retrospect, they realize that it was their mother, who died five years ago, who played a very big governor role and had been his sounding board. “She would be the one to say ‘no we don’t need to do that,’” says Conner. “After she passed away, there wasn’t anyone to say ‘hey, honey, what are you working on there?’”

Conner was surprised to find that rather than become defensive about his financial folly, his father was relieved to have his son offer to help him fix things. “He told me he was glad I found this because he may have been spending some money unwisely,” recalls Conner. Conner’s father then proceeded to explain that he had just purchased a new vacuum cleaner for $2,700. A salesperson had called, and Conner’s father had invited him to the home for a demonstration. The fact is, the senior apartment complex where Conner’s father lives provides maid service, and he had purchased an expensive vacuum cleaner just a year ago. Luckily, Conner was able to return the second vacuum cleaner because it was covered under a three-day return policy.

Tip: Watch for warning signs: not knowing what bills have been paid, obvious spending habit fluctuation, bounced checks, and late payment charges on credit cards.

Elder-fraud tips from the Conner family:

  • Hold family financial meetings on a regular basis.
  • Have someone in the family create a “personal balance sheet” to keep track of income and expenses.
  • Establish power of attorney on key accounts.
  • Watch for signs of aging, dementia, and a loss of executive processing.
  • Set up a system to pay all bills electronically and automatically.
  • Cancel unused or extra credit cards.
  • Don’t be afraid to say no to or hang up on unsolicited phone offers.
  • Opt out of solicitations.
  • Monitor credit reports.
  •  

5.

Simplify finances.

Two months after Conner discovered his father’s charges, his stepmother moved to Conner’s father’s home. The siblings used the move as a new beginning for their dad.

They cleaned house financially. He had six credit cards, and Conner’s sister whittled those down to one debit card connected to his credit union and two credit cards. She also reviewed expenses, put her father on a budget, and set up automatic bill paying and direct deposit into a checking account for any income. Conner’s stepmother’s daughter had already taken over financial management of her mother’s affairs, paying the bills and giving her mother an allowance.

 

6.

Keep up to date on local scams.

Educate your parents about the scam du jour. A good way to do that is to sign up for AARP’s free Fraud Watch NetworkOpens in a new window., to stay plugged in to what may be happening in the area of the country where your parents live. In fact, this could be a good tactical way to start a conversation: Just ask, “Have you heard about the latest scam?”

Remind them regularly to never reply to any request by email, regular mail, or phone for personal information such as a Social Security or credit card number, or to pitches to purchase a product or investment that they didn’t request. “Older adults are often too polite to hang up on a scammer, or to close the door on someone coming to their home,” explains Schmitt.

It’s not always an outright scam, as in the case of Conner’s father’s newsletters. “It’s not necessarily that the caller or emailer has a bad intent,” says Schmitt. But it’s over and above what someone in their mid-80s needs or would consume—things like a multiyear ticket subscription to a symphony orchestra concert series or three pairs of $350 silk pants are just not needed or prudent. Conner’s sister, for instance, now on credit card–review duty, recently flagged a $1,000 donation to the local public broadcasting station pledged by phone. The lure: a complete video set of the entire Downton Abbey series.

One way to slow things down is to eliminate as many calls and as much junk mail as possible. Consider signing your parents up for the National Do Not Call RegistryOpens in a new window.. The Data & Marketing Association's (DMA’s) Mail Preference ServiceOpens in a new window. (MPS) lets you opt out of receiving unsolicited commercial mail from many national companies for five years.

 

7.

Maintain a social connection.

Isolation is a trigger for financial problems. “It creates a vulnerability for an older adult where a fraudster can step in and take advantage of that emotional gap,” says Schmitt. “Families are dispersed across the country, but understanding who your loved ones are interacting with is important.” Her advice: If you don’t live nearby, stay connected frequently by phone and electronically by email or social media. Listen carefully to whom they chat about in these conversations.

 

8.

Assign money management jobs.

Money management can be handled in a divide-and-conquer strategy, advises Schmitt. In Conner’s family, for example, because his sister lives near their father, she has taken on the duties of monitoring credit card accounts, bill paying, and checking credit reports regularly. His stepmother’s daughter checks the couples’ bank accounts and debit card use daily.

Conner has a handle on his father’s investment accounts. Because his father still likes the idea of buying and selling stocks, Conner uses an online meeting website so they can each meet online virtually and do small trades together. Conner also set his father up with a Mint.com account, so Conner can check his father’s brokerage account balances, but it’s not transactional. “That would be too tempting,” he says.

In addition, Conner is doggedly working to get some of his father’s money for the newsletter subscriptions refunded. So far, he has recouped $26,000.

 

9.

Monitor accounts.

There are a few handy technological tools for fighting fraud. These are “virtual safety nets,” says Schmitt. One layer of protection to consider is FidSafe®, a free, secure online safe deposit box, to save digital backups of electronically scanned essential documents such as bank and investment account statements, birth certificates, insurance policies, passwords, tax records, wills, and more.

EverSafeOpens in a new window. sends suspicious activity alerts, including warnings for unusual withdrawals, missing deposits, odd charges, changes in spending patterns, and much more. “We know folks have multiple relationships,” says Schmitt. “If you can centralize this view, it makes it simpler for everyone.”

You might pick three or four people to get alerts. “With both of these services, the people who are allowed access to the financial documents can be friends, a family lawyer, or biological family members. If privacy is a stumbling block, the service can be set up in a way where you don't have to reveal amounts you hold in accounts. Monthly fees range from $7.49 for up to five financial accounts to $22.99 for unlimited accounts and monthly credit reports. (Fidelity customers receive a discount.)

Conner set up a FidSafe box for his father. “Dad’s bank, credit card, and investment account numbers, and the passwords, and his renter’s and automobile insurance policy and long-term care policy are stored there,” he says. In addition to his father and his stepmother, Conner, his sister, and his stepmother’s daughter have access to the virtual vault.

 

10.

Schedule family financial meetings.

When it comes to preventing elder financial abuse, regular family conversations about your parent’s fiscal world is crucial. Keep the family conversation going, not just after a financial event or a health event,” says Schmitt. Make it a regularly arranged call, even if it’s once a month.

Immediately after the discovery of the newsletter subscriptions, Conner, his sister, his stepmother’s daughter, and his father talked weekly, but then the phone calls slacked off. “We haven’t done as much as we should,” admits Conner. “At first, we were right on top of it, but the follow-through takes a lot of work. It’s so easy to get caught up in one’s own life.”

More recently, though, Conner’s sister discovered on a review of her father’s credit report that he had opened a new credit card without telling them. The siblings quickly started biweekly conference calls. “We’re encouraging our stepmother to be part of the conversation, too,” says Conner. “Because she is living with him now, she is truly our eyes and ears on the ground.”

 

 

IRS works to improve its identity theft protections for tax season

By Michael Cohn

The Internal Revenue Service is making progress on its efforts to combat stolen identity refund fraud, but the accuracy of its measurements of the identity theft problem needs to be better, according to a new government report.

 

The report, from the Treasury Inspector General for Tax Administration, found that the IRS’s strategies for improving the detection and prevention of identity theft have led to some big improvements. But as identity theft continues to evolve and cybercriminals find increasingly sophisticated ways to get around the IRS’s barriers, the IRS has begun to explore more initiatives to aid in its overall detection and prevention efforts. For example, the IRS has created a Security Summit in partnership with the tax software industry, major tax prep chains and state tax authorities. It has also done additional coding of W-2 and Wage and Tax Statement forms to help detect and stop identity theft.

 

TIGTA has seen some continuing reductions in the volume of undetected potentially fraudulent tax returns. For tax year 2013, TIGTA identified 568,329 undetected potentially fraudulent tax returns with tax refunds totaling more than $1.6 billion, a reduction of more than $523 million from the prior year. However, the false reporting of wages and withholding continues to make up the largest amount of undetected potentially fraudulent tax return refunds, at $1.3 billion. With the passage of legislation to accelerate the reporting of Forms W-2, TIGTA believes the IRS should be able to significantly reduce the number of these undetected returns.

 

However, TIGTA found the accuracy of the Identity Theft Taxonomy quantification for both protected and unprotected revenue could be improved. For example, the IRS’s estimate of protected revenue was overstated by nearly $2.4 billion. That was the result of an incorrect calculation of tax refunds associated with rejected electronically filed tax returns.

 

“Identity theft continues to have a significant impact on tax administration,” said TIGTA Inspector General J. Russell George in a statement. “As a result, the IRS must continue to evolve and explore other initiatives that will assist with its overall detection and prevention efforts.”

 

TIGTA recommended the IRS expand the use of its identity theft models to include all accelerated Forms W-2. The IRS should also develop a process to use leads it receives from state tax authorities, and it should update the taxonomy methodology it uses to quantify the amount of unprotected and protected revenue, TIGTA suggested.

 

The IRS agreed with TIGTA’s recommendations and said it has modified its Return Review Program to include all accelerated Forms W-2 it receives from the Social Security Administration for tax year 2016. The IRS has also put in place a process to use more data from state leads, and it has modified its methodology for handling rejected tax returns. In addition, the IRS has updated the taxonomy methodology it uses to remove duplications of tax returns. The IRS plans to revise the methodology even more to improve the accuracy of its estimates of unprotected identity theft.

 

“As part of our strategy for improving IDT detection, the IRS has partnered with industry, tax practitioners, and state governments in sharing information, improving communication, and jointly developing effective countermeasures to constantly changing threats,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “The Security Summit, a groundbreaking partnership, made great progress in 2016. As a result, we have implemented new safeguards leveraging cooperation with Summit partners, begun working with Summit partners to develop a framework for enhancing cybersecurity protections, and developed an ‘early warning’ system that will help industry, tax practitioner, and state partners quickly identify and share identity theft schemes. Also, the Security Summit partnership has worked to establish an Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (ISAC) that will be effective for the 2017 filing season and that will assist the members of the Security Summit in detecting and stopping IDT fraud.” 

 

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

 

 

Many tax-exempt charities don’t meet IRS requirements

By Michael Cohn

Even though the Internal Revenue Service approves 94 percent of the applications it receives from charities for tax-exempt status filed through the simplified Form 1023-EZ, approximately a quarter of them do not meet the IRS’s own requirements.

 

A recent report by the National Taxpayer Advocate pointed out that Treasury Department regulations generally require 501(c)(3) organizations to pass an “organizational test” by including acceptable purpose and dissolution clauses in their organizing documents. However, according to the IRS’s pre-determination reviews of some Form 1023-EZ applicants, 25 percent don’t qualify for tax-exempt status because they don’t meet this test.

 

A 2015 study by the Taxpayer Advocate Service of a sample of approved Form 1023-EZ applicants in 20 states that make articles of incorporation viewable online at no cost found that 37 percent of them don’t meet the organizational test. A similar study last year by the Taxpayer Advocate Service indicated that 26 percent of the approved organizations didn’t meet the organizational test. In the 2016 study, 4 percent of the approved organizations consisted of two limited liability companies; two churches; seven schools, colleges, or universities or supporting organizations; and one private operating foundation. However, the Taxpayer Advocate noted that such organizations are not eligible to file the Form 1023-EZ.

 

Laura Kalick, tax director in BDO’s Nonprofit and Education practice, agreed there are some significant documentation shortcomings in the Form 1023-EZ since the narrative description of activities, articles of incorporation and bylines are not required to be submitted.

 

“In essence they have to meet the purposes test and have a dissolution clause, but they aren’t required to submit those articles and bylaws to the IRS with the form,” she said. “They just have to say, ‘Yes, we are OK and we’re not going to have any private inurement.’ The IRS doesn’t have to see a narrative or the financial information at this point.”

 

That type of information can be burdensome to provide for a small charity, she acknowledged, and it would be a considerable burden for the IRS to have to check all of that information. To be able to file the streamlined form, a charity can’t have received more than $50,000 in each of the past three years, nor expect that gross receipts will exceed $50,000 per year for the next three years, or have total assets of over $250,000. From July 1, 2014 through June 24, 2016, the IRS received nearly 88,000 of the forms.

 

The National Taxpayer Advocate recommended the IRS require Form 1023-EZ applicants to submit their organizing documents, unless they are already available online at no cost, along with summary financial information. It said the IRS should make a determination only after it considers the narrative statements along with the additional information. The IRS agreed to revise Form 1023-EZ to require a narrative statement of applicants’ activities, but the Taxpayer Advocate said more information is still needed.

 

“The Taxpayer Advocate had recommended that the organizations submit their organizing documents and summary financial information and a narrative statement, but to date this has not been something that the IRS has been requiring,” said Kalick. “What the IRS appears to be doing instead is taking a sampling of organizations and looking at those organizations to see if they are in fact in compliance.”

 

As imperfect as it is, the Form 1023-EZ helps reduce the workload of the overburdened IRS.

 

“It’s sort of a balancing act,” said Kalick. “It’s easier for them to do the post-submission review and less costly and more effective than for every organization to have to fill in the full-blown Form 1023. They certainly listened to the Taxpayer Advocate, but they have decided this is the better way to go to make it much more streamlined. In fact, to encourage more use of the Form 1023EZ, they reduced the user fee from $400 to $275 as of July 1, 2016.”

 

The IRS anticipates the reduction of the user fee will contribute to an increase in the adoption rate. Once a charity has been approved for tax-exempt status, it then has to file a Form 990 or the more streamlined 990-N or 990-EZ. The IRS recently added interactive features to the 990-EZ with question marks that provide additional information when filling it out online (see Form 990-EZ for nonprofits updated).

 

 “Both the 990 and the 990-EZ provide so much information that if the organization grows to the size to require the more extensive form, then the IRS and the public are getting more information about the organization,” said Kalick. “That being said, just because you fill out a full-blown Form 1023 and the IRS approves it doesn’t mean that we’re getting all the information. What happens if you fill out the application for exemption and then you do something different than what you said you were going to do on your application? There are just so many exempt organizations out there that it’s impossible to police everything. We’re a nation of voluntary compliance and we have to accept a very high level of faith on everybody’s part.”

 

The Form 1023-EZ does not include a number of key organizational and operational tests for weighing an organization’s right to claim tax-exempt status. “In essence they ask whether you have the appropriate provisions in your articles of incorporation, but because you’re not actually submitting those articles of incorporation and bylaws then they can’t do a cross-check,” said Kalick. “A 501(c)(3) has to be organized for charitable, educational, scientific or religious purposes, and have no private inurement, no substantial lobbying, and no political activity. The assets have to be dedicated in perpetuity to charitable purposes, so in essence you have to say that upon dissolution the residual assets will go to another 501(c)(3) organization.”

 

Kalick agrees with the National Taxpayer Advocate’s recommendations about providing more information. “The Taxpayer Advocate report said it would really not be very difficult to have the articles of incorporation provided as part of the application and also that there should be some narrative and some basic financial information,” said Kalick. “I think that makes sense. Filling out the full-blown form is really difficult, but I really like the idea of putting in a narrative because a good number of organizations just have very broad general charitable purposes. They will say the organization is organized exclusively for charitable and educational purposes, and then they have the dissolution clause, but the narrative really tells what the organization is going to do. What one person thinks is charitable might not be charitable in the eyes of the IRS.”

 

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

 

Should you take Social Security at 62?

FIDELITY VIEWPOINTS

 

When it comes to Social Security, it can be tempting to take the money and run as soon as you're eligible—typically at age 62. After all, you've likely been paying into the system for much of your working life, and you're ready to receive your benefits. Plus, guaranteed monthly income is nice to have.

 

Some drawbacks of taking Social Security at 62 vs. later.

 

But it can be a costly move. If you start taking Social Security at 62, rather than waiting until your full retirement age (FRA), you will receive reduced benefits. FRA ranges from 65 to 67, depending on the year in which you were born. (See your full retirement ageOpens in a new window..) And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin Social Security at 62, and start with reduced benefits, your COLA will be lower too.

 

If you can afford it, waiting could be the better option. But, make sure to evaluate your decision based on how much you've saved for retirement and your other sources of income in retirement. While in general many people would benefit from waiting to, say, age 70 to take payments, others may need the income sooner and may lack the resources necessary to meet expenses during the delay period, or may not live long enough to reap the rewards of delaying.

 

Reduced benefits

Delaying can boost payments compared to claiming early

The longer you wait, the higher your benefit.

 

Note: All lifetime benefits are expressed in present values, calculated using an inflation-adjusted discount rate and life expectancy of 89. The numbers are sensitive to, and would change with, the discount rate and life expectancy assumptions.

 

Consider the following hypothetical example. Colleen is 62, with an FRA of 66. If she starts taking benefits at 62, she will receive $1,200 a month. If she waits until her FRA to collect, she will receive 33% more, or $1,600 a month in Social Security. If she waits until 70, her benefits will increase another 32%, to $2,112 a month.1 And if she were to live to age 89, her lifetime benefits would be about $38,000, or 13%, greater if she waited until age 70 to collect benefits.2 (Note: All figures are in today’s dollars and before tax; the actual benefit would be adjusted for inflation and would possibly be subject to income tax.)

 

If you plan to claim benefits based on your spouse's work record, once you claim your spouse’s benefit you cannot delay or switch to your own later. Claiming before age 66 on a spouse’s record means you'll lose even more than claiming on your own record—the benefit reduction for a spouse is 30% vs. 25%. For instance, if you're the spouse of Colleen in the above example, you'd be eligible for only $560 a month at age 62, which is 30% less than the $800 a month you would get at your FRA of 66. Read ViewpointsSocial Security tips for couples

 

Your decision to take benefits early could outlive you. If you were to die before your spouse, he or she would be eligible to receive your monthly amount as a survivor benefit—if it's higher than his or her own amount. But if you take your benefits early, your spouse’s Social Security will be less for the remainder of his or her lifetime.

 

Broader costs to your retirement plan

It's natural to want to retire as soon as you can, but it's crucial to consider the earning and investing power you may give up if you stop working full-time and take Social Security at 62. If you leave a job with good pay and benefits, it may be difficult to ever regain that level of compensation if you need to return to work later. Of course, not everyone can keep working, but it is something to consider if you are healthy and have the opportunity to continue working.

 

Tip: Women often live longer than men are more likely to depend on one income when they are older. It may pay to delay. Read Viewpoints: "Women and Social Security"

 

Remember that while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments. The average yearly cost of health insurance for individuals age 55-64 was $9,466 (including $1,300 in out-of-pocket spending in 2014).3 Why cut your benefits permanently just to pay for health insurance?

 

But there's even more to the story. As you approach retirement, you're often at the peak of your earnings—and of your ability to save more for retirement. Keep working, and you can make "catch-up" contributions to a tax-deferred workplace savings plan like a 401(k) or 403(b) or a traditional or Roth IRA. Catch-up contributions allow you to set aside larger amounts of money for retirement.

 

Moreover, if you stay on the job past age 62, your Social Security benefits will increase each year, up to age 70. Delaying retirement for even a few years can offer the potential to substantially increase the size of your retirement savings and, at the same time, increase your monthly Social Security income—and increase the chances for a successful retirement. Conversely, if you stop working at 62, you will stop tax-advantaged saving opportunities and cap your Social Security benefits—and you may need to begin to draw down your savings earlier.

 

 

 

IRS puts new regulations and ACA coverage requirement on hold

ByMichael Cohn

The Internal Revenue Service is temporarily putting the brakes on issuing new rules while evaluating the impact of executive orders from President Trump, and scaling back enforcement of the individual mandate under the Affordable Care Act.

 

IRS associate chief counsel Robert Wellen told attendees at a Practising Law Institute conference this week that the agency would not be issuing any new revenue rulings or revenue procedures, at least until incoming Treasury Secretary Steven Mnuchin sets up his tax team, according to Tax Notes. Trump’s executive order required two regulations to be identified for elimination whenever any new regulation is proposed. Federal agencies are still assessing how to deal with the new requirement.

 

Wellen said the IRS would continue to issue routine updates such as for interest rates and mileage deduction allowances, but for the foreseeable future the IRS won’t submit any new regulations to the Federal Register or the Internal Revenue Bulletin. “Discussions continue,” he said, according to Tax Notes. “Read your newspaper. I don’t know how this is going to come out.”

 

The IRS plans to still issue private letter rulings and chief counsel advice memorandums, however.

 

The IRS press office did not provide any immediate comment. The press office, however, did provide a link to information posted Wednesday on the IRS website explaining how it will deal with the processing of tax returns as the new administration plans to repeal the Affordable Care Act. The IRS said it is currently reviewing another Trump executive order, signed on the day of his inauguration, requiring federal agencies to exercise their discretion and authority to reduce potential economic burden. The IRS is trying to determine the implications for the individual shared responsibility provision, also known as the individual mandate. It recommended taxpayers should continue to file their tax returns as they normally would. The individual shared responsibility provision requires most taxpayers and their families to have some form of health coverage or qualify for a special health coverage exemption. Tax forms include a check box where taxpayers indicate whether they have “full-year coverage.”

 

For this tax season, the IRS had originally made changes in its processing systems so it would automatically reject any tax returns if the taxpayer didn’t provide information on health coverage. However, as a result of Trump’s executive order directing federal agencies to exercise their authority and discretion to reduce potential burdens, the IRS has once again changed the programming on its systems so it will process tax returns, even if they don’t indicate the taxpayer has health coverage.

 

 “Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status,” said the IRS.

 

The IRS cautioned, however, that the legislative provisions of the ACA remain in force until they are changed by Congress, and taxpayers are still required to follow the law and pay whatever they owe. The IRS will continue to process the returns as it did in previous tax seasons.

“Processing silent returns means that taxpayer returns are not systemically rejected by the IRS at the time of filing, allowing the returns to be processed and minimizing burden on taxpayers, including those expecting a refund,” said the IRS. “When the IRS has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed. This is similar to how we handled this in previous years, and this reflects the normal IRS post-filing compliance procedures that we follow.” 

 

 

 

Don't fall prey to financial scams

FIDELITY VIEWPOINTS

Four best practices

 

Being contacted by the Internal Revenue Service can cause concern for any taxpayer, but imagine receiving a telephone call and hearing this:

 

“This prerecorded message is to notify you that the IRS has issued an arrest warrant against you. Right now you and your physical property are both being monitored, and it’s very important that I do hear from you as soon as possible before we proceed further in any legal manner.”

 

That’s an actual message received by a real taxpayer, but everything else about it is fake. It’s a criminal scam aimed at scaring the target into placing a call to someone who might demand an immediate cash payment or attempt to obtain personal information that could be used for identity theft.

 

With tax-filing season in full swing, intimidating calls of this type try to take advantage of taxpayers’ IRS anxiety. Most people are quick to spot the call as a fake—the IRS doesn’t threaten taxpayers by telephone, issue arrest warrants, or conduct surveillance.

 

But the IRS ploy isn’t the only scheme in the scam artists’ bag of tricks, nor do they occur only at tax time. Other approaches may be more subtle, appearing to come from a company you trust asking you to verify account information. Or the criminals may operate almost entirely behind the scenes, quietly gathering information about you that can be used for a wide range of identity fraud. The common thread in almost all of the schemes is that they rely on the target to provide some information or, at the very least, to be inattentive to security. 

 

The good news is that you can protect yourself in most cases by being aware of the threat and following best practices for safeguarding your information. Make sure all your contact information is up to date with your financial institutions. Your contact data is critical to account protection, and your financial institutions rely on that information to promptly inform you of any suspicious activity.

 

Five common scams

 

1.

Tax refund fraud

 

A criminal files a fraudulent tax return in your name, under your Social Security number, and collects a refund. When you submit your legitimate tax return, it is rejected because the IRS has already processed a return with your Social Security number. In some cases, you may receive a notice prior to filing your return that the IRS has received a suspicious return using your identity.

 

What to do:

  • File your return early, before a criminal can file a fraudulent return.
  • If your return is rejected, submit Form 14039, Identity Theft AffidavitOpens in a new window., to the IRS.
  • If you receive a letter from the IRS that it has received a suspicious return using your identity, contact the IRS.
  • Continue to pay your taxes and file your legitimate tax return, although you may have to submit a paper return rather than an electronic one.
  •  

2.

Employment or health care fraud

 

A person uses your identity to obtain a job or sign up for health care through the Health Insurance Marketplace. You may become aware of the scheme after you file your tax return and are notified by the IRS that you appear to have underreported your income and owe additional tax. Or, in the health care version of the scheme, you receive notification that you received a premium subsidy to which you weren’t entitled, based on your income, and you have to pay it back.

 

What to do:

  • If you suspect you are a victim of taxpayer identity theft, immediately contact the IRS and file Form 14039, Identity Theft AffidavitOpens in a new window..
  • If you believe someone has signed up for health insurance in your name, call the Health Insurance Marketplace call center at 800-318-2596, and explain the situation.
  •  

3.

Fake charities

 

You are solicited by email, phone, or in person to contribute to an organization that sounds like a good cause but is actually a scam. Such schemes may be general in nature, often using a name very similar to a well-known charity, or they may be more targeted, attempting to prey on people who are victims of a natural disaster or known to have a personal interest in a particular disease or social cause. Beyond being scammed out of your contribution, you might also become a victim of identity theft if you provided a credit card number.

 

What to do:

  • Before contributing, research the charity through the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Navigator, Charity Watch, or GuideStar.
  • If you suspect you have been a victim of charity fraud, file a complaint on IdentifyTheft.gov.
  •  

4.

Ransomware

 

You receive a phone call from someone claiming to be a technical support person informing you that there is something wrong with your computer and they can help you fix the problem. Alternately, a message appears on your computer screen informing you that you are locked out of your computer or your files have been encrypted, denying you access. If you act as asked by the caller or the screen message, your computer may be taken hostage or personal information stolen. You are then instructed to pay a fee to have access to your computer or data restored.

 

What to do:

  • Prevention is the best medicine. Don’t click on pop-up ads or attachments from unknown senders, don’t respond to scare messages about your computer being infected. Avoid clicking on links in emails. Visit known websites by manually typing the URLs in a browser.
  • Back up your data regularly. That way, you can reboot and regain control of your computer by cleaning your hard drive and reinstalling your operating system.
  • Look into commercial software programs that might be able to restore your files.
  • Ignore suspicious phone calls about your computer and go to your local computer or electronic store if you need help with your computer.
  •  

5.

Credit card fraud

 

Someone using your identity signs up for a credit card and racks up large charges. This is different than someone using your existing credit card to make purchases. That’s bad enough, but you’re likely to notice it when you get your next statement. A crook who obtains a new card could use it extensively before being discovered.

 

What to do:

  • Report the crime and start a recovery plan on IdentityTheft.govOpens in a new window..
  • Notify law enforcement officials.
  • Put a fraud alert on your credit reports, which notifies lenders and creditors that they should take extra steps to verify your identity before extending credit.

 

How to protect yourself

 

1.

Don’t take the phishing bait.

 

Phishing is a technique used by criminals to trick victims into providing personal information that can be used for identity theft. Most phishing attempts are carried out by email or phone.

  • Ignore deals and freebies that sound too good to be true, unusual foreign contacts, and requests from strangers for help.
  • Ignore phone calls, emails or texts that appear to be from the IRS. The agency will not contact you by phone, email, text message, or social media to request personal or financial information.
  • Be suspicious of requests for secure information, such as your Social Security number, date of birth, financial account number, email, or password.
  • Never click on a link or download from a suspicious email. If the email claims to be from a company you do business with, go to the company’s website and log in to your account from there.
  • Never provide personal security information over the phone to an incoming caller. If you think the call might be a legitimate request from a company you do business with, hang up, and call the company directly.
  •  

2.

Monitor and secure your accounts.

 

Many companies, including Fidelity, go to great lengths to safeguard customers’ information and provide security tools. But you need to do your part, too.

  • Choose passwords that can’t be easily guessed, use different passwords for different websites, and change them regularly.
  • Make sure your financial institutions have up-to-date contact information for you. Your contact data is critical to account protection, and your financial institutions rely on that information to promptly inform you of any suspicious activity.
  • Many financial institutions provide an option to sign up for automated alerts of suspicious account activity. Fidelity automatically alerts you by email of certain suspicious activity.
  • Regularly check your credit report. The three major agencies—Equifax, Experian and TransUnion—are required by law to provide you with a free copy of your credit report once every 12 months, which means you can check your report for free three times throughout the year.

 

3.

Guard your identity on social media.

 

Criminals can compile a surprising amount of information from social media that can open the door to identity theft. Birthdays, family names, schools, and similar details are often used in security questions to access financial accounts. Even photos can provide hints about your tastes, hobbies, and travels, which a crook can use to design a phishing attempt aimed directly at you.

  • Be careful about what you share.
  • Don’t be fooled by a phishing attempt that provides personal details.
  • Be aware that someone you know may use your identity to steal from you. Safeguard your personal information even from them.
  • Security measures aren’t foolproof, and anybody can suffer a moment of inattention or lapse in judgment. Nevertheless, awareness and basic prevention practices can protect you from the vast majority of attempts to steal your identity or money through fraudulent schemes.

 

 

 

GOP Obamacare plan would cover fewer people as blowback grows

By Bloomberg News

 

 (Bloomberg) Republican lawmakers expect that their Obamacare replacement will result in fewer Americans covered by health insurance, a fact that’s likely to increase blowback amid growing support for the program.

 

New details of the plan are beginning to emerge, described by lawmakers and their aides. While still being worked out, it would do away with the Affordable Care Act’s requirement that all Americans have health coverage or pay a fine, and replace it with rules that let people choose not to buy insurance, instead paying higher premiums or penalties if they need it later. The result would be fewer people covered, said Republican lawmakers.

 

“Not everybody is going to have health care—some people just don’t care enough about their own care,” Representative Dennis Ross of Florida, a senior member of House Republicans’ vote-counting team, said in an interview Wednesday. He said Republicans can provide people access to affordable insurance plans, “but whether they take it or not is like trying to legislate responsibility.”

 

The plan was described by Republicans in interviews and by aides to lawmakers who spoke on condition of anonymity because it’s not yet public. Parts of it are also contained in an outline distributed last week, some based on House Speaker Paul Ryan’s “Better Way” program.

 

Republican Details

While the Republican plan would provide tax credits to help people buy insurance, similar to Obamacare, those subsidies would be based on age rather than income. That means poorer people wouldn’t get additional money to help them afford insurance, potentially putting coverage out of financial reach. Republicans have also threatened to roll back an expansion of Medicaid. About 10 million people are covered in Obamacare’s individual insurance markets, and about 12 million have coverage through the Medicaid expansion.

 

Fewer people covered under a GOP plan also contradicts what President Donald Trump has promised.

 

"We’re going to have insurance for everybody,” Trump said in a Jan. 14 interview with the Washington Post. “There was a philosophy in some circles that if you can’t pay for it, you don’t get it,” Trump told the newspaper. “That’s not going to happen with us.”

 

Rising Support for Law

The GOP repeal plans have galvanized supporters of the law. At town halls held this week around the country by Republican lawmakers, they’ve been questioned and heckled by citizens demanding they back down from their repeal plans. Two new polls also show support for the law growing: a Pew Research Center survey conducted from Feb. 7-12 found that 54 percent of Americans surveyed approve of the law, the highest mark recorded by the survey. A Kaiser Family Foundation poll released Friday found that 48 percent of people support the ACA, and 43 percent disapprove—the widest margin of support since 2010.

 

On Friday, Trump called Obamacare “a failed health-care law that threatens our medical system. An absolute and utter catastrophe.” He was speaking at CPAC, a conservative political gathering in Washington, where he again promised to repeal and replace the law.

 

Executives from U.S. health insurers will meet on Monday with Trump at the White House to discuss changes to the law, a person familiar with the matter said Friday.

 

Less Insurance, More Liberty

One Republican painted a drop in insurance coverage as a positive, if it was the result of ending Obamacare policies such as the insurance requirement that conservatives oppose.

 

“We’re not going to send an IRS agent out to chase you down and make you buy health insurance,” said Representative Michael Burgess, a Texas Republican who’s a medical doctor and head of the House Energy and Commerce subcommittee on health. “If the numbers drop, I would say that’s a good thing, because we’ve restored personal liberty in this country.”

 

Under Obamacare, insurers can’t charge people who are sick higher premiums, or deny them coverage. Under the GOP replacement plan, insurers would be allowed to charge more to anyone —whether healthy, or with a pre-existing medical conditions—who had a gap in their health insurance coverage. That’s designed to create a strong financial incentive for people to buy and keep health insurance, without formally requiring them to do so.

 

Access versus Coverage

At the core of the Republican argument in favor of their plan is that it will expand access to insurance for those who want it, rather than expanding total coverage by forcing people to. The requirements for repealing the ACA mean it’s not possible to keep the same number of people covered, said Representative Trent Franks, an Arizona Republican.

 

“You can’t do that,” Franks said in an interview.

 

For the Republican plan to work, it needs to make sure tax subsidies get people to buy insurance who wouldn’t otherwise, said Rebecca Owen, a health research actuary with the Society of Actuaries.

 

“A perfect system encourages everyone to buy an insurance package,” said Owen. “It would not be a good thing to go back to the days of a large proportion of our population not having insurance.”

 

Doubts All Around

And there are doubts among Republicans about the plan, and whether it can gain enough support in their own party. “It’s a far cry from a conservative plan,” Representative Mark Meadows of North Carolina, chairman of the House Freedom Caucus, said on Wednesday. He said there remains no consensus among Republicans that this is the way forward, and few details such as what the law will cost.

 

When Democrats passed Obamacare in 2010, the coverage requirement was meant to force younger, healthier people into the system to subsidize the older and sicker. Penalties for not having coverage were light, however. A family that went without coverage in 2015 would have paid a fine of $975—more for wealthier families. Insurers have said they need a policy that achieves a similar effect as a mandate.

 

Republicans have yet to introduce a formal bill in the House or Senate, and the timeline to act has been pushed back repeatedly from promises made during the 2016 elections that a repeal and replace package would be ready during the first days of the new administration. Trump said Wednesday that there would be a White House health plan by early- or mid-March.

 

Congressional Plans

“We’re working hard on legislation to deliver relief from Obamacare’s skyrocketing costs and dwindling choices; restore state control; strengthen Americans’ access to care; and reinvigorate the free market in health care,” said Kevin Brady, chairman of the House Ways and Means Committee. Brady said the House will move forward with legislation in March.

There are doubters that Republicans will succeed with repeal, or if they do, that it will significantly change the existing law. Former Speaker of the House John Boehner, who led the fight against Obamacare until stepping down in 2015, predicted at a health industry gathering in Florida Thursday that changes would be modest.

- Zachary Tracer, Billy House and Anna Edney

 

 

 

Buffett sees Republicans needing to dial back tax plan ambitions

ByBloomberg News

 (Bloomberg) Warren Buffett cast doubt on a controversial centerpiece of House Speaker Paul Ryan’s tax overhaul plan, saying the measure would lead to higher prices for consumers and likely be scaled back because it’s too politically contentious.

 

The Berkshire Hathaway Inc. chairman told CNBC’s "Squawk Box" that the House Republican border-adjusted concept to tax imports but not exports “would be a big sales tax,” adding that it would hit “items that are not yachts or anything like that; they’re things that the ordinary person buys.”

 

Ryan and Kevin Brady, the chairman of the tax-writing House Ways and Means Committee, have been struggling to gain support from other Republicans for the border-adjusted tax. The unique proposal would replace the current 35 percent corporate income tax with a 20 percent tax on domestic sales and "border adjust" it by levying it on imports but not exports. President Donald Trump hasn’t yet said where he stands on border adjustments.

 

Retailers, automakers and oil refiners that rely on imported goods and materials oppose it, while export-heavy manufacturers support it. Proponents argue that economic theory shows that the plan wouldn’t raise consumer prices or favor exporters, while critics say there’s no real-world precedent.

 

Buffett said that in Berkshire-owned furniture stores, “75 percent of what you see is imported. That means if we pay an import tax on it, our customers are going to pay for it.”

 

With sharp divisions amid efforts to undertake the biggest tax overhaul in three decades before August, “my guess is they will find doing something really comprehensive will be too difficult and they’ll want to get something done,” Buffett said. “And I think they will end up going for something not as dramatic as they might even like to do because they simply don’t want to spend the time and political capital getting it done.”

 

Treasury Secretary Steven Mnuchin said during a CNBC interview last week that he’s looking closely at border adjustments and has “some concerns” with the idea. Mnuchin said he was focused on overhauling the tax code before the August recess for Congress.

 

 “I just have a feeling when the Treasury Secretary says fine, have this by August, you’re not going to get a really 1986 type overhaul,” or one similar to the reforms in the 1950s and 1960s, Buffett said.

— Lynnley Browning and Sonali Basak, with assistance from Noah Buhayar

 

 

 

To LLC or not to LLC: Entity choice and tax reform

ByRoger Russell

Sometimes, an accountant’s error is open for all the world to see, as in the wrong envelope handed over by the PwC accountant at the Oscars on Sunday night. At other times, only the accountant, the client, and perhaps the IRS are aware of the error. That’s the case in choosing the type of entity to use when setting up a business.

 

It’s a crucial decision that has to be made right at the outset of the entity lifecycle. And although taxes are a significant driver in determining which entity structure to select, they are not the only factor to consider – there’s also access to capital, liability, the nature and the number of owners, Social Security and Medicare taxes, restrictions on accounting methods, the owner’s payment of company expenses, filing deadlines and extensions, multistate operations, and exit strategy, according to Barbara Weltman, author of J.K. Lasser’s Small Business Taxes.

 

And with a blockbuster of a tax reform in the offing, now may be a good time to check into the possibilities and issues associated with each entity type. The promised tax reform may significantly affect how advisors and entrepreneurs choose the right entity in which to do business.

 

“I’ve always been an LLC guy because there’s a single level of taxation,” said Scott Kaplowitch, managing partner at Edelstein & Co. “But I’m starting to rethink that.”

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“If you exit an LLC, there are more benefits to the buyer, so potentially you may receive more for the business when you sell,” he said. But under a potential new tax regime, a C corporation may be more beneficial. There would still be the double tax, but with the lower rates and the possibility of using the Section 1202 exclusion if you’re a qualified small business, the C corporation becomes more attractive. ”

 

There are also additional deductions available to a C corporation that are not available to an S corporation or an LLC, such as the deduction for health insurance, Kaplowitch observed.

While the exact outline of tax reform is not known, there have been some hints along the way, according to Chip Wry, a partner in law firm Morse Barnes-Brown Pendleton. “It will be similar to the GOP Blueprint. Both the Trump plan and the Blueprint call for lower corporate and individual rates, and an intermediate pass-through rate.”

 

“The way to look at it when you approach entity choice is how you think you will make money,” he indicated. “Will you retain earnings, or will they be distributed? Even today the top corporate rate is lower than the individual rate. If you retain earnings, you can actually get a lower effective rate under a C corporation than an S corporation or an LLC, but if earnings are distributed to the owners periodically, you can get a lower effective rate with a pass-through entity, since a C corporation’s earnings are taxed twice.”

 

Both the Trump plan and the GOP plan the rate relativity remains as it is today, with the corporate rate under each plan lower than the individual rate, Wry observed. “So if you retain earnings, it might point to a C corporation as the better choice, but if you distribute earnings the combination of the two rates will result in a higher rate than on a pass-through, the same way it is today. If there is a need to be a C corporation for other reasons, the lower rates will make it more palatable under tax reform.”

 

A venture capital fund, for example, may include tax exempt and foreign investors, Wry noted: “They have certain sensitivities they can avoid by investing in a C corporation.”

 

 “Under the Trump proposal, a C corporation will have a significantly lower rate than the individual rate applied to pass-throughs, according to Timothy Jessell, CPA, Esq., a partner at Greenberg Traurig. “The question is whether or not entities should start converting to C corporations,” he said. “The answer is, ‘Not yet,’ and probably ‘No’ in most situations. Under the House and Trump proposals there’s also a lower rate for a pass-through entity, so it gets the benefit of the lower rates as well.”

 

There are situations where it makes sense to be a C corporation, such as the availability of the Section 1202 exemption on the sale of the stock. “If I could get zero tax on a sale of the business, I would accept a lower sale price,” he said. “That makes sense for tech start-up companies.”

 

For a company already in existence, the choice is probably to wait and see, noted Daniel Zucker, a partner at McDermott Will & Emery. “The situation is very fluid,” he said. “If it turns out that there are reductions in the corporate tax rate but no or very little reductions in the individual rates, that would favor a company being taxed as a C corporation. With an S corporation or an LLC you have one level of tax – earnings can be distributed without incurring a second level of tax. But a lot of corporations don’t pay dividends. If they re-invest earnings in the business, they would pay less tax than a flow-through entity. The real point is to wait and see. Behavior shouldn’t change based on what people are anticipating the law will be.” 

 

 

 

The future of online sales tax: What if they fail to kill Quill?

ByJennifer McLoughlin

What would happen if the current brick-and-mortar standard for sales taxes continues to survive in an increasingly Web-based world?

 

The lightning rod is the U.S. Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which forbids states from imposing sales tax collection obligations on remote retailers without a physical presence in-state. States have launched a growing "kill Quill" campaign against the 25-year-old constraint over the past two years, adopting increasingly aggressive measures with the hope of convincing the high court to overturn its precedent.

 

Challenges are weaving through Alabama, South Dakota and Tennessee over "economic nexus" regimes that expand each state's taxing jurisdiction over e-retailers. Through administrative rule or statute, the states require that retailers satisfying a specified threshold of sales must collect and remit sales tax. Similar economic nexus bills have surfaced in at least 15 statehouses during the 2017 legislative session, riding the growing wave of interest in capturing lost revenue from untaxed remote sales — and ultimately nullifying Quill.

 

Many anticipate that the Supreme Court will accept a Quill appeal, looking to Justice Anthony Kennedy's 2015 call for a case that triggers reconsideration of the court's earlier holding, given "changes in technology and consumer sophistication." That optimism has been buoyed by the nomination of Neil Gorsuch to join the high court, a judge who has indicated in a past opinion that Quill may be dated.

 

And others hope that a fleet of competing remote sales tax proposals in Congress — three bills and one discussion draft — signals that federal lawmakers will finally intervene.

 

However, there is no coalition behind any of those proposals and the Supreme Court just turned down another case that questioned Quill, from Florida.

In other words, there is no firm guarantee that Quill will die. So what might happen should the Quill physical presence rule remain in place?


Could `Kill Quill' efforts fall short?

Alabama kickstarted the recent "kill Quill" battle, openly inviting a lawsuit over its 2015 economic nexus regulation that revenue officials hope will wind its way to the Supreme Court.

Several states introducing or enacting similar regimes have incorporated language into the bills that suggest a similar motivation — including South Dakota, Arkansas and Indiana. State Sen. Dwight Cook, the Republican sponsor of a North Dakota measure, said recently that his pending 2017 proposal is likewise aimed at overturning Quill.

 

However, it isn't certain that the high court will accept an appeal.

 

The top court has batted away the last two disputes that called for the justices to reshape sales tax law (Brohl v. Direct Mktg. Ass'n, U.S., No. 16-458, petition for certiorari denied Dec. 12, 2016; Am. Bus. USA Corp. v. Fla. Dep't of Revenue, 2017 BL 51297, U.S., No. 16-567, petition for certiorari denied Feb. 21, 2017).

 

However, many point out that those appeals didn't involve direct challenges to Quill.

 

Charles A. Rothfeld, special counsel with Mayer Brown LLP, said last year that while "there is some degree of murkiness in the state courts, as to where the lines get drawn exactly," there is no conflict among states courts as to whether Quill is good law. And as a general matter, "it's not easy to get the Supreme Court to take the case when there is no conflict in the lower courts."

Moreover, even if the Supreme Court accepts a case for review, it isn't known for overruling its own precedents — especially one that is 25 years old, the unofficial line for when cases become almost untouchable.

 

Rothfeld said that although it happens sometimes, "it's a very, very heavy lift to get the Supreme Court to overrule its decision."


The impact on the states

The Supreme Court could take several paths if they accepted a Quill challenge. They could affirm or overturn Quill in its entirety, or they could set forth a modified standard.


Sources indicate that a Quill affirmation would deliver a revenue blow to states. According to the National Conference of State Legislatures, with information pulled from a University of Tennessee study, states lost an estimated $23.3 billion in revenue in 2012 from uncollected tax on remote sales.

 

And many expect that unless Quill is exterminated, cash-strapped states will continue to take a hit with a modern marketplace increasingly defined by digital transactions.

 

Max Behlke, the NCSL's director of budget and tax policy, said that if the Supreme Court upholds Quill, the physical presence constraint could lead to the end of sales taxes in the U.S. Consumers might see a price drop on purchases — but higher income and property taxes would likely follow.

 

Absent an enforcement mechanism for sales tax, and in lieu of raising rates, states will seek viable revenue streams to fund essential services like education or law enforcement, Behlke explained.


The impact on retailers

However, some foresee a judicial affirmation of Quill as only temporarily stemming the surge of economic nexus regimes — not foreclosing alternative approaches to capture tax from remote retailers.

Steve DelBianco, executive director at NetChoice, said there are three scenarios in a "keep Quill" landscape:

  • States will claim that Quill doesn't apply to specific taxes, such as Ohio's commercial activity tax and Washington's gross receipts tax. In November 2016, the Ohio Supreme Court declined to extend Quill to the state's business privilege tax. A petition requesting the high court's review is expected in April.
  • States will continue to enact legislation that aren't "kill Quill" laws, but are "creative extensions of nexus" to "withstand the physical presence" rule — such as affiliate, click-through and marketplace provider regimes. While those regimes recognize physical presence as the rule, they define physical presence as including a relationship with an in-state entity that has physical presence.
  • States will pursue "tattletale reporting tactics," such as the Colorado and Louisiana laws that mandate non-collecting remote vendors to report consumers' purchases to the state.

 

Scott C. Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara Inc., said that if Quill remains good law, states may then deem "any kind of physical presence whatsoever is going to create nexus."

 

At that point, fulfillment by Amazon.com, FedEx and UPS will become their primary target, Peterson said. This focus would impact any retailer using a fulfillment service to store property — including fulfillment by Wal-Mart Stores.

 

"That's going to change so much," he said. "Because the states are on really good constitutional standing to say that, if you've got property for sale in my state, that's nexus."


Are notice, reporting regimes the future?

Lynn Granger, spokeswoman for Colorado's Department of Revenue, has said that the state's notice and reporting regime responded to the "growing problem" of uncollected sales and use tax on remote transactions. In the wake of the Supreme Court sidestepping an appeal challenging Colorado's law, seven states have introduced bills this legislative session to create reporting/notice regimes like Colorado's. Those states are Alabama, Arkansas, Georgia, Hawaii, Kansas, Nebraska and Rhode Island.

 

Louisiana already has adopted comparable legislation, and Oklahoma and Vermont enacted notification laws.

 

While the regimes are cast as non-tax laws, many suggest they encourage retailers to collect instead, and will be a popular revenue tool should Quill survive. However, Overstock.com and Colony Brands have said that they will comply with the Colorado law, but won't go further to collect and remit in a state in which they have no physical presence.


Is Congress contemplating a ‘Keep Quill' solution?

The judiciary isn't the only political branch with a role in the future of remote sales taxation. In fact, Congress may be the more likely actor. The Supreme Court observed in Quill that Congress has the power to resolve the issue.

 

Notwithstanding calls to resolve the remote sales tax debate, Congress has stalled. Gestating proposals include the Marketplace Fairness Act and the Remote Transactions Parity Act, which broaden states' taxing authority over remote retailers.

 

Another pending candidate is the No Regulation Without Representation Act of Rep. Jim Sensenbrenner, R-Wis., first introduced in July 2016, which would codify Quill and dictate that no state could require collection or reporting from retailers without a physical presence.

Another framework is the discussion draft of the Online Sales Simplification Act of Rep. Robert Goodlatte, R-Va. The plan is a hybrid origin-based system that generally bases the taxation of remote purchases on the seller's location, but at the tax rate of the consumer's location.

 

"Goodlatte's bill confirms the physical presence standard with specificity, and then goes on to open the door to a multistate compact that allows home state enforcement on remote sales," DelBianco said, adding that "the beauty of the congressional approach, of either Sensenbrenner or Goodlatte, is they in fact would stop the madness of all these state bills."


What are the chances of Congress sustaining ‘Quill'?

Sources have said that congressional leadership feels pressure to secure a national solution in 2017. However, there is skepticism that Congress will address the long-shelved issue this year, particularly given they're already mired in other matters related to overhauling the Tax Code and the Affordable Care Act.

 

Should Congress break from its holding pattern, the ultimate solution is anyone's guess. Many indicate that the Sensenbrenner and Goodlatte proposals won't have sufficient support, but others have advised not to discount those measures.


Could this self-correct? 
 

In the meantime, many states are already seeing success with their regimes, regardless of their compliance with Quill.

 

Of the states with sales tax, Hawaii, Idaho, Maine and New Mexico are the only four states in which Amazon hasn't agreed to start collecting tax. The retail behemoth has announced a flurry of agreements this year to start collecting in states, including jurisdictions in which it lacks physical presence.

 

DelBianco noted that Amazon's business model has led to its expansion into more states to provide faster fulfillment. Likewise, competition over customer service and rapid shipping will encourage other retailers to expand their physical footprint, thus triggering collection obligations in more locations.

 

Davison said that several ACMA members are "aggressively piercing nexus" by opening brick-and-mortar stores in states, "because they believe that's the best way to serve their customers."

However, others have noted that not all retailers lacking an in-state footprint are keen to follow Amazon's lead and start voluntarily collecting. Several smaller businesses don't have the need — i.e., a small customer base — or desire to establish physical locales.

 

"States in which Amazon is collecting may think they've solved this," Behlke said. However, he explained that Amazon only collects for items it sells — not items sold by third-party providers through the marketplace platform.

 

 

 

 

IRS audits this year are bad news for the rich

ByBloomberg News

 (Bloomberg) The IRS is turning up the heat on taxpayers. Some of them, anyway.

The number of audits conducted by the Internal Revenue Service has dropped as it continues to reel from years of budget cuts. But even as its workforce shrinks, the agency must keep the money flowing into the U.S. Treasury. The solution in 2017? Focus on target-rich environments, and squeeze more dollars out of each audit.

 

That means more scrutiny of people and companies who are likeliest to hide money or under-report their tax burden. Tax specialists are warning their clients, especially if they’re wealthy or have complicated tax situations, to be ready to hand over a lot more information. “My clients are concerned,” said Debra Estrem, managing director of the tax controversy group at Deloitte LLP.

 

The IRS has revealed only a few details about its plan of attack—too much information can give tax evaders clues, after all. But as head of the Deloitte division overseeing responses to hundreds of large, complex audits every year, Estrem has a better idea than most about what the IRS is up to.

 

While the IRS launches fewer full-blown audits, she noticed the agency sending out more “mass notices” addressing specific issues. For example, if you reported an especially large charitable contribution on your 1040 form, IRS computers may send you an automated notice asking you for proof.

 

Her list of the IRS’s “favorite issues” is a long one: In addition to charitable contributions, she’s seen more notices about large losses, mortgage interest deductions, and 529 college savings plans. So-called “hobby losses” are a frequent IRS target. That’s when people claim “losses” for business ventures that, in the IRS’s eyes, were never meant to make a profit. Think of otherwise wealthy people claiming losses for musical groups, raising horses, racing cars or yachts, and even dog grooming, and you’ll get the picture.

 

“Audit lite”

That notice in the mail is a sort of “audit lite,” Estrem said. Provide solid substantiation of your credit or deduction–like a business plan for your alleged hobby—and the IRS may then leave you alone. If not, expect to hear from an agent. “The best practice is to respond promptly and thoroughly, so it will hopefully end there,” she said.Sure, any taxpayer with a suspicious-looking charitable donation may get some extra mail from the IRS. But the clues Estrem cites all point to the new reality of this year’s tax season: The agency’s real firepower is now being aimed at the ultra-wealthy and large companies.

 

For several years, the IRS has been running a “Wealth Squad,” formally known as the Global High Wealth Industry Group, comprising a group of agents specially trained to pore over the finances of the very rich. They don’t just examine a loaded person’s 1040, but also any companies or investments he or she owns.

 

Even as the IRS workforce has shrunk in recent years, the agency has found other ways to get aggressive. Along with other federal agencies, it has forced banks in tax havens such as Switzerland to disclose more about Americans’ investments, and it’s tried harder to connect the dots between rich individuals and their sometimes-vast networks of global wealth.

 

Now the IRS has a strategy focused on large companies and the very wealthy people who own them. The Large Business and International Division, which includes the Wealth Squad, announced in January that it is launching 13 new “campaigns” focusing on particular areas in which the IRS suspects it can bring in additional revenue.

 

Plan of attack

The “goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources,” the IRS said in a statement. Groups of specially trained experts will focus on these tax issues wherever they pop up. Some of the campaigns will be very narrow–looking at energy tax credits, for example, or the way that housing developers do their accounting.

 

Other campaigns could end up netting a wide variety of well-off taxpayers. One looks at “repatriation,” when taxpayers move money from abroad back to the U.S. The IRS is also focusing on so-called “basket options,” transactions structured in a way to reduce tax bills. The IRS said it will address some issues by first sending out letters warning taxpayers that their maneuvers may get extra scrutiny. For other campaigns, the agency said its main weapon will be full-blown audits.

 

Tax experts are scrambling to interpret the IRS’s public statements and get taxpayers prepared. “My clients are noting what these issues are,” Estrem said. “To the extent they have these issues, they’re getting ready for an IRS inquiry.” Big companies and the ultra-wealthy should be prepared for “more invasive and larger” audits than they’ve seen in the past, she added. “The IRS is upping its game.”

 

The agency’s new strategy could end up forcing taxpayers to be less creative about how they lower their tax bills. But any federal revenue gains from such defensive conservatism could be undercut by the overall drop in audits. Last year, according to preliminary data, the IRS audited just 0.7 percent of the 147 million individual income tax returns filed. Audits fell for all income groups.

 

It’s not yet clear how the new Republican administration could change the IRS’s plans. Tax collection is supposed to be immune from politics. But President Donald Trump is free to replace IRS Commissioner John Koskinen, whose term expires in November. Koskinen’s time in office has been marked by fierce criticism from Congressional Republicans, some of whom tried to impeach him for allegedly impeding their probe into whether conservative non-profits were improperly targeted by the agency.

 

When it comes to tax collection under Trump, who said he’s been the subject of many an audit, “it’s unclear what the priorities might be,” said Indiana University professor and economist Bradley Heim. “You have to wait and see who he appoints.”

- Ben Steverman

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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