Wednesday, October 4, 2017

Tips for Individuals Who Need to Reconstruct Records After a Disaster



Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.
Here are 12 things taxpayers can do to help reconstruct their records after a disaster:
  • Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov, or use their smartphone with the IRS2Go mobile phone app. They can also call 800-908-9946 to order them by phone.
  • To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
  • Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of appropriate documents.
  • Home owners should review their insurance policy as the policy usually lists the value of a building to establish a base figure for replacement.
  • Taxpayers who made improvements to their home should contact the contractors who did the work to see if records are available. If possible, the home owner should get statements from the contractors to verify the work and cost. They can also get written accounts from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, the taxpayer can contact the attorney who handled the trust.
  • When no other records are available, taxpayers can check the county assessor’s office for old records that might address the value of the property.
  • There are several resources that can help someone determine the current fair-market value of most cars on the road. These resources are all available online and at most libraries:
    • Kelley’s Blue Book
    • National Automobile Dealers Association
    • Edmunds
  • Taxpayers can look on their mobile phone for pictures that show the damaged property before the disaster.
  • Taxpayers can support the valuation of property with photographs, videos, canceled checks, receipts, or other evidence.
  • If they bought items using a credit card or debit card, they should contact their credit card company or bank for past statements.
  • If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
More Information:

IRS Reminds Parents, Students to Explore Education Resources on IRS.gov


WASHINGTON – The Internal Revenue Service today reminded parents and students that there are many tax benefits available to them, and the easiest way to learn more about them is through the education resources available on IRS.gov.
Besides tax credits such as the American Opportunity Tax Credit and the Lifetime Learning Credit, there are other education-related tax benefits that can help reduce a taxpayer’s tax liability. Savings plans, such as 529 plans, also offer tax-free ways to save for a student’s qualified education expenses.
Deductions:
Student Loan Interest Deduction
If a taxpayer’s modified adjusted gross income (MAGI) in 2017 is less than $80,000 ($165,000 if filing a joint return), there is a special deduction allowed for paying interest on a qualified student loan used for higher education. This may include both required and voluntary interest payments. Eligible taxpayers can claim this deduction even if they don’t itemize their deductions on Form 1040 Schedule A.
  • Qualified Student Loan is a loan:
    • Taken out solely to pay qualified education expenses that were for the taxpayer, their spouse or a person who was their dependent when they took out the loan.
    • Paid or incurred within a reasonable period of time before or after the taxpayer took out the loan.
    • For education provided during an academic period for an eligible student.
    • From someone other than a relative.
    • That is not taken from a qualified employer plan.
  • Qualified Education Expenses include amounts paid for the following items:
    • Tuition and fees.
    • Room and board.
    • Books, supplies and equipment.
    • Other necessary expenses, such as transportation.
Business Deduction for Work-Related Education
A taxpayer who is an employee and can itemize their deductions may be able to claim a deduction for expenses they paid for work-related education.
For self-employed workers, deduct expenses for qualifying work-related education directly from self-employment income. This reduces the amount of income subject to both income tax and self-employment tax.
To claim a business deduction for work-related education, the taxpayer must:
  • Be working.
  • Itemize their deductions on Schedule A (Form 1040 or 1040NR), if they are an employee.
  • File Schedule C, Schedule C-EZ or Schedule F if the taxpayer is self-employed.
  • Have expenses for education that meet the requirements for qualifying work-related education.
Savings Plans:
Qualified Tuition Programs (529 Plans)
States may establish and maintain programs that allow taxpayers to either prepay or contribute to an account for paying a student’s qualified education expenses at a postsecondary institution. No tax is due on a distribution from a qualified tuition program unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses.
Qualified expenses include:
  • Required tuition and fees.
  • Books, supplies and equipment.
  • Computer or peripheral equipment, computer software and internet access and related services.
  • Room and board for those who qualify as at least half-time students.  
Additional IRS Resources:

IRS Reminds Educators of Tax Benefits


WASHINGTON — As teachers, administrators and aides have launched into their fall semester, taxes may not be on the top of their list. However, knowing what to keep track of now can help reduce the burden at tax time. The Internal Revenue Service reminds educators that there are three key work-related tax benefits that may help them reduce what they pay in taxes.
Educators can take advantage of tax deductions for qualified expenses related to their profession. The costs many educators incur out-of-pocket include items such as classroom supplies, training and travel.
There are two methods educators can choose for deducting qualified expenses: Claiming the Educator Expense Deduction (up to $250) or, for those who itemize their deductions, claiming eligible work-related expenses as a miscellaneous deduction on Schedule A.
A third key benefit enables many teachers and other educators to take advantage of various education tax benefits for their ongoing educational pursuits, especially the Lifetime Learning Credit or, in some instances depending on their circumstances, the American Opportunity Tax Credit.
Educator Expense Deduction
Educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators, but not more than $250 each) of unreimbursed business expenses. The educator expense deduction, claimed on either Form 1040 Line 23 or Form 1040A Line 16, is available even if an educator doesn’t itemize their deductions. To do so, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.
Those who qualify can deduct costs like books, supplies, computer equipment and software, classroom equipment and supplementary materials used in the classroom. Expenses for participation in professional development courses are also deductible. Athletic supplies qualify if used for courses in health or physical education.
Itemizing Deductions (Using Schedule A)
Often educators have qualifying classroom and professional development expenses that exceed the $250 limit. In that case, the IRS encourages them to claim these excess expenses as a miscellaneous deduction on Schedule A (Form 1040 or Form 1040NR). In addition, educators can claim other work-related expenses, such as the cost of subscriptions to professional journals, professional licenses and union dues. Transportation expenses may also be deductible in situations such as, for example, where an educator assigned to teach at two different schools needs to drive from one school to the other on the same day.
Miscellaneous deductions of this kind are subject to a  two-percent limit. This means that a taxpayer must subtract two percent of their adjusted gross income from the total qualifying miscellaneous deduction amount. For more information, see Publication 529, Miscellaneous Deductions, available on IRS.gov.
Keeping Records
Educators should keep detailed records of qualifying expenses noting the date, amount and purpose of each purchase. This will help prevent a missed deduction at tax time.
Taxpayers should also keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income. Get one from the IRS for free.
The quickest way to get a copy of a tax transcript is to use the Get Transcript application. After verifying identity, taxpayers can view and print their transcript immediately online. The online application includes a robust identity verification process. Those who can’t pass the verification must request the transcript be mailed. This takes five to 10 days, so plan ahead and request the transcript early.
Additional IRS Resources:

Taxpayers Should Be Wary of Unsolicited Calls from the IRS



Taxpayers who get an unexpected or unsolicited phone call from the IRS should be wary – it’s probably a scam. Phone calls continue to be one of the most common ways that thieves try to get taxpayers to provide personal information. These scammers then use that information to gain access to the victim’s bank or other account. 
When a taxpayer answers the phone, it might be a recording or an actual person claiming to be from the IRS. Sometimes the scammer tells the taxpayer they owe money and must pay right away. They might also say the person has a refund waiting, and then they ask for bank account information over the phone.
Taxpayers should not take the bait and fall for this trick. Here are several tips that will help taxpayers avoid becoming a scam victim.
The real IRS will not:
  • Call to demand immediate payment
  • Call someone if they owe taxes without first sending a bill in the mail
  • Demand tax payment and not allow the taxpayer to question or appeal the amount owed
  • Require that someone pay their taxes a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in local police or other agencies to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit
Taxpayers who don’t owe taxes or who have no reason to think they do should follow these steps:
  • Use the Treasury Inspector General for Tax Administration’s IRS Impersonation Scam Reporting web page to report the incident.
  • Report it to the Federal Trade Commission with the FTC Complaint Assistant on FTC.gov. 
  • Taxpayers who think they might actually owe taxes should follow these steps:
  • Ask for a call back number and an employee badge number.
  • Call the IRS at 1-800-829-1040.
Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights. Taxpayers can visit IRS.gov to explore their rights and the agency’s obligations to protect them.
IRS YouTube Videos:

Tuesday, September 19, 2017

Your next worry after the Equifax breach: Fake tax returns


After the Equifax (EFX) data breach, year-end tax planning may be even more important. Social Security numbers were among the data exposed in the Equifax hack, which affects up to 143 million people. Immediate to-dos have focused on fraud alerts, credit freezes and monitoring to curtail thieves' ability to open new accounts in victims' names. But experts say consumers should also start thinking ahead to tax season — when criminals could potentially use those stolen Social Security numbers to file fraudulent tax returns and snare refunds. "This is going to be an ongoing problem," said Tim Gagnon, an associate teaching professor of accounting at Northeastern University's D'Amore-McKim School of Business. Having a credit freeze or other monitoring in place doesn't prevent tax-related identity theft, which is among the top scams on the IRS "Dirty Dozen" list. The agency estimates that during the first nine months of 2016, beefed up safeguards helped it stop 787,000 fraudulent returns totaling more than $4 billion — but it still paid out $239 million in "suspect" refunds.
It's still unclear what impact the Equifax breach could have on the 2018 filing season. "The IRS continues to review and assess this serious situation to determine necessary next steps," an IRS spokesman said to CNBC in an e-mailed statement. So what can you do? First, some bad news. IRS protections currently in place — filing an identity-theft affidavit or obtaining a filing PIN (more on that, below) — are specifically for victims of tax-related identity theft. Having your Social Security number exposed in a data breach isn't enough. As the IRS notes in its taxpayer resource, "not every data breach results in identity theft, and not every identity theft is tax-related identity theft." "Unfortunately, there's no panacea," said Eva Velasquez, chief executive and president of the Identity Theft Resource Center, which helps consumers dealing with such fraud. But there are still some steps you can take to mitigate the risks ahead of tax time: Prepare to file early "Our motto is, file first and beat the crooks," Velasquez said. "It does have an impact. You are not giving them an open window." "File early" doesn't mean rush to file (and risk underreporting income or having to file an amended return later), Gagnon said. Some taxpayers can't file right at the start of the season — investment 1099s for dividends and interest can show up in mid-February, and taxpayers with partnership income may still be waiting for their K-1s for last season's returns, he said. The prep you can do is more about getting organized so that you're ready to go ASAP: Review your most recent tax return. That can provide a good framework for this year, in terms of deductible expenses to tally and official documents (W-2s, 1099s, etc.) to expect, Gagnon said. Note any changes, say, if you switched jobs, or opened a new investment account. Make a list of key documents you'll need, so you can check them off as they arrive and see at a glance what you are still waiting on. (See common deadlines, below.) Be proactive about calling or emailing to track down a late document, he said. If you have moved this year, reach out to any of the employers, financial institutions and other entities sending you key forms, to make sure they have your current mailing address and contact information, he said. Start gathering receipts and records for potentially deductible expenses, like charitable donations or business expenses. Monitor online accounts, Gagnon said. Some entities only make tax documents available online, rather than mailing a copy; others offer online access well before they send paper copies in the mail. Monitor your tax record The IRS offers online access that lets taxpayers see details of their tax account, said certified public accountant Andy Mattson, tax partner at Moss Adams in Campbell, California. "It's a good way to monitor your account, if you're concerned about it," he said. You'd be able to see if someone files a return in your name and take action more quickly. But signing up is no easy feat. The IRS requires a slew of personal information, and the process is so stringent that less than half of those who try to register actually succeed, Mattson said. Adjust your withholding If you're a victim of tax-related identity theft, untangling the problem can take months, said Velasquez — who described the time frame as "wildly inconsistent." That's a tougher wait if you were anticipating a refund windfall. (The average this year was $2,769, according to IRS filing statistics.) "[Tax-related identity theft] has less of a day-to-day impact for folks who aren't relying on, waiting on or counting on a refund," she said. Even if you're not a victim, safeguards put in place could delay your refund . In its 2016 report to Congress, the IRS National Taxpayer Advocate estimated that some filters used to detect fraudulent returns and identity theft had false positive rates exceeding 50 percent. "These incorrect selections delayed approximately 1.2 million tax returns associated with about $9 billion in legitimate refunds for more than an additional 30 days on average," the IRS noted in the report. Your best defensive move: Revisit your W-4 , the form that tells your employer how much federal income tax to withhold from your paycheck, Gagnon said. Changing allocations can keep more in your paycheck now, and even out your tax bill. "You want as little a refund as possible, so you're least exposed," he said. "It's better to wait for $100 to come in than $1,000." But be careful with this strategy, Mattson said. It's not always easy to estimate tax liability, and you'll need to have cash set aside in case you end up owing at tax time. "The cure might do more harm than the disease," he said. "People could end up owing money they weren't expecting to." Consider a PIN The IRS does offer so-called identity protecting PINs, or IP PINs, to prevent someone from filing a fraudulent return with your Social Security number. Participants get a new six-digit number each year, without which your e-filed return will be rejected and a paper return, significantly delayed. "The PIN makes perfect sense," Mattson said. "But right now you can only get a PIN if you're a victim of tax identity theft, if someone files a return using your Social." Currently, IRS guidelines only allow you to get an IP PIN if you filed last year's return with a home address in Florida, Georgia or Washington, D.C., where the government is running a pilot program. Or if the IRS invites you to apply — which, as Mattson points out, generally only happens if you have already been a victim of tax-related identity theft. (Another point for would-be applicants: According to IRS documents, "If you've placed a credit security freeze with Equifax, you must contact Equifax to have the freeze temporarily removed to allow us to verify your identity.") PIN protection isn't foolproof, Velasquez said. The IRS PIN system has itself been subject to cyberattacks, she said. Earlier this year, the Treasury inspector general for tax administration released a report noting inconsistencies in IRS processes that left some victims without PINs.
Watch for fraud flags Fraudulent tax returns aren't the only tax-time identity theft issue to keep an eye on. The IRS warns that receiving certain tax documents or IRS notices — like a CP2000 to verify unreported income or a 1099 from an employer you haven't worked for — can be a red flag for employment-related identity theft.

Monday, September 18, 2017

How the IRS decides if you have a business or a hobby

Let's say you're a lover of bonsai plants -- you're good at growing and grooming them and sometimes you sell them, but not always for a profit. You started off thinking of this pursuit as a hobby, but maybe you're thinking of it more now as a business. And as with any business, you should be eligible to claim any losses as a tax deduction against your other income. Right?
Well, maybe.
The IRS can disallow this deduction if it believes the "business" you're engaging in is really a not-for-profit activity. That is, if the taxman sees what you're doing still as a hobby.
The distinction between a legitimate business, which has an expectation for generating a profit, and a hobby can be significant. Let's say you start your own business and your income from it was approximately $1,000, and your expenses were $10,000.
If the IRS agrees it's a business, you would be able to claim a loss of $9,000 against the other income on your tax return. For example, when filing jointly, your spouse may have income from her job, and you could deduct the $9,000 loss from that income. But if the IRS sees it as a hobby, your deduction for your expenses would be limited to the amount of gross income from the activity. Any excess expenses wouldn't be deductible.

What allows a taxpayer to categorize revenue-producing activity as a business? The IRS has two standards when making this determination.
First is the presumption that a trade, business or revenue-producing activity has a profit motive and is not a hobby when certain criteria are met. An activity is presumed to not be a hobby when the gross income from the activity exceeds its deductions for three out of five consecutive tax years. (This standard is two out of seven years when the activity involves breeding, training and showing of racing horses.)
This standard is straightforward, and when met, the burden is on the IRS to prove the activity is actually just a hobby. Also, taxpayers should make sure to file a Form 5213 before the end of the fourth taxable year (or sixth taxable year in the case of horse racing) to notify the IRS of their intent to claim the presumptive determination.
But what if the business failed to generate enough gross income to exceed its deductions during a five-year period? After all, many businesses fall into this category.
Treasury regulations say a reasonable expectation of profit isn't required, and consideration can be given to objective factors to conclude that an activity is engaged in for profit and isn't a hobby. These regulations include nine factors that can result in the IRS determining that an activity isn't a hobby.
  1. The manner in which the taxpayer carries on the activity. Acting in a business-like manner and keeping complete books and records is an important indication of a profit motive.
  2. The expertise of the taxpayer or his advisers. Preparing for the trade or activity, studying accepted business, economic and scientific practices, and consulting with an expert are important factors.
  3. Time and effort expended. Devoting much of your personal time, or even leaving a job in another occupation to devote your time to the activity, will be a factor in your favor.
  4. The expectation that assets purchased or used in the activity may appreciate.
  5. Taxpayer's success in carrying on similar activities in the past, resulting in a profit.
  6. The history of income and losses in respect to the activity. It's reasonable to incur a lot of expenses when starting a business, so startup costs can exceed income for several years. But unexplained losses for an extended period can indicate a lack of profit motive. So having a business and financial plan is helpful to explain what's going on.
  7. The amount of occasional profits that are earned. Don't try to outsmart the IRS and claim a $10 profit every few years. The agency will look at the total of your expenses and income over a period of time to determine what's really going on.
  8. Your financial status. If you have substantial income from other sources, the IRS may conclude you are really using your hobby to generate a loss to claim deductions against other income.  
  9. Your personal pleasure or recreation derived from the activity. The presence of a personal motive for carrying on the activity may indicate the absence of a profit motive. This is especially apparent when the activity brings personal enjoyment or recreation.

Thursday, September 7, 2017

5 times you don’t need to give out your Social Security number

If you feel like you’re constantly asked to provide your Social Security number, you may be right! Social Security numbers were originally created to track income to determine your Social Security benefits in retirement. But now, a Social Security number has become a near-universal form of identification, and is often sought whenever you give out your personal information.
With this increase in use has come a massive increase in the amount of identity theft reported in the United States. In 2016, 15.4 million cases of identity theft were reported, according to the Insurance Information Institute. One way to lessen your risk is to limit where you give out your information. Here are 5 places where you don’t need to give out your Social Security number.
1. Before you’ve been hired for a job
Employers may ask for a Social Security number before you’ve been hired, but it’s not mandatory to provide it, according to the Society of Human Resource Management. When you are hired, you will need to provide your Social Security number so your employer can do a background check. But if you’re asked for your SSN on your job application, you may be able to leave it blank, or explain that you don’t feel comfortable providing that information.
2. At the doctor’s office
Your doctor may ask for your Social Security number when you fill out patient forms because they want to easily identify you to collect outstanding payments. But your insurance company identifies you by your insurance policy number in order to bill you and submit payments. While your insurance company will need your SSN, your doctor does not need this information for billing purposes.
If you have Medicare or other federally sponsored health care, you will need to provide your SSN, according to the IRS. Otherwise, leave this box blank the next time you’re visiting the doctor.
3. To attend schools or colleges
According to the US Department of Justice, all children living in the US are entitled to attend public school, and schools cannot require children or their parents to provide a Social Security number in order to enroll. If they ask for proof of identity, provide a birth certificate or passport. Leases or electric bills can also be presented as proof of address.
If you’re heading to college, you’re not required to submit your Social Security number. However, if you’re applying for financial aid, loans, or scholarships, this information will be needed to confirm you or your family’s income, as well as to check your credit score.
4. At supermarkets and other retailers
You will need to provide your Social Security number when applying for a credit card, because the bank associated with your card will want to track your credit score. But rewards cards at grocery stores, pharmacies, and other retailers don’t have any credit value, and are used just to track your purchases. So don’t give out your SSN when you sign up!
5. When purchasing travel
You don’t need to provide your SSN in order to book travel. Depending on where you’re going, you will need to provide your passport number and will need a credit card in order to purchase your tickets. Once you’re ready to take off, bring your driver’s license, passport, or another TSA-approved form of ID.
There are situations when you will need to provide your Social Security number, like applying for a credit card; filing your tax returns; when signing up for state and federal benefits like Medicare or food stamps; or when applying for a driver’s licence. Otherwise, if you’re asked for your SSN, the Social Security Administration recommends you ask these questions:  
  1. Why do you need it?
  2. What will it be used for?
  3. What other identification do you accept?
  4. What will happen if I don’t provide my number?
Keep your Social Security card in a safe place and take steps to protect your identity.