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.

Wednesday, August 23, 2017

Divorce or Separation May Affect Taxes



Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.
IRS.gov has resources that can help along with these key tax tips:
  • Child Support Payments are not Alimony.  Child support payments are neither deductible nor taxable income for either parent.
  • Deduct Alimony Paid. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse's Social Security number or Individual Taxpayer Identification Number.
  • Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
  • IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse's traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.
  • Report Name Changes.  Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to SSA.gov for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.

Tuesday, August 1, 2017

Don’t Take the Bait, Step 4: Defend against Ransomware


  
WASHINGTON – The Internal Revenue Service, state tax agencies and the tax industry today warned tax professionals that ransomware attacks are on the rise worldwide as bad actors here and abroad infiltrate computer systems and hold sensitive data hostage.
The IRS is aware of a handful of tax practitioners who have been victimized by ransomware attacks. The Federal Bureau of Investigation recently cautioned that ransomware attacks are a growing and evolving crime threatening the private and public sectors as well as individuals.
The “Don’t Take the Bait” campaign, a 10-week security awareness campaign aimed at tax professionals, hopes to increase awareness about these attacks. The IRS, state tax agencies and the tax industry, working together as the Security Summit, urge practitioners to learn to protect themselves. This is part of the ongoing Protect Your Clients; Protect Yourself effort.
“Tax professionals face an array of security issues that could threaten their clients and their business,” IRS Commissioner John Koskinen said. “We urge people to take the time to understand these threats and take the steps to protect themselves. Don’t just assume your computers and systems are safe.”   Ransomware is a type of malware that infects computers, networks and servers and encrypts (locks) data. Cybercriminals then demand a ransom to release the data. Users generally are unaware that malware has infected their systems until they receive the ransom request.
The 2017 Phishing Trends and Intelligence Report issued annually by Phishlabs named ransomware one of two transformative events of 2016 and called its rapid rise a public epidemic.
In May 2017, a ransomware attack dubbed “WannaCry” targeted users who failed to install a critical update to their Microsoft Windows operating system or who were using pirated versions of the operating system. Within a day, criminals held data on 230,000 computers in 150 countries for ransom.
The most common delivery method of this malware is through phishing emails. The emails lure unsuspecting users to either open a link or an attachment. However, the FBI also has warned that ransomware is evolving and cybercriminals can infect computers by other methods, such as a link that redirects users to a website that infects their computer.
Victims should not pay a ransom. Paying it further encourages the criminals. Often the scammers won’t provide the decryption key even after a ransom is paid.
Tips to Prevent Ransomware Attacks
Tax practitioners – as well as businesses, payroll departments, human resource organizations and taxpayers – should talk to an IT security expert and consider these steps to help prepare for and protect against ransomware attacks:
  • Make sure employees are aware of ransomware and of their critical roles in protecting the organization’s data.
  • For digital devices, ensure that security patches are installed on operating systems, software and firmware. This step may be made easier through a centralized patch management system.
  • Ensure that antivirus and anti-malware solutions are set to automatically update and conduct regular scans.
  • Manage the use of privileged accounts — no users should be assigned administrative access unless necessary, and only use administrator accounts when needed.
  • Configure computer access controls, including file, directory and network share permissions, appropriately. If users require read-only information, do not provide them with write-access to those files or directories.
  • Disable macro scripts from office files transmitted over e-mail.
  • Implement software restriction policies or other controls to prevent programs from executing from common ransomware locations, such as temporary folders supporting popular Internet browsers, compression/decompression programs.
  • Back up data regularly and verify the integrity of those backups.
  • Secure backup data. Make sure the backup device isn’t constantly connected to the computers and networks they are backing up. This will ensure the backup data remains unaffected by ransomware attempts.
Victims should immediately report any ransomware attempt or attack to the FBI at the Internet Crime Complaint Center, www.IC3.gov. Tax practitioners who fall victim to a ransomware attack also should contact their local IRS stakeholder liaison.

Tips to Keep in Mind on Income Taxes and Selling a Home



Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.
Below are tips to keep in mind when selling a home:
Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:
  • Owned the home for at least two years  
  • Lived in the home as their main home for at least two years    Gain.  If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return
Loss.  A main home that sells for lower than purchased is not deductible.
Reporting a Sale.  Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.
Possible Exceptions.  There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.
Worksheets.  Worksheets are included in Publication 523, Selling Your Home, to help you figure the:
  • Adjusted basis of the home sold
  • Gain (or loss) on the sale
  • Gain that can be excluded
Items to Keep In Mind:
  • Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
  • Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
  • Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
  • Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
  • Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Monday, July 17, 2017

Members of the Armed Forces Get Special Tax Benefits



Members of the military may qualify for tax breaks and benefits. Special rules could lower the tax they owe or give them more time to file and pay taxes. In addition, some types of military pay are tax-free.
Here are some tips to find out who qualifies:

 
1. Combat Pay Exclusion.  If someone serves in a combat zone, or provides direct support, part or even all of their combat pay is tax-free. However, there are limits for commissioned officers. See Earned Income Tax Credit below for important information.
2. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
3. Special Deductions:
  • Reservists’ Travel.  Reservists whose duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
  • Moving Expenses.  Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
  • Uniform.  Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
4. Earned Income Tax Credit or EITC.  If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
5. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
6. ROTC Allowances.  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
7. Separation and Transition to Civilian Life.  If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
8. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.
For more, refer to IRS.gov/Military or Publication 3, Armed Forces’ Tax Guide, on IRS.gov.
Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Monday, July 10, 2017

How to Handle an IRS Letter or Notice



The IRS mails millions of letters every year to taxpayers for a variety of reasons. Keep the following suggestions in mind on how to best handle a letter or notice from the IRS:

  1. Do not panic. Simply responding will take care of most IRS letters and notices.
  2. Do not ignore the letter. Most IRS notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do. Read the letter carefully; some notices or letters require a response by a specific date.
  3. Respond timely. A notice may likely be about changes to a taxpayer’s account, taxes owed or a payment request. Sometimes a notice may ask for more information about a specific issue or item on a tax return. A timely response could minimize additional interest and penalty charges.
  4. If a notice indicates a changed or corrected tax return, review the information and compare it with your original return. If the taxpayer agrees, they should note the corrections on their copy of the tax return for their records. There is usually no need to reply to a notice unless specifically instructed to do so, or to make a payment.
  5. Taxpayers must respond to a notice they do not agree with. They should mail a letter explaining why they disagree to the address on the contact stub at the bottom of the notice. Include information and documents for the IRS to consider and allow at least 30 days for a response.
  6. There is no need to call the IRS or make an appointment at a taxpayer assistance center for most notices. If a call seems necessary, use the phone number in the upper right-hand corner of the notice. Be sure to have a copy of the related tax return and notice when calling.
  7. Always keep copies of any notices received with tax records.
  8.  The IRS and its authorized private collection agency will send letters and notices by mail. The IRS will not demand payment a certain way, such as prepaid debit or credit card. Taxpayers have several payment options for taxes owed.

Thursday, July 6, 2017

IRS Offers Tips for Teenage Taxpayers with Summer Jobs


Students and teenagers often get summer jobs. This is a great way to earn extra spending money or to save for later. The IRS offers a few tax tips for taxpayers with a summer job:
  1. Withholding and Estimated Tax. Students and teenage employees normally have taxes withheld from their paychecks by the employer.  Some workers are considered self-employed and may be responsible for paying taxes directly to the IRS. One way to do that is by making estimated tax payments during the year.
  2. New Employees. When a person gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the employee’s pay. The IRS Withholding Calculator tool on IRS.gov can help a taxpayer fill out the form.
  3. Self-Employment. A taxpayer may engage in types of work that may be considered self-employment. Money earned from self-employment is taxable. Self-employment work can be jobs like baby-sitting or lawn care. Keep good records on money received and expenses paid related to the work.  IRS rules may allow some, if not all, costs associated with self-employment to be deducted. A tax deduction generally reduces the taxes you pay.
  4. Tip Income. Employees should report tip income. Keep a daily log to accurately report tips. Report tips of $20 or more received in cash in any single month to the employer.
  5. Payroll Taxes. Taxpayers may earn too little from their summer job to owe income tax. Employers usually must withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer, in a timely manner.
  6. Newspaper Carriers. Special rules apply to a newspaper carrier or distributor. If a person meets certain conditions, then they are self-employed. If the taxpayer does not meet those conditions, and are under age 18, they may be exempt from Social Security and Medicare taxes.
  7. ROTC Pay. If a taxpayer is in a ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive may not be taxable, see Publication 3 for details.

Monday, April 17, 2017

IRS Reminds Taxpayers of April 18 Tax-Filing Deadline


WASHINGTON — The Internal Revenue Service has received 103.6 million 2016 individual income tax returns as of April 7 and expects millions more to be filed by the April 18 deadline. Special filing deadline rules apply to members of the military serving in combat zones, those living outside the U.S. and those living in declared disaster areas.

The IRS also expects more than 13 million taxpayers to request a filing extension, giving them six additional months to complete and file their tax return.

Who Needs to File?
Not everyone is required to file a tax return. The requirement to file depends on a person’s income, filing status, age and whether they can be claimed as a dependent on someone else’s return. Anyone not sure whether they need to file a return should see Do I Need to File a Tax Return or refer to Publication 17, Your Federal Income Tax for Individuals, on IRS.gov.

For an estimated one million taxpayers who did not file a 2013 tax return, April 18, 2017, is the last day to file to claim their part of tax refunds totaling more than $1 billion. Taxpayers due a refund must file a return within three years of its due date or the money becomes the property of the U.S. Treasury. There are no late filing penalties if a refund is due.

According to the IRS, the most common reasons people do not file a return who should are: they don’t know how, may not have the documents needed or owe more tax than they can pay. Taxpayers who owe more than they can pay should pay as much as they can by the due date in order to minimize interest and penalties.

Extensions of Time to File
Taxpayers who are not ready to file by the deadline should request an extension of time to file. An extension gives the taxpayer until Oct. 16 to file but does not extend the time to pay. Penalties and interest will be charged on all taxes not paid by the April 18 filing deadline.


IRS will automatically process an extension of time to file when taxpayers select Form 4868 and they are making a full or partial federal tax payment using IRS Direct Pay, the Electronic Federal Tax Payment System or by paying with a credit or debit card by the April due date. There is no need to file a separate Form 4868 extension request when making an electronic payment and indicating it is for an extension.
Taxpayers also can complete and mail in Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to get a six-month extension.

Taxpayers Who Can’t Pay
Taxpayers should file by the deadline, even if they can’t pay, or pay as much as possible and ask the IRS about payment options. By filing a tax return, even without full payment, taxpayers will avoid the failure-to-file penalty. This penalty is assessed when the required return is not filed by the due date or extended due date if an extension is requested.

The failure-to-file penalty is generally 5 percent per month and can be as much of 25 percent of the unpaid tax. The penalty for returns filed more than 60 days late can be $205 or 100 percent of the unpaid tax.

The failure-to-pay penalty, which is the penalty for any taxes not paid by the deadline, is ½ of 1 percent of the unpaid taxes per month and can be up to 25 percent of the unpaid amount. Taxpayers must also pay interest on taxes not paid by the filing deadline.

The IRS reminds taxpayers that there is no law that permits taxpayers to refuse to file a federal tax return or refuse to pay their taxes. This includes for reasons based on programs or policies with which they disagree on moral, ethical, religious or other grounds. Taxpayers who file a frivolous tax return can be assessed a $5,000 penalty and civil penalties of up to 75 percent of the underpaid tax. Frivolous tax returns are those tax returns that do not include enough information to figure the correct tax or that contain information clearly showing that the tax reported is substantially incorrect.

Thursday, March 23, 2017

IRS Reminds Seniors to Remain on Alert to Phone Scams during Tax Season


WASHINGTON – With the 2017 tax season underway, the IRS reminds seniors to remain alert to aggressive and threatening phone calls by criminals impersonating IRS agents. The callers claim to be IRS employees, but are not.
These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling.
The victims are told they owe money to the IRS and must pay it promptly through a preloaded debit card or wire transfer. If the victim refuses to cooperate, they are often threatened with arrest. In many cases, the caller becomes hostile and insulting. Alternately, victims may be told they have a refund due to try to trick them into sharing private information. If the phone isn’t answered, the phone scammers often leave an “urgent” callback request.
“The IRS warns seniors about these aggressive phone calls that can be frightening and intimidating. The IRS doesn't do business like that," said IRS Commissioner John Koskinen. “We urge seniors to safeguard their personal information at all times. Don't let the convincing tone of these scam calls lead you to provide personal or credit card information, potentially losing hundreds or thousands of dollars. Just hang up and avoid becoming a victim to these criminals‎."
In recent years, thousands of people have lost millions of dollars and their personal information to tax scams and fake IRS communication.
Later this spring, the only outside agencies authorized to contact taxpayers about their unpaid tax accounts will be one of the four authorized under the new private debt collection program. Even then, any affected taxpayer will be notified first by the IRS, not the private collection agency (PCA).
The private debt collection program, authorized under a federal law enacted by Congress in 2015, enables designated contractors to collect tax payments on the government’s behalf. The program begins later this spring. The IRS will give taxpayers and their representative written notice when their account is being transferred to a private collection agency. The collection agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Information contained in these letters will help taxpayers identify the tax amount owed and help ensure that future collection agency calls are legitimate.
The IRS reminds seniors this tax season that they can easily identify when a supposed IRS caller is a fake. Here are four things the scammers often do but the IRS and its authorized PCAs will not do. Any one of these things is a telltale sign of a scam.
The IRS and its authorized private collection agencies will never:
  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.
If you don’t owe taxes, or have no reason to think that you do:
  • Do not give out any information. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" in the notes.
If you know you owe, or think you may owe tax:
  • Call the IRS at 800-829-1040. IRS workers can help you.
Remember, too, the IRS does not use email, text messages or social media to discuss personal tax issues involving bills or refunds. The IRS will continue to keep taxpayers informed about scams and provide tips to protect them. The IRS encourages taxpayers to visit IRS.gov for information including the “Tax Scams and Consumer Alerts” page.
Additional information about tax scams is available on IRS social media sites, including YouTube Tax Scams.

Saturday, March 18, 2017

Understanding the Child and Dependent Care Tax Credit



The IRS urges people not to overlook the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it if they paid for someone to care for a child, dependent or spouse last year.
Taxpayers can use the IRS Interactive Tax Assistant tool, Am I Eligible to Claim the Child and Dependent Care Credit?, to help determine if they are eligible to claim the credit for expenses paid for the care of an individual to allow the taxpayer to work or look for work.
Eight other key points about this credit include:
  1. Work-Related Expenses. The care must have been necessary so a person could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
  2. Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
  3. Earned Income. A taxpayer must have earned income for the year, such as wages from a job. For those who are married and file jointly, the spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.
  4. Credit Percentage / Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for paid care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.
  5. Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer. Form 2441, Child and Dependent Care Expenses, has more on these rules. File the form with a tax return.
  6. Qualifying Person’s SSN. The Social Security number of each qualifying person must be included to claim the credit.
  7. Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return.
Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer's Tax Guide.
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.

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions



WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.
The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017. 
Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.
Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B. 
Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.
IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.
A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.
More information on RMDs, including answers to frequently asked questions, can be found on IRS.gov.