Saturday, January 30, 2016

Watchdog pushes IRS on identity theft detection

A new fraud detection system that the Internal Revenue Service (IRS) is developing needs to be refined to spot identity theft, a watchdog said in a report publicly released Thursday.
The Treasury Inspector General for Tax Administration (TIGTA) examined the system as part of its efforts to review the IRS's identity-theft detection efforts. Identity theft is a big issue for the IRS, with the agency having detected 1.8 million fraudulent tax returns with stolen identities in 2014, according to the report.
The IRS has been developing a new program, called the Return Review Program (RRP), to replace its current fraud detection system. The agency conducted a pilot of the program during the 2014 tax return processing year, and it expanded its use of the RRP the following year, the TIGTA said.

While the RRP pilot successfully detected some returns involving identity theft that weren't flagged by other fraud detection systems, TIGTA found that the RRP did not detect more than 54,000 identity theft tax returns with refunds totaling more than $313 million that were identified by other existing systems. "As the IRS continues to develop the RRP, it needs to ensure that the RRP will identify identity theft cases being identified by existing systems as well as other identity theft cases," the TIGTA said.

The TIGTA recommended that the IRS ensure the RRP is detecting the identity-theft tax returns that are being identified by the existing systems before the RRP replaces them. The IRS agreed with the recommendation.
The watchdog also reviewed the IRS’s process for limiting the number of refunds that can be deposited into the same bank account. If there are more than three refund checks requested for an account, refunds are required to be converted to a paper check.
The TIGTA found that programming and oversight errors led to more than 5,500 direct deposits not being converted to paper refund checks. The IRS has addressed two of the errors and said it will fix a third by August, according to the report.

The watchdog also said that the IRS needs additional processes for handling checks that are returned as undeliverable.  

Friday, January 29, 2016

10 ways to mess up your taxes

It's tax season again, and you'll likely be required to file a tax return within the next few months. There is plenty of advice being published about tax deductions, strategies to save money, and ways to keep your personal information safe when you file. However, not much is said about all of the ways you could potentially screw up your taxes. With that in mind, here are 10 mistakes you'll want to avoid when preparing your 1040.
1. Mathematical errors -- If the numbers on your tax return don't add up, it could greatly increase the likelihood of an audit. The IRS receives a copy of all W-2 and 1099 forms mailed to you, so they check what you're supposed to report. For example, if you have two W-2s, one for $40,000 and another for $10,000, and you incorrectly report income of $41,000, it can trigger an audit.
2. Misspellings -- The IRS's computers may kick back returns if words are misspelled -- especially if names don't match up. For example, if I were to spell my name "Matthew" one year and "Mathew" the next, it could potentially create an unnecessary problem.
3. Incorrect bank account information -- You have the option of requesting that your return be direct deposited into one or more bank accounts. However, make sure to double-check the account numbers you enter. Incorrect bank information could cause your refund to disappear.
4. Forgetting to report some income -- It's tough to "forget" the income from your primary job, but smaller W-2s and 1099s are easier to forget about. For example, if you worked a part-time job last January, you may not even remember to look out for a W-2 and file your tax return without it. However, you can be sure that the IRS won't forget about that income.
5. Wrong filing status -- "Single" and "married filing jointly" are the most common, but did you know there are five options you can choose from. Specifically, one major oversight is filing as single instead of "head of household" if you have a qualified person living in your home. This can cost you quite a bit of money -- head of household filers qualify for an additional $2,950 standard deduction over singles, as well as more favorable tax brackets.
6. Not itemizing deductions -- Many people simply claim the standard deduction without checking if it's the most beneficial option for them.  The standard deduction may indeed be the best choice for you, but it pays to take the time and make sure. Just to give you an idea, you would be better off itemizing if your deductions exceeded $6,300 (single filers), $9,250 (head of household), or $12,600 (married filing jointly).
7. Ignoring some charitable contributions -- Taxpayers who donate large sums of cash rarely forget to claim them at tax time. However, smaller cash donations are often overlooked, as are donations of property, which are often a hassle to document. Small donations -- even of a few dollars -- can really add up throughout the year, so it pays to save your documentation.
8. Not signing your return -- The IRS won't process an unsigned tax return, even if it was e-filed. This isn't a common mistake, but it's worth mentioning. After all, forgetting to sign your return is a silly reason for a processing delay.
9. Filing or paying too late -- The tax filing deadline for your 2015 return is April 18, 2016, and you must either file your return or request an extension by that date -- no exceptions. The penalties for not filing on time can be severe. If you owe the IRS money, it must be paid by the April 18 deadline even if you file an extension, or interest and penalties will begin to accumulate.
10. Not filing at all -- The penalties for filing late are harsh, but they're nothing compared to the consequences for not filing a tax return at all if you're required to do so. There are some individuals that will tell you that filing a return isn't necessary for a variety of reasons (it's unconstitutional, etc.). They are lying. Failing to file a return comes with a penalty of 5% of your tax owed per month or portion of a month you're late.
Take your tax return seriously
Some of these are admittedly rare, especially in the modern era of electronic filing. For example, few people submit an unsigned return to the IRS anymore (although it does happen). However, some of these are quite common, such as mathematical errors or misspellings -- and these are mistakes that could lead to an audit.
My point here is that when it comes to your tax return, it's worth the time and effort to get it right. Be sure to investigate what deductions you may be entitled to, document them thoroughly, and claim the breaks to which you are entitled. Check your return for errors several times before you submit it, and include any paperwork that backs up the information on it.
Anyone who has been through one can tell you that an audit is at best an inconvenience, so do yourself a favor -- don't screw up your taxes.

Sunday, January 24, 2016

The Most-Overlooked Tax Breaks for the Newly Retired

Because federal tax law reaches deep into all aspects of our lives, it’s no surprise that the rules that affect us change as our lives change. This can present opportunities to save or create costly pitfalls to avoid. Being alert to the rolling changes that come at various life stages is the key to holding down your tax bill to the legal minimum.
Bigger Standard Deduction
When you turn 65, the IRS offers a gift in the form of a bigger standard deduction. For 2015 returns, for example, a single 64-year-old gets a standard deduction of $6,300 (it will be the same amount for 2016). A 65-year-old gets $7,850 in 2015 (and $7,850 in 2016).
The extra $1,550 will make it more likely you’ll take the standard deduction rather than itemizing and, if you do, the additional amount will save you almost $400 if you’re in the 25% bracket. Couples in which one or both spouses are age 65 or older also get bigger standard deductions than younger taxpayers. Be sure to take advantage of your age.

Easier Medical Deductions
Until 2017, taxpayers age 65 and older get a break when it comes to deducting medical expenses. Those who itemize get a money-saving deduction to the extent their medical bills exceed 7.5% of adjusted gross income. For younger taxpayers, the AGI threshold is 10%.

Deduct Medicare Premiums
If you become self-employed—say, as a consultant—after you leave your job, you can deduct the premiums you pay for Medicare Part B and Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
This deduction is available whether or not you itemize and is not subject to the 7.5%-of-AGI test that applies to itemized medical expenses for those age 65 and older. One caveat: You can't claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by either your employer (if you have retiree medical coverage, for example) or your spouse's employer (if he or she has a job that offers family medical coverage).

Spousal IRA Contribution
Retiring doesn’t necessarily mean an end to the chance to shovel money into an IRA.
If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own. (We’re assuming that since you’re reading about breaks for retirees, you’re at least 50 years old.) If you use a traditional IRA, spousal contributions are allowed up to the year you reach age 70 ½. If you use a Roth IRA, there is no age limit. As long as your spouse has enough earned income to fund the contribution to your account (and any deposits to his or her own), this tax shelter’s doors remain open to you.

Timing Tax Payments
Although ours is widely hailed as a “voluntary” tax system, it works best when there is the least opportunity not to volunteer.
So, although we think of April 15 as tax day, taxes are actually due as income is earned, and employers have become the country’s primary tax collectors by withholding taxes from our paychecks. When you retire, you break out of that system: Now it’s up to you to make sure the IRS gets its due when it’s due. If you wait until the following April 15 to send a check, you’re in for a nasty surprise in the form of penalties and interest.
You have two ways to get the job done:
Withholding. Withholding isn’t only for paychecks. If you receive regular payments from a company pension or annuity, the payers will withhold tax. . . unless you tell them not to. The same goes for withdrawals from an IRA. That’s right: In retirement, it’s up to you whether part of the money will be proactively skimmed off for the IRS.
With pensions and annuity payments and traditional IRA withdrawals, taxes will be withheld unless you file a Form W-4P to put the kibosh on it. When it comes to traditional IRA distributions, withholding will be at a flat 10% rate, unless you request a different rate or block withholding all together. Things are topsy-turvy with Social Security benefits. There will be no withholding unless you specifically ask for it . . . by filing a Form W-4V. Withholding isn’t necessarily a bad thing, as it stretches your tax bill over the entire year. It might also make life easier if you would otherwise have to make quarterly estimated tax payments.
Quarterly estimated tax payments. The alternative to withholding is to make quarterly estimated tax payments. You need to if you’ll owe more than $1,000 in tax for the year above and beyond what’s covered by withholding. Otherwise, you’ll face a penalty for underpayment of taxes.

The RMD Workaround
Retirees taking required minimum distributions from their traditional IRAs may have an extra option for meeting the pay-as-you-go demand.
If you don’t need the required distribution to live on during the year, wait until December to take the money. And, ask your IRA sponsor to hold back a big chunk of it for the IRS—enough to cover your estimated tax on both the RMD and your other taxable income as well.
Although estimated tax payments are considered made when you send the checks, amounts withheld from IRA distributions are considered paid throughout the year, even if they are made in a lump sum at year-end. So, if your RMD is more than large enough to cover your tax bill, you can keep your cash safely ensconced in its tax shelter most of the year . . . and still avoid the underpayment penalty.

Avoid the Pension Payout Trap
There’s a menacing exception to the general rule that it’s up to you whether taxes will be withheld from payments from pensions, annuities, IRAs and other retirement plans. If you get a lump-sum payment from a company plan, you could fall into a pension-payout trap.
If you take such a payment, the company is required by law to withhold a flat 20% for the IRS ... even if you simply plan to move the money to an IRA via a tax-free rollover. Even if you complete the rollover within the 60 days required by law, the IRS will still hold on to the 20% until you file a tax return for the year and demand a refund. Worse yet, how can you rollover 100% of the lump sum if the IRS is holding on to 20% of it? Failure to come up with the extra money for the IRA would mean that amount would be considered a taxable distribution—triggering an immediate tax bill, maybe penalties and certainly forever reducing the amount in your IRA tax shelter.
Fortunately, there’s an easy way around that miserable outcome. Simply ask your employer to send the money directly to a rollover IRA. As long as the check is made out to your IRA and not to you personally, there’s no withholding.
Even if you intend to spend some of the money right away, your best bet is still to ask your employer to make the direct IRA transfer. Then, when you withdraw funds from the IRA, it’s up to you whether there will be withholding. 

Tax-Free Profit from a Vacation Home
The rules are clear: To qualify for tax free-profit from the sale of a home, the home must be your principal residence and you must have owned and lived in it for at least two of the five years leading up to the sale. But there is a way to capture tax-free profit from the sale of a former vacation home.
Let’s say you sell the family homestead and cash in on the break that makes up to $250,000 in profit tax-free ($500,000 if you’re married and file jointly). You then move into a vacation home you’ve owned for 25 years. As long as you make that house your principal residence for at least two years, part of the profit on the sale will be tax-free.
To determine what portion of the profit qualifies as tax-free, you need to compare the amount of time you owned the property before 2009 and after you converted it to your principal residence to the amount of time, starting in 2009, that it was used as a vacation home or rental unit. Assume you bought a vacation home in 1998, convert it to your principal residence in 2015 and sell it in 2018. The post-2008 vacation-home use is seven of the 20 years you owned the property. So, 35% (7 ÷ 20) of the profit would be taxable at capital gains rates; the other 65% would qualify for the $250,000/$500,000 exclusion.
Give Your Money Away
Few Americans have to worry about the federal estate tax. After all, each of us has a credit large enough to permit us to pass up to $5,450,000 to heirs in 2016. Married couples can pass on double that amount.
But, if the estate tax might be in your future, be sure to take advantage of the annual gift-tax exclusion. This rule lets you give up to $14,000 annually to any number of people without worrying about the gift tax. If you have three married children and each couple has two children, for example, you can give the kids and grandkids a total of $168,000 in 2015 without even having to file a gift tax return. Money given under the protection of the exclusion can’t be taxed as part of your estate after your death.

Saturday, January 23, 2016

Filing Early for Social Security: When it Makes Sense

It’s fairly common advice spread by financial advisors and laymen alike: it’s always better to file for Social Security later rather than earlier. After all, by delaying taking benefits, payments can go up significantly.
Chances are that advantage of delaying taking benefits will apply (and appeal) to most people. Filing earlier (or as soon as one is eligible) can be the right choice many people. Here are some situations when that's true. (For more, see: 4 Unusual Ways to Boost Social Security Benefits.)
  • You want to retire now: While some people choose to delay receiving Social Security until they hit age 70, others want to enjoy their golden years immediately. Unless you have other forms of income, filing for Social Security is the only way you’ll survive without a steady job. Try to wait until your full retirement age, usually at 66 or 67. Taking it before then will lower your monthly benefit.
  • You’re in poor health: Though life expectancy continues to rise in this country, many seniors still worry about dying early. If you have a chronic condition or a terminal illness, you might consider taking your benefits early. That way, you can enjoy retirement without living on peanuts. “Delaying benefits doesn’t make sense if there is a good chance you won’t be around to enjoy it,” said CFP Jennifer Davis of Halpern Financial.
  • You have dependents: If you have children who qualify as dependents, they may receive benefits when you take Social Security. The math might work out in their — and your — favor. The details can be confusing for the layperson, so consult an advisor if you’re unsure.
  • You’re older than your spouse and earn more: For older spouses who are also high earners, it might behoove you to take your benefit at age 70 and have your spouse take it at 62 years old. The details can get tricky on this one as well, so make sure to do the math with the official Social Security calculator.
  • You’re divorced or have a deceased spouse: Filing early can make financial sense for those who are divorced but were married at least 10 years, as well as those who’ve lost a partner. The survivor benefits can be a great boon, especially for a single senior. Each person can claim one benefit (their own or their spouse’s) at a time and wait to take the other benefit later.
  • Your spouse can take benefits later: If you’re still married, you may only need to take one person’s Social Security benefits early. This strategy can give you some income immediately while the other person’s benefits continue to grow.
  • You have no other assets: Some people only use Social security to supplement their income. For some, it’s their only source of income in retirement. If you’re laid off or find your job too difficult to maintain, it may be easier to retire and take your benefits early. While the spend-now/worry-about-it-later mentality is typically toxic when it comes to personal finance, it can be the only option for those of us struggling financially in older age.

The Bottom Line

The common advice still holds true for many, so don’t assume filing early for Social Security is a good idea. It’s important to avoid the temptation to take Social Security early just because it’s available,” Davis said. “It may be the only steady source of income (that grows with the cost of living) an individual has.” If you’re not certain how applicable your situation is, consult an advisor.

Wednesday, January 20, 2016

Getting Ready to File Your Tax Return: Health Coverage Exemptions and Payments

The Affordable Care Act requires you and your dependents to have health care coverage, an exemption from the coverage requirement, or make a shared responsibility payment for any month without coverage or an exemption with your return. This law will affect your federal income tax return when you file this year
Here are five things you should know about exemptions from the health care law’s coverage requirement and the individual shared responsibility payment that will help you get ready to file your tax return.
  • You may be eligible to claim an exemption from the requirement to have coverage and are not required to make a payment. If you qualify for an exemption, you will need to file Form 8965, Health Coverage Exemptions,with your tax return.  You can claim most exemptions when you file your tax return. However, you must apply for certain exemptions in advance through the Health Care Insurance Marketplace,
  • If you receive an exemption through the Marketplace, you’ll receive an Exemption Certificate Number to include when you file your taxes. If you have applied for an exemption through the Marketplace and are still waiting for a response, you can put “pending” on your tax return where you would normally put your ECN.
  • You do not need to file a return solely to report your coverage or to claim a coverage exemption.
If you are not required to file a federal income tax return for a year because your gross income is below your return filing threshold, you are automatically exempt from the shared responsibility provision for that year and do not need to take any further action to secure an exemption.
  • If you file a tax return and your income is below the filing threshold for your filing status, you should use Part II of Form 8965, Coverage Exemptions for Your Household Claimed on Your Return, to claim a coverage exemption. You should not make a shared responsibility payment if you are exempt from the coverage requirement because you have income below the filing threshold.
  • If you do not have qualifying coverage or an exemption for the year, you will need to make an individual shared responsibility payment for each month without coverage or an exemption when you file your return. Examples and information about figuring the payment are available on the IRS Calculating the Payment page  

Friday, January 15, 2016

Will Someone Else Be Cashing Your Tax Refund This Year?

Here is the IRS’s phone number: 800-829-1040. With an anticipated $21 billion in tax refund fraud this year, you might need it. And that figure doesn’t include losses from dodges like the IRS phone scam, which has been enjoying a renaissance of late.
IRS phone frauds aren’t terribly difficult to detect. You get a call from the IRS saying you owe money and that you must pay immediately. The threat of police intervention may or may not accompany this hot and heavy approach.
Here’s the one-step method: hang up. The IRS doesn’t call asking for money — yet.
Let’s say you forget the one-step method. Here are four dead giveaways that it’s a scam:
  1. The IRS never asks for immediate payment,
  2. The agency will never bill you without giving you an opportunity to dispute the claim.
  3. Although you shouldn’t get this far into the conversation, the IRS doesn’t care how you pay, and won’t point you to a particular method.
  4. There will never be any threat involving police or marshals or prison.
If you were starting to feel a little better, stop. Think of tax refund fraud as the clever cousin of the above. It’s not at all easy to detect, or even avoid.
Tax Refund Fraud Is Getting Worse
With more than a billion personal records “out there,” identity theft has become the third certainty in life, right behind death and the topic at hand.
I write about this topic extensively, and I continue to talk about it because a knowledgeable taxpayer stands a better chance of sidestepping the tax-time pitfalls out there — especially tax refund fraud.
What Can You Do?
Unfortunately, if you become the victim of tax refund fraud, you are going to have a long road ahead before everything is resolved. It is not uncommon to wait more than six months before you get the tax refund that’s actually owed to you.
That is why it’s important to shift to a new paradigm, and act.
  1. Assume that your data has been compromised, and proceed accordingly.
  2. File your taxes as early as possible.
  3. Read all mail from the IRS, and if there is any indication of fraud, act without delay.
What’s the bottom line here? There are myriad ways to get scammed. If your Social Security number has been compromised in a data breach (21.5 million SSNs were compromised in last year’s Office of Personnel Management breach alone, not to mention the approximately 100 million SSNs involved in healthcare breaches), then you are in the danger zone. (See the above three pieces of advice.)
What to Do If You Are a Victim of Tax Identity Theft
In addition to a big-picture discussion of what needs to happen at the federal level to stanch the bleeding of our federal treasury, my new book Swiped details what you should do if you have been the victim of tax refund fraud.
Report the crime. File a report with your local police, call the FTC Identity Theft Hotline at 1-877-438-4338, and the IRS at the number provided at the beginning of this column.
Request a fraud alert or credit freeze. Your Social Security number is definitely in enemy hands. Contact one of the three major credit reporting agencies — Equifax, Experian or TransUnion — and ask that a fraud alert be placed on your credit records. A credit freeze is a more comprehensive lockdown of your credit report than a fraud alert, but it’s also a bit more cumbersome. You have to request a freeze with each of the three bureaus and there may be a fee to freeze and unfreeze your credit, depending on the state where you live. No matter which option you choose, it’s important to remember this is no silver bullet and there are still other forms of identity theft you’re vulnerable to despite having a frozen credit report.
Consider enrolling in credit monitoring programs. You might wish to purchase a combination credit and fraud monitoring service, which provides instant alerts whenever anyone attempts to open a credit account in your name. This can be an effective backup to fraud alerts.
Close fraudulent accounts. Again, the tax refund fraud is impossible without your personally identifiable information. Check your credit reports. You can get free copies of your credit reports once a year at (You can also get a free credit report summary every month on Close any credit or financial account that has been tampered with by a thief or opened without your permission.
Contact the IRS. Call the number provided on the IRS notice informing you of the fraud if it is not the same as the number provided here. To clear your tax record, complete IRS Form 14039, Identity Theft Affidavit. You can use a fillable form at, print it, then mail or fax it.
Pay your taxes. Be sure to continue to pay your taxes and file your tax returns on time, even if you must do so by mailing in paper forms.
Stay diligent. If you contacted the IRS about taxpayer ID theft and did not receive a resolution, also contact the Identity Protection Specialized Unit at 1-800-908-4490 about your case.
Stay alert. You have to assume that if someone has enough of your personal information to file a tax return, they have more than enough information to commit other forms of identity theft. Read every explanation of benefits statement and be sensitive to any communication you may receive from a debt collector. It may not be a mistake.
Unfortunately, tax fraud is a fact of life. The best way to deal with it also happens to be simple: file as early as possible and open all your mail.