IRS Scams

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Tax Professionals have a duty to protect taxpayers and warn them of possible scams that might affect them. One of the latest scams, called “Phone scam”, targets individuals, especially recent immigrants. Victims are told that they owe money to the IRS and instruct them to make a payment using a prepaid debit card or a wire transfer. When victims begin to question the caller, who impersonates an IRS agent, scammers respond with threats of arrest, jail sentence, deportation and suspension of driver or business licenses. Scammers often use fake names and badges, as well as phone numbers that imitate real IRS numbers. Sometimes scammers send follow up emails as a way to support their fake calls or make additional phone calls pretending to be a local police department or a DMV. In addition, they might be able to recite the last four digits of a victim’s social security number and other personal information.

The IRS assures the public that they do not initiate communication electronically, but use regular mail. The agency does not ask for taxpayers’ personal information, including passwords, pins, and credit card or social security numbers; therefore, it’s a sign of scam that needs to be carefully assessed. Taxpayers are advised not to click on any links provided in the fake email due to the risk of “Phishing”. Such links may guide to the website that appears to be affiliated with the IRS to tempt taxpayers to submit personal information that can be used for future hoax. As a result it can lead to “identity theft” and many problems associated with it. Scammers frequently use personal information to steal refunds or take out personal loans. Often it is costly and time consuming to resolve such issues.

As Tax Professionals it is important to educate taxpayers to remain cautious about such fraudulent activities. Taxpayers will be less likely to fall for these scams if they are armed with knowledge of them. In case such scams were attempted against one client, it is important to timely notify other potential victims and the appropriate authorities and governmental agencies.

Turn Your Stock Losses Into Tax Savings

Income tax expense is the largest expense you’ll encounter in your life, bigger than your mortgage or the cost of getting through college. There is however, a way to offset your tax expense with your capital losses.

It could be to your financial advantage to finally sell the stock that will most likely never recoup and turn that investing disappointment around by claiming the loss against any capital gains you might have for the tax year. You will end up not paying any tax on your positive returns on investment. Most taxpayers will be taxed at a 15% rate on long-term capital gains. More affluent taxpayers will be taxed at a 20% rate. Therefore, you’re saving by not paying the IRS and it’s totally legal.

If you don’t have any capital gains, you can deduct up to $3,000 of your capital losses against ordinary income for the tax year. Ordinary income is defined as income received that is taxed at the highest rates and is composed mainly of wages, salaries, commissions and interest income. Any excess can be carried forward indefinitely for use in reducing your taxable income in upcoming tax years.

This could be a deal breaker for some when it comes to staying or dropping out of the stock market. If an individual makes calculated decisions and shows capital gains in the future, they will recoup their capital losses faster than if they would just rely on ordinary income to replace the money they’ve lost.

Rules for corporations looking to catch a tax break on their capital losses differ from rules that apply to individuals.

First of all, capital gains are not taxed at lower, preferential rates for corporations. Even though individual taxpayers pay less tax on their capital gains than on ordinary income, corporations pay the same amount. Furthermore, both corporations and individuals can deduct the capital losses against capital gains they’ve received during the tax year but corporate taxpayers cannot deduct their capital losses against their ordinary income. They can carry the excess capital loss back three years and forward five years. After five years, the corporation will not be able to take advantage of the tax savings. So, if the tax payer does not completely use up the capital loss by the end of the carry-forward period, it will be lost forever. Also, the carry-back of a loss must not increase or result in a net operating loss for the year to which it is being carried back. In that case, it must only be carried forward.

All in all, do not be quick to exit the stock market if you had a bad year. Sometimes stock losses can be turned into tax savings.

The Tax Benefits of Life Insurance

Life insurance can be the most important purchase a person will make in their life. (Life insurance is defined as the contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person.) It can help protect the insured person’s family from excessive costs that may pile up after his/her death, finance children’s education, allow to continue a business or replace lost income. What a lot of people don’t know is that life insurance also may accumulate cash value and offers some tax advantages, which I will describe below.

1. An insured person’s beneficiary (a person who receives proceeds from the life insurance policy) does not pay any federal income tax on death benefits received. So, a beneficiary will obtain the full amount of $250,000 from a $250,000 insurance policy. The IRS does not require any deductions or withholding from beneficiary’s proceeds. In fact, the benefits received are not included in the calculation of their gross income and do not have to be reported.

2. If an insured person transfers the ownership of their life insurance policy to another person, they will avoid paying estate taxes on life insurance death benefits. In order for that to happen, the transfer must take place three years prior to an insured person’s death.

Side note: according to the IRS, “The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your Taxable Estate. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $5,250,000 in 2013.” Therefore, only those people who leave behind over 5 million dollars need to worry about the estate tax.

3. Finally, a life insurance policy that can accumulate cash benefits for it’s owner is called permanent insurance and generally provides coverage for the duration of the insured person’s life. The premium amount remains the same for the life of the policy, and accumulates cash value. This cash value is available to the insured through policy loans. As the cash value builds up, the insured does not have to pay any current federal income tax. In addition, after a big enough amount of cash value has accumulated, the insured can borrow from it to supplement their retirement income.

In my next blog post I will talk about capital losses and how the IRS can help you reduce the financial burden through tax breaks. This might be one of the main reasons to remain in the stock market and recoup your losses faster.

How The Partial Government Shutdown Affects Taxpayers

First of all, say happy birthday to the federal income tax! On October 4th, the federal income tax has turned 100 years old. It is in the heart of our lives, as it makes possible our federal government’s vast operations. Before the income tax, federal government mostly relied on taxing imported goods, alcohol and tobacco for revenue. The first time the federal income tax was implemented was in 1862, during the Civil War, in order to generate revenue for war efforts. However, the government let it expire ten years after. Eventually, the income tax was written into our Constitution during the Progressive Era. The 16th amendment gives our Congress the power to tax income. With years, the tax code became more and more confusing. The tax code consisted of “only” 400 pages in 1913 but now it is made up of 73,954 pages and counting.

Now that we had a little history lesson, let’s get to the current issue the taxpayers are facing…besides the overly complicated tax code.

As you may know, the budget standoff forced the federal government to partially shutdown their operations but you (obviously) will still have to pay any taxes you owe. Taxpayers that are having tax issues this year are the ones who are going to suffer the most because the IRS won’t be answering any phone calls. Surprisingly, this is big news. According to Kelly Phillips Erb, a writer for Forbes magazine, “Even during the busy tax return filing season more than two thirds of callers do get through to a human being at the IRS, although they have to hold for an average of 15 minutes first.”

In addition to that, according to the IRS final shutdown plan, none of the employees dedicated to protecting taxpayer rights were included in the 8,824 employees kept on the job. Even people who never had a balance past due, need to be worried about the IRS generated automated notices that they send out if they decide that you’ve made a mistake. There is confusion as to whether these notices will be generated during the shutdown but even if there won’t be any new ones, there are people who are already waiting to resolve their issues. Usually, you’ll get this notice that may require you to pay extra money if you, for example, claimed the wrong credit or made a calculation error. Keep in mind, a lot of these notices are send out as a mistake. Unless you contact the IRS to resolve this issue within two months, you will definitely have to pay that fine. This is where the problem occurs…the IRS will not be answering their phones.

If you find yourself in that situation, my advice would be to pay the fine so you don’t ruin your standing with the IRS and don’t accumulate extra fines. There will be a chance to resolve your issues after the government fully resumes their operations. Make sure you postmark anything you send out so that if you’re going to need to take up your issue in court, there will be no confusion.

How To Get a Bigger Refund

Whenever people came to me to get their taxes done, they wanted to know what to put down to get more money back.

While there are multiple ways to prepare taxes, some are better than others. If you go to a professional, they will figure it out for you but if you do your own taxes you might want to consider the following:

1. The gym

Many people try to deduct the cost of attending the gym, especially with the recent gym craze. Unfortunately, expenses that are merely beneficial to your health are not deductible. Don’t pout just yet. If you can get your doctor to prescribe you a gym or a health club membership for a medical condition (keep in mind, it’s a broad category) you can qualify for a deduction.

2. Pets

The year the IRS required to list social security numbers for all dependents being claimed, millions of dependents were dropped. That seems like an awful lot of people but many of these so-called dependents were people’s pets. Pets cannot be claimed as dependents and the costs associated with them are typically not deductible unless you are maintaining them to assist you with your medical condition or you’re using them for business purposes. For example, a business that uses cats to get rid of rats in a facility can deduct the costs of keeping these cats as a business expense.

3. Don’t be greedy

Only the amount considered reasonable can be deducted. If you employ your brother and pay him $10,000 more than you pay an average employee for performing similar work, only the reasonable amount will be deductible. You won’t be able to deduct the extra $10,000 unless you can prove that your brother’s work was somehow more beneficial to your business. You could probably dodge the IRS’s radar if you aren’t too greedy by not overstating this expense by too much. It would be safest to stay within the national pay range if you want to take advantage of this deduction.

4. Make the time work for you

Schedule an appointment with your doctor in the last few months of the year. This will allow you to deduct more medical expenses if you get a check-up or receive treatment.

Sometimes it can be more beneficial to itemize instead of taking the standard deduction. Paying property taxes before December 31 can increase your itemizing potential.

Paying off mortgage before December 31 that is due in January allows you to take a bigger interest deduction.

& remember … the risk of cheating on your taxes far outweighs the benefits.
Check back in a few weeks for more tax tips.