WOW. I haven't updated this blog since April Fools Day! This last news bit made me do it. The IRS has reported that 104,000 tax payers data may have been hacked through the IRS' very cool "Get Transcipt" on-line application tool. Worse the Identity Thieves already had data on these tax payers in order to pass through elaborate prescreening security questions so they were basically looking to fine tune their data to better pass through the IRS' behind-the-scenes software filters that weed-out fake returns and stop them before damage is done. The IRS said they will be providing free credit monitoring services to those effected. Big deal if the ID theft purpose was for filing fake tax returns in the first place which doesn't effect the credit monitoring area. FYI, in my experience, once your social has been hacked by these ID thieves filing fake returns with your data, it takes about two more years of tax returns before you are back to normal efiling processing and refund delivery times.--Tax Trish
The statute of limitations for the IRS to collect on back taxes can be greater than 10 years in some cases. The federal court says that the time a debtor is repaying a tax debt through the IRS’ installment agreement program isn’t counted against the total 10 years allowed for debt collection. If the IRS terminates a payment plan, the statute of limitations for collecting is extended for an additional 30 days. Separately but related, if during the period you are on an installment agreement, you find yourself beneath the federal definition of the poverty level, you can write the IRS and ask them to suspend collection activities on you until you are once again above that poverty level and/or are earning wages reported on a W2 that they may be able to garnish.—Reporting from the line of duty, your friendly neighborhood tax accountant, Trish Wright
The IRS has just released its 2015 Dirty Dozen tax scams. With its budget being cut to record lows, the IRS has to focus on getting the biggest bang for its effort. With everything being digital, it is very easy for the IRS technology department to write computer programs that can sniff out likely tax fraud and issue letters demanding proof of income/expenses—all without any human eyeballs looking at anything or talking to anyone.
High on the list…Return Preparer Fraud. This is when your tax account prepares your return and puts down, either with your knowledge or without your knowledge, false expenses and false credits so that you don’t owe as much and so you keep coming back. I just handled a two-year audit (we were lucky it didn’t go to three), for a new client that was a high end professional whose tax accountant was writing off a flat $60,000 in business expenses every year. BUSTED. With returns being efiled and not hand-signed, it is easy not to really look at your return. This professional ended up owing some money to the IRS every year, so the professional figured it all was on the up and up. Another tax payer was nailed for multiple years for claiming energy credits. Both of these folks had one thing in common---they didn’t ask for the cheats and they didn’t mind and could afford to pay the tax (of course, no one wants to).
Another on the IRS’ Dirty Dozen List—Inflating Refund Claims. If this is you, STOP IT. You are on the radar. This could include claiming energy credits, education credits, and the like or it could mean claiming a false Business to take false losses by writing in false expenses like paying rent for office space (a classic no no). As noted above, make sure your tax accountant isn’t just “slipping” them in to make you love them because you receive a higher refund or lower amount due. Remember, the IRS offers payment plans. The interest and penalties suck, but you can get through this in the short term. But if you are busted over multiple years, the penalties are huge and the interest on the penalties is “huger”. Except your real refund such that it may be and/or come up with a plan to pay off what you owe to avoid an uglier situation that may occur downstream.
How Much Should You Spend on a Car?
Cars are bad investments. They are depreciable assets—that’s what happens as soon as you drive it off the lot the very first time—it depreciates and you can never resell it for what you paid for it. .If you do this say every two or three years (as in when you lease a car), the cost of those cars can easily sabotage your retirement plans. Kelly Blue Book reports those buying new cars paid on average $32,000 for that new car in 2014. Yet the National Institute on Retirement Security reports that 45% of working-age households did not have anything in their retirement account. Does that seem backwards to you?
The average monthly loan payment on a car in 2014 was $474 with an average loan life of 5.5 years as reported by Experian Automotive. Retirement planner Peter Bohr states that if you bought a less expensive car and cut your payment in half and saved the difference you would have $16,000 when you paid off the car. Invested at 7% in a retirement account would return about $120,000 to the car owner over 30 years. See the difference between spending money on a depreciable asset (Car) and an appreciable asset (investment).
When you do decide you need to trade in your old car for a new model here are some things to think of: 1) Buy Used. Really is there that much difference between a new car and the year or two old previous model year version of that same car? Make sure low miles are part of the specs of your used car search. 2) Don’t be tricked by sales people that lower your payment by extending the life of the loan or rolling a previous amount due from a lease into a new car loan such that you are buying a car you really can’t afford. You may end up with an old car you know longer like that has an extremely high loan balance that’ll take you many more years to pay off. 3) Avoid upsells to higher premium package—put the monetary difference into a savings account instead. Most base packages come with plenty. Really you can do without that spoiler or moon roof. 4) Resist the urge to buy another car every few years. Hang on to that car for 7 years or longer--as long as the safety features are present. A repair here or there, while inconvenient and maybe a little scary at the time, is a lot cheaper than the depreciation on a new car.
When a spouse pays the other spouse spousal support, it is a deduction to the paying spouse and is income to the receiving spouse. Child support on the other hand is not deductible nor is it taxed. This is why many folks try to say their child support is actually spousal support. The IRS says nuh, uh, uh. To be considered spousal support the amount must be paid in cash, paid pursuant to a divorce or separation agreement, said agreement does not specifically say they are not deductible, the spouses live apart, payments end when the other party remarries.
Clients started coming in with their 1095-A forms that report their payments and subsidies for the Affordable Care Act these past few weeks. Since we did both our clients tax returns and their health applications, I was just beginning to pat myself on the back for getting within $10 of forecasting their 2014 subsidies correctly when the Covered California Exchange announced it will amend those very same forms. Apparently their database did not match what the health plans had on file. Imagine that. Since the Exchange already mailed out 800,000 forms, many Californian tax payers are anxiously waiting to see what awaits them next and whether they will have to give back any of their long awaited refunds. The Exchange will be mailing revisions as well as notifying them by email when the newly revised forms are available in their on line accounts.
A recent Bloomberg article states that the IRS will answer fewer than half the calls it receives this year. Hold times will be 30 minutes or longer. My tax accountant friends and myself are reporting hold times of over 2 hours when the voice announcements says 30 minutes to one hour. The IRS’ ability to respond to written communications about such things as filing errors and penalties is also collapsing. It took one of my clients 24 months for their amended corporate return to be finally fully addressed.
Congress has cut its budget by more than $1 Billion since 2010--its training budget has been cut by 83%; its staff reduced by 12%--all the while such complexities as the Affordable Care Act and Foreign Account Compliance Ace and a $20 Billion surge in identity thefts have all been added to its workload in the same time period. According to Bloomberg, $346 million more in cuts are expected in 2015. These cuts in all likelihood will result in the IRS loosing its most talented staff (great the IRS will be understaffed and by minimally talented individuals). Since $6 of revenue occurs with every dollar spent in the collections arena, one has to question the wisdom of this budget cutting mentality in this area of expense.
What does this mean for you? Well if you are poor, elderly or handicapped, you will receive no help with filing your returns. Additionally, if you have any questions on filling out the all new Affordable Care Act paperwork and penalties now being factored into tax returns, you can expect to be on hold for a very long time—a call that may very well not be answered at all. If you are a tax preparer, enrolled agent or CPA, plan on waiting to call the IRS until you have “banked” several issues into one phone call.
And as for us, since we promise 3 free IRS resolution phone calls per client per year as part of our customer service support, we will likely add another phone line and keep a phone glued to our ear! -- Tax Trish
No one who has ever received a letter from the IRS can deny how it makes your heart race and go pitty pat super-fast! Here are another 5 common mistakes that can result in a “nasty gram” from the IRS letter generating machine:
8. Not taking education credits because tax payer “didn’t pay for the tuition, the student loan did.”-- Or conversely, taking the credit when grants paid for the tuition.
9. Forgetting to add alimony in as income or deduct alimony from income or claiming child support as income or deducting child support from income.
10. Teachers that itemize insisting they should only take the $250 educator credit when they could take the full amount of their teacher expenses (frequently much higher than $250) as additional business expenses.
11. Winning gamblers that itemize not taking their gambling losses up to the amount of earnings on Schedule A.
12. Tax payers that withdraw money from their 401K not deducting appropriate exemptions to reduce the tax penalty for early withdrawal.
13. Putting 1099-Misc form income in as wages instead of self-employment income which results in taxes being calculated incorrectly.
14. And the big question mark of this year…how we input health care information and subsidies to calculate the health care penalty and offsets.
The H&R Block campaign says that Americans on average leave behind $500 in refund money, while trying to save money by doing it themselves. I agree--maye not every year, but collectively over the years, the average person will make either one big mistake/over site or the same small mistake every year. Here are the mistakes I commonly find...1. Not claiming the second installment of property tax (Doh!)
2. Not calculating stock profits correctly
3. Not taking depreciation correctly or most advantageously
4. Not taking the college tuition credits most advantageously or at all given confusion over when you take the credit if you didn't pay for the tuition because your loans paid for it.
5. Not calculating correctly or taking business use of your home at all even though it's deserved (you should take the loopholes to which you are entitled!)
If you drive your car for business (not commuting) than by all means, take the deductions you are allowed! Know though that mileage is frequently targeted for paper audits. A paper audit is a letter the IRS sends to you asking for documentation of your expenses. Typically, you just fax in your back up. To prove auto mileage expenses, be prepared to literally go the extra mile. Most everyone knows that you should keep a log of where you went and why with date and odometer readings. What you might not know is that you also need proof that your odometer actually "turned". You can provide this proof by showing copies of repair bills with the odometer readings on them and the mileage between the repair bills can be used to infer your total yearly mileage. You could also make it a habit to take a photo of your odometer alongside a newspaper as proof of date at the beginning of every year. ADDITIONALLY, the IRS requests a copy of the section of your employee handbook (for reals) that states your company's mileage reimbursement policy as the IRS wants to make sure you are not double dipping. Since these paper audits usually happen 18 - 24 months after the return is processed, tax payers may have already left that job and no longer have access to that documentation. So it is probably a good habit to copy the hand book and keep it with that years tax paper work.