by NFS | Feb 28, 2012 | Archives
Taxes and inflation erode the return you make on your investment portfolio. If you are in a 30% tax bracket and inflation is 4%, you need to earn 5.7% to earn nothing.
Any effective plan to minimize your income taxes requires an ongoing effort on your part. That means you have to plan and make adjustments year-round, not just when you fill out your tax forms. Most tax preparers are just scorekeepers. They are reactive rather than proactive. You should work with a firm available throughout the year, not just one time a year.
There are three broad categories of tax-favored investments that reduce your income taxes. These are: “Tax-Exempt”, which offers income that is not taxed by the federal government; “Tax Deferred”, which defers taxes on accumulation until it is withdrawn; and “Tax Advantaged” instruments, which provide a tax credit against taxes.
Municipal bonds and Tax Free Money Market funds are two types of tax exempt vehicles.
The most popular tax-deferred investments are 401k plans, and IRA’s – both Traditional IRA’s and Roth IRA’s. Other tax-deferred alternatives are annuities, life insurance, and individual stocks and mutual funds.
Tax advantaged alternatives legally shelter income from taxes by creating a tax credit versus a tax deduction. The 3 primary Tax advantaged vehicles are: Rental Real Estate, Low Income Housing and Historic Rehabilitation Properties.
Older annuity and life insurance contracts can be exchanged for newer, higher paying interest contracts by using a 1035 exchange. This IRS section allows you to re-position these investments without incurring any tax liability.
The tax law allows married couples to exclude up to $500,000 of capital gains on the sale of their personal residence. This benefit can be used every two years.
There are numerous options available for all of these strategies and a tax and financial professional should assist you in selecting one that properly fits your specific needs.
by NFS | Feb 23, 2012 | Archives
WASHINGTON — Refunds totaling more than $1 billion may be waiting for one million people who did not file a federal income tax return for 2008, the Internal Revenue Service announced today. However, to collect the money, a return for 2008 must be filed with the IRS no later than Tuesday, April 17, 2012.
The IRS estimates that half of these potential 2008 refunds are $637 or more.
Some people may not have filed because they had too little income to require filing a tax return even though
they had taxes withheld from their wages or made quarterly estimated payments.
In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.
For 2008 returns, the window closes on April 17, 2012. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.
The IRS reminds taxpayers seeking a 2008 refund that their checks may be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans.
By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2008. Some people, especially those who did not receive an economic stimulus payment in 2008, may qualify for the Recovery Rebate Credit. In addition, many low-and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2008 were:
- $38,646 ($41,646 if married filing jointly) for those with two or more qualifying children,
- $33,995 ($36,995 if married filing jointly) for people with one qualifying child, and
- $12,880 ($15,880 if married filing jointly) for those with no qualifying children.
For more information, visit the EITC Home Page on IRS.gov.
We can help you file your current and prior year tax returns. Contact us at 800-560-4NFS for an appointment to get started.
by NFS | Feb 22, 2012 | Archives
Congress has voted in favor of extending for the entire year of 2012 the temporary reduction in the employee’s portion of the Social Security tax. Currently, employees pay 4.2% of their wages in Social Security taxes, a rate that has been in effect since January 2011 and was scheduled to expire at the end of February 2012. HR 3630, the Middle Class Tax Relief and Job Creation Act of 2012, extends this 4.2% rate through the end of 2012. The House voted in favor of HR 3630 by 293 to 132; the Senate approved the legislation by a vote of 60 to 36. President Obama has not yet signed the bill into law.
Employers still pay the normal rate of 6.2% of wages into the Social Security program. For 2012, Social Security taxes are assessed on wages up to the annual wage base limit of $110,100.
Self-employed persons will pay a combined 10.4% in Social Security taxes, instead of the normal 12.4%, reflecting both the employer’s and the employee’s share of Social Security taxes.
This payroll tax holiday does not change Medicare taxes, which are assessed on all wage and self-employment income at a rate of 2.9%, with half paid by the employee and half paid by the employer.
The payroll tax holiday began has a one-year rate reduction for the employee-portion of Social Security taxes in 2011 (HR 4853, the Tax Relief Act). This was then extended for two months through the end of February 2012 (HR 3765). It has now been extended through the end of 2012 (HR 3630).
To prevent Social Security from losing tax revenue, Congress mandated that revenues be transferred from the general fund to the Social Security trust funds to make up for the tax reduction.
The rate reduction also applies to employees covered by the Railroad Retirement System.
The previous, two-month extension of the payroll tax holiday passed in December 2011 (HR 3765) contained a pay-back provision designed to prevent higher-income persons from timing the receipt of salary in January and February in order to obtain a reduction in Social Security tax. That recapture tax has been repealed by HR 3630 since the Social Security rate reduction applies to the whole year of 2012.
Prior to the payroll tax holidays of 2011 and 2012, the last time America saw a 4.2% rate for Social Security coverage was the years 1969 and 1970. (Source: SSA.gov.)
Tax planning tips for the payroll tax holiday
This is now the second, and perhaps final, year for the temporary reduction in the rate of tax paid for Social Security coverage. 2012 is also the last year (under current law) for the reduced tax rates on income. Thus 2013 may witness a double increase in taxation from the expiration of the Bush-era tax cuts and the expiration of the temporary reduction in Social Security taxes.
Wage earners may want to consider negotiating for bonuses to be paid out in 2012 so as to take advantage of the lower Social Security tax rate. Similarly, self-employed persons may want to accelerate income into 2012 by increasing revenues or deferring deductions. Deductions can be deferred, for example, by depreciating property over its normal depreciation schedule rather than expensing the entire amount through Section 179.
Accelerating income in this fashion can create a permanent tax reduction if the wages or self-employed income are over the $110,100 Social Security wage base, since any earnings over that limit are not subject to Social Security taxes.
by NFS | Feb 21, 2012 | Archives
WASHINGTON, D.C. – The Internal Revenue Service has been having more problems with delayed tax refunds.
Early in tax-filing season, the IRS warned that taxpayers who had filed prior to January 26 might see delays of a week beyond the projected date shown in the online “Where’s My Refund” tool (see IRS Warns of Tax Refund Delays).
However, since February 15, the “Where’s My Refund” tool has displayed a message indicating further delays. “We are aware that some taxpayers who have filed electronically and received an acknowledgement from the IRS are concerned when they visit ‘Where’s My Refund’ and are told that we have no information regarding their return,” said an update message on the page five days later. “This is a temporary situation, and we expect to resolve the matter in a few days. At that time, taxpayers will be able to get an expected refund date when they visit ‘Where’s My Refund.’”
Part of the problem appears to be with the new filters that the IRS installed this tax season to combat identity theft fraud, and which were blamed for causing the delays last month.
The IRS asked taxpayers not to repeatedly call the agency to inquire about their refunds, but apparently many taxpayers are concerned about the delays, especially when they are getting mixed signals from the “Where’s My Refund” tool.
“If a taxpayer received an acknowledgment message that their e-filed tax return has been received, they can be assured that the IRS has the tax return even though ‘Where’s My Refund’ does not reflect that,” said the IRS. “Taxpayers should not call the IRS unless specifically directed by ‘Where’s My Refund,’ as there is no new information to give them.”
The IRS apologized to taxpayers for the situation and said most of the refunds would be issued within 21 days. “We expect the vast majority of tax refunds to continue to be issued within the historical range of 10 to 21 days,” said the IRS. “The IRS is taking steps to update information so that Where’s My Refund has current information. The IRS apologizes for any inconvenience and will provide updated information as soon as possible.”
The IRS said that most of the delayed refunds were filed between February 2 and February 7, according to a local ABC News affiliate in Charleston, S.C. Other taxpayers were reporting delays of nearly a month, according to eCreditDaily.com.
When the IRS blocked tax refunds last year, the Taxpayer Advocate Service found that 75 percent of the taxpayers who complained to the service ultimately were found to be eligible for the blocked refunds, but taxpayers had to wait an average of nearly six months to receive them. The average amount of the blocked refunds was upwards of $5,600.
By Michael Cohn, Accounting Today
by NFS | Feb 18, 2012 | Archives
WASHINGTON –– The Internal Revenue Service today issued its annual “Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.
The following is the Dirty Dozen tax scams for 2012:
Identity Theft
Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.
Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.
The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.
The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.
In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.
Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
Phishing
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.
Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.
In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.
Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:
- Do not sign the return or place a Preparer Tax identification Number on it.
- Do not give you a copy of your tax return.
- Promise larger than normal tax refunds.
- Charge a percentage of the refund amount as preparation fee.
- Require you to split the refund to pay the preparation fee.
- Add forms to the return you have never filed before.
- Encourage you to place false information on your return, such as false income, expenses and/or credits.
For advice on how to find a competent tax professional, call our office at 800-560-4NFS.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.
At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
“Free Money” from the IRS & Tax Scams Involving Social Security
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.
Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.
There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000 penalty.
False/Inflated Income and Expenses
Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
False Form 1099 Refund Claims
In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
Disguised Corporate Ownership
Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
IR-2012-23
