Beware of Tax Scams

It’s true: tax scams proliferate during the income tax filing season. This year’s season opens on Jan. 31. The IRS provides the following scam warnings so you can protect yourself and avoid becoming a victim of these crimes:

• Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
• Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
• The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.
• The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
• If you get an unexpected email, don’t open any attachments or click on any links contained in the message. Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

• Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
• Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
• Protect your financial information.
• Check your credit report every 12 months.
• Secure personal information in your home.
• Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
• Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
• Be careful when you choose a tax preparer. Most preparers provide excellent service, but there are a few who are unscrupulous. Refer to Tips to Help you Choose a Tax Preparer for more details.

Let's Talk! For a deeper conversation on how this issue might affect you or your business, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace of Mind.

Click here to schedule an appointment with Kenneth Hoffman.

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Stephen Baldwin Arrested State Income Tax Evasion

The NY Daily News is reporting that actor Stephen Baldwin has been arrested and charged with state income tax evasion.

Read about it in the Daily News.

Failing to file your tax return and pay your taxes can and does lead to a criminal conviction. Contact me immediately if you have not filed your federal or state taxes. Don't end up with your mug shot in the local newspaper.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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1099-K and Business Income Matching

In September, the IRS launched its first information return–matching program for corporate entities filing Forms 1120, 1120S and 1065. This program will match business return incomes to separately reported Form 1099-K receipts, in order for the IRS to see if companies are reporting all of their income correctly.

This year business taxpayers also started receiving Form 1099-K (merchant card and third-party network payments) to report amounts received from payment settlement entities (debit/credit cards and third-party network payers such as PayPal). For 2012 business returns, the expectation should be to separately report Form 1099-K receipts as line items on their returns.

On November 16, the IRS announced that it will start questioning businesses with smaller-than-expected income, based on its analysis of Form 1099-K amounts reported to the business. For 2011, the IRS cannot propose specific adjustments to the returns because it can’t match Forms 1099-K directly to line items on 2011 business returns. However, the IRS is contacting taxpayers when it thinks that there is a discrepancy.

Last week the National Association of Tax Professionals (NATP) reported that the IRS is starting three compliance initiatives with regards to Form 1099-K reporting:

• A soft-touch inquiry that asks taxpayers to review their returns more closely
• A correspondence audit
• An underreported notice and assessment

The NATP reported that the IRS will send out about 20,000 letters to small businesses before year-end. If your company is in receipt of IRS Letters 5035, 5036, 5039 or 5043, Notification of Possible Income Under-reporting, you may have under-reported gross receipts. The IRS is comparing the amount in gross receipts reported on tax returns to the amount in receipts from merchant card payments on Forms 1099-K. Based on the IRS’s analysis of your industry, the IRS calculates whether it thinks you may have more income than what is reported on the filed tax returns.

Depending on the letter you receive, your next steps may vary. Contact me immediately at 954.591.8290 if you receive such a letter.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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IRS Considering Reporting Tax Debt to Credit Bureaus

Congress is considering allowing the Internal Revenue Service to report on taxpayers’ tax debts to consumer credit bureaus such as Equifax, TransUnion and Experian.

The Government Accountability Office provided a report Wednesday to Senate Finance Committee chairman Max Baucus, D-Mont., and Senate Judiciary Committee ranking member Charles Grassley, R-Iowa., on the factors for considering a congressional proposal to report tax debts to credit bureaus. The report noted that millions of individual and business taxpayers owe billions of dollars in unpaid federal tax debts—$373 billion as of the end of fiscal year 2011, including $258 billion in individual debt and $115 billion in business debt—and the IRS expends substantial resources trying to collect these debts.

Unlike many other debts owed to the federal government, tax debts are not directly reported to the credit bureaus that collect and sell information about the credit history of individuals and businesses. The IRS is not allowed to directly report tax debt information to credit bureaus because long-standing federal law protects the privacy of any personally identifiable information reported to or developed by the IRS. The IRS is, however, allowed to file tax liens on some tax debts. Tax liens become part of the public record, which can be picked up by credit bureaus and included in the credit history information they compile

Among the potential reasons for directly reporting tax debt information to credit bureaus are the possibility that it could increase revenue by encouraging tax debtors to pay off their debts and the possibility that it could give the users of credit bureau information a more complete picture of the indebtedness of tax debtors. A proposal could conceivably encompass all tax debts or specify types of tax debts for such reporting.

How much of this debt would be suitable to report to credit bureaus could depend on the purpose of the reporting proposal, such as to collect more debts or simply to inform other potential creditors of the existence of tax debts, the GAO noted. Most debts are relatively small in size. Well over half of individuals and businesses with tax debts owed less than $5,000.

However, much of the aggregate debt is concentrated among those owing relatively large amounts. Debts over $25,000 add up to a total of $310 billion.

However, the National Taxpayer Advocate cautioned that such reporting could cause some taxpayers to choose not to file or file inaccurately if they know they owe money to the IRS.

Now is the time to contact your congress critters to let them know how you feel.​

Do you have unfiled back taxes or owe the IRS money, contact me ASAP to get this resolved.​

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.​​

Churches - Unrelated Business Income

A church must make quarterly estimated tax payments if it expects an unrelated business income tax liability for the year to be $500 or more.

Use IRS Form 990-W to figure your estimated taxes. Quarterly estimated tax payments of one-fourth of the total tax liability are due by April 15, June 15, September 15, and December 15, 2012, for churches on a calendar year basis.

If you need assistance in completing Form 990-W, have any questions about this topic, tax law changes, have questions about the IRS and your church, or want to become a client, please call us at 954-591-8290 or use our Contact form.

Failed To File A Tax Return?

In Mario E. Cayabyab (T.C. Memo. 2012-89) the taxpayer was going through a divorce in 2006 and was struggling with the care of his children. The taxpayer's ex-wife was in possession of documents relating to their investment income. He did not attempt to retrieve these documents because his priority was to settle his divorce and take care of his children, and he believed he could settle his taxes for 2006 "later on".

The taxpayer was in good health throughout 2006 and was not hospitalized for any illness between 2006 and 2010. He was aware of his obligation to file his Form 1040 for 2006 but he did not file a timely return. The IRS sent the taxpayer a letter on November 30, 2009, requesting that petitioner file his Form 1040 for 2006. He filed the return with the IRS on October 14, 2010. The Court noted Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed unless the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. To prove reasonable cause for a failure to timely file, the taxpayer must show that he exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time. The determination of whether reasonable cause exists is based on all the facts and circumstances.

The taxpayer argued that certain documents required for filing his return were unavailable to him because of his divorce. He further argued that he was too preoccupied with the difficulties of his divorce and the care of his children to attempt to retrieve those documents.

The Court noted it has previously held that a taxpayer does not have reasonable cause for failure to file where he knew of his obligation to file but chose to make his divorce and custody battle a greater priority. Further, the unavailability of information or records does not necessarily establish reasonable cause for failure to file a timely return. The Court found the taxpayer did not demonstrate that he exercised the ordinary business care and prudence that would qualify him for relief from the Section 6651(a)(1) addition to tax. Consequently, he has not met his burden of persuasion, and the IRS's determination was sustained.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Fraud Can Lead to Deportation

On February 21, 2012, the Supreme Court of the United States issued a decision that may have an important impact on many immigrants in the United States – visa and green card holders alike.  The decision, written by Justice Thomas, isKawashima v. Holder.

As a background note on the workings of immigration law, an alien (a non-U.S. citizen) may be removed from the United States if he or she is convicted of an “aggravated felony” (yes, this even applies to Green Card holding permanent residents, who can be removed from the United States).  The term “aggravated felony” has a specific definition under immigration laws of the United States.  That term includes crimes such as trafficking in firearms, murder, rape, certain crimes of violence, and theft offenses.  And, after Kawashima v. Holder, the term “aggravated felony” also includes certain tax violations, perhaps even misdemeanors.

In Kawashima v. Holder, Mr. and Mrs. Kawashima (who were both permanent residents of the United States) have pleaded guilty to violations under 26 USC §7206(1) and §7206(2), respectively.  Mr. Kawashima pleaded guilty to one count of willfully making and subscribing a false tax return, and Mrs. Kawashima pleaded guilty to aiding and assisting in the preparation of a false tax return.

After a detailed analysis of the law’s language, the Supreme Court decided that an alien becomes deportable when he or she is convicted of a tax violation, and that violation involved intentional fraud or deceit, and a loss to the government exceeding $10,000.  Because Mr. and Mrs. Kawashima’s actions were intentional and fraudulent, and resulted in the government’s loss in excess of $10,000, the husband and wife were found to be deportable from the United States.

So, what does this mean for the average non-U.S. citizen?  Of course, each case is unique, and the courts have yet to apply the Supreme Court’s decision.  Yet, as the dissenting Justices in Kawashima v. Holder pointed out, this decision will probably have very important consequences for non-U.S. citizens.  Specifically, if a person is found guilty of (or pleads to) a tax violation which entails fraud or deceit and a $10,000 + loss to the government, he or she may be deported from the United States.  As Justice Ginsburg indicated, “the Court’s reading sweeps a wide variety of federal, state, and local tax offenses – including misdemeanors – into the ‘aggravated felony’ category.” 

In light of this decision, non-citizens should think twice before pleading guilty to tax violation charges.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Daughter Gets Tax Deduction For Expenses Mom Paid

Judith F. Lang v. Commissioner, TC Memo. 2010-286, December 30, 2010.

Mother paid medical expenses directly to provider, and also paid daughter’s real estate taxes. IRS denied deduction to daughter since the daughter did not pay the expenses. Tax Court ruled that based upon substance over form, the mother had in fact made a gift to the daughter, and the daughter was the payor of the expenses. Hence, the daughter is entitled to the deduction.

In 2006, Judith Lang incurred $27,776 of deductible medical expenses (assumed to be net of the 7½% of AGI limitation), and had $6,840 of real estate taxes.  Her mother, Frances Field, paid $24,559 directly to Judith’s medical providers and paid $5,508 directly to the city to pay for Judith’s real estate tax. Mrs. Field had no obligation to make these payments. Nor did she claim an income tax deduction for these payments.

In order to claim a deduction for medical expenses, the expense must be for the taxpayer, spouse or dependent. Since Judith was not a dependent of Mrs. Field, Mrs. Field could not legally claim a deduction. In order to claim a deduction for real estate taxes, one must be legally obligated to make the payment. Mrs. Field was not.  The second requirement for each of these expenses is that the taxpayer actually make the payment.  It is this second requirement that was the subject of the case.

The IRS argued that Judith did not make the payment, and therefore she could not take the deduction. Judith countered that based upon substance over form, she received a gift from mom, and she was the actual payor of the expenses.

The Court sided with Judith, stating that Mrs. Field did make a gift to Judith and Judith gets credit for making the payment. The Court noted that Mrs. Field’s payments directly to the medical providers meant that, under the gift tax rules, these payments were not taxable gifts. But the Court said that the gift tax rules do not control for income tax treatment. Hence, Judith is entitled to the deduction.

If the IRS position was allowed to stand, then no one would be entitled to a deduction in this case; mom because it wasn’t her obligation, and daughter because she didn’t pay it. The Court seemed to look at this as a situation where SOMEONE should get the deduction, and wisely (in my opinion) decided in favor of Judith.

It should be noted that since the medical payments did not constitute a gift, and the real estate tax payment did not exceed the annual exclusion, there was no gift tax issue. I would suggest that it would not be a bad idea in situations such as this, or similar ones such as a grandparent paying college tuition and  the parent claiming a deduction or credit, that the actual payor file a gift tax return to document that they’ve made a gift to the person obligated to make the payment, so that that person can claim the deduction/credit.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Without Adequate Records - IRS Can Reconstruct Income

If you don't have adequate books and records, the IRS can reconstruct your income using any of several methods.

In the case of Bradley M. Cohen and Kathy A. Cohen (T.C. Memo. 2003-42) the Court said that when a taxpayer fails to maintain these records, the IRS may determine income under the bank deposits method.

A bank deposit is prima facie evidence of income. The bank deposits method of reconstruction assumes that all money deposited into a taxpayer's account is taxable income, unless the taxpayer can show a nontaxable source for the income. The taxpayer could not produce evidence of a nontaxable source for the deposits made to an S corporation's bank.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.