Most tax preparers are ethical and honest professionals who properly service and represent their clients. However, every year many people fall victim to scams perpetrated by their tax preparer. In one common scam the tax preparer will offer the taxpayer their refund immediately in return for signing over the refund on the tax return to them, but then a different return is filed showing a different amount. For example, the tax return shows a refund of $1,000. The tax preparer offers the taxpayer $990 right now to sign over their refund on the return. This seems like a great scenario because the taxpayer gets the refund immediately. The tax preparer then files an alternate return which shows a refund of $10,000. All of this takes place without the taxpayer ever knowing because the return is deposited directly to the tax preparer. Years later, the taxpayer gets a letter from the IRS that their refund was overstated, tells them the proper amount, and asks for payment of the overstated refund. At this point, the taxpayer does have the ability to file the proper fraud claims against the tax preparer but it is not an easy or quick process. Other common scams involve variations of identity theft, false items on the tax return, and improper reporting of tax credits. All of these situations can create a financial and personal nightmare for the taxpayer.
Taxpayers can take precautions to avoid these problems. First, make sure your tax preparer is a reputable, trusted member of the professional community. Try to use tax preparers recommended by friends, coworkers or colleagues. Avoid tax preparers offering too good to be true results or with other questionable advertising methods. Only sign over a refund if you can completely trust the preparer and have an established relationship, even then, it may be advised to simply wait the conventional way for your refund. Also, you have to take responsibility for every item on your tax return. Even if you do not understand the technical aspects, review the return and make sure the numbers are familiar or make sense. Ask questions if there is anything that looks out of place or you do not remember. Lastly, NEVER ignore letters from the IRS. The IRS has become very good at detecting fraud and correcting mistakes. The sooner you reply the easier it may be to reach resolution. The longer you wait the more difficult the process can be, and, most of all, it is not going to go away so waiting solves nothing. (Click here for more)
If you think you have been victim of a tax scam or need a recommendation for a tax preparer contact us at Hone Maxwell LLP today. As mentioned above, ignoring the problem is never the answer and the longer you wait the worse it can get. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.
This week the IRS has ask taxpayers to try to refrain from calling for assistance because of the expected high level of calls this week. You are still welcome to call the IRS, but you can expect to be on hold for a long time, considering that even during non peak times it can take hours to speak with someone.
In general, this points out a situation many taxpayers face. Should they hire a tax attorney or try to resolve the issue on their own? Some cases may be simply a straightforward misunderstanding, which if so, it is possible the taxpayer could fix themselves if they are willing to wait on hold for an extended period and potentially have to talk with several people. However, there are several benefits to hiring an attorney to resolve the issue. First and foremost, tax attorneys are more qualified to discuss not only tax issues but are much more familiar with the administrative process and know the best ways to resolve problems. Tax professionals even have dedicated phone lines they can call to speak with the IRS, which can sometimes be much quicker and effective. Next, the IRS is not under any obligation to tell you the best option for your situation. The IRS merely has to give you the facts and tell you the option that they prefer for you to settle. If you ask about other possibilities they will tell you the truth, but they likely will not make these suggestions and if you are not a tax professional you may not know to even ask. Lastly, you have to decide what your time is worth to you. When considering the costs of hiring an attorney you have to consider the time needed away from your work to potentially be on hold for more than a few hours and not even be guaranteed a resolution at the end of that time. As mentioned, this doesn’t mean that you will be paying an attorney to be on hold with the IRS for an entire day because in general the tax professional phone lines have much shorter hold times.
Overall, make sure you consider all the pros and cons when deciding if you need to, or want to, hire a tax attorney to call the IRS on your behalf. If you have questions about your tax situation call us at Hone Maxwell LLP today for an assessment of your situation. We strive to do what is best for the taxpayer and if your issue can be resolved without our assistance, we will be happy to tell you the steps to take, and we will still be here if you reach a dead end or want assistance. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.
As we enter into tax season, and as our firm continues to see people encounter problems due to misconceptions regarding tax filing, we have decided to recirculate this information from a post last year. Being informed on these issues may help you from creating additional, unnecessary problems.
Although, the proper method of filing your return is to pay your tax at the same time, it does not mean that both have to be done at the same time. Even if you owe money on your return and cannot afford to pay it, you should still file the tax return on time for several reasons. First, you can avoid failure to file penalties that can be imposed on a late tax return. Also, if you need to setup an installment agreement to pay the debt the IRS will not work with you until your return is filed. By filing the return you are being compliant and also the amount due is determined. If your return is not filed, you cannot setup any arrangement to pay your tax. Lastly, if you fail to file your tax return the IRS may file a return for you using a “substitute for return.” This is a process where the IRS will take all information reported to them, mainly income items only, and prepare a return for you. Since the IRS does not have deduction information or other details, these returns are usually very unfavorable to the taxpayer. The substitute for return can be updated with an actual return but it is a longer process than simply filing the return on time.
On the other side, another common misconception is that if the tax return shows a refund or no tax due the filing date is not important. For the same reasons as above this is not true. Even if you file a return showing a refund, if it is after the due date you can still be assessed failure to file penalties. Also, due to the process discussed for a substitute for a return, just because you show a refund on your tax return does not mean the IRS will also show a refund if they prepare a substitute for return.
Overall, filing tax returns and paying tax is a process that can quickly get out of hand if you fall behind, causing you stress, penalties, and unnecessary headaches. When dealing with the IRS it is almost always better to do as much as you can even if it is not everything. You need a starting point for resolving a tax issue. The longer you avoid the entire situation the fewer options you have, the more exposure to penalties you have and the situation could get out of control before you know it. If you have questions about late filing, penalties or other tax issues contact us at Hone Maxwell LLP today. Also, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.
The levels of information needed are much different for preparing a tax return v. going through an audit. Your tax preparer is only required to ask for verification on certain items, generally, when something doesn’t look right. Beyond this low level of required diligence, tax preparers can take your word for it on most of your information without looking at receipts, bank statements or other documentation. This doesn’t mean these records aren’t necessary to have and keep.
If you ever are unfortunate enough to be audited you will need this documentation. Often taxpayers incorrectly assume the information provided to their tax preparer is sufficient to defend their tax return in an audit. However, the auditor will need to see all the receipts, statements, invoices, and other items of documentation and cannot take your word for it the same as your tax preparer. Therefore, it is extremely important to retain all this information. Retaining the information from the start is the easiest method. After giving the tax preparer all the information to prepare the return you should then organize and save all your documentation so you are prepared if you are ever audited. This will be much easier than a few years from now trying to find everything you had at that moment of the tax return.
As a general rule you should always retain all tax records for at least 4 years, and longer if possible. If the IRS or CA allege fraud they could go back further than the standard audit period (3yrs IRS / 4yrs CA). Also, some items might be relevant even after the original year of the tax return cannot be audited. For instance, if you have an asset you are depreciating over 7 years, if the 7th year gets audited you might have to show how much you bought it for 7 years ago to justify the expense, even though that tax return from 7 years ago cannot be audited.
Overall, taxpayers need to be aware that they are responsible for the proper documentation of items on their tax return. Your tax preparer should be able to tell you exactly what is needed for your records in case of an audit, even if they do not need to review it to prepare your tax return. If you have questions about proper documentation or need assistance with an audit contact us at Hone Maxwell LLP today. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
William Berroyer was at a meeting at an IRS office in Long Island when he tripped over a phone cord and fell into a cabinet. Berroyer was at the office to work out a payment plan for a $60,000 tax debt he owed. As a result of the injuries, Berroyer spent 17 days in hospitals and physical rehab. In his lawsuit Berroyer claimed that as a result of the injuries he had pain and suffering worth $10 million, including negative effects on both his golf game and sex life with his wife. Despite the IRS claiming the results of the injury were greatly exaggerated, Berroyer was awarded $862,000. To rub salt in the wound for the IRS, the award is not taxable. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
The billionaire creator of Beanie Babies, Ty Warren, received his sentence for failing to report and pay income tax on Swiss bank accounts. At the sentencing hearing the Judge stated that rather than jail time society would be best served to allow Warner to continue his good works. These “good works” will now include 500 hours of community service and a $100,000 fine, and Warren also will have two years of probation. The community service and fine is in addition to the $53 million civil penalty and $27 million in back taxes Warren has already paid to the IRS. The civil enforcement and prosecution of Warren is part of the IRS’s ongoing efforts to crack down on unreported, foreign bank accounts.
The takeaway for taxpayers is that the IRS is very serious about this issue and continues to use resources towards finding and prosecuting taxpayers with unreported, foreign bank accounts. However, the Offshore Voluntary Disclosure Program remains a possible option for taxpayers who have failed to report foreign bank accounts with a cumulative value over $10,000 on the FBAR form. As a part of the OVDP, qualifying taxpayers pay a civil penalty and file all forms to be in complete compliance in exchange for avoiding criminal prosecution. If you have unreported, foreign bank accounts contact us at Hone Maxwell LLP today for a comprehensive analysis of your options including the risks and potential costs. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
JP Morgan Chase’s deferred prosecution agreement contains an interesting twist that illustrates one of the basic rules of taxes. JP Morgan Chase agreed to pay the government $1.7M for its part in the Bernie Madoff Ponzi scheme. Generally, these types of litigation expenses and payouts are tax deductible. However, under terms of the agreement the payment is not classified as a tax deductible, compensatory payment, but as a “penalty paid to the United States government.” Penalties are not tax deductible. As such, this agreement had some unforeseen tax consequences for JP Morgan Chase that affected its earnings. The lesson for taxpayers is that penalties and fines are generally not tax deductible and it is important to have the proper classification of all payments. Contact us at Hone Maxwell LLP today if you have questions regarding your expenses and if they are tax deductible. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
After over a year without a commissioner, last week the U.S. Senate finally confirmed John Koskinen to the position. During this time there was an acting commissioner but it took President Obama several months to appoint someone permanently. In many years, this appointment would barely be noticed by the public. However, this was not an average year for the IRS. The IRS has had a significant loss in credibility capped with the scandal earlier this year when it was reported the IRS was targeting non-profit groups related to Tea Party members and other conservatives. Having a commissioner in place at that time likely would not have avoided the scandal, but might have been able to help with the fallout. Koskinen is a corporate restructuring expert, but his biggest task likely isn’t the technical aspect of the job, but the public relations portion and restoring faith and credibility in the IRS. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS could issue nearly $2.3 billion in fraudulent refunds to taxpayers who steal or forge tax identification numbers. TIGTA recently released results of an audit of the IRS, which showed that the IRS routinely issued refunds to businesses which had fabricated or stolen EINs. For tax year 2011, TIGTA’s audit discovered 277,624 stolen EINs and 8,064 falsely obtained EINs were used to file a combined 767,071 returns. The result of these tax returns was $2,273,177,371 in potentially fraudulent refunds. TIGTA fears this trend could continue costing the IRS over $11 billion in fraudulent refunds over the next 5 years. The IRS does record and track suspicious EINs, however, in 2012 this lead to the prevention of only $35 million in fraudulent refunds. As you can see, there is a long ways to go to combat the problem. A large hurdle to the IRS’s efforts to discover fraudulent refunds is that it does not want to delay the issuing of legitimate refunds. Nevertheless, it is apparent the IRS is going to explore many options and take additional efforts to try to cut into the staggering amount of fraudulent refunds.
Besides the frustration that someone else is costing you tax dollars while you pay your fair share, this also means a few other things for honest taxpayers. First, you should be vigilant about your tax information. In this age many people are aware of the risks of identify theft, but this is just one more area to be cautious of your personal information. Next, as the IRS continues to search for fraudulent refunds you want to make sure you don’t accidentally wind up on the IRS’s radar. Improper reporting or presentation of your tax information could flag your tax return as a potential problem and at the very least the IRS could come asking questions for you to resolve the issue. Ensure that your tax preparer is reputable and presents your information correctly. Lastly, whenever you receive correspondence from the IRS, or any taxing agency, it should never be ignore. Sometimes taxpayers feel they can ignore an incorrect notice because they figure the IRS will solve the problem itself or that it is not their issue since the information is wrong. However, if someone has stolen your tax ID and the IRS is questioning you about it, you will also be the one they take enforcement action against if the questions are not answered. In these situations it is always better to be proactive and resolve the issue instead of waiting for the IRS to take action against you.
If you have encountered any problems with your tax filings, contact us today at Hone Maxwell LLP to review your case. We can work with the IRS to make sure your correct tax information is the information that is on file under your tax identification number. When problems arise because of a mistake or otherwise, we can work with you to get the proper information filed and your account in good standing. Per our previous post, “Ignoring the IRS Never Works, Well Almost Never” it is not a good idea to wait and hope the situation resolves itself on its own. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP
In addition to the somewhat misleading television and radio commercials claiming to settle IRS tax debts for pennies on the dollar (click here for more), there is a new wave of information regarding “Currently Not Collectible” status or “CNC”. The commercials inform the listener that if they cannot afford to pay the IRS anything they can obtain CNC status and the IRS immediately has to cease all collection activity. This is true, but there is more to it than simply telling the IRS to back off because you don’t have any money.
In order to gain CNC status you have to provide the IRS a personal financial statement. The financial statement will review income and expenses, all of which you may be asked to document. Also, for some expenses, such as food, clothing, housing, vehicle, the IRS has standard amounts which they allow. If you are above these amounts the IRS will not consider this added expense and will instead ask that you change your lifestyle to be more in line with the set standards. Furthermore, the IRS likely will not consider expenses they do not deem necessary such as credit card payments or personal hobbies and activities. Assuming you get to the point where you and the IRS agree on a personal financial statement and that you cannot make payments, it is still not over. CNC status is considered temporary and the IRS will very likely ask you to update your situation in the future to prove you still cannot afford to pay. If your job status changes, you inherit money or you have an expense that is no longer required, it is possible your financial statement could look much different than before. If so, you may now have to pay on a debt that has been accumulating interest during the period you were in CNC status. This is one more detail often lost in the fine print, interest continues to accumulate while you are in CNC status – the debt does not pause or go away, it continues to sit there and grow waiting for you. The only possible conclusion that might get you out of the debt is if you are able to prove CNC status for long enough that the IRS’s collection period of 10 years expires. In reality, generally the closer it gets to this date the more the IRS will scrutinize your personal financial statement and look for assets you have to pay them back. This is why in practice CNC status should be looked at more as a bandage than a cure.
If you owe money to the IRS and have questions regarding your options contact us today at Hone Maxwell LLP. We can give you a complete overview of your case including the risks, benefits, and also the possible long term consequences of the decisions you make today. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.