Tag Archives: IRS

Never Take on the IRS Alone

Sleuthing your way through a tax audit by yourself is not the same as fixing a leaky faucet or changing your oil. Here are reasons you should seek professional help as soon as you receive a letter from the IRS:

  • IRS auditors do this for a living — you don’t. Seasoned IRS agents have seen your situation many times and know the rules better than you. Even worse, they are under no obligation to teach you the rules. Just like a defendant needs the help of a lawyer in court, you need someone in your corner that knows your rights and understands the correct tax code to apply in correspondence with the IRS.
  • Insufficient records will cost you. When selected for an audit, the IRS will typically make a written request for specific documents they want to see. The list may include receipts, bills, legal documents, loan agreements and other records. If you are missing something from the list, things get dicey. It may be possible to reconstruct some of your records, but you might have to rely on a good explanation to avoid additional taxes plus a possible 20 percent negligence penalty.
  • Too much information can add audit risk. While most audits are limited in scope, the IRS agent has the authority to increase that scope based on what they find in their original analysis. That means that if they find a document or hear something you say that sounds suspicious, they can extend the audit to additional areas. Being prepared with the proper support and concise, smart answers to their questions is the best approach to limiting further audit risk.
  • Missing an audit deadline can lead to trouble. When you receive the original audit request, it will include a response deadline (typically 30 days). If you miss the deadline, the IRS will change your tax return using their interpretation of findings, not yours. This typically means assessing new taxes, interest and penalties. If you wish your point of view to be heard — get help right away to prepare a plan and manage the IRS deadlines.
  • Relying on an expert gives you peace of mind. Tax audits are never fun, but they don’t have to be pull-your-hair-out stressful. Together, you and your expert can map out a plan and take it step-by-step to ensure the best possible outcome. You’ll rest easy knowing your audit situation is being handled by someone with the proper expertise that also has your best interests in mind.

IRS Rules Issued On Paid Family and Medical Leave Credit

The IRS announced that eligible employers who provide paid family and medical leave to their employees may qualify for a new business credit for tax years 2018 and 2019. Notice 2018-71 provides detailed guidance on the new credit in a question and answer format. The credit was enacted in the 2017 Tax Cuts and Jobs Act.

The notice released clarifies how to calculate the credit including the application of special rules and limitations. Only paid family and medical leave provided to employees whose prior-year compensation was at or below a certain amount qualify for the credit. Generally, for tax year 2018, the employee’s 2017 compensation from the employer must have been $72,000 or less.

To claim the credit, an employer must have a written policy that satisfies the following requirements:

  • The policy must cover all qualifying employees; that is, all employees who have been employed for a year or more and were paid not more than a specified amount during the preceding year, generally not more than $72,000 in 2017.
  • The policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee.
  • The policy must provide for payment of at least 50% of the qualifying employee’s wages while the employee is on leave.
  • If an employer employs qualifying employees who are not covered by Title I of the FMLA, the employer’s written policy must include language providing “non-interference” protections, as described in Section A of Notice 2018-71. Thus, the written policy must incorporate the substantive rules that must be met for an employer to be eligible for the credit.

Any leave paid by a state or local government or required by state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer, meaning those amounts do not qualify for the credit.

For purposes of the credit, an employer is any person for whom an individual performs services as an employee under the usual common law rules applicable in determining the employer-employee relationship. Wages qualifying for the credit are determined under the Federal Unemployment Tax Act (FUTA) rules but disregarding the $7,000 FUTA wage limit.

The notice is effective Sept. 24, 2018, and applies to tax years beginning after Dec. 31, 2017, until Dec. 31, 2019. The contents of the notice will be incorporated into proposed regulations, which the IRS is requesting comments on through Nov. 23.

Source: Journal Of Accountancy

Best Way to Avoid an IRS Audit: Preparation

Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS’s gaze if you make one of several common mistakes.

That means your best chance of avoiding an audit is by doing things right before you file your return this year. Here are some suggestions:

Don’t leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.

Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people’s calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.

Don’t stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.

Have your documentation in order. Be meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.

Remember, the average person has a less than 1 percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you’ve filed.

Contractor or Employee? Knowing the Difference is Important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

The basics

As the worker. If you are a contractor and not considered an employee, you must:

  • Pay self-employment taxes (Social Security and Medicare-related taxes)
  • Make estimated federal and state tax payments
  • Handle your own benefits, insurance and bookkeeping

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

  • Payment and penalties related to Social Security and Medicare taxes
  • Payment of possible overtime including penalties for a contractor reclassified as an employee
  • Legal obligation to pay for benefits

Things to consider

When the IRS re-characterizes an independent contractor as an employee, they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:

  • The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee
  • The more the financial relationship is controlled by the employer, the more likely the relationship will be seen as an employee and not an independent contractor To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner
  • The more businesslike the arrangement, the more likely you have an independent contractor relationship

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.

Use Your Tax Refund Wisely

Three of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully.

Here are some ideas:

Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.

Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.

Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.

Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.

Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1

If a refund is in your future, start planning now on how it can best help your financial situation.

1 https://www.wired.com/2010/12/the-science-of-charity

The College Student Tax Scam

School is well under way and the IRS has reminded us to pay attention to a new scam that is targeting students and their parents. Here is what you need to know.

  • The scam – Callers will contact your student and demand payment of an unpaid Student Tax. This tax does not exist. The contact is typically via phone call, but can take the form of a realistic looking email.
  • It will seem real – The caller will say they are from the IRS. They will have your student’s name and some of their personal information stolen from another source. There may be a caller ID displaying IRS. They will often call multiple times and may even threaten arrest.
  • Their goal – To get your unwary student (or you – the unwary parent) to provide them with payment through a prepaid debit card, credit card, or other type of gift card.
  • What to do – If this happens to you, hang up. If they call back, do not answer. Make sure your students are aware that this may happen and they should inform you immediately of the call. Remember, the IRS NEVER initiates a tax question with a phone call or email. You can also report the scam to the Treasury Inspector General for Tax Administration: IRS Impersonation Scam Reporting Form

 Your data must be stolen

Should this scam occur, one thing is certain. Personal data has been stolen. If you receive this scam call, you may be targeted for other scams. So be alert and consider reviewing your credit reports to ensure someone is not trying to access your identity in other ways.

IRS Changes That May Delay Your Early Refund

In an effort to reduce the amount of money paid to identity thieves who file fraudulent returns, the IRS will be implementing changes in the timing and way they handle the processing of tax returns.

These steps will continue to evolve, but recent changes will impact millions who depend on receiving an early refund.

Earlier filing of form W-2s and 1099-MISC – The timing required to send these forms to employees and vendors remains the end of January. However, the extended deadline for filing the electronic version of these forms to the IRS and Social Security Administration is now a full month earlier. This is done to allow the IRS to match records with early filed tax returns. The prior timing gap was ideal for thieves to file fraudulent tax returns.

Earned Income Tax Credit and Additional Child Tax Credit – If you file a tax return that contains either of these credits, do not expect to receive an early refund. The IRS has been mandated to hold these refund payments until February 15th or later. Given the payment backlog this will create, it is still important to file early to get your refund in the queue.

Begin planning now to be prepared for these upcoming changes. Rest assured, we can all look forward to further changes as the IRS continues to address the multi-billion dollar identity theft problem plaguing the Agency.

1099 Filing Requirements

Another year has come to an end and we would like to take the time to remind you of Form 1099 reporting requirements and changes to filing deadlines.

Certain payments made in the course of business are required to be reported on the appropriate Form 1099.  The type of 1099 filed depends on the type and amount of the business expenditure.  Some of the most common expenditures requiring a 1099 are listed below:

Payments for: Equal to or Exceeding: Form:
Dividends $  10 1099-DIV
Interest (generally) $  10 1099-INT
Royalties $  10 1099-MISC
Liquidating distributions $600 1099-DIV
Interest (paid in the course of business) $600 1099-INT
Fees paid for services $600 1099-MISC
Commissions $600 1099-MISC
Prizes and awards $600 1099-MISC
Rents $600 1099-MISC

Note: Generally, payments made to a corporation are not required to be reported on a form 1099.  However, there are some exceptions such as attorney fees.

A copy of the 1099 is required to be postmarked to the recipient and the IRS by January 31, 2017. Failure to correctly file the required 1099’s within the due dates can result in penalties of up to $260 per return (based on when filed) with a maximum of $1,059,500 for each year.

In addition to the above mentioned requirements, business taxpayers will be required to answer two questions on their 2016 income tax returns: (1) Did you make any payments in 2016 that would require you to file Form 1099(s)? (2) If yes, did you file the required Form 1099(s)?

In order to properly fill out the required forms, you will need to obtain information from each person to whom you make qualifying payments. Form W-9 is used for this purpose and can be obtained by going to http://www.irs.gov/pub/irs-pdf/fw9.pdf.

The information above relates to the most common types of transactions and circumstances.

The IRS is Not Always Right

Quotes from actual IRS correspondence received by clients:

“Our records show we received a 1040X… for the tax year listed above, We’re sorry, but we cannot find it.”

“Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken.”

“Payment is due on your account. Please submit payments on or before June 31st to avoid late payment penalties and interest.”

It’s pretty tough to pay a balance due of $0 on June 31st when June only has 30 days. The message should be clear. If you receive a notice from the IRS do not automatically assume it is correct and submit payment to make it go away. The same is true for any state notices. They are often in error. So what should you do?

Stay calm – Try not to overreact to the correspondence. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.

Open the envelope – You would be surprised at how often clients are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category try to remember that the first step in making the problem go away is to open the correspondence.

Careful review – Review the letter. Make sure you understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with their findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but it sometimes happens.

Respond timely – The correspondence received should be very clear about what action the IRS believes you should take and within what timeframe. Ignore this information at your own risk. Delays in responses could generate penalties and additional interest payments.

Get help – You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.

Correct the IRS error – Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.

Certified mail is your friend – Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties, and additional interest on your tax bill.

Don’t assume it will go away – Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.

IRS Announces Dirty Dozen Tax Scams – Part 2

Last week we told you about the three largest of the “Dirty Dozen Tax Scams”. This week we will cover the rest.

Return preparer fraud – In conjunction with Identity Theft, many temporary tax preparation offices set up shop and generate fraudulent tax returns. These folks often file a return using stolen information, create refund fraud and other scams that leave you holding the tax obligation when caught.

Offshore accounts – The IRS has taken many enforcement actions in this area after breaking the long-standing secrecy wall of Swiss bank accounts. If you have money in foreign accounts, you must understand the reporting requirements or you could be subject to substantial fines.

Fake charities – After major disasters, many charitable givers are scammed into making donations to fake charities. In addition, new IRS charitable organization reporting requirements are not being followed by many organizations. This makes donations to them non-deductible. To protect against this, make sure the charity is both legitimate and deemed a qualified charity by the IRS before you donate.

Other scams – The other six scams that round out the IRS list include: inflated refund claims, falsely padding deductions, excessive business credit claims, falsifying income to claim credits, abusive tax shelters, and frivolous tax arguments.

If you want more info, visit the IRS website at www.irs.gov and click on the News & Events tab/Tax Scams!