Monthly Archives: February 2013

IRS Under Reporting

 

Casual “Merchants” Likely to Get IRS Under Reporting Notices 

Small business taxpayers whose gross receipts, as reported by credit card companies and third-party networks, appear to exceed the income stated on their tax returns may soon be receiving notices from the IRS inquiring about the discrepancy. Specifically included in this category are individuals who sell items on Ebay and other online auction sites as well as food cart operators, mom-and-pop shops, or swap meet participants.

In various forums and meetings, IRS officials have said the agency would begin sending “soft letters” of inquiry to taxpayers whose Form(s) 1099-K, Merchant Card and Third Party Network Payments, show an unusually high portion of receipts from credit card payments and other reportable transactions but whose tax returns do not show commensurate levels of income. The letters would ask these taxpayers to provide additional information about the apparent over- or under reporting of their gross credit card and other receipts, the IRS said.

The letters are an outgrowth of a provision in the Housing Assistance Tax Act of 2008, which required reporting of income from merchant payment cards beginning in 2011— including credit, debit, and certain electronic transactions—to provide the IRS a tool to help increase voluntary compliance and improve collections.

The IRS has acknowledged it is aware that the amounts reported by various third-parties, such as PayPal, may not match a merchant’s monthly reported income for legitimate reasons, including accounting discrepancies such as the use of an accrual system or a difference between parties calendar year versus fiscal year accounting systems. Furthermore, discrepancies can arise because Form 1099-K is a report of gross receipts and does not take into account a refund of a merchant’s cost of goods, or other deductions from gross income.

The IRS plans to begin with the soft letters and to request taxpayers to amend their returns if they agree with IRS’s assessment of under reporting.

 

IRS Whistleblower

Man in Jail small

IF SOMEONE ELSE KNOWS IT COULD COST YOU. Ever wonder how the IRS finds tax evaders to go after? One way they do it is by relying on Whistleblowers who often tell all sometimes for the reward sometimes just to get even or because they don’t like someone or something they have done. Topping the list of Whistleblowers are ex-wife’s, ex-girlfriends and ex-business partners.

The first thing to remember to protect yourself is do the right thing report all your income and pay your taxes. If you don’t you may want to watch your pillow talk and not share that great tax scheme with your business partner.

Section 7623(b) of the Internal Revenue Code requires the IRS to pay awards if an individual provides information that substantially contributes to the collection of tax, penalties, and interest when disputed amounts are more than $2 million. The fiscal year 2012 annual report to Congress, noted that the IRS received 332 submissions identifying 671 taxpayers who appear to meet the statutes’ criteria. The IRS pays awards from collected proceeds after a taxpayer has exhausted all appeal rights and the statutory period for filing a refund claim has expired or been waived. The first awards paid for information provided to the IRS after 12/19/06 [the date new IRC Sec. 7623(b) was enacted] occurred in fiscal year 2011.

Although this may seem like easy money and certainly a great way to get revenge on an ex-spouse or employer it will be awhile before you can collect if you turn in someone as it takes time for the case to process through all divisions of the IRS and be finalized in many cases this could by years of waiting. As for the revenge part well you can be sure that even if no additional tax can be assessed and hence no reward paid the process will hurt.

Protect yourself report your income, pay your taxes and don’t tell friends, relatives or business partners about your schemes real or imagined  on how to hide income or avoid taxes.

Tax Loop Hole

 

TAX LOOP HOLE – A tax provision created to offset real or perceived costs and to encourage taxpayers to act in a certain way.  Examples:  1) Bonus Depreciation was added to the tax code to get businesses to invest in new capital equipment, by purchasing new equipment, there by encouraging the manufactures of said equipment to hire additional workers to meet demand. 2) Oil depletion introduced to encourage oil companies to increase production by reducing the benefit or leaving petroleum resources untapped increasing future value. 3) Accelerated depreciation of private jets, encourages the purchase of said jets which creates manufacturing jobs and the use of such jets which require the hiring of mechanics, pilots, and servicing firms.  These so called Loop Holes were put in place by congress for a reason and although some may no longer be necessary that is no reason to demonize businesses and individuals for doing what the government asked them to do by putting these incentives in place.

Identity Theft

 

IRS expands identity theft efforts, but you still need to protect yourself. Although the IRS is working harder than ever this year to prevent identity theft and stop the filing of fraudulent tax returns it’s still important that you protect yourself for those who would use your identity to enrich themself’s by using your identity or personal information.

The IRS has more than doubled the number of employees from last year to more than 3,000, who work on identity theft cases. It is working to reduce the 180 days it currently takes to resolve most cases. For 2013, the IRS’s expanded efforts include (1) increasing the number and quality of screening filters that spot fraudulent returns before refunds are issued, (2) additional IRS criminal investigations, (3) expanding the pilot program that allows local law enforcement agencies in nine states to obtain tax return data and assist in investigations, and (4) collaborating with more than 130 financial institutions to identify fraud schemes and block refunds from reaching the hands of thieves.

If you think this means you are protected think again. Treasury Inspector General for Tax Administration noted that the IRS reported that it detected 938,664 tax returns totaling $6.5 billion in fraud in 2011 tax year. These fraudulent returns meant delays for tax payers expecting refunds of up to 12 months. Worse yet the same information used to produce a fraudulent tax return can be used to open credit card accounts, borrow money and generally wreak havoc on your credit and your life.

So how do your protect yourself?   While there is no sure fire way to make sure you will not be a victim of identity theft you can take steps to reduce the chance of it happening to you.

Step one don’t make your personal information available to others. This mean don’t post your date of birth, city of birth, College or other information on the internet. FaceBook, Google and the many other social media sites are not your friend when it comes to protecting your ID.

Step two don’t give your social security number to just anyone, while this number is needed by your employer and bank and investment firm it should not be used as identification for other things or shared with others through unsecured email, treat it like the important key it is. Think of your social security number as a key to your credit, with it and a little other personal information a criminal can get access to your credit and your reputation.

Step three; don’t use a tax shop that just pops up when tax time rolls around. These tax firms that pop up at tax time can afford to work cheap because there is so much money to be made from the information they collect (not in any good ways).  You should also beware of anyone that offers to take the fee out of your refund.  Your tax refund should go to your account and not to the address or account of a tax preparer or his bank. Find a professional that has been in business for some time (the longer the better) and whose office is open year round. Get a referral from a friend or associate you trust. If the tax preparer won’t sign your return once complete and does not include his PTIN (preparer ID) on the completed return not only should you not use them but you should also report them to the IRS. The only tax professionals currently subject to IRS regulation and supervision are Enrolled Agents (EAs), Certified Public Accountants (CPAs) and Attorneys.  These professionals are subject to IRS circular 230 which governs rules of conduct, continuing education and more.

Step four; don’t leave your information lying around. Keep copies of tax returns and other important information locked up and out of sight of those that may wish to steal it. Don’t throw bank statements, credit card statements, insurance cards or other forms in the trash where anyone can get them.  Shred these documents before throwing them away.

Step five keep an eye on your bank accounts and credit reports. Check your bank and investment account statements monthly; report any transactions that you don’t recognize.  Review your credit report regularly; if someone is checking your credit that you don’t recognize find out who they are and why they requested the information.

These five steps will help to safe guard your information and make you aware if your identity is compromised.  If you find a problem or if your identity is stolen file a police report as soon as you are aware. Although the police may not be able to do much to help, having the report on file goes a long way to protect you from becoming responsible for the thief’s activities. You should also report theft of suspicious activity to your bank and credit card providers right away if you find or suspect a problem.

Tax Questions

It’s tax time and we though we would give our readers and fans an opportunity to ask any tax related questions they might have.  It’s is important to remember that while we want to provide the answers to your questions correct answers can depend on the individual facts and that without having all the facts we can only provide general answers. Before using the answers provided it would be advisable to consult a tax professional.