Monday, April 20, 2015

How Did Someone Hijack My Tax Refund?!

People who waited until Wednesday’s deadline to file their tax returns may have found that someone hijacked their refund.  That’s what happened to several of my clients this year.  Here are a couple of their stories:

One client arrived home to find a letter from the IRS that they were conducting a review of questionable income amounts and claims for credits listed on his return.  His conversation went like many thousands before...

Client: "What return?  I haven't even filed yet.
IRS: "Ummm…yes you have". 

Well my client was right of course; he hadn't filed his return...but someone else had filed it for him.

Other clients discovered the identity theft when I attempted to electronically file the return.  The IRS will not accept a return that has already been filed.

Naturally, the first question they ask me is:  "How can this happen?"  That's a good question and one I myself wanted to know the answer too. This is how it works: 

A criminal steals your identity (more on that later), files a bogus tax return in your name and collects a refund check from the IRS.  Then when you go to legitimately file your return, it’s rejected by the IRS because someone else already filed as you!

It’s such a simple scam you would think surely the IRS is protecting themselves and taxpayers from it….but they aren't.


Corey Williams told his story to 60 minutes.  He used to be a legitimate tax preparer until his boss turned him on to the scam.  Before he was arrested and sentenced to 40 months in prison, he made millions of dollars.   He said all you need for this fraud is a laptop, internet access, someone's SSN, date of birth, not even their name.  

According to Mr. Williams, it's as easy as one, two, and three.

1.       Collect or buy a list of stolen identities (available for sale on the black market for $3 - $5)
2.       Go to one of dozens of tax preparation sites on line, and using the stolen social security numbers and dates of birth you fill out a completely bogus W-2 form, claiming a modest refund of a few thousand dollars.
3.       Tell the IRS where to send the money, your house, wired to your bank account or loaded onto a prepaid debit card.

That's it.  You simply put down a name and a SSN, make up an employer or the amount of money that was earned and withheld.  Send it off to the IRS and they will send you a check back for the refund.

But how did the IRS not catch this?


You would think the IRS computers would notice that they were sending thousands of checks to a single address.  But they don't. 

And you might expect the IRS would match taxpayer returns with legitimate W-2 forms filed by employers.  It doesn't do that either because the law requires refund checks to be sent out within six weeks; and employer W-2's are often not available until months later.  So if a bogus return is received before a legitimate one, the check will go to the criminals. 

It’s a pay first, ask questions later tax refund system. 

This scam has been around since 2008 and the IRS still cannot tell if the person filing the return and claiming the refund is actually the real taxpayer.  In 2014 the IRS lost $6.5 BILLION in fraudulent refunds. 

Yes that's B for billions. 

The IRS is well aware of the magnitude of the problem.  But with budget cuts and an outdated system there is only so much they can do.   

Image result for jfk"We’re running applications we were running when John F. Kennedy was president. “  
 John Koskinen
    IRS Commissioner

But despite the $200 million IT budget cut this year the most notable step the IRS has taken to protect taxpayers has been the roll-out of an identity protection PIN.  Essentially, if you’ve been a victim of tax fraud, the IRS will issue a PIN number to use when filing electronically.

This is designed to address the problem inherent to this kind of fraud: Unlike passwords or a credit card, you can’t “reset” your SSN – you’re stuck with it for life.

Unfortunately, the PINS are currently only available to filers with past resolved fraud cases as well as to taxpayers in Georgia, Florida and the District of Columbia—areas with high incidences of fraud. They are also available to taxpayers with suspicious activity on their accounts.

To get a unique PIN number or find out if you are eligible, visit the IRS website or call 1-866-704-7388. You will be asked for information from last year’s tax return and can then select a six-digit PIN to file your return. The PIN is only good for one tax year, so the IRS will send you a new one in December. 

April 15th has come and gone but tax refund fraud will be sticking around until some major changes are made to how we file returns.  Researching this issue has helped me realize how serious identity theft is and the measures that everyone should be taking to protect their personally identifiable information.   No one is immune no matter how tightly held your personal information is.

Stay tuned for articles and resources on what you can do to minimize your exposure. 

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Sunday, March 1, 2015

Fake IRS Phone Calls Tops List of Tax Scams

Earlier this week I received a call from a client who came home from work to find the following message on his voicemail:

"Hello, we have been trying to reach you. This call is officially a final notice from the IRS, Internal Revenue Service. The reason of this call is to inform you that IRS is filing a lawsuit against you."

Fortunately, my client knew better than to call the number in the message.  Instead he called me to confirm this really was a scam.  But not everyone is so fortunate.

“Oh I would never fall for a scam like that”, you say?  Hopefully not.  But sadly many have.  

In fact the IRS impersonation phone scam has claimed nearly 3,000 victims who have collectively paid over $14 million, according to a recent TIGTA report

Phones are ringing in every state.  Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer.

If the victim refuses to cooperate, they are threatened with arrest, lawsuit, deportation, or suspension of a business or driver’s license.

These calls can be so intimidating that many start looking for an attorney and others rush out to load up thousands of dollars on prepaid cards.  

It’s no accident that calls are popping up during tax season when many are stressed out about their finances; scammers are looking for vulnerable people who don’t know how things work. 

So how do things work with the IRS?

Five Easy Ways to Spot Suspicious Calls
Here are five things the scammers often do that the IRS will not do.  The IRS will never:

  1. Call to demand immediate payment, nor will we call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
What should I do if a caller says they are with the I.R.S.?
Don’t provide any personal information and don’t engage with the caller (other than, perhaps, to ask their name so you can include it in a complaint). Then, hang up.

You can report the incident to the Treasury inspector general for tax administration by:
·         Calling 1-800-366-4484
·         Emailing  complaints@tigta.treasury.gov
·         Or filling out an online form

When you file the complaint, you will be asked to choose a five-digit PIN. If you are contacted about the incident, you should ask for the PIN, so you can be sure you are speaking to a legitimate agent.

You can also file a complaint with the Federal Trade Commission on its website using the FTC Complaint Assistant.  

What if I think I may actually owe taxes?
If you are concerned, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.

What else should I watch out for?
Fake phone calls and emails are just some of the "Dirty Dozen" of tax scams the IRS is alerting tax payers about this year.

Be on the lookout for preparers who try to steer you towards cheating on your taxes, by falsifying income to claim tax credits, hiding income with fake documents, using abusive tax shelters, or making excessive claims for tax credits.

Following the loss of over 80 million records in the Athem insurance breach in late January, you need to be extra cautious of tax-related scams this tax season. Millions of Social Security numbers were also taken in the breach. With just that number and your date of birth, criminals can file fake tax returns in your name and try to steal your tax refund.

Be smart and protect yourself.  

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Tuesday, February 24, 2015

Missouri Income Tax Deduction for New Workers

One of the fun parts about my job is finding cool tax deductions or credits that people don’t know about but can be a real tax saver.  The one I want to talk about today is called the “Missouri Income Tax Deduction for New Workers”.


Notice this is a “state” tax deduction.  The thing about state deductions is that most of them won’t just pop up on your tax software.  You have to actually know about them and specifically request the forms to come up.   How sneaky is that.

Here’s how it works:

If you are a small business you may qualify to claim a special state tax deduction for each new job you create in 2013 and 2014.

Eligible Small Business:
  • Employ fewer than 50 full-time and part-time employees at all times during the tax year for which the deduction is taken.

Eligible Employee:
  • Completed at least 52 consecutive weeks of full-time employment (average 35-hours/week).
  • Earned wages for the 52 week period above the “county average wage” as determined by the department of economic development.  – click here for average wages by county   
    • (Greene County Average wage for 2013 was $36,840)
  • Not previously employed in Missouri by the small business or any business affiliated with the small business for a period of 12 months prior to the creation of the new job.

State Tax Deduction:
  • The deduction equals $10,000 for each new job created or $20,000 for each new job created in which employer paid at least 50% of the employees’ health insurance.

“New” Jobs Created:
  • The small business must choose a single date to compare the number of full-time employees on that date in the deduction year, to the number employed on the same date in the immediately preceding year.
Example: 

ABC, Inc., an S-Corporation, had fewer than 50 full-time and part-time employees in Greene County for all of 2013. ABC chooses December 31st as its comparison date. On December 31, 2014, ABC employed 35 full-time workers, and on December 31, 2013, ABC had only 33 full-time workers. The two new full-time employees made more than the county average wage of $36,840.

ABC, Inc. is allowed to deduct an additional $20,000 (2 times $10,000) on their 2014 state income tax return. The $20,000 deduction is passed through to the S-Corporation shareholders, who take the deduction on their Missouri state income tax return. Total tax savings to the shareholders would be $1,200 (6% state tax rate times the $20,000 deduction).

If your business is growing and you meet the criteria above let me know and we will take the deduction on the 2014 return.  


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Thursday, February 19, 2015

Relief for the $100/Day ACA Penalty

The IRS issued Notice 2015-17 clarifying the application of Notice 2013-54 to certain situations. The notice provides relief for employers who are not applicable large employers (ALES), as defined in §4980H. In summary, the IRS will not assess any penalties for reimbursement arrangements for 2014 through June 30, 2015. After June 30, 2015, the IRS states they may start assessing penalties. Specifically, the IRS addresses:
  • The transitional relief through June 30, 2015.
  • The treatment to 2% S corporation shareholders.
  • Reimbursing for Medicare, TRICARE or Medigap.
  • Increasing employee compensation on an after-tax basis in a way that is not tied to health insurance.
  • Treating insurance reimbursements as taxable wages.
The IRS confirmed that for the time being, they'll allow an S corporation shareholder to deduct reimbursed insurance as a self-employed health insurance under §162 (l). 

The IRS has also clarified that treating insurance reimbursements as after-tax is still in violation of Notice 2013-54; however, the IRS will not assess penalties for 2014. 

Lastly, the IRS clarified that if an employer offers a group health plan, it may be integrated with a reimbursement for Medicare premiums without violating the Market Reforms.

Stay tuned for further guidance as this impacts every business who has reimbursed, or are currently reimbursing, employees for health insurance.

If you need further assistance, please contact me at Kinzey & Arndt, CPA.  


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Wednesday, January 15, 2014

The Affordable Care Act - What You Need to Know

It’s coming faster than you think: the Affordable Care Act (ACA) mandate that kicks in on March 31, 2014.  On this date, the ACA will make health insurance mandatory for most Americans. Many clients are asking for advice and guidance.   So I’ve put together the basics in a question and answer format on how the law will affect your coverage, your health plan options and your costs.

When Does the Law Start?

Some of the ACA’s reforms and consumer protections have already started. Most will take effect by March 31, 2014.  For instance, if you don’t have health coverage through your employer or a public plan like Medicare or Medicaid, you will need to purchase coverage by March 31, 2014 or pay a penalty.
 
For some requirements, the federal government has extended the deadline. For example, large employers will have to offer health coverage to their workers, or pay a penalty. Employers now have until 2015 to comply with that rule.

What Coverage Will I Need to Have? 

By March 31, 2014, everyone unless an exemption applies must have “minimum essential coverage” or pay a penalty.  Health coverage provided by your employer, an individual plan that you buy, and public insurance like Medicaid all count as minimum essential coverage.  If you can’t afford coverage, you may be eligible for financial help.

Under certain circumstances, you won't have to pay a penalty if an exemption applies.  Click here for a list of qualifying exemptions.   

Why is there a penalty for not having insurance?  

When you are uninsured and cannot pay for healthcare services, others indirectly have to foot the bill.  The ACA is intended to encourage as many people as possible to have coverage in order to spread the risk among a large group and minimize costs for everyone.


How much is the penalty? 

The penalty is based on income and starts at $95 per adult and $47.50 for each child in 2014.  And of course, in addition to the penalty, you will still have to pay all of your own medical costs.

You can see examples of minimum essential coverage and learn more about the penalty fee here.


What are Health Insurance Exchanges?

Starting on October 1, 2013, you will be able to buy a health plan using a “Health Insurance Exchange” or “Health Insurance Marketplace.”  Think of the Exchange as a centralized website where you can shop and compare different plans. Keep in mind that if you already have minimum essential coverage through your employer, a family member or another plan, you’re all set - you won’t need to use an Exchange.

How Do I Find an Exchange?

Exchanges will be run by some states, the federal government, and in some cases, states in partnership with the federal government. If you live in a state that is running its own Exchange, you will use that one.  If your state will not have its own Exchange, or if it will offer one in partnership with the federal government, you can use the federal Exchange.

You can find out if your state will run its own Exchange, and locate its website here (scroll to the bottom of the page to find your state).  The federal Exchange will be available at www.healthcare.gov. Missouri does not run it’s own exchange so Missouri residents should use the federal Exchange.

When Can I Enroll?

You can sign up for a health plan on the Exchange during an “open enrollment” period. Open enrollment starts on October 1, 2013 and ends on March 31, 2014.  You can enroll online, by phone or in person.

If you want your coverage to begin on January 1, 2014, you must sign up by December 15, 2013.  If you enroll between December 16, 2013 and March 31, 2014, as long as you sign up by the 15th of the month, your coverage will begin on the first of the next month.

What Do the Exchange Plans Provide? 


Each Exchange will sell “qualified health plans” – plans that meet a minimum level of coverage and cost sharing.  Every plan on the Exchange will need to meet these requirements:

Essential Health Benefits


Qualified health plans must offer a core set of benefits.  These include coverage for behavioral health services, emergency services, maternity and newborn care and preventive/wellness services.

Starting on January 1, 2014, all health plans, even those that are not sold on an Exchange, must cover essential health benefits.  A full list of essential health benefits is available here.

Coverage for Preventive Care

Taking care of our health is often the best way to reduce our health risks – and our health costs.  One of the most important things we can do is get regular preventive care, like immunizations and cancer screenings.  Some health plans already cover a range of preventative services at no cost to you – even if you haven’t met your deductible, or usually have co-pays for other services.  All health plans on the Exchange will cover certain preventive services at no cost.

New health plans created after the ACA was signed on March 23, 2010, or plans that have changed their coverage since then, are already required to cover preventive services for free.  Older plans that have stayed the same since the law was signed are considered “grandfathered.”  These plans don’t have to cover free preventive services yet, but they will on January 1, 2014. If you aren’t sure if you have a grandfathered health plan, review your plan documents, check with your employer or contact your plan.

Levels of Cost-Sharing

Most plans require cost-sharing: you pay for a portion of your care, and your insurer covers the rest. Qualified health plans are grouped into four categories of cost-sharing: Platinum, Gold, Silver and Bronze.  Monthly premium payments are higher for Platinum and Gold plans than for Silver and Bronze plans, but they also offer lower deductibles, co-insurance and co-pays.  On your Exchange website, you will be able to compare all of these costs and see what type of plan works best for you.

Remember, all plans will cover, at a minimum, the same essential benefits – the big difference will be how much you pay.

What If I Can’t Afford a Plan?

When you enroll in a health plan, you generally pay a premium to your health insurance company for health coverage.  When you get health insurance through an employer, the employer generally pays a portion of the premium and you pay the rest, usually through regular deductions from your paycheck.

If you buy a plan through an Exchange, you will pay the cost yourself. But, you may qualify for financial help – and you won’t have to figure out whether you’re eligible on your own. When you submit your application, it will automatically be sent to the right place to determine what kind of financial help, if any, you can receive.


Premium Tax Credit

Based on the information you include on your Exchange application, you may qualify for a premium tax credit to help you pay the plan premium. You may be eligible for a credit if you are under age 65 and are not eligible for employer coverage, Medicaid or Medicare.  Your income and family size also affect your eligibility for financial help.

You can learn more about tax credits here.  The Kaiser Family Foundation offers a helpful subsidy calculator that you can use to see what type of assistance you may qualify for.

Medicaid and CHIP

Under the ACA, many states will be expanding Medicaid eligibility to more people. If you live in one of them, and your income is less than 138% of the federal poverty level (currently $32,500 for a family of four), you will be able to enroll in Medicaid using the federal Exchange at www.healthcare.gov.

The Children’s Health Insurance Program (CHIP) offers low cost health insurance coverage for children as well as for some parents and pregnant women. You can find more information about CHIP here.

Your Action Plan: Get Your Affordable Care Act Together

If you won’t have health coverage by January 1, 2014 and you don’t want to pay a penalty fee for being uninsured, start thinking about buying coverage through an Exchange.
 

  • Do your homework!  Start reading up on the coverage options and plans that will available in your area by visiting finder.healthcare.gov.


Being in the know about the ACA can help you make smart decisions and get the coverage that’s right for you and your family!

S-Corporations and the Reasonable Wage Requirement

One of the top audit risks for S corporations is salary and wages paid to officers of the corporation.  S corporations have many advantages, tax and legal, as long as you follow the rules.  So if you are considering an S corporation for your business, here is what you need to know on reasonable compensation and S corporations:

Reasonable Compensation

The fastest way to get audited as an S corporation is to file an 1120S with no amount showing on Form 1120S Line 7 "Compensation of Officers." It is assumed by the IRS that no one works for free, and so the IRS has said over and over again that officers of the corporation must receive wages (reported on line 7).

As an owner-employee of the S corporation, you must pay yourself a salary, and pay payroll taxes on your salary, even if the business is losing money. You don't have to pay yourself a high salary, but it must be a "reasonable amount" according to the IRS. Reasonableness can be interpreted in different ways. I would keep track of the number of hours you work for your business, and then figure out a "reasonable" salary to pay yourself based on the amount of time you spend.

If your S corporation is losing money (especially in the first few years of operation), then your losses will be exaggerated by the salary you have to pay yourself. Thus, if your economic losses (not counting your salary) is $10,000, but you need to pay yourself a "reasonable" salary of $10,000, then your tax loss will be at least $20,765 ($10,000 economic loss + $10,000 salary + $765 in employer-paid payroll taxes). In an S corporation, your tax losses will always be greater than your economic losses, and your tax profits will always be less than your economic profits.

What's a Reasonable Salary?

IRS Fact Sheet 2008-25 provides some guidance on how to determine the amount of wage compensation that is reasonable for a taxpayer.  In making the determination, the IRS notes that the courts have taken into account all facts and circumstances of each case.  Some of the specific factors considered by the courts include the following:

  1. The training and experience of the taxpayer
  2. The taxpayer’s duties and responsibilities
  3. The time and effort the taxpayer devotes to the business endeavor
  4. The draw history
  5. The payments made to nonshareholder employees
  6. The timing and manner of paying bonuses to key people in the business
  7. The amount of comparable pay for similar services that the taxpayer provides
  8. The existence of any compensation agreements
  9. Whether there is any formula that determines compensation


Salary is reasonable if a non-shareholder would be willing to accept the job at the proposed salary level.

Comparable compensation information may be found from sources such as the U.S. Department of Labor, employment agencies and placement offices, union administrations and professional associations.

Note> It is important to document the sources of information used to justify the wage compensation amount paid to an S corporation business owner.

Generally, the IRS will grant the S corporation a degree of latitude in setting salary compensation for shareholder-employees. However, the salary must be paid, and the level of salary must be appropriate.

What's an Unreasonable Salary?

Zero salary is unreasonable. No one works for free.  Salary below minimum wage is unreasonable. You would not persuade a non-shareholder to accept a job offering below minimum wage.

Salary far in excess of an appropriate wage is unreasonable. Paying a million-dollar salary when an officer in similar position would expect to make only $150,000 is also unreasonable. Some S corporations have attempted to pay higher-than-normal salaries as a way to increase business expenses.

Why is Officer Compensation an Audit Priority?

The IRS can collect payroll taxes on officer compensation.  If the IRS determines the S corporation paid the shareholder an unreasonable wage, they can recharacterize the distributions as salary and require payment of employment taxes and penalties which can include payroll tax penalties of up to 100% plus negligence penalties. 

For example, a CPA who incorporated his practice took a $24,000 annual salary from his S corporation and received $220,000 in distributions which were free of employment taxes. The IRS said that his salary was unreasonably low and that $175,000 of the distributions should be treated as wages subject to employment taxes. The court upheld the IRS’s power to recharacterize the dividends as wages subject to employment tax. (Watson v. United States, (DC IA 05/27/2010) 105 AFTR 2d ¶ 2010–908.)

If you have questions about this information or need assistance in determining a reasonable wage please contact our office and make an appointment.

Monday, February 4, 2013

How to Track Your IRS Refund


So you’re getting a tax refund and now you want to know when to expect it.   The good news is that the IRS wants you to know as well.  There are three fast and easy ways to track the status of your refund.

Go Online

The IRS created “Where’s My Refund?,” a digital tool designed to answer taxpayer questions about the status of their refund.  This year the IRS has refreshed, enhanced and polished the app just in time for the 2013 tax season, making it more automated and accurate than ever before.

With “Where’s My Refund", a new progressive feature called a “refund tracker” displays the return progress in three separate stages.  Here are the three stages and the messages you may receive:

1. Return Received

·          We have received your tax return and it is being processed.

·          You should get your refund within 21 days from the date we received your tax return.

·          Please check here or use our free mobile app, IRS2Go, to check on your refund.

2. Refund Approved

·          Your tax refund is scheduled to be sent to your bank on (MMDDYYYY). (Direct deposit date of refund) or (Other appropriate text if a paper check)

·          If your refund is not credited to your account by (the above date), check with your bank to see if it has been received.

·          Please Note: For refund information, please continue to check here, or use our free mobile app, IRS2Go. Updates to refund status are made no more than once a day.

3. Refund Sent

·          Your refund was sent to your bank on (MMDDYYY) for direct deposit (or other appropriate text if a paper check).

·          If your refund is not credited to your account by (MMDDYYY), check with your bank to find out if it was received (or other appropriate text if a paper check).

To get started you need your social security number, filing status and the exact dollar amount of the refund.  All of this information can be found on your 2012 tax return.

Wait 24 hours after e-filing a return and four weeks after mailing a return. 

The IRS tool updates overnight so there is no need to check more than once a day.

Call a Special Toll Free Number

If you don't have access to a computer or simply prefer using a telephone, you can call the IRS to track down your refund.

A special automated toll-free line is dedicated to refund status reports. When you call (800) 829-1954, you'll need the same information the online system requires – social security number, filing status and exact dollar amount of refund.

Use an App on Your Smartphone

The IRS has released a new version of IRS2Go, a smartphone application that lets you interact with the IRS using your mobile device.  Three new features are available, providing access to video, new updates and more tax information.

Get Your Refund Status You can check the status of your federal income tax refund using IRS2Go.  Simply enter your Social Security Number, which will be masked and encrypted for security purposes, then select your filing status and enter the amount of your anticipated refund from your 2012 tax return.  If you e-file your return, you can check your refund status within a 24 hours.  If you file a paper tax return, you will need to wait three to four weeks to check your refund status because it takes longer to process a paper return.

Get Tax Updates You can also use IRS2Go to subscribe to filing season tax updates by entering your e-mail address to automatically get daily tax tips. Tax Tips can help you with your tax planning and preparation needs. They are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.

Follow the IRS
You can use IRS2Go to sign up to follow the IRS Twitter news feed, @IRSnews.  IRSnews provides the latest federal tax news, including information about tax law changes and important IRS programs.

New! Watch Us IRS2Go delivers video from the IRS YouTube channel to your mobile device.  As IRS launches new videos on YouTube, the videos are automatically featured on IRS2Go.

New! Get the Latest News
IRS news is available via IRS2Go as soon as it is released to the public. This feature allows you to learn about new programs, legislative updates and relevant tools to help you navigate taxes and the IRS.

New! Get Your Tax Record You can request your tax return or account transcript using your smartphone.  IRS2Go allows you to request this information, which will be mailed to you within several business days.

The app is free for both Android and Apple users.

I hope this information is helpful.  If you need further assistance, please contact me at Kinzey & Arndt, CPA.  
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