A Look Back at 2012 and a Preview of 2013 Tax Tip of the Week | No. 199 May 22, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentIRS Practice and Procedure Changes
In 2012, a $305 million IRS budget reduction resulted in $5 billion less in enforcement revenue.
On January 6, 2012, the IRS announced the results of its most recent measurement of annual losses to the U.S. Treasury due to taxpayer noncompliance, also known as the tax gap. This study reflected the IRS’ estimates of noncompliance for tax year 2006. The IRS’ conclusion: In only five years, the tax gap increased from $345 billion in 2001 to $450 billion in 2006. In 2012, the IRS implemented new programs and made changes to its procedures to try to close the tax gap. But budget cuts also meant that the IRS had to conduct compliance activity with $305 million less. The result was $5 billion less in revenue from enforcement activities.
Despite budget challenges, the IRS expanded some programs and improved others. Here are some of the most significant changes in IRS compliance that took place in 2012 – and a look ahead at what to expect in 2013.
Examinations
In 2012, the IRS continued to focus on correspondence (mail) examinations, which contributed to an overall audit coverage rate of slightly more than 1% for individual taxpayers. This rate dropped slightly in 2012 due to a reduction in examination personnel. The IRS will continue to focus on Schedule A deductions and tax credits in these examinations.
In 2012, the IRS started to focus closely on flow-through entities, and increased field examinations of partnerships and S corporations by 18.7%. In 2013, the IRS will focus on partnerships, looking closely at abusive transactions and underreported income, and on S corporations, looking closely at officer compensation and losses taken in excess of basis. IRS field agents will also continue to investigate small businesses, including e-commerce, for underreported income in 2013.
In 2012, the IRS emphasized accuracy-related penalty assessments and held preparers responsible for return errors and omissions, especially in areas of rental property and deducting S corporation losses in excess of basis. This trend will continue in 2013.
Penalties
In 2012, the IRS continued to pursue penalties to deter noncompliance. Since 2005, accuracy-related penalties assessed against individual taxpayers have increased 757%. In 2013, the IRS will continue to press for accuracy-related penalties in CP2000 underreported adjustments and audits.
For 2011 individual returns, the IRS provided a six-month grace period for unemployed and self-employed taxpayers who experienced a significant reduction in income. For certain taxpayers who filed Form 1127-A, this grace period allowed an extension of time to pay, without penalty, until Oct. 15, 2012. The IRS has not extended this provision for 2012 returns.
In 2012, the Treasury Inspector General for Tax Administration (TIGTA) criticized the IRS about what TIGTA described as a lack of uniformity in applying penalty abatement, and specifically criticized the IRS for not facilitating access to the first-time abatement relief option for failure to file, failure to pay, and failure to deposit penalties. First-time abatement is an administrative waiver that many taxpayers qualify for, but that the IRS does not readily publicize and that practitioners often don’t understand or request. In 2013, look for more pressure on the IRS to provide a form to simplify the process of requesting all types of penalty abatement.
Collection
In 2012, the IRS instituted additional Fresh Start initiatives to help struggling taxpayers pay their taxes. As part of these initiatives, the IRS relaxed streamlined installment agreement rules for individuals by increasing the threshold from $25,000 to $50,000, and the time to pay from 60 months to 72 months. The IRS also increased the qualifying amount for business trust fund express installment agreements from $10,000 to $25,000 to help businesses pay employment taxes and avoid the filing of a federal tax lien.
In 2012, the IRS made significant changes to its offer in compromise (OIC) program terms to provide more access to the program. The IRS revised the future income calculation and made changes to allow taxpayers more expenses in determining the offer amount. In 2012, these changes allowed many more taxpayers to qualify for and receive an OIC.
Installment agreement and OIC changes in 2012 were part of a multiyear effort by the IRS to help struggling taxpayers with better payment alternatives. In 2013, we will likely continue to see a kinder, gentler IRS in regard to payment alternatives.
IRS Matching Programs
2012 was a breakthrough year for IRS automated matching programs. In 2012, it’s likely that the IRS exceeded the 4.7 million individual CP2000 (underreported) notices that it sent in 2011. In 2012, this was the only major IRS compliance program that generated increased enforcement revenue over 2011. However, the IRS was not limited to information matching on individual returns.
In 2012, the IRS initiated a business information-matching program and a Form 1099-K matching program. The IRS sent new notices in late 2012 questioning businesses on the accuracy of their returns, based on information statements filed under business employer identification numbers (EINs). The IRS also matched Forms 1099-K to business returns and sent inquiries to taxpayers with potential discrepancies, requesting explanations for possible unreported income.
Editor’s Note: We are seeing a huge increase in correspondence audits in our office. Two key things to remember: most of the notices are incorrect and most importantly bring the notice to us quickly!
The IRS may get more aggressive, but they have to play by the rules. We are here to make sure the rules work for you.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
Another New Requirement is Coming…..Tax Tip of the Week | No. 198 May 15, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentIRS to Require EIN Holders to Provide Updated Info
The Internal Revenue Service has issued final regulations requiring any person who has been assigned an Employer Identification Number to provide updated information to the IRS.
The regulations affect people and businesses with EINs and are aimed at enhancing the IRS’s ability to maintain accurate information about persons who have been assigned EINs. The regulations are expected to take effect in 2014.
The final regulations require any person assigned an EIN to provide updated information to the IRS in the manner and frequency prescribed by forms, instructions or other appropriate guidance.
The IRS noted in the regulations that the collection of this information is necessary to allow the IRS to gather correct application information with respect to persons who have EINs. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.
“Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law,” said the regulations. Generally, tax returns and tax return information are confidential, as required by Section 6103 of the Tax Code.
The Treasury Department and the IRS originally published a notice of proposed rulemaking in the Federal Register, on March 14, 2012, requiring persons issued EINs to provide updated application information to the IRS. The IRS did not receive any requests for a public hearing, but several written comments were received. After considering all the comments, the proposed regulations were adopted without amendment.
Two commentators objected to the increased burden on entities resulting from the updating requirement and questioned the necessity of the requirement, and two suggested that the estimated annual average burden of 15 minutes provided in the Paperwork Reduction Act section of the proposed regulations underestimated the actual burden to entities and their agents. One commentator also argued that this rule is “material” because the related costs could reach over $100,000,000.
The Treasury and the IRS considered the objections, but concluded that updating the application information was necessary for effective tax administration. They noted that some EIN applicants continue to list individuals temporarily authorized to act on behalf of EIN applicants (sometimes referred to as “nominees”) as principal officers, general partners, grantors, owners, and trustors on EIN applications. “The listing of nominees or other individuals who are no longer associated with the entity prevents the IRS from gathering and maintaining correct and current information with respect to the responsible party for the EIN applicant,” said the IRS and the Treasury. “The requirement in the final regulations to provide updated application information will allow the IRS to ascertain the true responsible party for persons who have an EIN. This knowledge will prevent unnecessary delays by allowing the IRS to contact the correct persons when resolving a tax matter related to a business with an EIN. In addition, this information will help the IRS combat schemes that abuse the tax system through the use of nominees, which results in the concealing of the true responsible party for entities that hide assets and income.”
The Treasury and the IRS also concluded that the costs related to this rule are not “material.” Any associated burden on entities resulting from this requirement would be minimal, and the costs and burden would be outweighed by the benefits to tax administration. They argued that an entity with an EIN would always know the identity of its appropriate responsible party, which is generally defined as the individual with the authority to control, manage or direct the entity and the disposition of its funds and assets. The updating requirement in the final regulations requires entities to keep the IRS informed of the identity of the responsible party.
Editor’s Note: At this time we do not know who this effects or how the reporting is to be filed. We will be watching this closely and keep you posted.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
IRS Has Different Definitions For Children | Tax Tip of the Week | No. 197 May 8, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentDo You Know a Child When You See One?
Recently the Tax Court ruled on a situation where a taxpayer claimed dependent exemptions and the Child Tax Credit for two children. Here are the facts: the taxpayer cared for two of her cousin’s children as if they were her own. The children resided with her, and she acted as their guardian. They were neither placed in the home as foster children nor did the taxpayer adopt the children.
On her tax return, the taxpayer claimed both children as dependents and claimed the $2,000 Child Tax Credit ($1,000 for each child).
A dependent is defined as a qualifying child or a qualifying relative. One of the requirements for being a qualified child is that the child must be the taxpayer’s child, brother, sister, stepbrother, stepsister or a descendant of such relatives. A child who does not meet the definition of a qualified child can still be claimed as a dependent if he or she meets the qualifying relative requirements for the year at issue. To be a qualifying relative, the individual must have the same place of abode as the taxpayer and be a member of the taxpayer’s household for the entire year. In addition, the taxpayer must provide over one-half of the individual’s support.
By tax code, the Child Tax Credit is allowed with respect to each qualifying child of the taxpayer in the amount of $1,000. Since her cousin’s two children did not fall under the definition for a qualifying child, the IRS was ruled correct in disallowing the Child Tax Credit. However, the IRS was correct in allowing her to claim the children as dependents because they each met the requirement of a qualifying relative.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
Updates on Social Security | Tax Tip of the Week | No. 196 May 1, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentSeven New Social Security Rules for 2013
Payroll tax cut ended. As you probably noticed by now, your payroll check is less than last year. This is because the payroll tax cut expired at the end of 2012. In 2011 and 2012 you paid 4.2% of your income into Social Security. Starting in 2013, the Social Security tax rate has returned to 6.2%.
Higher payroll tax cap. The payroll tax cap increased by $3,600 for 2013. This means you will now pay Social Security taxes on $113,700 of your income, up from $110,100 in 2012. As always, there is no maximum earnings limit on the 1.45% (2.9% if self-employed) Medicare tax.
More online services. A trip to the Social Security office is no longer necessary to start your Social Security payments. A growing number of retirees are now claiming benefit payments online. For the first time in 2012, you could access your Social Security statements online, including your complete earnings history and expected payments. In early 2013, Social Security added online services including the ability to access a benefit verification letter and payment history.
Reduced office hours. Social Security offices are reducing the hours they are open to the public to save money and avoid paying overtime to their workers. Social Security offices nationwide began closing offices 30 minutes early each day starting on November 19, 2012. Offices will also be closed at noon every Wednesday.
Paper checks will end. On March 1, 2013 the Treasury department stopped mailing paper checks to Social Security recipients. The preferred method for retirees to receive benefits is to have the funds directly deposited in their bank or credit union checking accounts. For those recipients without bank accounts, the funds will be deposited onto a prepaid Direct Express Debit MasterCard. Note that over 93% of Social Security and Supplemental Security Income (SSI) recipients have already signed up for direct deposit.
Higher earnings limit. You have the option of receiving Social Security benefits at age 62. If you continue to work between the ages of 62 and 66 and receive Social Security benefits you might have part or all of those benefits temporarily withheld. Workers between the ages of 62 and 66 can earn up to $15,200 in 2013, after which $1 in benefits will be withheld for every $2 of income above the earnings limit. People who turn 66 this year can earn up to $40,080, and then $1 of benefits will be withheld for every $3 earned above the limit. Earnings after the month you turn 66 are not subject to any earning limits. Benefits may be recalculated at age 66 to reflect any previously withheld benefits and continued earnings.
Bigger Payments. Social Security beneficiaries received a 1.7% increase in benefits in 2013 due to the increased cost-of-living index. Beginning in January 2013, the average Social Security benefit increased from $1,240 to $1,261/month. The maximum Social Security benefit for someone turning 66 (and receives benefits for the first time) in 2013 is $2,533/month. The actual amount depends on a formula that considers your lifetime earnings.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
What the IRS Wants You to Know | Tax Tip of the Week | No. 195 April 24, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentDon’t be Scammed by Cyber Criminals
The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams – known as phishing – is to trick you into revealing your personal and financial information. The scammers can then use your information – like your Social Security number, bank account or credit card numbers – to commit identity theft or steal your money.
1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
2. The IRS does not initiate contact with taxpayers by email to request personal or financial information. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term ‘identity theft’ for more information and resources to help.
3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious email to phishing@irs.gov.
5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you’ve been victimized are available at www.irs.gov. Click on “phishing” on the home page.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
Thank You! | Tax Tip of the Week | No. 194 April 17, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentThe Week After Tax Season
Aaaah……The week after tax season (and the first full weekend home in two and half months) is the best week in a tax accountant’s life!
We met a lot of new clients this year because of referrals from existing clients, and readers of our Tax Tip of the Week. Thank you! A referral is the best compliment we can ever receive.
Even though tax season is over—we will continue our Tax Tip of the Week mailing for the rest of the year. We will keep you updated on the constant changes as well as spotlighting specific tax planning ideas.
If there are any special tax topics you would like us to cover, just send us an email or give us a call.
Again, thank you for making this one of most rewarding tax seasons yet.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
It is Better to Extend vs. Not Filing on Time | Tax Tip of the Week | No. 193 April 10, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentFiling For Extensions
If you haven’t filed your tax return by now, you should probably consider filing for an extension. It is a lot easier to file for an extension than it is to amend a return later for a mistake you made trying to rush your return to completion. A hastily filed return is even more costly if the IRS finds a mistake you made and assesses underpayment penalties and interest.
To file for an extension, you simply need to submit Form 4868. After submitting this form, you then have until October 15, 2013 to timely file your return. Note, however, that an extension of time to file is not an extension of time to pay. If you suspect you will owe some taxes, you must send a payment along with the extension. This is true for your federal, state and city returns.
Ohio will automatically accept the federal extension. Some cities, however, require a special city extension form. Also, some cities will not allow extensions if you only have W-2 income. Be sure to check with your work and/or resident cities before April 15th.
Another reason to file for extension is that some speculate your chances for an audit decreases for extended returns. How? One of the methods the IRS uses to select a return for audit is to select a random sample of returns filed by April 15th. If your return is not in that sample—then you don’t get picked!
Editor’s Note: One of the pledges I make to all my clients is that my personal return will be the last one filed each year. When my most procrastinating client’s return is filed on October 15th —-mine is right behind it! And has been that way for nearly 20 years!
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
IRS Proposes Truncated Taxpayer Identification Numbers to Curb Identity Theft | Tax Tip of the Week | No. 192 April 3, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentIdentity Theft Update
The Internal Revenue Service has issued proposed regulations to create a new taxpayer identification number known as the IRS Truncated Taxpayer Identification Number, or TTIN, that can be used instead of a Social Security number, in response to the growing problem of identity theft related tax fraud.
The TTIN would provide an alternative to using a Social Security number (SSN), Individual Taxpayer Identification Number (ITIN), or IRS Adoption Taxpayer Identification Number (ATIN). The filer of certain information returns would be able to use a TTIN on the corresponding payee statements to identify the individual being furnished a statement. The TTIN would display only the last four digits of an individual’s identifying number and is shown in the format XXX-XX-1234 or ***-**-1234.
The IRS has been struggling to curb identity theft. From 2008 through the middle of 2012, the IRS identified more than 600,000 taxpayers who have been affected by identity theft. Last tax season, the IRS added filters to its system to check for signs of identity theft, stop suspicious tax returns and contact the taxpayer before the return is processed, but that in turn led to delayed tax refunds for millions of taxpayers. The IRS has also enhanced the use of Identity Protection Personal Identification Numbers for identity theft victims.
In 2011 the IRS protected $1.4 billion in refunds from being erroneously sent to identity thieves, according to the IRS Advisory Council. Through mid-April 2012, the IRS had stopped over 325,000 questionable returns with $1.75 billion in claimed refunds using filters specifically targeting refund fraud.
However, the impact of identity theft on tax administration is significantly greater than the amount the IRS detects and prevents, according to the Treasury Inspector General for Tax Administration. TIGTA’s analysis of tax returns using characteristics of IRS-confirmed identity theft has identified approximately 1.5 million tax returns with potentially fraudulent tax refunds totaling in excess of $5.2 billion. TIGTA estimates that the IRS could potentially issue $21 billion in fraudulent tax refunds over the next five years as a result of identity theft.
The IRS’s proposed regulations would affect the filers of certain information returns who will be permitted to identify an individual payee by use of a TTIN on the payee statement furnished to the individual, and those individuals who receive payee statements containing a TTIN. The TTIN can be used in payee statements on 1099, 1098 and 5498 series forms, except for the 1098-C. The IRS has already begun testing the use of the TTIN under a 2011 pilot program.
We will keep you posted if this becomes a final regulation.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
Taxpayers Don’t Comply With Reporting Requirements for Noncash Charitable Contributions | Tax Tip of the Week | No. 191 March 27, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentAre You in Compliance?
About 60% of taxpayers who claim large-dollar noncash charitable contributions on their returns may not be complying with Federal reporting requirements, according to a new report by the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA’s report found that the IRS is not ensuring that taxpayers are complying with reporting requirements for claiming noncash charitable contributions. An estimated 273,000 taxpayers claimed about $3.8 billion in potentially erroneous noncash charitable contributions in Tax Year 2010, which resulted in an estimated $1.1 billion reduction in tax.
“Taxpayers can generally deduct noncash charitable contributions made to qualifying organizations during the tax year on their Federal tax returns,” said J. Russell George, Treasury Inspector General for Tax Administration. “However, taxpayers who do not comply with the reporting requirements for noncash contributions could be incorrectly reducing their tax liabilities and receiving tax refunds to which they are not entitled,” he added.
Taxpayers who donate motor vehicles must attach a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to their tax returns. However, the IRS is still not effectively identifying taxpayers who are not complying with reporting requirements for donations of motor vehicles.
This is an easy target for the IRS to take aim—make sure you have your records!
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
You Need to be Proactive… | Tax Tip of the Week | No. 190 March 20, 2013
Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a commentIn Debt and Unemployed?
A job loss is an unfortunate event that can throw household finances and debt repayment for a loop. When it happens to you or your family, it’s essential to make a list of your monthly payments and any expected household income, and to begin prioritizing them.
As soon as it’s obvious your income isn’t going to cover your household budget and monthly debt payments, you should proactively contact creditors and your attorney to find out what kind of modified payment plan and other options are possible.
Be sure to write down the full name of the person you spoke with, along with the date and time. Ask the representative to mail you a letter to confirm the new terms discussed.
For a mortgage, contact the lender currently holding the loan and explain your family situation. Ask them about any temporary or permanent loan-modification arrangements they might have.
You may also qualify for assistance under the Making Homes Affordable Program. Depending on your needs and the terms of your loan, you may qualify for different types of assistance. Don’t count on your bank to bring the options to your attention.
If a loan modification is not sufficient, you may want to consider a short sale of your home, in which a buyer is willing to pay less than the underlying mortgage balance, and the bank agrees to forgive the balance of the loan. Be aware that this loan forgiveness will have a negative impact on your credit rating and score for a long time, and could create reportable taxable income.
Bankruptcy is a serious decision that should, in most circumstances, be taken only as a last resort when no other options are available.
Bankruptcy proceedings stay on your credit reports for 10 years and could hamper your ability to obtain credit for at least that long. A bankruptcy can hurt your chances of landing a job or may trigger an increase in your auto and homeowner insurance premiums.
Sometimes, bankruptcy is unavoidable when the amount of your debt payments greatly overwhelms your ability to repay them, usually when the amount of debt exceeds the value of your assets by a large amount.
Despite disadvantages, Chapter 7 bankruptcy can wipe out most unsecured debts, such as credit card and medical bills; it can also stop bill collectors and give you a fresh start.
If you feel that bankruptcy is your only option, call or visit the folks at the National Foundation for Credit Counseling, a non-profit organization that can help you make sense of your options.
As always, give us a call with any questions or concerns you may have.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.
Rick Prewitt – the guy behind TTW
…until next week.
