Posts Tagged ‘internal revenue service’

How to get a “loan” from the IRS

Posted on: February 11th, 2015 by

Estimated Payments - Rockville, MDEven if your overall cash-flow situation is good, but you still need to cover a short-term deficit, today’s still-strict credit environment often won’t allow you to take out a loan.  More than likely, your only option would be an untapped home equity line of credit or a generous relative.  If that’s the case, great.  If not, you may be able to turn to a surprising source for some help: the taxman.

If you’re self-employed, an investor or someone who lives off Social Security benefits, pension payments, retirement account withdrawals, and the like, you can apply for loan from the Internal Revenue Service.  Better yet: To borrow from the IRS, you don’t have to fill out any annoying applications, prove your income or fence with a balky loan officer.  While this may sound too good to be true, it is true.

What you do is simply postpone some federal income tax payments that you would otherwise make to the IRS via estimated tax installments.  You don’t need the government’s permission.  You just do it and then make up the difference later.  Of course, the IRS will charge interest on the difference between what you should have paid in for each installment and what you actually paid.  However, the current interest rate on estimated tax underpayments is only 3%.  While the rate can potentially change each quarter, it will probably remain at a reasonable level for a while.

The IRS calls the interest on estimated tax underpayments a “penalty.”  But since the current interest rate is only 3%, it’s not really a penalty.  In fact it’s actually a pretty good deal for someone with a short-term cash crisis.

Note: If you are a salaried employee, you must pay in federal income taxes via payroll withholding.  You may be able to adjust the withholding downward a bit for the rest of this year by turning in a revised Form W-4 to your employer.  However, the strategy of borrowing from the IRS is basically unavailable to you.  Sorry.

Estimated Taxes:

There is no federal income tax withholding on income from self-employment activities conducted via sole proprietorships, partnerships, or LLCs.  Nor is there generally any required federal income tax withholding on interest income, dividends, capital gains, Social Security benefits, pension payments, or taxable retirement account withdrawals.  Instead those with income from these sources are expected to make four installment payments of estimated taxes for each year. The installments for the 2012 tax year are due on Apr. 17, June 15 and Sept. 17 of this year, and Jan. 15 of 2013.  Obviously the first date has since passed, but the next three are still in the future.  So you can work with the installments due on those dates by paying in less than you owe or even nothing at all.

As mentioned, you will be charged interest based on the difference between the amount you should have paid in for each installment and the amount you actually pay for as long as the underpayment remains outstanding.  The amount that you should pay in for each installment generally equals the lesser of: (1) 22.5% of what you expect to report on your 2012 Form 1040 for total federal income and self-employment taxes or (2) 25% of what you reported on your 2011 return (27.5% if your 2011 adjusted gross income was over $150,000).

Borrowing from the IRS in this fashion is only a short-term fix.  By no later than April 15th of next year, you must catch up for any estimated tax payment shortfalls for the 2012 tax year.  If you don’t, the IRS will start charging additional interest of half a percent per month on the shortfall, which equates to a 6% annual rate.  That 6% is on top of the “regular” interest charge, which is currently only 3%.  So you could be looking at a rate of 9% or maybe more.  In any case, owing the IRS for 2012 taxes after April 15th of next year is just not a good position to be in.  So, if you are not ready, willing, and able to pay up by that date, this is not a good option for you.  You do not, however have to wait until April 15th to catch up.  You can do so as soon as you are able and that is the recommendation.

 


The IRS is using social media to investigate

Posted on: April 12th, 2013 by

CPA Rockville - IRS OfficeWhile all the information collected by the Internal Revenue Service is protected by strict privacy statutes, the federal tax collector is well within his investigative rights to peruse what you choose to make public.  So you might want to reconsider bragging on Facebook about buying a Ferrari when you’re reporting just a $30,000 annual income on your Form 1040.  Or at least tighten up the privacy controls on your social media account.

The IRS reportedly plans to collect personal information from sites such as Facebook and Twitter as part of its continuing effort to catch tax cheats.  The added social media attention reportedly will be given to individuals with tax returns that already have raised audit red flags.

This is not a surprise.

Social media ‘spies’

Advertisers already are data mining all our social media activities, seeking ways to manage public attitudes and encourage us to buy their products.   On the legal front, criminals are regularly caught because of their ill-advised social media discussions about or videos of their illegal activities.   It’s even happened in the tax area.  Five years ago, a group of University of Central Oklahoma students bragged on MySpace that their party business had served thousands.  That boast caught the attention of the Oklahoma Tax Commission, which promptly issued the young businessmen a $320,000 state tax bill.

I’ll bet Mom and Dad weren’t thrilled when their kids called to ask for help paying the tax collector!

Limited IRS surfing

Will the IRS do the same, using taxpayer information posted on today’s popular social media outlets?  Maybe.

But you shouldn’t expect the agency to bring in a lot more money based on social media prompted tax investigations.   The main reason is that the IRS already is running on a tight budget.  Many workers face furloughs if sequestration cuts continue.   And the IRS also recently caught congressional flack for making what some lawmakers saw as frivolous and money-wasting videos, ostensibly for training purposes, in its own in-house production studio.   So I suspect that diverting already thin resources to monitor social media sites won’t go over too well on Capitol Hill.

That said, remember that what you say on the worldwide web about your lifestyle could have consequences beyond just impressing your friends.

Best real life example I experienced this past Tuesday – I was involved in a hit and run and did not get the driver’s license plate number.  I was able to identify the make and model of the car and had seen the driver.  Luckily, it was a nurse that was leaving a hospice and I was able to use Google and social media to find her, as no one at the facility actually knew her name.  Myself and the facility staff identified her by her picture online alone.  Thank you smartphone.  Once you are out there, you are there for anyone to find.  Just remember, social media (in my case) can be your friend, or (in the case of the students) be your foe.  Be mindful of you put out there.

 


Don’t even try to take these deductions

Posted on: April 9th, 2013 by

CPA - Taxes Due - Rockville, MDEvery tax-filing season, the great quest by filers is to find the most tax deductions.  But there are some deductions you should steer clear of.  If you claim these wrong write-offs, you’ll deduct expenses that don’t meet Internal Revenue Service guidelines.  Simply, that means you’ll end up spending time with a tax auditor and paying more in taxes, penalties and interest.

With the assistance of Bankrate, here is a list of no-nos (but to be fair, there are some related tax breaks included that will pass the through the IRS).

Don’t deduct homeowners insurance, but …

The hazard policy you bought to cover damage from fires, tornadoes, hurricanes, winter storms and other disasters, as well as for more-routine mishaps, offers peace of mind.  What it doesn’t provide is a tax deduction for the insurance premiums.

But if you meet some tax law guidelines, you can deduct private mortgage insurance, or PMI on your 2012 tax return.  PMI is the insurance your lender requires you to buy if you don’t put down a big enough down payment.  PMI premiums are deductible as an itemized expense (it goes on Schedule A with your mortgage interest claim) as long as the mortgage insurance policy was issued in 2007 or later.  This tax deduction is in effect through 2013.

You also must meet income requirements.  If your adjusted gross income is $100,000 or less (or $50,000 and you’re married and filing separately), your full PMI premium amount is deductible.  If you make between $100,001 and $109,000, the amount of PMI that you can deduct is reduced.  And if your income is more than $109,000 ($54,500 married filing separately), you can’t deduct PMI at all.

You can figure your allowable PMI deduction using the work sheet in the Schedule A instructions.

Don’t deduct a telephone land line, but …

You can’t deduct the cost of your main home telephone land line, even if you primarily use that phone for your business.  The IRS says that the first hard-wired phone line in your home is considered a nondeductible personal expense.

But you can deduct as a business expense the cost of business-related long distance charges on that phone.  If you are an employee, they would be claimed as an un-reimbursed business expense on Schedule A.  If you are self-employed, you would count the phone calls as an expense on your Schedule C or C-EZ.  And if you install a second telephone land line specifically for your business, its full cost is deductible.

Don’t deduct commuting costs, but …

The cost of getting to and from your workplace is never deductible.  Taking public transportation or driving to work is a personal expense, regardless of how far your home is from your office.  And no, you can’t deduct commuting expenses even if you work during the commute.

But you might be able to deduct some commuting costs if you work at two places in one day, whether or not for the same employer. In this case, you can deduct the expense of getting from one workplace to the other.

You also can deduct some expenses related to other work-related travel, such as visits to clients (current and potential) and out-of-office business meetings.  If you’re self-employed, these expenses would go on your Schedule C or C-EZ.

If you’re an employee, travel costs must be claimed as un-reimbursed business expenses.  As such, your business and other miscellaneous itemized expenses must exceed 2 percent of your adjusted gross income.

Whatever your business travel situation, be sure to keep good records.

Another idea is to ask your employer to establish a commuter savings account program.  This employee transportation fringe benefit lets workers use pretax dollars to purchase mass-transit passes and pay for parking near work.

Don’t deduct your pet, but …

Yes, your dog or cat is a family member.  And yes, some insurance companies now include coverage for Fido or Fluffy in auto policies.  But your affection for your pet or an insurer’s willingness to pay for some of your domesticated animal’s care doesn’t carry any weight with the IRS. so don’t dare try claiming your pet as a dependent.  Yes, as ridiculous as it sounds, there are people out there that have tried it.  And yes, it is disallowed by the IRS when the furry facts are revealed.

You can, however, deduct as itemized medical expenses the costs of buying, training and maintaining a guide dog or other service animal to assist a visually impaired or hearing-impaired person, or a person with other physical disabilities.

Don’t deduct Social Security taxes, but …

You lose a lot of income each payday to Federal Insurance Contributions Act, or FICA, taxes, the money withheld from your checks to pay for your future Social Security benefits.  The debate as to whether Social Security will be around when you retire is still raging.  But one thing is sure: Don’t even think about trying to deduct these taxes.

But if you overpaid this tax, you can get a credit for your Social Security over-withholding.  There is a limit on how much FICA taxes can be contributed each year.   The tax is withheld on up to the Social Security earnings base, which is adjusted annually for inflation, and which for 2012 is $110,100 and for 2013 is $113,700.

If you had multiple jobs and your combined earnings exceeded the wage base, you probably had too much FICA withheld.  You can claim the excess Social Security tax as a credit when you file your tax return.

Don’t deduct plastic surgery, but …

If you simply are following your inner Joan Rivers, the IRS definitely won’t let you deduct the costs of your nips and tucks.  The IRS specifically says you generally cannot include in deductible medical expenses the amount you pay for procedures such as face lifts, hair transplants, hair removal (electrolysis) and liposuction.

But if a surgery is medically prescribed, for instance, a nose job to treat respiratory issues, and you just happen to like the look of your new sniffer, then that’s OK.  The doctor’s decision makes it a medical deduction.

The IRS says: “You can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease.”

Remember, all your medical expenses, including any allowable plastic surgeries, must come to more than 7.5 percent of your adjusted gross income on your 2012 Schedule A before you can claim them.  For the 2013 tax year, the medical deduction threshold is 10 percent of your AGI.

Don’t deduct dry cleaning, but …

Looking sharp at work rests totally on your shoulders.  A recent U.S. Tax Court ruling reaffirmed this tax law when the judge disallowed a television anchorwoman’s deductions for tens of thousands of dollars in clothing she bought to wear on air.

But you can deduct the cost of dry cleaning or laundry of business uniforms.  Under the tax code, that means attire you can’t wear anywhere else, although with the ways some folks dress today, that designation could be hard to nail down.

When an outfit is “not suitable for everyday use,” the IRS says the costs of upkeep for the apparel can be claimed as an un-reimbursed business expense on Schedule A.  Also deductible are the cleaning charges for nonprofit uniforms, for example, an outfit required of hospital volunteers or Boy Scout or Girl Scout troop leaders.  Here the costs of the uniform and its maintenance would count as charitable deductions, also claimed on Schedule A.

Don’t deduct time for volunteer services, but …

Your time is valuable, but that doesn’t matter to the IRS when it comes to volunteering at a charity.  You can’t claim the value of your wages for the hours spent helping out at your favorite nonprofit.  Neither can you count as a deduction the value of a project you created, such as a poster that you, a graphic artist, designed for the charity.

But you can deduct other costs associated with your charity work.  This includes your mileage in connection with the group’s work, which can be claimed on Schedule A at the rate of 14 cents per mile.  You also can claim as a charitable deduction un-reimbursed out-of-pocket expenses.

As with all things tax, keep good records.  Track your charitable travel and hang on to the receipts for the poster board and special markers you bought just for the nonprofit’s poster project.

Don’t deduct OTC medication, but …

Headache and cold treatments from your neighborhood pharmacy shelves have never been tax deductible.  There was some confusion here because for a while, the IRS allowed owners of medical flexible spending accounts, or FSAs, to use money in those pretax accounts to pay for over-the-counter drugs.

That option ended when 2011 began.  Now you must get a doctor’s prescription for OTC medications before the purchase can be reimbursed with FSA funds.  But you still can deduct diagnostic tests, such as store-bought tests for pregnancy and diabetic blood sugar levels.

And the IRS says moms get a tax deduction on breast-feeding supplies, including pumps and bottles, because, like obstetric care, “they are for the purpose of affecting a structure or function of the body of the lactating woman.”

Don’t deduct kids’ overnight camp costs, but …

When school lets out for the summer, working parents face a child care dilemma: what to do with the youngsters while Mom and Dad are at the office.

Some families send the kids off to summer camp.  That’s a great experience for the kiddos and eases, at least temporarily, parental child care concerns.  But sleep-away camps, in the summer or any other time of the year, are not tax deductible.

However, if you decide instead to keep the kids at home and simply send them to day camp during the hours you’re working, that expense could qualify as a claim for the child and dependent care credit.

If your care costs are for one child, you can count up to $3,000 of care expenses each year toward the credit.  The expense amount is doubled for the cost of caring for two or more dependents.

Your actual tax credit can be up to 35 percent of your qualifying expenses, depending upon your income.  And while that might not seem like a large percentage, remember that since it’s a credit, you get to use it to offset your tax bill dollar for dollar.

If you have further inquiries, contact Eric Bach at Eric L. Bach, CPA for a free consultation and all your tax questions.  We work to make your taxes work toward your best interest.


Prepare to pay if you don’t file – Ghost Returns

Posted on: February 15th, 2012 by

Eric L. Bach CPA - Rockville, MDWHEN confronted by a letter from the Internal Revenue Service, some people look at is as though they’ve seen a ghost.  BOO!

And when they open certain letters, a few people do see a ghost — or, more accurately, the ghost of a tax return.

When the IRS detects that a person had reportable income but did not file a return, even after much cajoling, it steps in and does the job itself.  Based on what it knows, the agency prepares what it calls a “substitute for return”, a Form 1040 (the generic tax return).  It lists income, calculates the tax due, adds interest and a penalty for failing to file, and sends the recalcitrant taxpayer a bill based on its efforts.

In one way, that may be a relief to procrastinators who just didn’t get around to filing, perhaps for years.  But it often comes at a VERY high price.

Substitute returns are really no substitute for ones that taxpayers could have filed themselves.  That’s because the IRS uses data from only the income side when it creates such a return, which means that it doesn’t include all kinds of items that might offset that income, according to Julian Block, a tax lawyer in Larchmont, N.Y.

The IRS works from W-2 reports of wages paid, filed by employers, and reports of payments to self-employed people from companies that used their services.  The agency also uses reports from financial institutions about interest and dividends paid and reports from brokers about assets sold.  All these things are taxable income.

For self-employed people, in particular, there is often a big disparity between payments received and taxable income, because much of what they receive goes for supplies or salaries or other expenses.  But the IRS will know only the gross payment, and will plug that figure into its return.  It does not even know about the original cost of assets that were reported sold.

In other words, the IRS does not include many of the deductions to which a non-filer may be entitled.  But this doesn’t mean that the IRS is being mean or vengeful or evil.

The IRS is candid that it does not even look for deductions.  In a fact sheet in what it calls the “tax gap” series on its Web site, the IRS warns that a substitute return it prepares is a “basic” one that “will not include any of your additional exemptions or expenses.”

The IRS investigates about a million “non-filer situations” a year.  But it does not prepare a substitute return for everyone that it believes failed to file.  People in the underground economy do not leave a trail that can contribute to such a return, tax experts have been noted as saying.  If those people are caught, they may not get an official printout in the mail.  A visit from someone who dangles handcuffs from a belt is more likely.  And the IRS substitute is not used when a taxpayer has filed a return but the agency believes that he or she failed to report some income.  It has other methods for resolving those issues — often an audit… just what we all have time for!

A taxpayer prompted to action by a substitute return can file the return that he or she should have filed in the first place, and the IRS will adjust the taxpayer’s account accordingly.  The next step, in which taxpayers can claim their exemptions and deductions, can sharply cut the amount due or even yield a refund.  Many nonfilers wouldn’t owe large amounts if their returns were done properly. The IRS fact sheet says its research shows that such failures “could simply be due to procrastination”, as stated by Mr. Eric Bach, CPA.

ONCE a ghost return appears in the mail, simply avoiding it isn’t a viable option. The IRS will send reminders.  If there is no response, it will start collection efforts, based on its calculations.

“The worst thing a taxpayer can do, is not file a return and then continue to ignore the repeated letters from the IRS”, Mr. Bach said.

But taxpayers sometimes do just that, provoked by “fear, paralysis, and denial”, as Mr. Bach has stated it.  “The most important point to remember is that the substitute returns only reflect the income and some some expense information such as mortgage interest because they are required to be reported to the IRS.  These returns are not final.  When the actual return is filed, it supercedes the ‘ghost return’.  This is very important to remember because the actual return will include your itemized deductions that may substantially reduce the IRS’ original assessment.”  In essence, Mr. Bach’s point is, file your returns as quickly as possible if a “ghost return” has been filed to, not only reduce your tax debt and possibly eliminate it, but also to minimize penalties.

Unpleasant as it may be to file  a tax return, and paying the bill to begin with… filing may prove much more appealing than the alternatives.

 


IRS Claims Whistleblowers are on the Rise

Posted on: May 4th, 2010 by

CPA - Rockville, MDUS tax authorities have said they are investigating about 4,500 potential tax cheats due to tips from the public.  The Internal Revenue Service’s whistleblower office, created under a December 2006 law and took effect in in the beginning of 2008, is getting about 40-50 tips a month on cases involving evasion of $2 million dollars or more.  This is thought to be because of the new guarantee of a minimum reward of 15 percent and going as high as 30  percent in these large cases. Previously, the IRS set reward amounts ranging from 1 percent to 15 percent of money recovered.

The government, however, has yet to pay a whistleblower under the new law, as it takes about 5 to 7 years for a claim to make its way through the system.  And that is only best case scenario.  And, although the law has been widely supported, it has been said that informants have not been treated all that well.  Informants just have to understand that the IRS does not and will not pay in advance to get the information and then have to see what its actually worth.  If you have more questions about whether you have been witness to tax evasion, contact your local accountant or local IRS office.