Posts Tagged ‘linkedin’

Oops! H&R Block screws up

Posted on: March 14th, 2013 by

Eric L. Bach, CPA - Professional Tax Preparer - Rockville, MDA tax-preparation software glitch caused more than 600,000 returns to be filed incorrectly, delaying refunds by as much as six weeks, the IRS says.

H&R Block, the nation’s largest tax preparer, confirmed that its software failed to fill out a mandatory field on Form 8863, which is used to claim educational credits.  The IRS would not say what percentage of the roughly 600,000 faulty returns came from H&R Block, but the company received thousands of complaints on its Facebook page and on Twitter.  An Internet search did not yield similar complaints against other tax preparers.

The snafu is affecting about 10% of the 6.6 million tax returns containing Form 8863, IRS spokeswoman Michelle Eldridge says.  Those taxpayers may have to wait six more weeks before they receive their refunds, she says, adding that the IRS is hoping to reduce that wait time.

H&R Block confirms there is an issue with tax returns filed before Feb. 22 because the IRS changed the way it processes some of the yes or no questions on the form.  While in previous years, leaving a field blank to indicate “No” on certain questions was acceptable, the IRS is now requiring preparers to enter an “N.”  As a result, H&R Block says, it is working with the IRS to clear these errors, but the company would not give details on how it is correcting returns or exactly how long taxpayers will have to wait for their refunds. The IRS says it is able to keep processing these returns now that it is aware of the system-wide error, but that affected taxpayers will still face delays because of extra steps needed to correct the issue.

The error is creating delays for taxpayers who, following the fiscal-cliff deal, already had to wait an extra two weeks before filing their returns, many of whom were counting on their refunds to pay their bills.

Leslee Napier, a 26-year old nursing student in Princeton, Ind., prepared her return with H&R Block on Jan. 24 so that it would be one of the first returns accepted on Feb. 14, when the IRS began processing forms for education credits.  But weeks after her return was supposed to be accepted, the “Where’s My Refund” tool on said her return was still being processed. It wasn’t until more than three weeks after her return was supposed to be accepted that an IRS agent told Napier her return was being held because of issues with Form 8863 and that it might be four more weeks before she receives her refund.  “I was worried all this time that I did something wrong or that I was being audited,” says Napier, who is waiting on her refund to pay off a $600 line of credit she opened with H&R Block in December to get her through the holidays.  Meanwhile, interest charges are piling up, she says, and she is waiting to catch up on bills and buy new clothes for her 2-year-old daughter.

For students, the delays come at a time when many are facing state deadlines for applying for financial aid: the Free Application for Federal Student Aid, the form for applying for federal financial aid, requires tax information.  Elizabeth Havens, a student in South Carolina, says she took a copy of her return to her school so that she could move ahead with her financial aid application while she waits for IRS approval.

Students still waiting on their returns to be processed can manually enter their financial data on the FAFSA and then return to update the information once their returns have been accepted, according to the IRS.

Maybe you should look for a BETTER tax professional.

Social Security myths solved

Posted on: March 10th, 2013 by

Eric L Bach, CPA- Rockville, MDSocial Security is America’s largest source of retirement income.  But most of us have little or no idea how it works.  Worse yet, misinformation causes many to make poor retirement decisions.  Here are the facts you need to know.

First, some background.  Social Security is insurance, paid for by workers and employers.  Only workers and their families benefit from it.  It insures against loss of your work income due to retirement (or age), disability or death.  It has an annual cost of living adjustment (COLA) equal to the inflation rate, to protect your long-term buying power.

Mystery #1: Will Social Security be there for me? Social Security can pay 100% of all promised benefits until 2033.  After 2033 it can pay about 75% of promised benefits.  There are numerous options to extend solvency indefinitely with a mix of tax increases and/or benefit cuts.  If you’re a pessimist, subtract 25% from your SSA benefit estimate.

Mystery #2: Is Social Security a good deal? Social Security is a complete package of worker benefits, including retirement, disability and life insurance.  The average worker earning $43,000, with a non-working spouse, would need to save over $700,000 to duplicate their retirement payments, plus buy additional disability and life insurance.  The Social Security Administration’s administrative overhead is a low 0.8%.  Social Security payments are at least 15% tax-free.

Mystery #3: How does Social Security compute my payment? Your payment is based on three steps:

  • Once eligible, your payment is based on averaging your 35 highest-paid work years (or fewer years for mid-career disability or death).

Mystery #4: How can I get the most lifetime payments—by filing early, at FRA, or later? It’s an individual and financial-planning decision.  In simple dollars, it’s best to apply later, if you have average life expectancy or above.  But in ”present value” dollars, counting inflation, taxation, withdrawal options and interest rates, it may be best to apply early.  See this post for some considerations and software resources.

Mystery #5: What are good Social Security planning tools? Definitely sign up for a ”My Social Security” account at  See SSA’s suite of calculators at  And see the software products at the link in Mystery #4.

Mystery #6: Will Social Security pay my family members?
Yes, in certain circumstances.

  • Your spouse or former spouse can get up to 50% of your FRA payment if they are at least FRA; less if they file early (as early as age 62).
  • Your spouse can be paid 50% at any age if caring for your child under 16.
  • Your unmarried child can be paid 50% if under 18, under 19 and in high school, or at any age if totally disabled since youth.
  • In most cases, your family member must first file for any benefits on their own work record.  (An exception is your spouse who is over FRA.)

Mystery #7: Can family members receive Social Security after I die? Yes.  Payments to your survivors are possible whether you die before or after your own Social Security eligibility.

  • Your widow(er) or surviving former spouse can be paid up to 100% of your payment if they are at least FRA, or a reduced amount as early as age 60.
  • Your widow(er) can be paid 75% at any age, if caring for your child under 16.
  • Your unmarried child can be paid 75% if they are under 18, under 19 and in high school, or any age if totally disabled since youth.
  • Your parent over 62 can be paid if they were dependent upon you.

Mystery #8: Can I work and still get Social Security? Yes.  If you are over FRA, there is no work limit; you can earn as much as you can and still get full Social Security payments.  Before FRA, some of your Social Security is withheld if your earnings exceed the annual earnings threshold, $15,120 in 2013.  (Higher limits apply the year you turn FRA.) Only work income counts against Social Security; not counted are pensions, interest, dividends, capital gains, etc. Remember, your Social Security does not stop as soon as you reach the threshold; that’s where partial withholding begins.  If you get Social Security disability, different work rules apply.

Mystery #9: How do I file for Social Security? You can file by visiting an office, by calling (800) SSA-1213, or online at  You can file up to 3 months before you want payments to begin.

Mystery #10: When can I enroll in Medicare? Medicare age is 65.  You should file promptly by contacting SSA (see Mystery #9), preferably 2-3 months early.  Late filing causes penalty fees and delayed coverage.  If you are covered by health insurance from current work done by you or your spouse, you can postpone Medicare until that insurance or work ends.  Note that it must be insurance from current work, not a retiree plan or COBRA. Everyone should contact SSA 3 months before their 65th birthday to make sure their Medicare enrollment is on track.

You now have a good start at understanding your retirement’s cornerstone.  For more detail, see my book.  But remember, everything here has individual nuances and exceptions.  Only SSA can make official decisions, so be sure to study their website and consult with them by phone or in-office.

As always, keep on planning.

Don’t miss out on these Tax credits and deductions

Posted on: February 24th, 2013 by

Eric L. Bach, CPA - Rockville, MDThe IRS expects that 75 percent of all 2012 returns will be entitled to a refund, so if you haven’t started preparing your taxes yet, time to get on it: There is no reason to wait for April 15 to roll around to get that money back from Uncle Sam.  And remember: If you do not file your return by the due date, you may have to pay penalties and interest.  Even if you can’t meet the deadline, you can file for an extension, which will give you until October 15 to file your 2012 tax returns.

UPDATES for 2012:

  • The IRS is providing taxpayers whose incomes are $57,000 or less with “Free File“,  available through, where a number of tax software companies make their products available for free.  Additionally, some states are offering similar options.  Electronic e-filing is available to all taxpayers, regardless of income.
  • Mailing your return: If you are filing a paper return, you may be mailing it to a different address this year because the IRS has changed the filing location for several areas.  See Where To File for a list of IRS addresses.
  • Exemption amount: $3,800 from $3,700 in 2011.
  • Standard deduction: For married couples filing a joint return, the standard deduction is $11,900 for 2012.  For single individuals and married couples filing separate returns, it is $5,950 and for heads of household it increases by $200 to $8,700 for 2012.
  • Tax-bracket thresholds increase for each filing status.  For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700, up from $69,000 in 2011.
  • Estate and gift tax: The exclusion amount for 2012 is $5,120,000.  The exclusion for gifts to a spouse who is not a citizen of the United States increases to $139,000 for 2012.
  • Itemized deductions and personal exemptions: The itemized deduction limitation and personal exemption phase-out rules were repealed for 2011 and 2012, which means taxpayers can deduct the full amount of their itemized deductions and personal exemptions in 2012.  These limitations ($250,000 for individuals and $300,000 for joint filers) will go back into effect for tax year 2013

Get ALL your Credits:

Tax credits are the best tax deal going, because they reduce your taxes dollar for dollar, instead of being calculated based on your tax bracket.

Earned Income Tax Credit (EITC) is a refundable credit for low and moderate income workers and working families.  The 2012 income limit for the EITC is under $50,270 for joint filers and under $45,060 for singles and the maximum credit is $5,891.  The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.  Use Schedule 8812 to figure your additional child tax credit for 2012.  (Details are in IRS Publication 596 — PDF)

Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012.  This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples that earn more than $110,000 and single filers who earn more than $75,000.  In an IRS-esque type move, taxpayers should use Schedule 8812 (instead of Form 8812) to figure the additional child tax credit.  (Details are in IRS Publication 972 — PDF)

Child and Dependent Care Credit is available if you pay someone to care for a dependent under age 13, so that you can work or look for a job.  The credit is 20 to 35% of your child-care expenses up to $6,000 (the size of your credit depends on your income). This credit will be reduced significantly next year.  (Details are in IRS Publication 503 — PDF)

Retirement Savings Contributions Credit is designed to help low and moderateincome workers save for retirement. Individuals with incomes of up to $28,750, head of households with $43,125 and married couples with joint incomes of up to $57,500 may qualify for a credit of up to $1,000 per person.  (Details are in Form 8880 — PDF)

Energy and Appliance Tax Credit If you made any energy-efficiency improvements to your home in 2012, you may be eligible for a tax credit of 10 percent for the cost, up to a maximum of $500.  Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air conditioning, among many.  Be sure to keep your receipts and manufacturer certification.  (See which Energy Star items qualify for the tax deduction and use IRS Form 5695)

Adoption Tax Credit in 2012 has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child from $13,360 in 2011.  The income limit on the adoption credit is based on your modified adjusted gross income (MAGI).  For tax year 2012, the MAGI phase out begins at $189,710 and ends at $229,710.  (IRS Topic 607)

College Costs

American Opportunity Tax Credit:
For tax year 2012, students can claim a $2,500 “higher education tax credit” for the first four years of college.  The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).

Lifetime learning credit: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Tuition and fee deductions: Every family can deduct up to $4,000 of college tuition and fees in 2012, subject to income limitations.  If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000.  (IRS Publication 970)

Student loan interest deduction: The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011.  For single taxpayers, the phase out ranges remain at the 2011 levels.

Itemized Deductions:
Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.  You may be leaving money on the table.  If your deductible expenses exceed the 2012 standard deduction limits above, be sure you itemize and grab these write-offs.

Miscellaneous deductions: These are deductible if they total more than 2 percent of your adjusted gross income.  They include tax-preparation fees, job-hunting expenses, business car expenses, and professional dues.

Sales tax: You can deduct sales tax paid in 2012 if the amount was greater than the state and local income taxes you paid.  In other words, you get to choose: Write off your sales taxes or write off your income taxes.  If you didn’t keep your sales-tax receipts, use the IRS’s sales tax deduction estimator.  Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate.  If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes.  If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.

Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2012 medical expenses that exceed 7.5 percent of your adjusted gross income.

Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money.  The 2012 rate for business use of your car remains 55.5 cents a mile; medical and moving is 23 cents per mile; and charitable use is 14 cents per mile.

Mortgage insurance deduction: Borrowers with AGI’s up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible.  The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI’s between $100,001 and $109,000.  (IRS Publication 936)

Classroom deduction for teachers: K-12 educators who work at least 900 hours during the school year can claim an above-the-line deduction of up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) for any un-reimbursed expenses (books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials) used in the classroom.  (IRS Topic 458)

IRA/Roth Conversion

When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill.  In other words, socking cash in an IRA is like saving with help from your Uncle Sam.

You have until tax filing to contribute up the lesser of your taxable compensation for the year or $5,000 to a 2012 IRA ($6,000 if you are 50 or older).  If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can wait until then to put 2012 money into those accounts.

Even if you’re covered by a retirement plan at work, you can deduct some or all of your IRA contribution.  The 2012 IRA limits for modified AGI as follows:

  • More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er)
  • More than $58,000 but less than $68,000 for a single individual or head of household, or
  • Less than $10,000 for a married individual filing a separate return.

For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000 in 2012.

Charitable donations from IRA’s: Taxpayers aged 70 1/2 or older can make direct tax-free transfers of up to $100,000 from IRAs to qualified charities.  The transfers can satisfy minimum required distributions without increasing adjusted gross income.

Roth IRAs

Roth IRAs allow taxpayers to invest money for future retirement needs.  Unlike a traditional IRA, there is no current tax deduction available for contributions to a Roth and all funds within the Roth IRA compound tax-free and all withdrawals from the account are also tax-free.  To qualify to contribute to a Roth, your income must fall within the Modified Adjusted Gross Income (MAGI) limits. The 2012 limit for 2012 is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000.  For single taxpayers, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000 in 2011.

Roth conversion: If you converted or rolled over an amount to a Roth IRA in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.  (See Publication 575 for details)

Ann Curry leaves ‘TODAY’

Posted on: June 28th, 2012 by

TODAY show - Eric L. Bach & AssociatesAnn Curry announced, just before the 9 o’clock hour, that she will be stepping down as co-host of the TODAY show. She stated that she will be taking on a new challenge at NBC News.  As TODAY Anchor at Large and National and International Correspondent for NBC News, Curry will lead a new team covering stories spanning the globe.  She’ll anchor prime-time specials and report for TODAY, Nightly News, Rock Center, Dateline and MSNBC, and will have a major presence across all digital properties.

“We’re going to go all over the world and all over this country at a time where this world needs clarity,” she said.   “After all these years I don’t even know if I can sleep in anymore,” she joked.  Matt, Al and Natalie “seemed” to express their love. “You have the biggest heart in the business,” Matt said.  “You put that on display every single day for almost 20 years.  Most importantly, you’ve made us better, and we thank you from the bottom of our hearts.”

Over 15 years at NBC News, Ann has covered violence and ethnic cleansing in Sudan, interviewed the Dalai Lama, reported from Japan after 2011’s devastating earthquake and tsunami and broke the news that Iranian President Mahmoud Ahmadinejad would release the two American hikers held hostage in that country for two years.  She has earned seven Emmy Awards.  “I know of only one journalist who in just a matter of years has travelled to Sudan six times, broken exclusive world news with top world leaders, and broadcast live from both the South Pole and Mount Kilimanjaro,” said TODAY Executive Producer Jim Bell.  “Ann has quite literally reached amazing heights in her career, and with this new role, she will continue her intrepid climb bringing viewers her signature brand of humanitarian reporting.”

At this point, there is no word on the deal she struck with NBC to leave TODAY, but it has been rumored that she was asking for the remainder of her contract, $20 million.  Nothing has been announced officially, but the front runner for her position is Savannah Guthrie.  It has also been swirling that Natalie was threatening to quit if she was passed over again, as well as Matt’s wife threatening to divorce him if Natalie gets the position.  I’m sure many of these rumors will be addressed throughout the day.  Stay tuned.

UPDATE: Matt Lauer’s wife WILL be accompanying him, along with his 3 children to the Olympic games in London this summer.  She generally not travel with him, as it is a lot of work to tote along 3 children, let alone across an ocean.  They will be staying at a different hotel then the rest of the cast and crew.  Annette clearly still has concerns about Natalie and is not taking any chances.   Radar Online reported, “Annette has made no bones about the fact she will be keeping close tabs on Matt.”

All of this controversy stems from rumors that seem to never cease about Matt Lauer cheating on his wife.  It had once been said he had an extramarital affair with Meredith Vieira, as well as fathering a love child with Natalie Morales.  Are the tabloids right?  Is Matt not the family man he portrays on tv?

UPDATE:  Savannah Guthrie will be taking over Ann’s chair next to Matt tomorrow morning.  TMZ has also reported that, “it’s ‘likely’ they will formally announce the big switch during the show.”

UPDATE: No replacement has been named as of yet.  It appears it is still up in the air.  They are still debating between Hoda Kotb and Savannah Guthrie.

UPDATE: Savannah Guthrie HAS been named, on the TODAY show website, as the new co-anchor of the TODAY show.  She will now officially be sitting alongside Matt Lauer each morning.

Subway looking to add 3 new vegan sandwiches

Posted on: June 19th, 2012 by

Eric L. Bach & AssociatesSubway has decided to expand its menu to attract more vegan customers.  The company says it will begin a limited test of three new vegan sandwiches in 8 locations throughout Maryland, Washington D.C., and Virginia, according Kevin Kane, Subway’s public relations manager.  They are set to be released this week.

The three new options: Malibu Greek, Sweet Riblet, and Italian Black Bean – all are available meat free, and dairy free.

“We’re testing to see what what the reception is, if people like them,” says Kane who added that there are no plans at this time to add the vegan options on menus nationwide.  Kane says the idea for the sandwiches was presented to Subway by one franchise owner in the mid-Atlantic region.  The sandwiches are available on the vegan breads available at the restaurant: Roasted Garlic, Sourdough, Light Wheat English Muffin, Hearty Italian, and Hearty Italian White.  The cost is $7.00 for the foot-long and $4.50 for the 6-inch.

Animal advocacy organization, Compassion Over Killing, says it convinced Subway to sell the new options after it launched its “We Love Subway” campaign, after the group lobbied the fast food chain to introduce the “Totally Vegged” vegan patty in Canada.

Locations to get new sandwiches:

Washington, DC:

  • 555 13th St NW, Washington, DC 20005 — (202) 347-4616
  • 455 Massachusetts Ave, NW (1st Floor) Washington, DC 20001 — (202) 638-0348
  • 550 First St., NW, Washington, DC 20001 — (202) 661-6639


  • 8145 Main St, Ellicott City, MD 21043 — (410) 418-4330
  • 5520 Research Park Dr, #107, Catonsville, MD 21228 — (410) 455-5222
  • 300 Sentinel Dr, #100, Annapolis Junction, MD 20701 — (301) 490-6553


  • 320 King St, Alexandria, VA 22314 — (703) 879-4321
  • 2361 Eisenhower Ave, Alexandria, VA 22314 — (703) 879-4321


Why you need a will

Posted on: May 8th, 2012 by

If you died tomorrow, who would inherit your assets?  Your house?  Your Snapfish albums?  If you’re like half of American adults with children, you haven’t made a will and therefore, legally speaking, haven’t answered these questions.

A survey from, a legal services web site, last month found that 50% of Americans with children do not have a will.  Even more alarming, 41% of baby boomers (age 55-64) don’t have one.  The top three reasons cited by survey respondents for not having a will: procrastination, a belief that they don’t need one, and cost.

So what happens if you die without a will?  The state will decide how your property is distributed.  The state will sometimes decide in the favor of those intentioned to receive items, other times not.

Shifts in demographic patterns are making estate plans even more critical.  As the survey notes, in the past five years the number of unmarried couples has jumped, according to the National Marriage Project.  Throw a child into the mix and the surviving partner doesn’t get the same protections that are default under law for a married couple.

Don’t forget your ‘digital estate’
And no doubt you’ve heard about the digital afterlife.  According to the RocketLawyer survey, 63% of respondents don’t know what happens to their digital assets when they die.  Traditional estate planning doesn’t take into account this emerging class of assets — and it’s not just thinking about what you want to happen to your Facebook page or profile.

Your survivors may not even be aware of the extent of your online presence.  Consider your online bank accounts, email accounts, iPod and all its music, blogs, photo albums, YouTube account, eBay account, PayPal account, e-book collection, Gilt Group subscription…you get the picture.  Even your U.S. savings bonds are online.

Most popular online account services like Facebook, Gmail, LinkedIn and Twitter have developed deceased-user policies, which provide the family or executor of the deceased user with information about what’s required to access the account.  This, however, is a problem most people don’t know that they have.

How to create a will: a primer
– List your significant assets, financial advisors, retirement plans, divorce papers, premarital agreements, and any other such documents.
– Gather employment benefits statements, life insurance policies, deeds to real property, partnership and business agreements and the last two years of income tax returns.
– If you’re married, each spouse makes a separate will.
– Decide who will inherit your property.  After you make your first choices, choose alternate beneficiaries, too, in case your first choices don’t survive you.
– Choose an executor to handle your estate.  Every will must name someone to serve as executor, to carry out the terms of the will. Be sure to let that person know you want them to serve as the executor so it’s not a surprise.
– Identify a guardian for your children.  If your children are under 18, decide who you want to raise them in the event that you and their other parent can’t.  You should also pick someone who can manage your children’s property.
– Identify other decision makers to carry out your health & money choices for you if you’re incapacitated.
– With that information, you can create a will online (there are plenty of online options and tips), or hire an estate planning attorney to help you (they can charge hourly rates of $100 to $500 or more)

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.


Who really benefits from the “Safety Net”

Posted on: February 15th, 2012 by

A new analysis from the Center on Budget and Policy Priorities underscores that the poor are no longer the primary beneficiaries of the government safety net.  Terms like entitlements, government benefits, and safety net often conjure images of tax dollars sliding from the hands of the wealthy into the pockets of the poor.  But as reported by The New York Times, Saturday, that image is badly outdated.  Benefits are now flow primarily to the middle class.

Eric L. Bach - CPA - Rockville, MD

The center’s study found that the poorest American households, the bottom fifth, received just 32 cents of every dollar of government benefits distributed in 2010.  The finding is broadly consistent with the data reported Sunday that the poorest households received 36 percent of benefits in 2007, down from 54 percent in 1979, numbers that came from a study published last year by the Congressional Budget Office.

While the findings are not directly comparable because of differences in methodology, the new study suggests that the recent recession did not cause any significant increase in the share of benefits flowing to the poor, as might once have been expected.  The study found that older people received slightly more than half of government benefits, while the non-elderly with disabilities  received an additional 20 percent.  These benefits are not means tested, but rather, better-paid workers get more in Social Security.

Furthermore, the study notes that politicians have shifted benefits away from the “jobless poor,” through reductions in traditional welfare, and increased benefits for working families, for example through tax credits.  The government also also expanded elegibility for benefit programs.

“The safety net became much more work-based,” wrote Arloc Sherman and his collaborators at the center, a left-leaning research group.  “In addition, the U.S. population is aging, which raises the share of benefits going to seniors and people with disabilities.”

Another finding of the study is that the distribution of benefits no longer aligns with the demography of poverty.  African-Americans, who make up 22 percent of the poor, receive 14 percent of government benefits, close to their 12 percent population share.  White non-Hispanics, who make up 42 percent of the poor, receive 69 percent of government benefits… again, much closer to their 64 percent population share.

Make a point of filing your taxes early

Posted on: February 8th, 2012 by

Eric L. Bach CPA - RockvilleEric L. Bach & Associates – Yes, filing your taxes can be trying and extremely annoying… therefor we like to put the whole ordeal off until the last possible moment.  Other than getting your refund sooner or having more time to gather up the funds to pay your tax bill, there is another good reason to get your taxes done early: identity theft.  Simply, this is when someone gets your Social Security number or other identifying information and forges a tax return in your name to get a refund.

It’s understandable that many people don’t want to deal with the IRS because it can be a very trying experience.  But, just imagine how frustrated you would be if you found out someone had filed a false tax return using information stolen from you.  Identity thieves will often submit their fake returns early in the filing season before the victim finishes their real return.

Tax refund identity theft is a growing problem.  In 2010, the IRS was able to identify and remove almost 49,000 returns seeking fraudulent refunds.  Last year, it removed 262,000 fraudulent returns.  The IRS is taking every step they can to try to combat this problem.  If you suspect you are a victim of identity theft, contact the IRS Identity Protection Specialized Unit at 800-908-4490.  You will then be asked to complete IRS Form 14039, the identity-theft affidavit.  Also, remember that the IRS will not contact you by email to request any personal or financial information.  If you get any such message, delete immediately.  Do not, however, dismiss IRS notices you receive in the mail that indicate that more than one tax return was filed for you.

Joe Paterno to be honored in public memorial

Posted on: January 25th, 2012 by

Joe Paterno dead at 85 - Penn StateJoe Paterno’s family announced Monday that  the legendary football coach will get a two-day viewing and a public memorial this week on the Penn State campus, two months after the university fired him over the phone.  The legendary coach had been linked to the Jerry Sandusky scandal and had allegedly not taken all the proper steps to put a stop to the reported behavior.

Bitterness over Paterno’s removal has turned up in many forms, from online postings to a note placed next to Paterno’s statue at the football stadium blaming the trustees for his death.  A newspaper headline that read “FIRED” was crossed out and made to read, “Killed by Trustees.”  Lanny Davis, lawyer for the board, said threats have been made against the trustees.

The family gave no details as to who might be invited or asked to speak at the memorial Thursday at the basketball arena, which can hold 16,000 people.  Penn State spokeswoman Lisa Powers said the specifics were still being worked out with the Paternos.  But many alumni and students say Paterno was treated shabbily by the Board of Trustees in November, and trustees and other members of the administration might not be made to feel welcome at the memorial for the 85-year-old coach, who died Sunday of lung cancer.  At this point, it seems the Board of Trustees has completely alienated itself from State College and the Penn State community.

“I don’t think it’s going to be heavily laden with administration and trustees,” said trustee Linda Strumpf, who lives in New York and will not attend.  “This is something the family is putting together and not the university.  I don’t think the university wants to be in a position to tell them what a memorial service looks like.”  Sounds rather cold-hearted considering all that Paterno did for the university.

But trustee Al Clemens said he will be there to honor a man he described as a good friend.  “This is really a family thing, and so we’re just going to go as individuals,” Clemens said.  “Joe’s a great guy.  No matter what the situation was in the last two months, it doesn’t take away from what he’s done through history for so many people.  He’s just been tremendous.”

The viewing will be held Tuesday and Wednesday at a campus spiritual center, followed by a private funeral Wednesday afternoon.  The public memorial will be at the Jordan Center and is expected to draw thousands.

Janice Hume, a journalism professor at the University of Georgia, said that staging an appropriate memorial creates a dilemma similar to the one faced by Paterno’s obituary writers: how to address the scandal without letting it negate his entire career.  “I think it’s probably very difficult to strike the right balance,” she said.

Clemens said the board will later consider more lasting tributes to Paterno, including scholarships in his name.  Because of his generosity to the school, his family name is already on the library and a spiritual center.

There has also been a movement over the past few years to change the name of Beaver Stadium, the football team’s home field, to Joe Paterno Field at Beaver Stadium, and on Monday the man behind it, Warren W. Armstrong, a 1960 graduate and retired Allentown advertising executive, said he would renew his efforts.  Some are suggesting renaming the street leading to the stadium Paterno Way.

A family spokesman said the Paternos’ focus this week is on the viewing and funeral plans and they do want to weigh in on any ideas for a permanent memorial right now.  But “I would say the family would welcome a conversation on that,” Dan McGinn said.

RIP JoePa.