How to Protect Your Tax Refund from Identity Theft

Getting a refund come tax time is always a good feeling. What’s NOT a good feeling, however, is finding out that your refund has been snatched up by a greedy thief. Sadly,  this happens to many people each year. These people are the victims of a type of identity theft in which fraudsters use their information to pocket their tax returns. Though you might think this could never happen to you, it most certainly could if you’re not careful! Fortunately, though, there are a great many things you can do to protect your tax return from being taken by these criminals.   

Protection Tip #1: File Your Return ASAP

As mentioned, the most common form of tax identity theft occurs when criminals use your social security number and other identifying information to file a return in your name. If someone is going to target you for one of these scams, you can rest assured that the scammer will act early. After all, he wants to get to your tax return before you do!

Thus, the longer you put off filing your return, the greater your risk of having a fraudster do it for you! To keep yourself safe and to reap the benefits of your tax returns sooner, just go ahead and file at the earliest possible date.

Protection Tip #2: Don’t Respond to Suspicious Emails

The internet has made our lives easier in so many ways. In fact, these days, you can file your tax return online in a matter of minutes. Unfortunately, though, the internet has also brought some not-so-great things into our lives too, including “phishing scams.”

These scams occur when scammers send you trick emails, asking you to input personal information. Often times, they will pose as your bank, the IRS, or someone else with authority. More often than not, they will even go so far as to have very “official” sounding email addresses. Typically, these emails will ask you to click on a link and/or provide personal and should-be-secure information or face consequences.

Instead, the fraudsters use your personal information to scam you, or, even worse, to install dangerous malware on your computer that will allow them to access your credit card number and other sensitive information.

If you get a suspicious email or really ANY email that asks for personal information, send it to spam right away! If you are concerned it could actually be from your bank or the IRS- though that’s highly unlikely- contact the real source to be sure. Typically, though, most serious organizations know better than to ask you for personal information through email!

Protection Tip #3: Use Caution When Filing Online

Finally, as mentioned, the internet provides a multitude of ways for you to file your taxes online. Unfortunately, though, not every filing website can be trusted. Before you start putting personal information into an online tax form, make sure it’s legitimate! Read up on the website you are using, check the site’s security certification, and always take a look at your address bar to ensure you’ve typed in the site’ s name correctly. Some fraudsters buy domain names that are close to the domain names of legitimate tax filing sites and use them to try and steal your information.

It’s a scary world out there, but you don’t have to let it get to you! By following these tips and being smart with your private information, you can avoid tax fraud and other forms of identity theft.

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Avoiding the Dreaded Audit

Tax audits are one of the things that American taxpayers dread and fear the most. Even if you’ve been honest, the thought of someone going through your finances with a fine-toothed comb, just looking for mistakes for which to penalize you, is more than a little scary.   

And, while there’s no foolproof way to avoid an audit- sometimes, they just happen- there definitely are things you can do to reduce your chances of being selected for an audit. The IRS has certain “red flags” that it looks for, flags that, if it spots them, urges officials to pay more attention to your tax forms and filings.

By making yourself aware of these red flags and ensuring that none of them apply to you, you can greatly reduce your risk of getting audited.

Unreported Income

One of the easiest ways to find yourself facing an audit is if you have unreported income. If you’re getting paid from any organization or individual, expect that income to get reported back to the IRS.

The IRS will match up any reported income to your tax return. And, if your tax return doesn’t contain all income you’ve earned, you’re practically begging for an audit. In other words, make sure your records and the income you’re reporting matches up with all of the documentation the IRS has on you!

Too Much Money

If you’re like most Americans, then you probably think there’s no such thing as “too much money.” As far as the IRS is concerned, though, there definitely can be. If you’re earning more than $200,000, you have a much greater chance of getting audited than someone who earns less.

That may not be fair, but it’s true. The IRS knows that people who earn higher amounts of money than average are likely to owe more in taxes, thus equaling a greater profit for the IRS, and that they’re more likely to make “mistakes” on their tax forms.

So, if you earn above the $200,000 mark, you’ll definitely want to be extra careful to report everything correctly. That way, if you do get marked for an audit, everything will be on the up and up, keeping you out of trouble.

Not Reporting Foreign Assets

Finally, if you have foreign assets, be aware that, these days, you are required to report them, not just to signify that you have them by checking a box, which is the way things used to work.

The rule of thumb is that you have to report any assets worth $50,000 or more on Form 8938. If you don’t, the IRS will find out about it due to required reporting from foreign agencies, and when it does find out, it’s likely to go after you with an audit.

As you can see, there are all kinds of behaviors that put you at risk for an audit. Reduce your risk by being honest, making smart choices, and working with a knowledgeable tax adviser that you can trust.

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Casualty and Theft Loss Itemized Deductions

Casualty Loss

A casualty loss is the damage, destruction, or loss of property resulting from an identifiable event. The identifiable event must be:

•    Sudden, not gradual or progressive.

•    Unexpected, not ordinarily anticipated or intended.

•    Unusual, not a day-to-day occurrence or typical of the taxpayer’s activity.      

Theft Loss

A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be:

•    Illegal under the law of the state where it occurred.

•    Done with criminal intent.

Deductible Amount of Losses

A non business casualty or theft loss is the lesser of the taxpayer’s basis in the property damaged or destroyed, or the reduction in fair market value due to the casualty or theft. From this amount, any insurance or other reimbursement received, or that could have been received, if the taxpayer chose not to file a claim is subtracted.

The casualty or theft loss is then reduced by $100 per event when computing the deductible amount. Multiple items lost in a single event result in only one $100 reduction. The total of all casualty and theft losses from all events during the year is further reduced by 10% of the taxpayer’s adjusted gross income.

Criminal Fraud

Victims of criminal fraud or embezzlement related to a transaction entered into for profit are allowed to deduct the theft loss as a miscellaneous itemized deduction not subject to the 2% adjusted gross income limitation. The deduction is also not subject to any other theft loss or itemized deduction reductions or limitations.

Insurance

Losses are not deductible to the extent they are reimbursed by insurance. If property is covered by insurance, a timely insurance claim for reimbursement must be filed or the deduction is not allowed. The part of the loss not covered by insurance is deductible. If a casualty loss is claimed in one year, and in a later year the taxpayer receives reimbursement for the loss, the deductible loss is not recomputed for the taxable year in which the deduction was taken. Rather, the reimbursement amount is included in income in the taxable year in which it was received.

Insurance proceeds used for living expenses are not reimbursements for damages so amounts paid for normal living expenses are generally taxable. However, payments to cover a temporary increase in living expenses are excluded from income.

Note: If the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable.

Gain on Reimbursement

If insurance or other reimbursement is more than the basis in the property damaged or destroyed, the reimbursement is a gain. The gain is taxable if a taxpayer does not use the proceeds to purchase replacement property similar or related in service and use. The gain is postponed if:

•    The taxpayer purchases property that is similar or related to it in service or use within two years of the end of the first tax year in which any part of the gain is realized (or acquires at least 80% of a corporation owning such property), and

•    The cost of the replacement property is equal to or more than the reimbursement received for the damaged, destroyed, or stolen property.

If the replacement property costs less than the reimbursement, gain is recognized to the extent the reimbursement exceeds the cost of the replacement property.

Federally-Declared Disaster Areas

A federally-declared disaster is a disaster determined by the President to warrant federal government assistance. The 10% of adjusted gross income limitation for casualty losses also applies to the portion of loss due to a net disaster loss.

Year of Deduction for a Federally-Declared Disaster Loss A taxpayer may elect to deduct a loss in a federally-declared disaster area in the tax year immediately prior to the disaster year. The return (or amended return) claiming the loss must be filed by the later of: The due date for filing the original return (without extensions) for the tax year in which the disaster occurred, or The due date for filing the original return (including extensions) for the tax year immediately prior to the tax year in which the disaster occurred. Items to include on the tax return include the date of the disaster and the city, town, county, and state in which the damaged or destroyed property was located.

Disaster Relief

Food, medical supplies, and other forms of assistance received do not reduce the casualty loss, unless they are replacements for lost or destroyed property. Qualified disaster relief payments received for expenses incurred as a result of a federally declared disaster are not taxable income.

Cash Gifts for Disaster Victims

If a taxpayer receives a cash gift as a disaster victim (such as gifts from relatives and neighbors) and there are no limits on how the taxpayer can use the money, the gift is excluded from income. The casualty loss is not reduced by the cash gift. This is true even if the cash gift is used to help pay for repairs to property damaged in the disaster.

When to Deduct a Casualty or Theft Loss

Casualty or theft losses are deductible in the year the casualty occurred or the theft was discovered. If it is uncertain whether insurance will reimburse all or a portion of the loss, do not deduct the amounts of the loss in question until the tax year when it is reasonably certain the loss will not be reimbursed.

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Death of a Taxpayer

When a taxpayer dies, there are certain returns that still need to be filed, a responsibility that falls onto the personal representative.

Personal Representative      

Under state law, a personal representative is the person appointed by a court to administer an estate. The term includes both executors (appointed when decedent has a will) and administrators (appointed in the absence of a will). A personal representative nominated in a will has no authority over estate assets unless appointed by a court.

Duties of Personal Representative

Duties include collecting all of the decedent’s property, paying any creditors, and distributing assets to beneficiaries. In addition, the representative is responsible for filing various tax returns and seeing that the taxes owed are properly paid.

No Court-Appointed Representative

When there is no probate and no appointed representative, the IRS will allow a “person charged with property of the decedent” to file the decedent’s income tax returns and claim refunds. IRS written guidance does not specify who this person should be. If there is a surviving spouse, he or she usually files a joint final Form 1040 and any other required returns. If there is no surviving spouse, the person who files is commonly: • The trustee of the decedent’s revocable trust,

The personal representative nominated in the will who would have been appointed if probate was required, or

A beneficiary receiving nonprobate assets who under-takes the work.

The IRS uses the term “personal representative” to refer to anyone filing for a decedent, whether or not court appointed.

Visit us on Thursday, October 2 for Part 2 of this series.

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Audits and Representation

Representation

Individual taxpayers who are under audit by the IRS may attend the audit in person without any assistance from a tax professional. However, this can be a dangerous mistake. Although not officially stated, it is the job of an IRS Revenue Agents to conduct an audit with an eye toward finding additional tax owed. With so many gray areas in tax law, and considering the tax code’s complexity, an individual who chooses to go it alone is a sitting duck. Without extensive tax education and experience, the examiner can (and sometimes will) say anything to find additional tax due on the return. Without the necessary knowledge, the taxpayer is powerless to refute the agent’s rationale.

Selection of Returns for Examination  

Search for Unreported Income

The IRS performs matching functions to reconcile information reported on Forms 1099 and W-2 with information reported on the taxpayer’s return. If income reported by the taxpayer does not meet or exceed amounts reported to the IRS, the taxpayer will receive either a bill for tax on the difference or an audit notice.

Worker Reclassification Efforts

The IRS conducts joint employment audits with state tax agencies to determine whether workers classified as independent contractors are in fact employees. One initiative looks at employers who issue both Forms 1099 and W-2 to the same employee in the same year, while a second examines employers issuing more than five 1099-MISC forms exceeding $25,000 each to contractors with no other source of income.

Schedule C, Profit or Loss From Business

Issues associated with sole proprietorships are common audit triggers. The IRS has several approaches to achieve an increase in income tax, as well as the assessment of self-employment tax.

•    Unreported income. There is a relatively high potential for unreported income from cash transactions with sole proprietorships. The IRS will examine the taxpayer’s bank records to detect deposits that are unaccounted for, compare revenue and expenses of similar businesses, and in some cases will perform a “lifestyle” audit to reconstruct income based on changes in the sole proprietor’s net worth based on valuation of assets.

•    Losses. Significant losses reported on Schedule C, or losses continuing over two or more years, may increase the chance of audit. If the IRS is successful in reclassifying an activity as a hobby instead of a forprofit business, losses will be disallowed.

•Bartering. The fair market value of products and services received through bartering can be considered business income if the products or services rendered are associated   with the sole proprietorship. If the sole proprietor trades through a barter exchange program, the program will issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

Audit Procedures

Soft Notice

The IRS uses the Automated Underreporter (AUR) Soft Notice to encourage taxpayers to self-correct income reporting with minimal burden and resources. Notice CP 2057 is issued to certain taxpayers with apparent underreported income. The form informs the taxpayer that there appears to be a discrepancy with the income types listed but does not provide them with any type of calculations. It instructs the taxpayer to file a Form 1040X to correct their return if the information shown on the notice is correct. The IRS does not directly follow up these notices but taxpayers that repeat their behavior will be identified in the following tax year.

Examination by Mail

The taxpayer receives Notice CP 2000 from the IRS disclosing proposed changes. The taxpayer typically has 30 days to respond and has three options to the IRS proposals.

•  To agree with all the proposals.

•  To partially agree with the changes.

•  To dispute all the changes proposed by the IRS.

The taxpayer is allowed to sign an authorization that enables another party to represent him or her in connection with the Notice CP 2000. The authorization is part of Notice CP 2000, and a separate power of attorney is not required.

Field Audit

The revenue agent will send a letter to the taxpayer requesting that the taxpayer phone the agent. At that time, the date, location, and agenda for the first meeting will be set. The taxpayer has the right to request that the examination take place at a reasonable time and place that is convenient for both the taxpayer and the IRS.

Audit Strategy

The best way to prepare for an audit is to put oneself into the auditor’s shoes. Take the perspective that you are looking for anything possible to increase the tax liability on the return. This is an area where a qualified tax preparer can be invaluable.

Pose tough questions and “throw out” any questionable deductions. Make sure any issue raised during an audit is something that has already been considered. If the pre-audit function is performed properly, the actual audit will be more comfortable, and you will be prepared for any negative adjustments.

Audit Video

The IRS has created a video web page to assist taxpayers preparing for a small business audit. Go to the IRS website at www.irsvideos.gov/audit.

Requesting a Different Auditor

A taxpayer or taxpayer’s representative has the right to request a different auditor if the current one seems uncooperative, too busy, or too inexperienced to properly consider the issues under examination. The request should be made to the auditor’s supervisor by phone or in writing and should include a detailed explanation of the reasons for the request.

Take It Seriously

Any comments made to an IRS employee that could be interpreted as a threat against the employee will be taken seriously and fully investigated. Advise clients not to joke around with IRS employees during an examination.

Repeat Examinations

If a return was examined for the same items in either of the two previous years, and no change was proposed to the tax liability, contact the IRS immediately and the examination will likely be discontinued. This policy is in accordance with IRC section 7605(b), which states that no taxpayer shall be subjected to “unnecessary examinations.”

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When You Don't File Your Taxes

YOU ARE ONE OF 50,000,000 AMERICANS WHO MUST FILL OUT AN INCOME TAX RETURN BY MARCH 15. FILE YOURS EARLY. - NARA - 516201 (Photo credit: Wikipedia)

It’s been said that two things in life are inescapable: death and taxes. Yet, every year, there are people who try to get out of the latter part of that equation. Whether they simply forget or are afraid they’ll be unable to pay their taxes, there are consequences that come when a return is not filed.  

One thing that may happen if you don’t file is that the IRS may file a substitute tax return for you. That might sound like you’re getting off easy, but in reality, the IRS is not going to do you any favors. It will likely leave out deductions and cause you to pay the highest tax amount possible,

You could also find yourself slapped with a “failure to file” penalty. This penalty will vary from person to person and may also include an interest charge on any owed money.

There are other possible penalties, and they get worse the more money you owe and the longer you wait to file. If you can’t handle tax return preparation or remember to file on your own, don’t set yourself up for failure. Allow an accountant to help you.

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Tax Time Mistakes

Tax time, have you met the deadline? If you are one of the many procrastinators, it’s crucial that you don’t make a mistake. Unfortunately, if you haven’t been doing the proper bookkeeping, you’re at a high risk of making a mistake, especially if you’re feeling rushed and stressed about the tax filing process.

Mickey Mouse's Social Security Number (Photo credit: Tom Simpson)

So, what’s the biggest tax mistake people make? Surprisingly, it’s often the little things that go wrong. One of the main mistakes people make is listing their social security numbers incorrectly or not listing them at all. The IRS reports getting thousands of tax returns without proper social security numbers, a mistake that can lead to late fees and interest charges.

To avoid little (and big) mistakes on your tax return, don’t take on the tough task of bookkeeping on your own. Let the friendly, professional accountants at Susan S. Lewis Ltd., located in Naperville, handle the tough work for you!

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Deducting Medical Expenses Just Got Harder

Smart taxpayers know that deducting any expenses possible is an easy way to save on taxes. For many years now, wise taxpayers have made sure to deduct all applicable medical expenses during the tax return preparation process. Unfortunately, however, recent changes to deduction laws have made it more difficult for medical expenses to qualify for deduction.  

While it used to be that the threshold for deducting medical expenses was 7.5% of the taxpayer’s adjusted gross income, the threshold is now at 10%. Fortunately, however, the change does not apply to individuals over the age of sixty-five; they can utilize the old rate for the next three years.

Even if you are no longer able to deduct medical expenses, the right accountant can still handle your tax return preparation in such a way that you get maximum benefits, so contact the friendly accountants at Susan. S. Lewis, Ltd. today.

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Identity Theft and Tax Fraud on the Rise

Identity theft has long been a problem affecting people throughout the United States, and unfortunately, it’s becoming even more prevalent. To make matters worse, many scammers are now using identity theft as a gateway to a new kind of tax fraud.

This new tax fraud involves individuals who steal a person’s identity and then, using that identity, file several fraudulent tax returns electronically. As a result of the filings, the scammers can often receive several undue refunds in a matter of days, long before anyone catches onto the scam.  

Obviously, trends such as this one are frightening, and what’s even worse is that absolutely anyone can be a victim of this kind of fraud. Fortunately, there are things you can do to protect yourself and/or your business from this type of fraud and from all other types of fraud. For assistance protecting yourself and/or your organization, secure the services of a trustworthy accountant. The right accountant can advise you on how to best protect yourself and your assets, and you can find that accountant at Susan S. Lewis, Ltd. of Naperville.

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