2018 Anticipated Fraud Activity

From the Author

The Internal Revenue Service is warning that the cybercriminals are already at work as the current tax season approaches. These fraudsters are using a new round of emails posing as potential clients or even the IRS to trick tax practitioners and their clients into disclosing sensitive personal tax information.
Be wary of communicating solely through email with potential or existing prepares or your new tax practitioner. These thieves have stolen identity data from thousands of taxpayers including names, addresses, social security numbers and email addresses.
In the case of identity theft, you will need to file an affidavit with your paper filed return and the IRS will assign to you a new PIN (personal identification number for future filing of your returns.
Both taxpayers and tax practitioners have become victims of this form of identity theft.
Be aware, know who you are dealing with and make sure you are using a reputable tax firm with a history in the profession.

Taxpayer Service

From the Author

I met with a client today in Grand Junction, Colorado, and he told me a story of his last visit to the local IRS office to get some forms so he could pay the IRS and stay in compliance. He is a local contractor and went there from a job site so he could obtain forms from the rack to pay his taxes and stay in compliance. When he went through the “screening” process he had a utility knife and even though it was in the security basket he was told to put it back in his car. Once he went back into the IRS, and went through the security screening, first they made him remove his boots (steel to work boots), then had a problem with his pants. He had on work jeans with the brass grommets in the construction. The IRS made him go into an interview room and take of his pants. Good thing he did not go “Commando”. He was provided his forms after a 45 minute screening and “Commando”. He was provided his forms after a 45 minute screening and security process. This client feels that the next time the IRS needs money from him they can go to his job site and not treat him like a criminal. He is an American taxpayer and should get more respect.

Patriotism

From the Author

The Fourth of July is a reminder they we are a free nation, a freedom that comes with responsibility. I was in the Marine Corps when they celebrated their 200th birthday in 1975, and the patriotism shown that day was unbelievable. Where has it gone since that time? We all need to remember that our country was founded on freedom, that we are all Americans, and that we need to work as a nation to maintain that freedom. We all have the freedom to choose our path, whether it be education, employment, marriage, family, and love of our country. We need to remember we are all AMERICANS, and while of different backgrounds we need to work as Americans to love our country and take to heart the potential we have as a nation. We are not perfect, but we are the best country in the world, and we all need to respond to the current times and work to keep our country strong and prosperous. Freedom is not free, and we as Americans need to remember what we will lose if our country does not keep in the right direction.

Sgt. Hale USMC (Inactive)

“To File or Not To File, That is the Question”

From the Author

In 2009 John spent a lot of money on braces for his daughter and when he prepared his 2009 tax return in March of 2010 he had a balance due of over $5,000, which due to the cost of the braces he had no funds available to pay to the Internal Revenue Service.  So he made the choice to not file the 2009 tax return.  When he went to prepare his tax return in March 2011, for the 2010 tax return, he remembered he had not filed the 2009.  Since he had no contact from the IRS on the prior missing return, and afraid to bring attention to this fact, he decided to not file the 2010 tax return, and the same thing happened for the 2011, 2012, and 2013 tax returns.  The IRS finally realized he had not filed these returns, and prepared the returns for John.  When the IRS files your returns, called a SFR (Substitute For Return) they file you as married filing separate, no business deductions, and no credits.  They then send you a statement of the proposed tax liability and you either pay this amount or prepare your own accurate returns and arrive at the proper tax liability.

When you file a tax return, the IRS normally has 3 years from the due date or the date filed to examine this return, and 10 years to collect any tax liability from these returns.  When you choose to not file the tax return in a timely manner these statutes, the time left to examine or perform collections,  never starts.  Even when the IRS files for you and have a liability these time limits do not start running.  When you have a filing requirement, for either a refund due return (you lose the ability to receive a refund after 3 years) or a liability, file on time to avoid additional penalties for late filing or non-filing.  Once the return is filed the IRS will work with you on a payment plan, reduction in liability, or other plans to keep you on track and in compliance.  Not filing the return will not make the liability go away, and will only make it harder to resolve tax issues.  If you are not in compliance with filing your returns they have no reason to work with you and grant any relief. Your tax professional can help you resolve he back year tax problems, work with you to not have a tax due return in the future, and let you rest assured the IRS is being taken care of to avoid additional problems.

When John met with his accountant to prepare these missing tax years, and correct the returns filed by the IRS, he had a tax liability of less than he imagined, they worked out a payment arrangement, and finally was able to stop worrying about the IRS seizing his bank account and wages.  Not filing due to inability to pay will never be the smart thing to do, and if you plan you can avoid so many problems. If you have a really large tax liability the IRS can and will work with you so long as you are in compliance and provide them with the information they need to assist you.

For more information on the different options available to resolve prior tax issues consult a tax professional, or of the amount owed is less than $50,000,contact the IRS directly and they will work with you.  Using a tax professional will make ot easier, as they talk to the IRS on a regular basis, and can further explain the options available to you

Business codes and their implications.

Daily Notes

When you file personal (filing as a sole-proprietorship), corporate, or partnership income tax returns there are numerous ways that the IRS uses information to track your business. The social security number, federal employer identification number, date of business formation, and also your business activity code.  As I will explain the use of the wrong code can lead to examination by the Internal Revenue Service.

Suppose for this example that you operate a plumbing business, in any of the above mentioned entity choices.  The business activity for a plumber is 238220.  This six-digit code is based on the North American Industry Classification System (NAICS) and can be found on the IRS website at www.irs.gov.   The IRS will use this code as a reference for all of the plumbing companies that file income tax returns.  They have a set formula for a basis for the type of and amount of expenses that will be reported on these tax returns.  A plumber will have a different type of expenses than an electrician, a drywall installer, or a landscaper.  The ratio of certain expenses, such as cost of goods, labor, small tools, and travel will be different for a plumber than other business types.  If you as a plumber use a code for a drywall installer (code 238310) and have a lot more in sub-contractor or small tools expense than a plumber normally has it will cause the IRS program to take notice.  If you have more in supplies (as a percentage of overall expenses) than all the other plumbers using the correct code you will have another item to notice.

The IRS has a program that keeps score of these noticeable differences and when there are enough of them your return will be selected for a cursory review. (This is the DIF SCORE-Discriminate Income Function) Based on this review the IRS will either see the error in the code used and close the review, or see other items for consideration and send the return to the field for an agent to review.

Before you file in future years review your business code and be sure it represents your business. Review the IRS Publication for small businesses for other important information regarding your business and items the IRS will consider when reviewing your return.

Bookkeeping

Daily Notes

In a recent IRS audit I was talking to the auditor about different industries, and methods used when they are selected for examination.  Two different types of businesses that we discussed were Chinese Restaurants and Massage Parlors.  The methods used to calculate income for these industries shows the unique thinking of the Internal Revenue Service.

On the Chinese restaurants, since so many records are kept in Chinese and they are such a family run operation, they contacted the company that provided the fortune cookies to the restaurant.  They figured that each customer that went to the restaurant received a fortune cookie after they were done eating and presented with a bill.  The IRS figured what the average price of the meal was per person, multiplied by the number of fortune cookies purchased, and calculated the years gross income to the restaurant.

On the massage parlor, the IRS verified the receipts from the laundry that serviced the linens for the parlor.  Once the IRS determined the numbers of towels and sheets cleaned by the service during the year, and determined the average price for a massage. the yearly income was calculated.  This accounted for any customers that may have paid in cash and the business forgot to report.

These methods of reconstructing income are what is called indirect methods of proof, and have help up in court to be a sound method to arrive at gross receipts when adequate books and records are not available. Keep in mind also that if the records used to prepare your tax returns are of such poor quality that the returns prepared from them are not accurate, the IRS can attach up to a 40% penalty of additional tax for the inadequate records penalty.

Know your business, maintain accurate books and records, stay in tax compliance, use planning to lower any possible tax liability, and respond to any IRS notices you may receive.

So you received a letter from the IRS, maybe even certified. Do NOT have a heart attack or loose sleep over this letter. Review the information, know where you stand, and respond with a sound plan to resolve the issue.  There are a series of letters that the IRS (Internal Revenue Service) will send to you before an actual person is assigned to meet with you.  One of these is a letter called the CP2000. (I will be discussing other letters in future posts).

What this letter means is that when you filed your original return you forgot to report some income and they have sent you this notice telling you what you forgot and what you now owe (called a summary of proposed changes not an actual assessment) when they added this income to your return.

For example: on a recent notice the IRS told my client he owed an additional $48,000 in tax because of this additional income (in this case income from stock sales that had been inherited). What the IRS failed to take into account was the basis for the stock that was sold, and eventually resulted in a loss for this client and a refund once the return was corrected.

Just because the IRS sends you a letter does not always mean you have an additional liability.  They are a large business, and are accurate most of the time, but it is your responsibility to be sure what they are stating is accurate.  Review their correspondence, know where you stand, and if in doubt consult a tax professional before agreeing to these additional tax increases. Know your rights and treat the IRS in a professional manner and they will be more than willing to explain items to you or your representative.