Category: IRS – Tax Help

Taxpayers Should Be Wary of Unsolicited Calls from the IRS

Taxpayers Should Be Wary of

Unsolicited Calls from the IRS

(IRS Tax Tip 2017-53)

Unsolicited Calls from the IRS

Taxpayers who get an unexpected or unsolicited phone call from the IRS should be wary – it’s probably a scam. Phone calls continue to be one of the most common ways that thieves try to get taxpayers to provide personal information. These scammers then use that information to gain access to the victim’s bank or other account. 

When a taxpayer answers the phone, it might be a recording or an actual person claiming to be from the IRS. Sometimes the scammer tells the taxpayer they owe money and must pay right away. They might also say the person has a refund waiting, and then they ask for bank account information over the phone.

Taxpayers should not take the bait and fall for this trick. Here are several tips that will help taxpayers avoid becoming a scam victim.

The real IRS will not:

  • Call to demand immediate payment
  • Call someone if they owe taxes without first sending a bill in the mail
  • Demand tax payment and not allow the taxpayer to question or appeal the amount owed
  • Require that someone pay their taxes a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in local police or other agencies to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit

Taxpayers who don’t owe taxes or who have no reason to think they do should follow these steps:

  • Use the Treasury Inspector General for Tax Administration’s IRS Impersonation Scam Reporting web page to report the incident.
  • Report it to the Federal Trade Commission with the FTC Complaint Assistant on FTC.gov. 
  • Taxpayers who think they might actually owe taxes should follow these steps:
  • Ask for a call back number and an employee badge number.
  • Call the IRS at 1-800-829-1040.

Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights.

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How to Protect Yourself from the Equifax Data Breach

How to Protect Yourself from the Equifax Data Breach

The massive Equifax breach means consumers need to be on guard against data thieves. The credit-rating company hack earlier this year left approximately 143 million people’s personal information exposed and vulnerable. Here are the steps you take to help protect yourself in the wake of this event.

1)      Determine the exposure of your information: Go to Equifax”s website here and follow the instructions provided. You’ll need your Social Security number handy to complete the check and to tell if you”ve been impacted by the breach.

2)      Enroll for free credit monitoring: Regardless of exposure, consumers who have information under Equifax are entitled to free credit monitoring for one year, along with other monitoring and protective services. You can learn more about what is available here.

3)      Monitor your credit reports and accounts for unusual activity: Equifax, Experian and TransUnion, the three major credit reporting companies, are required to supply you with a credit report free of charge once every 12 months. Go to AnnualCreditReport.com and request them. Once you have the reports, monitor them to ensure there are no unauthorized accounts, incorrect personal information or credit inquiries you didn’t initiate. These are signs of fraud and you should follow up on them to ensure you weren’t the victim of identity theft.

4)      Consider implementing a credit freeze: If you see suspicious activity or are highly concerned, you can place a credit freeze to help deter an identity thief from opening new accounts in your name. Visit the consumer information section of the Federal Trade Commission website to learn more about credit freezes and how to activate one.

5)      Set up fraud alerts: Fraud alerts require potential creditors to verify your identity before they can open an account, issue a new card or increase a credit limit. Remember that fraud alerts won’t necessarily prevent identity theft, but they will make it much harder for someone with your personal information to use it.

 

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Job Search Expenses Can be Tax Deductible

Job Search Expenses

Can be Tax Deductible

(IRS Tax Tip 2017-24)

Taxpayers who are looking for a new job that is in the same line of work may be able to deduct some job-hunting expenses on their federal income tax return, even if they don’t get a new job.

Here are some important facts to know about deducting costs related to job searches:

  1. Same Occupation. Expenses are tax deductible when the job search is in a taxpayer’s current line of work. 
  2. Résumé Costs. Costs associated in preparing and mailing a résumé are tax deductible.
  3. Travel Expenses. Travel costs to look for a new job are deductible. Expenses including transportation, meals and lodging are deductible if the trip is mainly to look for a new job. Some costs are still deductible even if looking for a job is not the main purpose of the trip.
  4. Placement Agency. Job placement or employment agency fees are deductible.
  5. Reimbursed Costs. If an employer or other party reimburses search related expenses, like agency fees, they are not deductible.
  6. Schedule A. Report job search expenses on Schedule A of a 1040 tax return and claim them as miscellaneous deductions. The total miscellaneous deductions cannot be more than two percent of adjusted gross income.

Taxpayers can’t deduct these expenses if they:

  • Are looking for a job in a new occupation,
  • Had a substantial break between the ending of their last job and looking for a new one, or
  • Are looking for a job for the first time.

Starting Your Own Business

Six Simple Steps to Consider when

Starting A Business

Starting A BusinessOwning a business is a dream that can become a nightmare without adequate planning. But if you follow some simple steps, a business can be a satisfying and lucrative venture. The following are six steps you can take to ensure that your business idea has a chance to succeed.

 

1) Evaluate Your Personality

Not everyone is meant to be an entrepreneur. Are you driven to be in business despite the inherent risks? Or do you prefer regular hours and the certainty of a steady paycheck? If the latter describes you, owning your own business might not be your cup of tea. Are you willing to work hard? Do you thrive on risk? Are you self disciplined? Think carefully about what it takes to be an entrepreneur and understand the risks; only you can choose the right course for you.

On the other hand, an uncertain job market can create new entrepreneurs out of necessity. If you can’t find the right job, making your own job is an option.

2) Get Professional Advice

The Small Business Administration and an organization called SCORE (Service Corps of Retired Executives) are among the organizations that offer free resources for entrepreneurs. Make full use of the resources available to ensure you get the best possible advice about starting your business.  Also, meet with business attorneys and tax consultants (CPAs) to get questions answered about starting your business.

3) Find a Good Idea

Every business idea requires thought and research, even those that strike you with a sudden burst of inspiration. No matter how excited you are about your idea, it must meet a demand or solve a problem in the marketplace. As you’re brainstorming for ideas, ask yourself:

  • Does my product or service solve a problem or fill a need?
  • Does it improve upon an existing product or service?
  • If my product or service is similar to one already being offered, can I do a better job of selling it than my competition?

Whether your idea springs naturally from a hobby or requires intense brainstorming and research, find something that interests you, that you are passionate about and that you can sell.

4) Do Your Market Research

Once you have identified an idea, get some feedback from potential customers to make sure it’s viable. Search online for similar or identical businesses. Can you compete with others on price? Is there room for your idea in the marketplace?

Present your product or service to potential prospects to see how many would buy it and at what price. However you choose to test your idea, this step could save you time, money and disappointment. Market testing will not only reveal your idea’s potential, but it will also help you learn about your customers. Knowing your buyers makes it easier to target your marketing efforts.

5) Write a Business Plan

A written business plan makes it easier to take your new business from concept to reality. And if you need funding from lenders or investors, a business plan is essential. Even if you don’t need financing, writing a business plan will force you to do your research and help you establish the details of your new business, including sales and marketing goals, expenses, business structure, target markets, sales channels, anticipated profits, competitive analysis and much more. If you need help, the Small Business Administration offers free business plan writing resources.

6) Find Your Financing

Depending on the type of business you choose, you may or may not require outside financing, but you should expect to invest some capital to get started. Online businesses will probably require a smaller investment than a brick-and-mortar store, which requires a building, utilities and other overhead expenses. You might need to buy inventory, pay for website development or hire employees.

Besides the standard funding sources, such as small business loans, your sources of capital can come from “bootstrapping” (personal savings, income from a job, credit cards, etc.), loans from friends, venture capital or even online “crowdfunding,” which allows you to solicit very small investments from many sources, minimizing risk for any single investor and saving you the hassle of loan applications.

Get Started!  There are many other elements to consider, such as business tax structure, location, business name, licenses, permits and others, and a good business plan will cover all of these details.

Starting a business can be a long, complex process, but if you lay the proper groundwork, you can save yourself time and money and ensure yourself the best possible chance of success.

Divorce or Separation May Affect Taxes

Divorce Taxes

(IRS Tax Tip 2017-23)

Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider.

IRS.gov has resources that can help along with these key tax tips:

  • Child Support Payments are not Alimony.  Child support payments are neither deductible nor taxable income for either parent.
  • Deduct Alimony Paid. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse’s Social Security number or Individual Taxpayer Identification Number.
  • Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
  • IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse’s traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.
  • Report Name Changes.  Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to SSA.gov for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.

For more on this topic, see IRS Publication 504, Divorced or Separated Individuals.

8 Things that Could Trigger an IRS Business Audit

8 Things that Could Trigger a IRS Business Audit

IRS Business Audit

Whether you’re doing taxes for your own business or a tax professional prepares your business return, the small – but real – possibility exists for an audit.

Understanding the chances of an audit and what the Internal Revenue Service may pay particular attention to can help you and your taxpayer during an audit, if and when one occurs. What are some common triggers that might lead to an audit by the IRS?

Running a Home-Based Business

Operating a business from one’s home is becoming more and more common with high-speed Internet. However, the IRS is scrutinizing just how much of a home is actually used for a home office. Per IRS Publication 587, someone claiming a den or single room of their house will be more likely to have the deduction approved versus claiming their entire home. Similarly, the sole room or workspace must be used exclusively for one’s business, not for family entertaining or personal storage.   

Reporting Business Losses

It is normal and often expected for a business to have losses during the first few years. However, if losses are still reported years after the business’ incorporation, the IRS might take a second look.    

Higher Income, Higher Audit Chances

On average, the chances of an individual audited by the IRS is about 1 percent. However, the more income reported, the greater the likelihood of an audit. Tax returns showing incomes of $200,000 and more have an increased chance of an audit, about one in every 30. Filers making $1 million or more have an even greater chance of an audit – about 11 percent.

Lopsided and Unsubstantiated Charitable Deductions

Donating and not substantiating a high percentage of one’s income might raise a red flag with the IRS. Giving away half of one’s income, not appraising a car or similar valuable donation or forgetting to include IRS Form 8283 might have the IRS requesting an audit.

Major Currency Withdrawals and Deposits

Businesses that make deposits or withdrawals of $10,000 or more may trigger an IRS audit. The IRS gets countless reports of these types of withdrawals every day, and they will naturally pique the interest for an audit.

Medical Bills  

Bills from medical problems might be deducted if they meet a certain threshold. If medical bills add up to more than 10 percent of a filer’s adjusted gross income and they are younger than 65, they might be deductible. However, gym membership fees, nonprescription medications and medical procedures for aesthetic purposes only do not qualify under the rules as medical expenses. 

Partially Completed Tax Returns

Whether it’s a Social Security number, a signature or a 1099 Form not submitted, the IRS’ system and auditors often flag such returns. And sometimes computer or data entry mistakes result in an audit to ensure there are no other errors in the tax return.

Tally Up and Include All 1099s

Staying organized with all types of 1099s will help a tax return go smoother, reducing the chances of accidentally forgetting a 1099 and potentially triggering an audit. Whether it’s a 1099-MISC documenting income earned from self-employment, a 1099-INT for earned interest, a 1099-G documenting an income tax refund or another type of 1099, ensuring all necessary 1099s are included will ensure the IRS’ system is in agreement with the supplied 1099s.

The IRS can still choose to audit a business’ tax returns regardless of the circumstances. However, staying organized, following IRS regulations and maintaining one’s own records will help reduce the number of errors – which will make it a much smoother process for all involved during tax time.

Income Tax Tips When Selling Your Home

Income Tax Tips When Selling Your Home

(IRS Tax Tip 2017-13)

Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.

Below are tips to keep in mind when selling a home:

Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

  • Owned the home for at least two years  
  • Lived in the home as their main home for at least two years    Gain.  If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return

Loss.  A main home that sells for lower than purchased is not deductible.

Reporting a Sale.  Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Possible Exceptions.  There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.

Worksheets.  Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

  • Adjusted basis of the home sold
  • Gain (or loss) on the sale
  • Gain that can be excluded

Items to Keep In Mind:

  • Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
  • Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
  • Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
  • Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
  • Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.

Newlyweds Should Think About Taxes

Summer Newlyweds Should Also Think About Taxes

(IRS Summertime Tax Tip 2017-08 – July 19, 2017)

Spring showers bring summer flowers and weddings typically aren’t far behind. Newlyweds have a lot to think about and taxes might not be on the list. However, there is good reason for a new couple to consider how the nuptials may affect their tax situation.

The IRS has some tips to help in the planning:

  • Report changes in:
    • Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at SSA. If it doesn’t, it could delay any refund. To update information, file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
    • Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, send the IRS Form 8822, Change of Address. Notify the postal service to forward mail by going online at USPS.com or at a local post office.
  • Consider changing withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Allowance Certificate, within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator at IRS.gov to help complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
  • Decide on a new filing status. Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of Dec. 31, the law says they’re married for the whole year for tax purposes.
  • Select the right tax form. Choosing the right income tax form can help save money. Newly married taxpayers may find they now have enough deductions to itemize them on their tax returns. Newlyweds can claim itemized deductions on Form 1040, but not on Form 1040A or Form 1040EZ.
  • Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Members of the Armed Forces Get Special Tax Benefits

Members of the Armed Forces Get Special Tax Benefits (IRS Tax Tip 2017-06)

Members of the military may qualify for tax breaks and benefits. Special rules could lower the tax they owe or give them more time to file and pay taxes. In addition, some types of military pay are tax-free.

Here are some tips to find out who qualifies:

  1. Combat Pay Exclusion. If someone serves in a combat zone, or provides direct support, part or even all of their combat pay is tax-free. However, there are limits for commissioned officers. See Earned Income Tax Credit below for important information.
  2. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  3. Special Deductions:
  • Reservists’ Travel.  Reservists whose duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
  • Moving Expenses.  Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
  • Uniform.  Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
  1. Earned Income Tax Credit or EITC. If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
  2. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
  3. ROTC Allowances.  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
  4. Separation and Transition to Civilian Life. If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
  5. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.

For more, refer to IRS.gov/Military or Publication 3, Armed Forces’ Tax Guide, on IRS.gov.

Summer Camp Costs May Qualify for the Child and Dependent Care Tax Credit

Summer Camp Child and Dependent Care Tax Credit

Many parents send their children to summer day camps while they work or look for work. The IRS urges those who do send their children to summer camps or day care to save their paperwork for the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it on their taxes in 2018 if they paid for day camp or for someone to care for a child, dependent, or spouse during 2017.

Here are a few key facts to know about this credit:

  1. Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
  2. Work-Related Expenses. The care must have been necessary so the taxpayer could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
  3. Earned Income. The taxpayer — and their spouse if married filing jointly — must have earned income for the tax year. Special rules apply to a spouse who is a student or disabled.
  4. Credit Percentage/Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.
  5. Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return. The childcare provider cannot be the taxpayer’s spouse, dependent or the child’s parent.
  6. Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer.  Make sure you consult your tax advisor to understand those rules.
  7. Special Circumstances. Since every family is different, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit. Make sure you consult your tax advisor to understand the exceptions.

Even if the childcare provider is a sitter in the home, taxpayers may qualify for the credit. Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer. If you are deemed a household employer, you may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax for those who provide child care.