Bits and Pieces

BITS AND PIECES

 

Other than some of you experiencing the tax increases we have spoken about before there is not much of any great import to spend an entire article on. Therefore, I’d like to share with you a few items you might not be aware of. (Wow, I look at the last two sentences here and am reminded of the old saying “A preposition is a bad word to end a sentence with.” I certainly have violated that rule – three times now.)

IRS scams have become much more common now as more and more scammers attempt to steal identities. Interestingly (and shockingly) the IRS is often the supplier of information used by scammers to perpetrate their frauds. Things you should know include:

  • A recent telephone scam in which the target receives a call informing them that they owe the IRS money and that it must be paid immediately, using a pre-loaded debit card or wire transfer. If the intended victim refuses, the caller threatens arrest, deportation (in the case of an immigrant), loss of business or driver’s license. The IRS NEVER asks for credit or debit card numbers over the phone.
  • The IRS never communicates with taxpayers via email, yet many scammers try to dupe people into either making payments or divulging personal information via emails.
  • Scammers frequently use IRS logos, fake IRS letterheads and even can make caller IDs on phone calls appear that they are coming from the IRS.
  • More common each year is the scam where a scammer files a tax return using a stolen name and social security number. The scammer shows a large refund is due and files VERY early in the filing season so as to have the fraudulent return, and refund, processed before the actual taxpayer has a chance to file. We had an interesting case where the scammer filed a fraudulent return for 2011, but did not manage to get the refund because the real taxpayer owed the IRS taxes for a previous year. The result was that the IRS wrote the scammer that the refund had been applied to a prior balance due. Here’s where it gets really crazy, this same scammer also filed a fraudulent return for the same taxpayer for 2012. Of course, the IRS “retained” that refund also – talk about your “dumb” criminals. Unfortunately, our client is still trying to clean up the mess that these fraudulent returns created.
  • Some scammers claim to represent other government agencies and tell the prospective victim that they need personal and financial information. This method is known as “phishing” and can result in financial devastation if the requested information is provided.

Regarding any of these scams requesting this kind of information, please do a couple of things: 1) of course, do not respond to the phone call or email, 2) if you think it could be for real, make a direct contact with the agency or company by going to their web site or making a phone call directly. You might also wish to report the scam to the appropriate agency or company when you do your follow-up. In speaking with web-savvy colleagues, I have been warned not to open any attachments or respond directly to any emails from unsolicited sources. This even includes emails from such respected sources as PayPal, Amazon, etc., etc. because the mere act of opening the email can put your computer at risk. I know I occasionally receive emails from such sources indicating that they need some sort of updated information. DO NOT open these email; rather contact the company directly to determine if the request is genuine.

  Form 1099-K is the form that must be filed by companies that process credit and other electronic payments to merchants. The IRS also receives this information and compares it to tax returns filed by the entity receiving such payments. If your business processes at least 200 such transactions totaling at least $200,000 during the year you will receive this 1099-K. Frequently the IRS perceives a difference between what is reported by the processor and the amount reported by the receiving entity and sends a “Notification of Possible Income Underreporting”. These differences could result from merchandise returns, charge-backs, sales tax or gift cards (gift card income is not required to be reported until the card is used). If you receive such a notice, you need to respond or you could be inviting an audit and possible additional tax being assessed, even though it is not due. The best course of action is, probably, to contact your tax preparer and begin gathering records that will prove that you filed an accurate tax return.

             IRS audit rates having gone down below 1% again in the past year. However, if you are a high income taxpayer OR report on a Schedule C for your business activity you are likely at much higher risk of an audit. As to Schedule C filers there are couple of things to be aware of:

  • If you have significant taxable income from other sources AND your Schedule C show a large loss, the IRS will take greater interest in your return. The reason is that, with high income you are in a higher tax bracket, meaning that your Schedule C loss will have a more dramatic effect on reducing your overall tax liability. If your are in the 33% tax bracket and report a Schedule C loss of $60,000, your tax liability would be reduced by $20,000, making you a juicer target for an IRS audit.
  • If you operated a Schedule C business (or even a partnership or corporation) where a significant amount of your income is subject to be derived from cash payments, you are likely to be a bigger IRS target. The reason, of course, is that such businesses can significantly underreport their income by hiding the cash and not reporting it as income. Unfortunately, if the IRS comes to call, you are in the unfortunate position of proving a negative – that you reported all of the cash income. The best suggestion I can give is what I tell ALL of my business clients and what I do in my business – ALWAYS report 100% of your income AND deposit it into your business bank account. In so doing you will be able to show the IRS that you deposit not only income received by check, but also income received in cash. This will lend significant credibility to your claim that you have reported all of your business income.