File on Time Even if You Can’t Pay
Do you owe more tax than you can afford to pay when you file? If so, don’t fail to take action. Make sure to file on time. That way you won’t have a penalty for filing late. Here is what to do if you can’t pay all your taxes by the due date.
• File on time and pay as much as you can. You should file on time to avoid a late filing penalty. Pay as much as you can with your tax return. The more you can pay on time, the less interest and late payment penalty charges you will owe.
• Pay online with IRS Direct Pay. IRS Direct Pay is the latest electronic payment option available from the IRS. It allows you to schedule payments online from your checking or savings account with no additional fee and with an immediate payment confirmation. It’s, secure, easy, and much quicker than mailing in a check or money order. To make a payment or to find out about your other options to pay, visit IRS.gov/payments.
• Pay the rest of your tax as soon as you can. If it is possible, get a loan or use a credit card to pay the balance. The interest and fees charged by a bank or credit card company may be less than the interest and penalties charged for late payment of tax. For debit or credit card options, visit IRS.gov.
• Use the Online Payment Agreement tool. You don’t need to wait for IRS to send you a bill to ask for an installment agreement. The best way is to use the Online Payment Agreement tool on IRS.gov. You can even set up a direct debit installment agreement. When you pay with a direct debit plan, you won’t have to write a check and mail it on time each month. And you won’t miss any payments that could mean more penalties. If you can’t use the IRS.gov tool, you can file Form 9465, Installment Agreement Request instead. You can view, download and print the form on IRS.gov/forms anytime.
• Don’t ignore a tax bill. If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you face a financial hardship, the IRS will work with you.
In short, remember to file on time. Pay as much as you can by the tax deadline. Pay the rest as soon as you can.
Secret Swiss Bank Codes Exposed in Landmark U.S. Tax Accord
BY DAVID VOREACOS AND TOM SCHOENBERG
BSI SA, a Swiss private bank, admitted helping customers duck taxes by using coded language, nameless debit cards and fake identities as part of a landmark $211 million accord to avoid U.S. prosecution.
Clients moving cash from secret accounts at the firm on Lake Lugano to their cards would tell BSI’s bankers the “gas tank is running empty” or ask “can you download some tunes for us?” the Justice Department said Monday in announcing the non-prosecution agreement. It’s the first case from a program letting Swiss banks escape charges by describing dealings with Americans. Dozens of firms seeking leniency watched it closely.
In some instances, BSI helped U.S. clients create sham corporations and trusts, opened numbered accounts that shielded identities even from its own employees and issued debit and credit cards with no name visible, the Justice Department said. Investigators credited the firm with providing “substantial assistance” in identifying the clients, and said it’s helping track money “well beyond Switzerland” to new tax-evasion schemes.
“We are using the information that we have learned from BSI and other Swiss banks in the program to pursue additional investigations into both banks and individuals,” Stuart F. Delery, the Justice Department’s acting associate attorney general, told reporters.
Banks that entered the program are seeking non-prosecution agreements, which aren’t available to the dozen Swiss banks under criminal investigation. Credit Suisse Group AG’s main bank subsidiary pleaded guilty last year and paid a $2.6 billion fine. BSI pledged to help the Justice Department root out tax evasion.
“It’s certainly fundamentally positive that finally one of the bigger ones has settled,” said Andreas Brun, a Zurich-based analyst at Zuercher Kantonalbank, said of BSI. “This means a solution is coming closer for all banks in the program.”
Swiss banks are also dealing with tax investigations by France and Germany and may face other probes into offshore structures across the globe after providing the Justice Department with details of money transfers. Many Swiss banks have operations in locations such as the Caribbean, the Channel Islands, Dubai and Hong Kong.
U.S. authorities “intend to follow that money to uncover additional tax evasion schemes,” the Justice Department said in a statement.
BSI managed about 3,500 U.S. accounts with a peak value of $2.78 billion in 2008, according to a statement of facts it admitted. At least 32 clients had prepaid debit cards known as “travel cash cards,” issued without a name, according to the statement of facts. Bankers let clients “withdraw funds remotely or pay for goods and services without a paper trail back to their undeclared assets in Switzerland,” BSI said.
Before 2009, clients could transfer $10,000 at a time to cards, as much as $30,000 a month and $100,000 a year. After 2009, at least 11 clients got a second type of debit card that allowed higher maximum amounts, BSI said.
For decades until 2013, “BSI conducted a U.S. cross-border banking business that aided and assisted thousands of U.S. clients in opening and maintaining undeclared accounts in Switzerland,” the bank admitted.
Assicurazioni Generali SpA last year agreed to sell BSI to Grupo BTG Pactual of Brazil. The sale is still subject to regulatory approvals.
“We have resolved our legacy tax issue with the DOJ and can now focus on our business and on the implementation of our growth strategy,” BSI said in a statement.
While 106 Swiss banks signed up for the program, some have dropped out. Acting Assistant U.S. Attorney General Caroline Ciraolo declined to say Monday how many banks remain in the program. She said the department hopes to conclude the cases by the end of the year.
Ciraolo also wouldn’t say how many of the 3,500 accounts weren’t declared to the IRS. She said the bank has turned over “some names when they were authorized” by Swiss authorities, but she wouldn’t say how many.
Fighting offshore tax evasion remains a “top priority” of the Internal Revenue Service Criminal Investigation Division, Chief Richard Weber said in a statement.
—With assistance from Jeffrey Vögeli in Zurich and Giles Broom in Geneva.
Swiss Asset Manager Admits He Helped Americans Evade Taxes
BY PATRICIA HURTADO
A former Swiss asset manager pleaded guilty to helping U.S. clients hide millions of dollars in offshore accounts and avoid paying federal income taxes.
Peter Amrein, 53, a Swiss citizen, told U.S. District Judge Sidney Stein in Manhattan Tuesday that from 1998 to 2012 he helped Americans evade taxes by concealing funds at various Swiss banks, including Wegelin & Co. He did so while working at an unidentified Swiss bank and later as an asset manager at a Swiss asset management firm.
He agreed to cooperate with U.S. authorities and testify before a federal grand jury and at other court proceedings, according to his plea agreement filed with the court.
Amrein was accused in an indictment last year of conspiring with a Swiss lawyer, Edgar Paltzer, to set up undeclared Swiss accounts at Wegelin, which pleaded guilty in New York to tax charges, and four other Swiss banks. None of the banks were identified.
Paltzer pleaded guilty in New York in 2013 and is cooperating in a crackdown on offshore tax evasion that has led to charges against more than 100 people, including about 70 U.S. taxpayers and more than 30 bankers, lawyers and advisers. Fourteen banks are under criminal investigation, including Credit Suisse Group AG, Switzerland’s second-largest bank, U.S. authorities have said.
“Mr. Amrein voluntarily surrendered on his own to the authorities in New York,” his lawyer, Tom Zehnle, said in an e-mailed statement. “He accepts full responsibility for the past actions he took on behalf of some of his U.S. clients, and he is confident in the fairness of the US justice system and will accept the court’s sentence, whatever that may be.”
Amrein pleaded guilty to one count of conspiracy to defraud the Internal Revenue Service, evade federal income taxes and file a false income tax return. He faces as long as five years in prison when he’s sentenced. He could seek a lesser sentence based upon the degree of his assistance to U.S. authorities, according to his plea agreement.
In 2008, it became public that U.S. authorities were investigating UBS AG for helping its American customers maintain undeclared accounts in Switzerland, said Manhattan U.S. Attorney Preet Bharara. After one Swiss bank told Amrein it was going to close undeclared accounts belonging to his U.S. taxpayer clients, Amrein searched for other Swiss banks willing to maintain them.
Amrein later helped nine clients hide assets, including aiding them in opening undeclared accounts at a Swiss bank in the name of sham foundations, according to prosecutors. As late as June 2011, the U.S. said he was still attempting to help American clients evade taxes and searching for Swiss banks willing to help open undeclared accounts.
Amrein worked at the Zurich-based bank from 1998 to 2006, and from 2006 to 2012 at the Zurich-based asset management firm, according to the indictment, which didn’t identify his employers. He provided wealth management services and advice on how to hide assets from the IRS, according to the indictment.
The case is U.S. v. Amrein, 13-cr-00972, U.S. District Court, Southern District of New York (Manhattan).
Bartering Income: The Value of Property or Services You Receive
Bartering is the trading of one product or service for another. Often there is no exchange of cash. Some businesses barter to get products or services they need. For example, a gardener might trade landscape work with a plumber for plumbing work.
If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.
Here are a few facts about bartering:
- Bartering income. Both parties must report the fair market value of the product or service they get as income on their tax return.
- Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Exchanges must give a copy of the form to its members who barter each year. They must also file a copy with the IRS.
- Trade Dollars. Exchanges trade barter or trade dollars as their unit of exchange in most cases. Barter and trade dollars are the same as U.S. currency for tax purposes. If you earn trade and barter dollars, you must report the amount you earn on your tax return.
- Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
- Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
Top Eight Tax Tips about Deducting Charitable Contributions
When you give a gift to charity that helps the lives of others in need. It may also help you at tax time. You may be able to claim the gift as a deduction that may lower your tax. Here are eight tax tips you should know about deducting your gifts to charity:
1. Qualified Charities. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. To check the status of a charity, use the IRS Select Check tool.
2. Itemized Deduction. To deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.
3. Benefit in Return. If you get something in return for your donation, your deduction is limited. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.
4. Donated Property. If you gave property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.
5. Clothing and Household Items. Used clothing and household items must be in at least good condition to be deductible in most cases. Special rules apply to cars, boats and other types of property donations. See Publication 526, Charitable Contributions, for more on these rules.
6. Form 8283. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.
7. Records to Keep. You must keep records to prove the amount of the contributions you made during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. For more about what records to keep refer to Publication 526.
8. Donations of $250 or More. To claim a deduction for donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.
Also refer to Publication 561, Determining the Value of Donated Property. You can get IRS tax forms and publications on IRS.gov/forms anytime.
FiveTips You Should Know about Employee Business Expenses
If you paid for work-related expenses out of your own pocket, you may be able to deduct those costs. In most cases, you claim allowable expenses on Schedule A, Itemized Deductions. Here are six tax tips that you should know about this deduction.
1. Ordinary and Necessary. You can only deduct unreimbursed expenses that are ordinary and necessary to your work as an employee. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is appropriate and helpful to your business.
2. Expense Examples. Some costs that you may be able to deduct include:
- Required work clothes or uniforms that are not appropriate for everyday use.
- Supplies and tools you use on the job.
- Business use of your car.
- Business meals and entertainment.
- Business travel away from home.
- Business use of your home.
- Work-related education.
This list is not all-inclusive. Special rules apply if your employer reimbursed you for your expenses. To learn more, check out Publication 529, Miscellaneous Deductions. You should also refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
3. Forms to Use. In most cases you report your expenses on Form 2106 or Form 2106-EZ. After you figure your allowable expenses, you then list the total on Schedule A as a miscellaneous deduction. You can deduct the amount that is more than two percent of your adjusted gross income.
4. Educator Expenses. If you are a K through 12 teacher or educator, you may be able to deduct up to $250 of certain expenses you paid for in 2014. These may include books, supplies, equipment, and other materials used in the classroom. You claim this deduction as an adjustment on your tax return, rather than as an itemized deduction. This deduction had expired at the end of 2013. A recent tax law extended it for one year, through Dec. 31, 2014. For more on this topic see Publication 529.
5. Keep Records. You must keep records to prove the expenses you deduct. For what records to keep, see Publication 17, Your Federal Income Tax.
IRS to Refund Penalties to Marijuana Dispensary
BY MICHAEL COHN
The Internal Revenue Service has settled a legal dispute with a medical marijuana dispensary by agreeing to refund approximately $25,000 in fines and abate future penalties.
The IRS had imposed the penalties on Allgreens because the unbanked business had been paying its taxes in cash. IRS rules require businesses to remit employee withholding payments electronically or face a 10 percent penalty. However, Allgreens argued that since it did not have a bank account, it had to make the payments in cash, according to the Denver Post.
Many banks refuse to do business with marijuana dispensaries because the substance is still illegal under federal law, even though an increasing number of states allow medical and in some cases recreational use, including Colorado.
Allgreens filed a petition in U.S. Tax Court, arguing that it should not be penalized since it was complying with the law by making its tax payments on time. The IRS argued that Allgreens could use a third-party service to make the payments electronically, but Allgreens countered that this could subject the other party to money-laundering charges.
The IRS eventually agreed to settle the case and refund about $25,000 in penalties. It is not clear whether the case could apply to other medical marijuana dispensaries, although Allgreens’ attorney believes it might.
Seven Tax Tips about Reporting Foreign Income
Are you a U.S. citizen or resident who worked abroad last year? Did you receive income from a foreign source in 2014? If you answered ‘yes’ to either of those questions here are seven tax tips you should know about foreign income:
1. Report Worldwide Income. By law, U.S. citizens and residents must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.
2. File Required Tax Forms. You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.
3. Review the Foreign Earned Income Exclusion. If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $99,200 of your wages and other foreign earned income in 2014. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.
4. Don’t Overlook Credits and Deductions. You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.
5. Use IRS Free File. Almost everyone can prepare and e-file their U.S. federal tax returns for free by using IRS Free File. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Some Free File software products and fillable forms also support foreign addresses for those who live abroad. Free File is available only through the IRS.gov website.
6. Tax Filing Extension is Available. If you live outside the U.S. and can’t file your tax return by April 15, you may qualify for an automatic two-month extension of time to file. That will give you until June 16, 2015, to file your U.S. tax return. This extension also applies to those serving in the military outside the U.S. You will need to attach a statement to your return explaining why you qualify for the extension.
7. Get IRS Tax Help. Check the international services Web page for the types of help the IRS provides. For all free IRS tax tools and products, visit IRS.gov at any time.
Contemporaneous recordkeeping key to avoiding loss limitations
Taxpayers who run up tax losses in a business must be prepared to prove that one of the material participation tests was passed to avoid having the losses characterized as a passive activity loss (PAL) that cannot be currently deducted. Adequatecontemporaneous records that detail the taxpayer’s tasks and time spent in the activity are crucial in attempting to sidestep the PAL rules. Records created after-the-fact are better than nothing, but they are much less believable than contemporaneous records. If losses are disallowed by the IRS, interest and penalties may be added to the unpaid taxes.
In general, an individual taxpayer can meet the material participation standard by passing one of the following seven tests outlined in the regulations:
· More-than-500 hours. This test is passed if the taxpayer spends more than 500 hours in the activity during the tax year in question.
· More-than-100 hours and more-hours-than-anyone-else. This test is passed if the taxpayer participates in the activity for more than 100 hours during the tax year and no other taxpayer participates more, including taxpayers who are not owners.
· Substantially all. This test is passed if the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity for all individuals (including nonowners).
· Significant participation activity. This test is met if the individual’s aggregate participation in all activities in which he or she participated for more than 100 hours during the year (significant participation activities) exceeds 500 hours for the year.
· Material participation in the last five years. This test is passed if the individual materially participated in the activity for any five tax years during the 10 immediately preceding years.
· Personal service activity. This test is passed if the individual materially participated for any three preceding tax years by performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
· Facts and circumstances. This test is passed if, based on all facts and circumstances, the taxpayer is found to have participated in the activity on a regular, continuous, and substantial basis during the year in question.
In attempting to pass the material participation tests, taxpayers can prove their participation levels by any reasonable means. This can include identifying the types of work performed and the approximate number of hours spent performing such work with contemporaneous appointment books, calendars, narrative summaries, and the like. Several court decisions have said that, while the regulations permit flexibility regarding what it takes to prove material participation, courts are not required to accept after-the-fact “ballpark guesstimates” or a taxpayer’s unverified, undocumented, and presumably self-serving testimony.
Special rules for inherited IRAs
Normally, retirement plan distributions made to a nonspouse beneficiary after the account owner’s death are taxable at the time they are received and cannot be rolled over to the beneficiary’s own IRA. However, employer-sponsored retirement plans are required to offer nonspouse beneficiaries the option to roll over inherited amounts tax-free in a direct (trustee-to-trustee) rollover to an inherited IRA. No taxes will be due on the inherited IRA rollover until the beneficiary receives a distribution from the inherited IRA. An inherited IRA is an IRA that has been acquired by a beneficiary on the death of someone other than a spouse.
The following special rules apply to an inherited IRA:
· The IRA must be a brand-new IRA set up for the specific purpose of receiving the inherited account.
· The IRA must be specially titled in the deceased account owner’s name.
· No other contributions may be made to the IRA.
· No other amounts may generally be rolled into or out of the IRA.
· Minimum required distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.
Avoid gift treatment by paying expenses directly
The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.
So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.
Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.
What landlords should know about rental income and expenses
Rental income is any payment received for the use or occupation of property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned. Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.
Advance rent is any amount received before the period that it covers. Include advance rent in rental income in the year received, regardless of the period covered or the accounting method used.
Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.
If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income. Include the fair market value of the property or services in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary.
Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.
Best States to Be Rich or Poor from a Tax Perspective
By Michael Cohn
The consumer finance site WalletHub has produced an analysis of 2015’s Best States to Be Rich or Poor from a Tax Perspective.
To identify the best states where people in different income brackets spend the most and least on taxes, WalletHub calculated the share of one’s income that is contributed toward sales and excise taxes, property taxes and income taxes.
Best States to Be Rich from a Tax Perspective
5. South Dakota
Worst States to Be Rich from a Tax Perspective
48. New Jersey
51. New York
Best States to Be Poor from a Tax Perspective
5. South Carolina
Worst States to Be Poor from a Tax Perspective
• The overall tax burden for low-income earners is two times higher in Washington than in Alaska.
• The sales and excise tax burden for low-income earners is six times higher in Washington than in Oregon.
• The property tax burden for low-income earners is five times higher in New Jersey than in Louisiana.
• The overall tax burden for middle-income earners is three times higher in New York than in Alaska.
• The property tax burden for middle-income earners is six times higher in New Hampshire than in Louisiana.
• The overall tax burden for high-income earners is four times higher in New York than in Alaska.
For the full report and to see where different states rank, click here.
IRS Sending Letters to Verify Taxpayer Identities
BY MICHAEL COHN
The Internal Revenue Service is sending letters to verify the identity of taxpayers as part of its effort this tax season to combat the growing problem of identity theft.
The IRS said taxpayers should use a special Identity Verification Service website,idverify.irs.gov, which will provide the fastest, easiest way to complete the task.
In the letter, known as Letter 5071C, the IRS asks taxpayers to verify their identity in order to complete processing of their return if the taxpayer did file it or reject the return if the taxpayer did not file it.
The IRS emphasized that it does not request such information via email, nor will the IRS call a taxpayer directly to ask this information unless the taxpayer receives a letter first. The letter number can be found in the upper corner of the page.
The IRS has been dealing with an increasing wave of tax scams this year in which fraudsters have been leaving messages on taxpayers' phones claiming to be from the IRS demanding payment, and have been sending phishing emails to taxpayers purporting to come from the IRS ( see Senate Probes Rise in Tax Scams). On Thursday, IRS Commissioner John Koskinen met with leaders of several of the major tax software companies, tax preparation chains, state tax commissioners and other officials to coordinate an approach for dealing with identity theft (see IRS Meets with Tax Community to Address Identity Theft). Koskinen noted that the IRS is sending out more letters to taxpayers this year asking for additional verification when it suspects a filing may be fraudulent.
The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers can use the idverify.irs.gov site or call a toll-free number on the letter. Because of the high-volume on the toll-free numbers, the IRS noted that the IRS-sponsored website, idverify.irs.gov, is the safest, fastest option for taxpayers with web access. Only those taxpayers receiving Letter 5071C should access idverify.irs.gov.
The website will ask a series of questions that only the real taxpayer can answer. Taxpayers should have available their prior year tax return and their current year tax return, if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.
Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six weeks to process it and issue a refund.
Taxpayers also can access idverify.irs.gov through www.IRS.gov by going to the Understanding Your 5071C Letter or the Understanding Your IRS Notice or Letter page. The tool is also available in Spanish. Taxpayers should always be aware of tax scams, efforts to solicit personally identifiable information and IRS impersonations. However, idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely.
The IRS noted that IRS.gov is the official IRS website, and taxpayers should always look for a URL ending with “.gov” – not “.com,” “.org,” “.net,” or other nongovernmental URLs.
Reality Check on Ted Cruz’s Proposal to Abolish the IRS
By Michael Cohn
Senator Ted Cruz threw his hat into the ring to launch his candidacy for the Republican nomination this week, promising among other things to get rid of the Internal Revenue Service.
During a speech to kick off his campaign Monday at Liberty University in Lynchburg, Va., the Texas senator echoed John Lennon’s song, “Imagine,” proclaiming, “Instead of a tax code that crushes innovation, that imposes burdens on families struggling to make ends meet, imagine a simple flat tax that lets every American fill out his or her taxes on a postcard. Imagine abolishing the IRS.”
That statement quickly got people wondering what would replace the IRS if the agency were ever abolished. Bill Smith, managing director in CBIZ MHM’s National Tax Office, is among those who have their doubts it could ever happen. Even though Republicans in Congress have voted to reduce the IRS’s funding for the past five years, and on Wednesday, lawmakers debated a series of measures that would effectively put limits on the IRS, he does not believe Cruz or his colleagues would be able to eliminate the agency or its functions.
“I don’t know how they would collect the taxes,” said Smith. “Even if you switch to a flat tax, which is what he’s advocating, you still have to have someone to collect it. You can’t just hope people are going to send their money in. We already know that even with an agency that does collect it, there’s a tremendous amount of noncompliance. That’s why they calculate the tax gap. They have an agency in place that has a great deal of weapons at its disposal for making people do the right thing, and it’s difficult even with that.”
According to various estimates, the IRS collects more dollars than each dollar in its budget. For example, according to the IRS, every dollar invested in IRS enforcement programs generates $7 in return. In fiscal year 2012, when the IRS budget was $11.8 billion, the agency collected $2.52 trillion, or roughly $214 for every dollar it spent.
Going to a flat tax, as Cruz has proposed, would not necessarily make the annual filing much simpler, even if it could be done on a postcard.
“He has proposed going to the flat tax, and he says you ought to be able to file your taxes on a postcard,” said Smith. “All you do is put down what you earn and send it in. When asked about charitable contributions and mortgage interest deductions, he suggests you just put down what you earn, take out your mortgage interest deduction and charitable contributions, and then send it in.”
Smith points out that approach would ignore many of the tax breaks, for example for capital gains and dividends. Even Cruz’s approach to charitable contributions has its contradictions, given the controversy over how the IRS reviews applications for tax-exempt status.
“He’s going to allow charitable contributions, but you don’t have an agency that says which organizations are exempt,” Smith pointed out.
Smith also sees a contradiction in eliminating the IRS while running for the presidency. “It’s the sole collector of revenues for the federal government,” he observed. “If you don’t have money coming into the federal government, you abolish the federal government and then there’s no need to run for president. None of it makes any sense.”
If Cruz wins support for the idea of eliminating the IRS, it might actually come from the opposing party. “I think he’s probably got a lot of Democrats who are interested in the presidential campaign who are going to back him very strongly because they’d love to have a Republican candidate who’s taking the position that we abolish the IRS because it’s not going to do very well in a debate,” said Smith.
Speaking of debates, Cruz might find himself facing off against a former IRS commissioner, Mark Everson, who is also running for the Republican nomination (see Former IRS Commissioner Everson Running for President). “I have a feeling Mr. Everson probably knows a little bit more about the IRS and the tax system than Mr. Cruz,” said Smith.
Bill Smith of CBIZ MHM has an answer to Ted Cruz's proposal, "Imagine abolishing the IRS," as he poses in front of the John Lennon Wall in Prague on New Year's 2015.
Best and Worst States Where Taxpayers Can Get Help from Accountants
BY MICHAEL COHN
The consumer finance site Wallethub has ranked the best and worst states across the country where taxpayers can find accountants to help prepare their taxes.
To identify the sweetest spots for tax assistance, WalletHub compared the 50 states and the District of Columbia in terms of six key metrics—ranging from the number of accountants per 1,000 people to their average workload and hourly compensation. In some cases, there were ties, indicated by a T followed by the ranking.
Best States for Tax Help
1 North Dakota
3 District of Columbia
9 New York
Worst States for Tax Help
T-42 West Virginia
48 North Carolina
WalletHub’s research found that 57 percent of people pay someone to prepare and file their return. There is an average of four accountants per capita in the U.S., with each handling roughly 225 returns. The number of accountants per 1,000 people is 10 times higher in D.C. than in Mississippi. The percentage of filers paying for tax help is 2 times higher in New York than in Washington. The number of returns filed per accountant is seven times higher in Mississippi than in D.C.
The number of accounting job openings per 1,000 people is also 66 times higher in D.C. relative to the Magnolia State. The number of filers who made “math errors” in 2013 was 2.3 million.
For the full report and state rankings, click here.
Some Tax Pros Fine Procrastinating Taxpayers
BY SUZANNE WOOLLEY
On March 31, anyone who hasn't filed their taxes yet might reassure themselves that two whole weeks remain. Some tax professionals see it differently and act accordingly: To encourage people to file early, some accountants and tax preparers are offering discounts for early filers, raising fees for latecomers, and even employing a few scare tactics.
Anil Melwani, a CPA and founder of 212 Tax & Accounting Services, starts with a carrot—a 10 percent discount to clients who hand in their documents or come in before the end of February. About 25 percent of clients take advantage of the discount, he says. He also sets an early deadline for clients who want returns filed by April 15. This year, they had to turn in their forms by March 21, 10 days sooner than the March 31 date he used in prior years—after too many clients were showing up in April.
Some accountants set deadlines even earlier. Marilyn Niwao, a CPA and president of the National Society of Accountants, tells clients that if all their tax information isn't in by March 15, their returns may require an extension, which means a more costly return because she'll have to estimate the tax due.
Melwani's goal is to encourage clients to file early. Still, if someone comes in around now and he can't help, he may enable some procrastination. "I generally don't like to advertise it, but if you're owed a refund, you can wait to file for three years from April 15, 2015, and there's no penalty," he says. There's no need to file an extension—you're basically penalizing yourself by not getting the money due you in a timely manner.
Taking that option can backfire, though. One wealthy client of CPA Mark Albaum didn't file returns for several years, though he made quarterly estimated payments all along. "He just couldn't get his paperwork together, or had a fear of getting his paperwork together," says Albaum. When the client finally filed, he found he'd been paying too much in his estimated payments, but it was too late to collect a $1 million refund. "He wasn't happy, but he understood it was something he did, and it was the price he paid," says Albaum.
In addition to that good, if unlikely, cautionary tale, Albaum also uses the stick approach, letting clients know that the later their information comes in, the higher his fee. Procrastinators who come in around now could pay as much as 20 percent more. He also makes sure that clients know about the severe penalties for filing late if they owe money. The late return penalty is 5 percent of what's owed, plus interest, if a filing is one month late; 10 percent for two months; 15 percent for three months, and so on—up to 25 percent in the fifth month. After that, the rate of increase drops and by the seventh month, the rate is 26 percent, he says.
In extreme circumstances, some CPAs resort to pleading. One year, Barry Kleiman, principal at Untracht Early, was expecting his first child, and his wife's due date was Oct. 9. He had one client who always filed for an extension and then procrastinated further until October 15 to file. Kleiman appealed to his client's sense of family, asking him to send in any outstanding tax information promptly—and he did. Kleiman's daughter was born on Oct. 15. "We joke that she waited for me to finish tax season before arriving," he says.
Taxpayers Gone Wrong
Tax pros share their clients’ worst ideas about taxes
Overflowing shoeboxes and a lack of basic documents aren’t the only things taxpayers bring into their tax preparers this time of year: They also bring along some pretty ridiculous ideas about the tax system.
We interviewed a number of tax pros about strange client misconceptions they’ve encountered; you can read the full story here; in the meantime, we’ve collected some of our favorites here, as well as some suggested by readers in response to our original story.
Income taxes are unconstitutional
Many taxpayers are either unaware of -- or simply don’t believe in -- the 16th Amendment.
Getting a refund means they didn’t pay taxes
Some taxpayers believe that a refund is an indication that they didn’t pay any taxes; more often, it means that they had too much deducted from their paycheck.
‘Cash’ is not income
Oh, but it is – it really is.
If you’re older than 70, you don’t have to pay taxes
The actual age cited may vary, but a disturbing number of taxpayers believe that there is some magic age after which you are exempt from taxes. There isn’t – not even death is a bar to some taxes.
Social Security cancels taxes
On a closely related note, some taxpayers think that once they start drawing Social Security, they no longer have to pay taxes or file a return – but they’re only safe from taxes if they have no other income besides the Social Security benefit.
Pets are dependents
Many taxpayers want to deduct their dog or cat, but they’re not dependents – just mooches.
Tax preparers work for the government
While some clients want their tax pro to cheat on their behalf, others go to the opposite extreme, believing that their preparer works for the government or on the government’s behalf. While some of the due diligence requirements forced on tax pros recently don’t help this impression, the fact remains that a tax pro can be a taxpayer’s best friend, and their best advocate with the tax authorities.
The Jan. 31 deadline
Some tax pros report having clients who think that if they didn’t receive a W-2 or 1099 form by Jan. 31, they don’t need to include it in their return.
Notary publics are tax professionals
This one was brand-new to us – but it speaks volumes about the public’s understanding (or lack thereof) of who tax professionals are and what they do.
No refund, no fee
This is probably the most pernicious taxpayer misconception: the idea that if you don’t get a refund, you don’t have to pay you
Tips for Filing an Amended Return
Have you found that you made an error on your federal tax return? If so, you may need to file an amended return. Here are ten tips that can help you file.
1. Tax form to amend your return. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct your tax return. You must file a paper Form 1040X; it can’t be e-filed. You can get the form on IRS.gov/forms at any time. See the Form 1040X instructions for the address where you should mail your form.
2. Amend to correct errors. You should file an amended tax return to correct errors or make changes to your original tax return. For example, you should amend to change your filing status, or to correct your income, deductions or credits.
3. Don’t amend for math errors, missing forms. You normally don’t need to file an amended return to correct math errors. The IRS will automatically correct those for you. Also, do not file an amended return if you forgot to attach tax forms, such as a Form W-2 or a schedule. The IRS will mail you a request for them in most cases.
4. Most taxpayers don’t need to amend to correct Form 1095-A, Health Insurance Marketplace Statement, errors. Eligible taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.
5. Time limit to claim a refund. You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. That means the last day for most people to file a 2011 claim for a refund is April 15, 2015. See the Form 1040X instructions for special rules that apply to some claims.
6. Separate forms for each year. If you are amending more than one tax return, prepare a 1040X for each year. You should mail each year in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. Check the form’s instructions for where to mail your return.
7. Attach other forms with changes. If you use other IRS forms or schedules to make changes, make sure to attach them to your Form 1040X.
8. When to file for second refund. If you are due a refund from your original return, wait to get that refund before filing Form 1040X to claim an additional refund. Amended returns take up to 16 weeks to process. You may spend your original refund while you wait for any additional refund.
9. Pay added tax as soon as you can. If you owe more tax, file your Form 1040X and pay the tax as soon as you can. This will stop added interest and penalties. Use IRS Direct Pay to pay your tax directly from your checking or savings account.
10. Track your amended return. You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is on IRS.gov or by phone at 866-464-2050. It is available in English and in Spanish. The tool can track the status of an amended return for the current year and up to three years back. To use ‘Where’s My Amended Return?’ enter your taxpayer identification number, which is usually your Social Security number. You will also enter your date of birth and zip code. If you have filed amended returns for multiple years, you can check each year one at a time.
What to Know about Late Filing and Late Paying Penalties
April 15 was the tax day deadline for most people. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will usually owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. Here are eight facts that you should know about these penalties.
1. Two penalties may apply. If you file your federal tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.
2. Penalty for late filing. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.
3. Minimum late filing penalty. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.
4. Penalty for late payment. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.
5. Combined penalty per month. If the failure-to-file penalty and the failure-to-pay penalty both apply in any month, the maximum amount charged for those two penalties that month is 5 percent.
6. File even if you can’t pay. In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. Use IRS Direct Pay to pay your tax directly from your checking or savings account. You should try other options to pay, such as getting a loan or paying by debit or credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.
7. Late payment penalty may not apply. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.
8. No penalty if reasonable cause. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014.
10 tools new college grads need to land a job
BY SEAN MCCABE
With graduation right around the corner for the nation's college seniors, landing that ever-important first job should be the first order of business off-campus. However, a résumé shouldn't be the only weapon at a job-seeker's disposal.
Ford Myers, a career coach, speaker and author of Get The Job You Want, Even When No One's Hiring, says the résumé is just one of many "tools" a job seeker should have in his or her "Job Seekers' Tool Kit."
"Unfortunately, most people don't know what these other tools are or how to use them. By integrating other elements into the job search - and not relying solely on your résumé - you can add power, professionalism and flexibility to your efforts," states Myers.
To stand out from the crowd, Myers suggests the following 10 items every new college graduate should have in their "Job Seekers' Tool Kit:"
- 1. Accomplishment Stories: Write five or six compelling stories about school or work-related tasks about which you feel proud.
- 2. Positioning Statement: Prepare and practice a "15-second commercial" about who you are, what you've done in the past (academically and professionally), and the particular strengths you can contribute to an employer.
- 3. Professional Biography: Write an impressive, one-page narrative of your career in the "third person" - as though someone else wrote it about you.
- 4. Target Company List: Make a "wish list" of adjectives that would describe your ideal employer, such as size, location, industry, culture, environment, etc. Then research specific organizations that meet those criteria, and put them on a list of 35 to 50 "target companies."
- 5. Contact List: Compile a list of all the people you know personally and professionally. Remember that approximately 80% of new opportunities are secured through networking - so this list will be critical.
- 6. Professional/Academic References: List colleagues or professors who would "sing your praises" if asked about you. Contact each of them, and get approval to use their names on your list of references.
- 7. Letters of Recommendation: Get letters from four or five respected business colleagues or academic associates, which should be printed on their business or professional letterhead, and signed by the writers. Leave out date and salutation.
- 8. Networking Agenda: Write-out a full networking agenda so you'll know exactly how to manage the networking discussion - how it flows, subjects to cover, what to expect, how to react to the other person's comments, etc.
- 9. Tracking System: Keep a detailed record of your job search activities, including phone calls, meeting notes and correspondence. This is essential to keeping your process organized and productive.
- 10. Résumé: It's the last on the list, but still indispensable. And, it has to be GREAT. Be sure your final résumé is carefully edited and succinct (no more than two pages) with a layout that is easy for the eye to follow.
Myers adds, "It may take some time to produce these documents and to learn how to use them effectively, but it will be worth it. Building a satisfying career is much easier when you have the right tools!"
For more information on Myers and his book, visit his site here.
Swiss Banks Preach Transparency in U.S. Tax Evasion Endgame
BY GILES BROOM AND DAVID VOREACOS
Swiss banks, for decades the bastions of secrecy, are preaching the virtue of transparency to their U.S. clients as they try to head off billions of dollars in potential fines for helping Americans evade taxes.
Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman.
As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t —and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted.
“Until they have a signed and sealed deal, they’re doing whatever they can to minimize the penalty,” said Jim Mastracchio, a Washington-based lawyer at BakerHostetler serving as an independent examiner to a bank in the program. “Some of the larger banks underestimated the time and energy required to identify and notify clients.”
On March 30, BSI SA became the first Swiss bank to reach a deal with the U.S. government, agreeing to pay $211 million for 3,500 accounts that held $2.8 billion in 2008. As part of the agreement, BSI, based on the shores of Lake Lugano, admitted to using coded language and fake identities to help customers duck taxes.
The U.S. wants to conclude all cases this year, Acting Assistant U.S. Attorney General Caroline Ciraolo said when she announced the BSI deal. The program, introduced in 2013, has dragged on longer than expected. Investigators had set a September 2014 deadline for banks to give client lists to the Justice Department as they argued for lower penalties.
The U.S. assault on offshore tax evasion has dealt a heavy blow to the bank secrecy that has helped Switzerland become the world’s largest center for offshore deposits. The country manages about $2.3 trillion for clients who don’t reside there, according to estimates from the Boston Consulting Group.
As they prepare to reach a settlement, some banks are pressing American clients to forgo their rights to secrecy under Swiss law, according to draft letters and agreements prepared by the firms and seen by Bloomberg. One such agreement, drawn up by the Royal Bank of Canada’s unit in Geneva, is available online.
Swiss law bars banks from revealing client names without their consent. While U.S. authorities can request names through a tax treaty with Switzerland, the Swiss government is obliged to comply only with very targeted requests under terms agreed on by the two governments. The Justice Department program helps the U.S. gather more information to make such demands from the Swiss authorities.
Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.
“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.”
Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest.
As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say.
In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence.
“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls.
Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program.
“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”
Firms in the program, which constitute about one-third of the 280 Swiss banks, include Cie. Lombard, Odier SCA, Geneva’s oldest bank, Rothschild Bank AG of Zurich, and Union Bancaire Privee, which acquired the international arm of U.K. private bank Coutts from Royal Bank of Scotland Group Plc in March.
Deutsche Bank AG and EFG International AG, controlled by Greek billionaire Spiro Latsis and his family, are also included.
Kilian Borter, a spokesman for Rothschild Bank, said the firm has contacted clients urging them to be tax compliant. Officials for Deutsche Bank, EFG, UBP and Lombard Odier declined to comment on specific measures they are taking.
The program requires banks to pay 20 percent of the value of undeclared accounts on Aug. 1, 2008, 30 percent for accounts opened between then and February 2009 and 50 percent for those opened later.
Banks are not necessarily aware of an account’s tax status, forcing them to contact clients to find out.
UBS Group AG, Switzerland’s largest lender, avoided prosecution in 2009 by paying $780 million and turning over account data. The main banking subsidiary of Credit Suisse Group AG, the country’s No. 2 bank, pleaded guilty last year, paying $2.6 billion. Another dozen or so banks are under criminal investigation and aren’t eligible for the amnesty.
Client lists are confidential and lawyers declined to reveal names. They include doctors, jewelers, widows and billionaires, court records of more than 100 people convicted of tax crimes in the U.S. since 2008 showed. One client referred to as “Client 6” had nearly $300 million in assets, a November indictment of Swiss banker Martin Dunki said.
After BSI, more settlements could be concluded in the next few weeks, and then recur weekly, allowing companies to put the issue behind them, said Tomasz Grzelak, analyst at MainFirst Bank AG in Zurich.
“They’re ready to sign an agreement so the final big issue is tackling the size of the fine,” said Milan Patel, a lawyer with Anaford AG in Zurich. “The larger banks are going to take a long time to resolve matters as the penalties are going to be huge.”
—With assistance from Jan Schwalbe in Zurich.
Taxpayers Are the Craziest People
Tax preparers share their clients' strangest misconceptions
BY JEFF STIMPSON
It's amazing what clients can walk in with: overflowing shoeboxes, demands for a refund in cash, insistence that you do their return before all others. Taxpayers try to deduct everything from unborn children and kids' weddings to speeding fines, groceries and massages. Many also walk around with some pretty wacky ideas about filing and taxpaying.
"That they don't have to pay any income taxes," said Becky Neilson of Neilson Bookkeeping in Sheridan, Calif., "as the taxes are unconstitutional."
Enrolled Agent Martha Nest of Westview Tax Services, Bardstown, Ky., also recalled:
- "If I get a refund, I didn't pay taxes!"
- "'Cash' is not income."
- "I don't have to pay taxes if I have an S-Corp," and,
- "Commuting is using my vehicle for business."
Added San Antonio-based CPA Susana Lozano:
- Being a notary public is synonymous with being a tax professional;
- Having a CPA prepare your taxes ensures you a higher return; and,
- High-income individuals ($1 million of revenue or more) should not pay more than a 20% marginal tax rate.
"That if you're older than 70, you don't have to pay taxes," added New York-based preparer Maurice Trauring, "and 90% of my clients want to deduct their dog or cat."
Another misconception: That a preparer, if things go wrong with tax authorities, can't be the client's best friend.
The favorite taxpayer statement of Donna Sue Henderson of Bristol Tax and Accounting, Bristol, Tenn.: "'I can't pay their taxes 'cause then the government will have all my money.'"
"I find that funny," Henderson said, "because the alternative is to not pay and then have the IRS assess late-payment fees and penalties - and sometimes something worse." Her advice to clients creative and otherwise? "Just pay what you owe before it all snowballs out of control and the IRS starts levying."
'Won't come after them'
Certain types of filing sometimes occasion wrong ideas. For example, Jeffrey Schneider, an EA at SFS Tax & Accounting Services in Port St. Lucie, Fla., finds the biggest misconceptions stem from a detail of business filing. "A client on the cash basis wants to write off a bad debt when a customer doesn't pay," he said. "It's foreign to them that since they didn't record into income, they cannot get the write-off. Another is a loan on a business asset: When I don't deduct principal, they have a hard time understanding cash expenditure and cash expense."
"Clients with inventory ask, 'How do I show a profit when I do not have any cash?' After a 10-minute explanation, they get it. They don't like it," Schneider added, "but they get it."
Government benefits are another patch of thick woods. Clients believe "that once you begin to draw Social Security, you no longer have to pay taxes or file a tax return," said Melissa Bowman, an EA with Bradford, Ohio-based Rainbow Accounting Services. "This is only the norm for those who have no other income besides the Social Security benefit. Another is that people tend to think that if they file an extension, they will be safe from an audit."
Straightening them out
Speaking of government, clients sometimes feel "that if they don't file their returns that the IRS will never catch up to them," said Kathleen Fitzpatrick, owner of Padgett Business Services, Princeton, N.J. "I have prospects who have gone five or more years without filing and who really think nothing of it or who feel that the government won't come after them because it's likely a small amount of money."
"One of the funniest things new clients think is that if they didn't get a W-2 or 1099 by Jan. 31, they don't need to include the forms with their return," said Douglas Lindgren of Lindgren's Tax Service in Brooklyn Park, Minn. "We straighten them out accordingly."
Five Key Tax Tips about Tax Withholding and Estimated Tax
If you are an employee, you usually will have taxes withheld from your pay. If you don’t have taxes withheld, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you are self-employed you normally have to pay your taxes this way. Here are five tips about making estimated taxes:
- When the tax applies. You should pay estimated taxes in 2015 if you expect to owe $1,000 or more when you file your federal tax return next year. Special rules apply to farmers and fishermen.
- How to figure the tax. Estimate the amount of income you expect to receive for the year. Also make sure that you take into account any tax deductions and credits that you will be eligible to claim. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
- When to make payments. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 15 and Sept. 15 in 2015, and Jan. 15, 2016.
- When to change tax payments or withholding.
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