Protecting Your Identity

Scary Identity Thief

Photo by David Goehring on

With your name, birth date, and social security number, I can ruin you.  Now I wouldn’t– I have laws to follow and a code of ethics too, but basically those are all the tools an identity thief needs to ruin your life.

Scary isn’t it?  And how easy is it to get that information?   Got a Facebook page?  There’s your name.  Did you post your birthday on it for all your friends?  That’s two.  The social security number is harder to get—or at least it should be.

Do you have a driver’s license that uses your social security number as the ID number?   Do you keep your social security card in your purse?  Both of those practices are extremely dangerous.

Why am I obsessing over identity theft in my tax blog?  It’s a really hot issue in taxes this year.  Fake tax returns reflecting huge refunds have risen exponentially, and the IRS is having a hard time fighting the phenomena.  I’ve written about children’s identities being stolen for tax returns before, but the issue of adult identities being stolen is what has really caused problems this past season.

Here’s the thing:  A fraudulent tax return gets filed in your name with a large refund.   You go to file your taxes, maybe you even owe, but you can’t file because your identity has already been claimed.  Next thing you know, you’re under criminal investigation for tax fraud.  Ugly, isn’t it?  You don’t want this to be you.

What can you do?   Prevention is the best.  Guard your social security number like your life depended upon it.  It does.  Take your birthday down from your Facebook page.   My apologies to everyone who’s sent me requests to sign up for the birthday club—sorry, I just won’t do it.

If you do get hit, be sure to report it right away.  Even if the police will do nothing about your case, you’ll have the fact of reporting it on file.  If you’ve been the victim of identity theft for tax purposes, you’ll need to fill out the IRS Identity Theft Affidavit, Form 14039.  Here’s a link to get it:

Even if you haven’t been affected by tax identity theft, if your purse has been stolen and your social security number is at risk, you should contact the IRS before a problem comes up.  You can call this number for assistance:  1 800-908-4490.  That’s the IRS Identity Protection specialized Unit.  They can take steps in
advance to protect your account.

I worked on an identity theft case years ago, before it was a common problem.  It was a nightmare—because not only had the man’s identity been stolen, but the IRS was charging him with fines, penalties, and tax fraud for getting a huge tax refund for claiming some children that weren’t his.   It all started with an IRS letter asking him if Billy and Susie were his children.  He responded back saying , “No,”  he didn’t have any children at all.  He wasn’t thinking about identity theft, he was thinking that maybe an old girlfriend was trying to pin paternity on him for some kids that weren’t his.   He had no idea that it was the beginning of a tax problem that took over a year to solve.

He hadn’t filed a tax return for that year due to lack of work, so he was a good candidate for identity theft.  Once the IRS determined that the return as fraudulent, they weren’t looking for someone else—they went to my client who happened to have the name and social security number on the tax return.   Like I said, it was a nightmare.

So be careful.  Protect yourself and your social security number.  You’ll be glad you did.

What if I Win the Lottery?


Photo by John Russell at

I recently received a question from a reader about winning the lottery.  His question was, “If I win the lottery, will I have to pay the Alternative Minimum Tax?”  My answer to that question was, “probably not” because under most circumstance it wouldn’t appy–but the idea of winning the lottery is so fun, I thought I’d do a whole post about it.

First, a couple of things you should know. If you plan on claiming a lump sum on the prize, you’ll get about half of what the advertised pot is.  So if the prize is a million dollars, and you take the lump sum, you’ll only get $500,000– that’s not including taxes.
There’s a deadline to being able to claim a lump sum–here in Missouri it’s 60 days, otherwise you’re automatically getting the annuity payments that are spread out over 25 to 30 depending upon which lottery you win.
I’ve actually gotten to help with two different lottery winners, one had a $100,000 win and the other had $1,000,000. Both took their money in lump sum payouts.
Neither was one of my own clients, I was just called in for a consultation, but they were still really fun to work on.
Let’s say you win the Missouri Lotto and will take home a lump sum of one million dollars.  Before you get the cash, the Lotto commission will withhold 25% for your federal taxes and another 4% for your Missouri taxes.  Your take home check will actually be $710,000.
The first thing you need to know is that the actual Missouri tax rate is 6%, so you’re going to want to make an estimated tax payment of another $20,000 before you go spending your money.  Now you’re down to $690,000.
Now on your federal return, you’re bumped up to the 35% tax bracket. You’ll get a deduction for the $60,000 you paid to the state and you’ll get credit for the $250,000 they withheld for federal taxes, but you’ll still owe another $55,000 to the feds when all is said and done.  So now your million dollar windfall is now only worth $635,000. (I’ll still take it, thank you very much.)
Now you’ve got some options here.  Personally, I’d want to take my money, pay my taxes, and have it be mine to do with as I want.  Maybe I give money to the relatives, maybe not.  My decision.  But I have a friend who knows that if he wins, it gets split 10 ways among family members.  He’s got a choice to make.
He can claim his ticket, pay the taxes, and then gift each of his other family members $63,500.  He wouldn’t actually owe gift tax on that money, but he would be required to file gift tax paperwork which would cost him something there.
Or, he could present the ticket as a group winner–with each of the family members being able to claim $100,000 in winnings.  And, each member could also chose the annuity option if they desired (which would double the payout.)  Because he knows this is what he’s going to do–it makes a lot of sense–the $100,000 win keeps him in the 25% tax bracket which saves the group $55,000 right off the top.  It also keeps him from preparing gift tax returns too (which is just kind of annoying.)
So what about the annuity payout option?  That would be $2 million dollars paid out over 25 years. (Remember, if you take the lump sum it’s half of the total so your million dollar lump sum example was a $2 million dollar win.)  This works out to a cool $80,000 a year.
The Lotto agency would still withhold 25% federal taxes and 4% state taxes leaving you with a take home check of $56,800 a year for 25 years.  You’d still want to pay Missouri an extra $1100 to cover your taxes, but your federal withholding should be sufficient.   Using this option, after 25 years you would have received $1,392,500 free and clear.  Sweet.
No matter whether you take the cash now or later, make sure you prepare for the taxes that go with it before you spend all your money and you’ll come out a winner.  Good luck!

EIC and Your Family Tree: What Counts as a Qualifying Child?

Qualifying child is an IRS term for claiming a dependent.

Family consists of the people we love, but the IRS definition of family is very strict based upon relationship. When filling out your tax forms, remember you need to use the IRS definition of family to claim dependents.


Some people honestly don’t know who does and who does not count as a qualifying child for EIC and they mess it up.  But one of the most common types of EIC fraud is someone claiming a child that does not belong on his income tax return.  If you make an honest mistake, the IRS agent is probably  going to assume you’re committing fraud anyway.  So I’m here to keep you out of trouble.

I come from one of those families where we use phrases like, “first cousin once removed.”  When I was a child I remember going to a wedding reception and playing all evening with my “cousin”, only to be told later that she wasn’t a cousin, she was my “father’s half-brother’s step daughter.”  (Yeah, do the calculation, in any normal family your uncle’s kid is a cousin, right?)

I married into a family that is “we’re all one big happy”.  We don’t have steps, or in-laws, or halfs, we’re all brother, sister, mom, cousin, etc.  I think most people are somewhere in between.  But what we’re dealing with today is the IRS version of family and the IRS version of family  goes like this:

Let’s start with you.  You are the center of the universe and all family members revolve around you.  What we’re trying to figure out here is what counts as a Qualifying Child for you—this eliminates all parents and grandparents and members of their generation.

You may count your brothers and sisters.  You must be older than your brother or sister to claim them (unless they are physically or mentally disabled.)   You can also include step brothers and
sisters, and half brothers and sisters, and adopted brothers and sisters.

A step sibling means that your parent married somebody else who had kids.  There is no blood relation, but there is a marriage license.  If your parent did not marry the other person, even though you all live together and think of yourself as one family unit, there is no IRS relationship.

A half sibling means that one of your parents had a child with someone other than your birth mother or father.  Let’s say your mom had you and then left your dad for someone else and had a child—that child is your half sibling—you two share half of a gene pool.  The counts with the IRS.

Adopted siblings are just that—they’re adopted.  There will be court records showing that they were adopted and part of your family.  Adopted children are always treated like natural born children for IRS purposes.

These people are all on your even level of the family tree.  Imagine you’re standing there with your arms straight out with your brothers and sisters side by side—this is your generation.

Down below your generation is your son, daughter, step child, foster child or a descendent of any of them, for example grandchildren or great grandchildren.  Additionally, any descendents of your  generation—those are your nieces and nephews (or great nieces and nephews.)    So let’s say your half brother adopts a child and he dies and you’re raising that child—that counts as your qualifying child for EIC purposes because he is your nephew.

A foster child is a child who has been placed by an authorized placement agency in your home or by a judgment or decree or court order.  No matter what, a foster child has some legal paperwork involved.  If your neighbor runs off and leaves her kid behind and you wind up raising her, she doesn’t count as a foster child until the courts come in and say she’s a foster child.  This is one of the most common mistakes people make—claiming children they’re taking care of as foster children without the court documents to back it up.  Without that legal piece of paper, the child is not a foster child.

Cousins are never qualifying children for EIC purposes.

Small Business: Proving You Have Income Without a 1099-MISC

Good records will prove your income to the IRS.

For some small businesses a simple wire bound receipt book is all you need to substantiate your income.



Now some people may be wondering, “Why would I want to prove I have more income than I have to?”   But for many small business owners, that’s exactly the problem—you have income, you want to report it to the IRS, and you’re having a hard time proving it.  This post is for you.


The number two reason for reporting your non-1099 income  (number one of course being basic honesty) is qualifying for the Earned Income Tax Credit.  2011 sort of hit small business owners who normally qualify for EIC with a one-two punch.  We had the new 1099 reporting requirements that upped the ante for so many businesses, and we had the new EIC tax preparer due diligence rules with one of the questions being “Do you have forms 1099-MISC to support the income?” With the next  question being, “If not, is it reasonable that the business type would not receive Form 1099-MISC?”  Here’s a clue:  if you answered NO to the first one, you have to answer YES to the second.


So what types of businesses wouldn’t normally receive a 1099?  Bunches of them!  Face it, if you’re reading this—I’m guessing that your business doesn’t receive 1099s.  Generally, it’s reasonable to expect that anybody who works for other people, as opposed to other businesses, would not receive a 1099.  House cleaners, dog walkers, handymen, lawn mowing services, daycare  providers, interior decorators, and even income tax preparers are all types of business that could easily never see a 1099.   (Yeah, me too!  Although I’m now getting 1099k forms because I take credit cards, I don’t get 1099-MISC for preparing personal tax returns.  Maybe I’ll see some 1099-MISC forms from some of my business clients this year, but I never used to get them in the past.)


So, how does a small time personal service provider prove his or her income to the IRS?  There are a couple of things you can do.  I’m going to start with my favorite:  the business bank account.  This is what I do and several of my clients do it too.   (Okay, because I’m their accountant and this is what I tell them to do.)   Get an Employer Identification Number (EIN) for your business and set up a separate bank account for your business in your business name.  Only business income goes in, only business expenses go out.  You may have to put some of your own money in for a start up, and once you’re making money you’ll take out a draw, but you’ll label those as such.  Other than those two items, your business checking account is pretty much your profit and loss statement as well.  Now for a bigger company that would be over simplifying things, but for us little folks–I’m spot on.  See this post for more information about getting an EIN number:  Free EIN


Why does this make good proof?  Because you’ve got a monthly record of your income and expenses.  I also have deposit slips to back it up:  Mary Jones paid me $200, Fred Smith paid $250.   It’s a good solid audit trail.  Here’s another post about bookkeeping and your business bank account:  Banking and Bookkeeping


But what if you don’t have a separate account?   Maybe your business is just too small to bother with the expense of an extra account.  What if you’ve just got something really simple like watching the little neighbor kid for a couple of hours after school every day.  There’s no contract, no business cards, no advertising.   You get $100 a week from your neighbor friend.  She pays you in cash—it never sees the inside of a bank because that’s your grocery money.   It’s not much but it supplements your child support.  How do you prove that kind of income?


The easiest way to prove your income if you provided child care is to have the person you provided it for claim your services on their tax return.  You make them a daycare receipt, just like the ones regular day cares do showing the name of the child, how much they paid you and your EIN number.  (You can use your social security number but I never recommend that.  You can get an EIN number for free.  Protect yourself.)  This is doubly good because the IRS will get confirmation of your income from an outside source.  You prove income, your customer gets a tax deduction, it’s a win/win situation.


But what if your business isn’t day care?  What if you did something like mow lawns around the neighborhood and shoveled snow in the winter?  Nobody’s going to be claiming you on their tax return, what can you do?  In your case, I like receipt books.  You can find different kinds at Office Max or any office supply store.  I like the ones with a carbon copy—one for you, one for your customer.


Now if you have just one customer and you’re always going to the same place—you can just use the little one that just has a couple of lines and the amount on it.  You might write, “Mowing, Mr. Jones, $30, 5/15/2012” on it.  You know what you did, who you did it for, how much you got paid, and when.  If you have multiple customers you’ll want the larger receipt books that include the address and phone number of the customer.  If you do different types of jobs for different people, you might need the bigger ones so you can write down the type of work that you did for them as well.


You don’t have to have a 1099-MISC to prove your income to the IRS.  You just need to have a system in place to document your income and you’ll be fine.

Stolen Children

Imagine being a parent, raising a family, taking your kids to school, making their breakfast, tucking them into bed at night and basically doing all of the everyday kinds of things that parents do for their children.  Then you go to file your tax return and you are notified by the IRS that someone else has already claimed your children on their taxes.  How can this happen?
UPDATE:  Effective January 1, 2016 The IRS will now require Identity Theft protection PINs for dependent children who have been victims of identity theft.  Thank you!
I had always thought that cases like this were caused by divorced parents behaving badly, and to be quite honest many times that’s exactly what it is.  But after I did a post about what you should do if someone else claims your child, I started receiving numerous posts, e-mails and phone calls about how for some people, this happens to them year after year after year.
One form of recourse the IRS has is to ban a person from claiming the Earned Income Tax Credit for three to eleven years if the person fraudulently claimed a child on a tax return.  You would think that would solve the problem–except, as I’ve since discovered, it does nothing to stop true fraud.  Although the original guilty party may not be able to file an EIC claim at all–it doesn’t prevent him or her  from selling the child’s social security number on the black market to be used for fraudulent tax returns.
So who’s harmed by this fraud?  Well obviously, the parents of the children who’s identities are stolen, and the children themselves.  But also you!  According to the IRS, there is approximately $12 to $14 billion dollars of EIC Tax fraud every year.  $14 billion that’s coming out of your taxpaying pocket.
We’re talking about some serious fraud here.
In a normal case, the wrong parent claims a child, IRS notices go out, the issue is settled and the offending parent pays back the taxes while the rightful parent claim gets paid his or her refund.  While the system isn’t perfect, in theory it’s all good.
With a stolen child identity case, it’s genuine fraud.  The criminal steals the ID, creates a fake tax return–often under a fake identity, uses the child’s very real social security number to receive refundable tax credits, and then disappears off the radar before the IRS can catch him (or her.)  The IRS has to pay the real parent his tax refund–because it’s the rightful claim, but the money that went to the criminal is lost forever.
As an adult, if your identity is stolen and used in a phony tax scam, you can receive a PIN number to protect you for future tax filing.  Currently, there is no such protection for children.  And child IDs are extremely valuable to fraudsters–with a single child being worth thousands of dollars in federal refundable tax credits.
What can you do?  Please sign my petition to the Obama Administration to create a child identity theft protection PIN number for victims of child identity theft.  Basically I’m asking that anyone who has successfully defended a rightful claim for having their children on their tax return for two years in a row to be awarded a PIN number to be used in association with their child’s social security number in order to prevent fraudulent returns from being filed.
You can access the petition by clicking on this link:  White House petition  (Update, I removed the link and petition 10/10/2015, we got what we wanted.)
Why defend for two years instead of only once?  Divorced families often have conflicts over claiming a child and it’s fairly common to have an issue once in awhile.  Issuing a PIN after just one claim could wind up muddying the system worse than before.  If a family has defended the claim twice in a row– that’s a clearer indication of fraud and the need for protection is much more defined.
What happens if custody changes and the rightful parent is not the one with the PIN number?  If the parent with the PIN number doesn’t turn over the PIN along with the child’s custody, the new custodial parent will wind up paper filing their tax return and going through the same process of claiming their child as what happens currently.   The purpose of the PIN is to stop fraud, not completely end parental rights.  Please sign the petition today, and help stop child identity theft.
See also:  My Ex Claimed My Kid, Now What Do I Do?