Category: IRS

Posted on by Jan Roberg

Baseball Fans and Taxes: Christian Lopez and the Derek Jeter Ball

Derek Jeter

Photo by Keith Allison on Flickr.com

You’ve probably heard the story about Christian Lopez, the guy who caught Derek Jeter’s 3,000 career hit ball at Yankee Stadium and then was classy enough to return the ball to Mr. Jeter. He was rewarded handsomely by Yankee management with box seat tickets for the rest of the season, autographed balls and other merchandise. There’s been a lot of talk on the radio and in the media about the IRS going after Mr. Lopez for taxes. And while there are some really good articles out there already about the tax issue, I’ve decided to answer some of the actual questions people have been asking me because not all the stories running around out there are accurate.

I’ve heard that the IRS has already issued a bill to Christian Lopez for $10,000, how can they do that? That rumor isn’t true. There’s some speculation about how much tax Lopez will have to pay, but no bill has been issued by the IRS-they just can’t do that. The IRS will have to wait until April 15, 2012 to see any money from this event.

I’ve heard that Christian Lopez will have to pay a gift tax to the IRS for giving the ball to Derek Jeter. Why? First, that’s not true. But this is why people are talking about that: You can give a “gift” to someone with a value of up to $13,000 and not have to deal with any gift tax issues. People estimate that the ball Christian Lopez caught is worth between $275,000 – $300,000. Since Lopez gave it to Jeter, some people are erroneously calling that a gift. Even if they would be right about the gift, you can gift up to $5 million in your lifetime without paying tax on it—it just requires paperwork.

But I say it’s not a gift at all. Christian Lopez caught the ball and gave it back right away. Kind of like turning down a prize at a game show, he just gave it back so there’s no taxable transaction there. I’m from St. Louis. In 1998 when the fan returned Mark McGwire’s ball when McGwire broke Roger Maris’ single season home run record, the IRS did not require a gift tax return. That gives Lopez legal precedent.

But what about the tickets and stuff the Yankees gave him? Will that be taxed or is that a gift too? It would be nice if it could be considered as a gift, but it won’t. I’m pretty sure that the Yankees will issue a 1099 to Christian Lopez for the value of the tickets and merchandise he was awarded.

So he’s screwed no matter what? Not completely. One option is for Christian Lopez is to sell some of his tickets.

But if he sells the tickets, then won’t he have to pay tax on that money too? Only if he makes a profit. You see, because he’s paying tax for receiving the tickets then he has what’s called basis in the tickets. Say for example one of the tickets is worth $100 (I know it’s worth more than that, but let’s make the math easy.) Christian Lopez is getting taxed on receiving the full fair market price of the ticket, right? So it’s like he paid the full $100 for the ticket. So if he sells that same ticket for $100, he hasn’t made a profit on it, so there’s no tax on the $100 (because he’s already paid the tax on it). For you tax geeks, it would go on a Schedule D, just like selling stock.

Now it’s possible that Christian Lopez could sell his $100 ticket for $125. (Come on, really. Wouldn’t it be kind of cool to sit in Christian Lopez’s box seat? I think people would pay extra for that.) If he sells his tickets for more than their face value, he would be stuck paying taxes on the profit. That’s cool, make a profit and smile. If I were Mr. Lopez, I’d sell enough tickets to be able to pay the taxes and have fun going to as many baseball games as I could.

For more tax information about the Jeter baseball, this article at Accounting Web.com makes the most sense: http://www.accountingweb.com/topic/tax/jeter-baseball-fan-catches-bad-tax-advice

Posted on by Jan Roberg

Why Closing the Tax Gap Won’t Solve America’s Budget Crisis

Finding Company Tax ID

Photo by Calita Kabir on Flickr.com

According to reports from Washington, instead of raising taxes or cutting spending we could solve America’s debt crisis simply by going after uncollected taxes. It’s claimed that over $400 billion dollars a year go uncollected. The difference between what is actually collected on time and what the IRS believes should be collected is referred to as the “tax gap.”
While I am quite certain that there is a gap between what is owed and what gets paid, I am equally certain that the tax gap is significantly under $400 billion per year. Working from the other side of the table, I find it very rare that the amount the IRS claims someone to owe in debt is accurate.
One case I worked on involved a young woman who received an IRS notice stating that she owed over $2 million in taxes. Yes, two million dollars! Clearly, there was a mistake. Once we sorted the whole thing out, it turned out that she owed $13. That’s not a typo; the IRS said she owed $2 million when she really owed $13. How many more mistakes like that are out there?
Although the $2 million case is an unusual example, the taxpayers I work with who receive collection notices from the IRS often wind up receiving refunds after I’ve finished processing their paperwork. This is not because I’m some kind of master tax genius (although I‘d like people to think so), but merely because I’ve done the paperwork correctly.
The tax code has become so complex that even college educated professionals have trouble navigating the tax code. This is my job, I have training and experience, and it’s not always easy for me to interpret the tax code. Sometimes, even IRS personnel have trouble interpreting the tax code. I recently represented a taxpayer at an audit that was very focused on one item on the tax return. Although it was implied that the taxpayer had prepared the information “wrong,” there were no guidelines as to how to do it “right.” I asked the auditor, “Tell me how you want this done. I will do it.” She couldn’t answer me. Not because she was stupid or incompetent, but because there are no IRS guidelines for that particular issue (Yes, we won that audit).
One particularly galling point in the “tax gap” argument is a claim made by Benjamin Harris, a research economist at the Brookings Institution. He was recently quoted in an article in the St Louis Post Dispatch, “You kind of feel like a sucker as a wage earner. Here you are paying taxes because someone else is paying you, but if someone else is getting paid on their own, they pay taxes at half the rate.” As a self-employed business owner, this makes me furious. First, I pay taxes at a higher rate than Harris because I have to pay my self- employment tax over and above my regular tax rate. Additionally, as an employer, I pay my share of my employee’s FICA taxes, a benefit that Mr. Harris receives but appears to be blind to. To see the entire article, here’s a link: http://www.stltoday.com/news/national/article_890fa85f-c788-5a96-978c-d90edae37593.html?print=1
Are there people who cheat on their taxes? Certainly, and they should be caught and prosecuted to the full extent of the law. However, do not assume that all business owners cheat on their taxes. They probably don’t owe what the IRS says they do.

Posted on by Jan Roberg

Emails from the IRS

No-Spam logo

Photo by David Hegarty on Flickr.com

Did you get an email from the IRS? Maybe it said they owed you more money and they wanted your bank account number so they could direct deposit it. Or maybe it said that there was a problem with your return and they needed your social security number to verify they reached the right person.
Those emails are SPAM. Don’t open them, don’t click on the links, don’t open the attachments, and whatever you do, don’t send them any information.
The IRS is not going to send you an email asking you for information. If the IRS needs something from you, you’ll get a letter the old fashioned way. The only IRS e-mail that you might possibly receive is a form letter that says your electronic return was received (or rejected). It won’t say anything else.
The IRS will never ask you for your social security number by email; they already know it. They also know your bank account number, your date of birth, where you work, and a lot of other things. If you call the IRS, they might ask you those things—not because they don’t know the answers, but to confirm that they’re really talking to the person you say you are.
These fake emails may look very official. They often have the IRS logo on them. The links can be very deceiving. You’ll see something that says www.irs/importantmessage.com But if you click on it, it will take you someplace totally different. (Did you try clicking on that link? It took you to my Facebook page. Spammers can set up links to look like they’re real, but they’re not).
If you receive IRS spam, and have the presence of mind to do so, forward it to the IRS at phishing@irs.gov That’s a real IRS email address. This will give the IRS the opportunity to hunt down the criminals and put a stop to them. Don’t be mistaken: these phishers are criminals and they’re dangerous. If you don’t have the presence of mind to forward it, just delete it. It’s probably a good idea to run a virus scan on your computer too. Sadly, many of those IRS scam emails are booby trapped with computer viruses, some of them can even wipe out your hard drive.
I hate to sound so much like Chicken Little with the “sky is falling” routine, but I’ve gotten asked about these emails twice in two days. One person forwarded his email to me, fortunately my virus protection program picked up the problem before I opened it.
Remember, no matter how real it looks, no matter how official it seems; the IRS will never send you an email asking for personal information.

Posted on by Jan Roberg

IRS Liens

North African Ostrich / Masai Ostrich - female non-breeding (Struthio camelus)

Photo by Lip Kee on Flickr.com

 

Updated January 2016

Okay, so you owe money to the IRS and haven’t paid yet. You get a notice in the mail saying that the IRS has slapped a lien on you (the lovely form 668(Y) Notice of Federal Tax Lien). So what exactly does that mean?
A lien means that the IRS is claiming first dibs on your money if you sell something—like a house or a car. A lien is a legal document that goes through the courts. Your creditors; the mortgage company or the bank holding your car loan are publicly notified that you owe the IRS money.
Let’s say you owe the IRS $20,000 and the IRS places a lien for your tax debt and you sell your home. The IRS is in line to get its money before you get any of the profit.
The lien also goes on your credit report. If you’re trying to buy a new home or even get a credit card, the IRS lien may prevent you from obtaining credit.
How bad does your tax debt have to be before the IRS files a lien? It used to be that the IRS would file a lien once you owed over $5,000, but starting in February of 2011, they raised it to $10,000. If the IRS issued a lien on you under the old rules, they won’t withdraw it just because of the rule change.
So how do I get the IRS to withdraw a lien? Well, paying the tax is the most effective way to remove a lien.
What if I don’t have enough money to pay the tax? That’s harder, but not impossible. You’ll need to be in a payment agreement, but not just any payment agreement—you’ll have to have a “Direct Debit Installment Agreement” if you want to have the lien removed. Direct debit is where you give the IRS permission to take the money directly out of your checking account every month (as opposed to mailing them a check or you paying them online.)
If you want your lien removed, you’ll also have to meet some other eligibility requirements.
· First, the amount you owe must be $50,000 or less. If you owe more than that, you can’t apply to have your lien withdrawn until you’ve paid the debt down to that amount.
· Also, your Direct Debit Installment Agreement monthly amount must be large enough that you can pay off the full amount of your tax debt within 6 years. For example, if you owe $20,000, you’d take the $20,000 and divide by 72 months. You wouldn’t be able to release your lien for less than $278 per month.
· Don’t apply for a lien release until you’ve made at least three consecutive direct debit payments.
· You can’t have already gotten a lien withdrawal for the same taxes, meaning that if you filed for a withdrawal before and then screwed up later, you’re not getting it withdrawn this time.
· Also, you can’t have defaulted on your current, or any previous, direct debit installment agreement.
Okay, so I’ve done everything necessary, how do I get the lien withdrawn? You’ll need to file another form of course! It’s called form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Is that a mouthful or what? The name of the form is longer than completing the form itself. Most of the questions are easy, like your name and social security number. The only question that you need help with is number 8: what reason are you requesting the withdrawal for? You want to check box “b.” You entered into an installment agreement. That’s it. Here’s a link to the form: http://www.irs.gov/pub/irs-pdf/f12277.pdf
What if I can’t do all of this stuff? Then you live with the lien until things change. It’s a lien, not a levy. They haven’t garnished your wages, they haven’t grabbed your bank account. Now if you don’t shape up and get your taxes taken care of, that could happen in the future, but not if you stay on top of things and actively work with the IRS to get your debt taken care of.
Don’t play ostrich and bury your head in the sand. Trust me, the IRS won’t just go away. A lien isn’t good, but it’s not the end of the world. If your financial situation is that bad, perhaps you might be able to negotiate an offer in compromise or a reduced payment option. (This is a point where it might help to get professional assistance. Some people are perfectly comfortable with these negotiations, but most folks aren’t). The point is, you have to make the move to solve the problem. You must be in control (as best as you can). Generally, if you’re on top of things, the IRS will be much easier for you to work with.

Posted on by Jan Roberg

Reconstructing Tax Records: Getting Your Ducks in a Row

Trio of cheerful chicks

Photo by Ducklover Bonnie on Flickr.com

A few years back I represented a client who had lost all of his tax records in a flood.  He had excellent documentation of the flood, but the IRS didn’t care about that, they still wanted him to back up some items that he had deducted on his tax return from a few years back.  They wanted copies of receipts for expenses that he claimed on a tax return that was destroyed in the flood.  He filed the receipts with the return, everything was destroyed.

This year, with all the tornado damage across the Midwest, including my own neighborhood, it seems like reconstructing records is an important topic.

First the easy stuff:  You can get a copy of your tax return transcript for free from the IRS.  If you still live at the same address that was on your last tax return, you can do it online at:  https://sa2.www4.irs.gov/irfof-tra/start.do

If your address has changed, you will either need to fill out form 4506T, here’s a link to that:    http://www.irs.gov/pub/irs-pdf/f4506t.pdf or call the IRS at 1 800 829-1040.   

Not only can you get information about your tax return, but you can also get information from your W2s, 1099s, and 1098 forms if you need it.  Note: the IRS W2 information does not include your state tax withholding, this is really a problem if you’re having a state tax issue, but at least you’ll have a list of your employers and you can contact them if you need that.

So that gets you the information that the IRS already has about you in the first place, but how can you reconstruct documentation when all of your files have been destroyed?  One thing in your favor, although the IRS requires actual receipts during an audit, if you’ve been the victim of a flood or tornado or some event where your documentation is lost, they will allow you to prove you expenses some other way.  But don’t just walk into an audit and say, “My files were destroyed you’ll just have to take my word for it.”  We’re talking about the IRS, they don’t take your word for nothing.  You’ll have to show them that you put some effort to recreating your expenses and it had better look plausible.  So what should we look at?

  1. Bank Statements:  this is really easy if you have a business account and you run all your business expenses through that one account.  Even if you’re running your business expenses through your personal account, it still provides you with proof of payment.  Most banks let you access your statements on-line for free.  Some banks still charge a fee for old statements but they should at least be able to access them for up to three years back. 
  2. Credit card statements:  Once again, you can often get these online for free. 

Bank statements and credit card statements are your two biggest and best sources of expense documentation, not just for business expenses, but also for proving your charitable donations which is another expense item that’s often looked at.

After you’ve proven your expenses, you may need to recreate your mileage log.  That can be tough, but once again, if you don’t try you’ll lose the entire deduction.

  1. If you still have your appointment calendar, start from day one and figure out where you’ve been and Mapquest everything.  (I’ve done this with folks who hadn’t really lost their data, they never had a mileage log in the first place.  Technically you’re supposed maintain it on a daily basis, or at least at the end of each week.)
  2. If you’ve lost everything though, you probably don’t have your appointment calendar to work with.  You can check with your oil change company.  They keep records of your mileage at each oil change.  This will at least give you a baseline to work with.  (Hint:  if your oil changes show you put 12,000 miles on the car don’t try to claim that you drove 20,000 miles for business.)
  3. Once, for a client that had lost her mileage log, I was able to show the IRS that she routinely went to a certain store once a week for her supplies.  She had driven on some business trips to various cities and we could prove that from her credit card statements as she had made charges in Nashville, Indianapolis, and some other cities.  I used those charges to vouch for her mileage there.  Although I didn’t have a “perfect” log book, by pulling together that information, the IRS auditor allowed the entire mileage claim because it was reasonable for what the taxpayer was doing.
  4. If you are in the same line of work, you can take a 90 day sample of your daily business mileage and use that as a sample of what you normally do throughout the year.  The problem here being that you might not have the luxury of 90 days to pull a sample together.  If you have nothing else to work with, I would at least do a sample log for as long as you can—something is better than nothing.

The most far- fetched proof I ever provided to the IRS was for a client who was adamant that an expense that the IRS had disallowed was legitimate.  We couldn’t find a record of it in the bank statement, and it wasn’t something that would go on a credit card.  It was a very normal and logical expense for the business but I just couldn’t prove it.  (The company refused to provide my client with a new receipt because they were upset because she fired them.  Oopsie.)   Anyway, I pulled up the company’s web site and they advertised their prices on line.  I had printed out the website price list and the agent allowed the expense.  I don’t believe that would work under most situations, but once again, if you have nothing else to use it can’t hurt.

As you can see, reconstructing expenses for a tax audit is not fun.  (Okay, let’s be real, audits in general aren’t fun but they’re definitely easier if you have all your ducks in a row.)  Now might be a real good time to think about how you’re storing your important data.  Are you backing up to the “cloud”?  Maybe you copy your annual records to a jump drive and store that in your safe deposit box?  Or perhaps you have a fireproof box that you keep your records in?  It’s a good idea to plan ahead, just in case there is an emergency.

Posted on by Jan Roberg

Will I Go to Jail for EIC Fraud?

EIC Fruad

There’s a big difference between accidentally claiming your child and criminal tax fraud.

I often hear the question, “Will I go to jail if I cheat on my taxes?”  People see celebrities go to prison all the time, Richard Hatch, the guy who won a million dollars winning “Survivor”was been all over the news for awhile for tax evasion.  He spent four years in prison.   Note:  if you win a million dollars on national television, it’s safe to assume that the IRS knows about it and is looking for it on your tax return.  Other celebrity tax evaders include Wesley Snipes, Darryl Strawberry and Willie Nelson.  (And the list goes on and on….)

But what about EIC fraud?  What happens to you when you claim a child that’s not yours, or if you allow someone to claim your child when that person isn’t the parent?  What’s the punishment there?

If the IRS examines your return and finds that you cannot claim EIC, the worst case scenario would be that they impose “civil fraud” penalties on your return.  The penalty for civil fraud is 75% of your underpayment of income tax.

Say for example that you involved yourself in a scheme where you claimed children that didn’t belong to you over the course of three years.  The difference between what you received as a tax refund averaged $5,000 more each year than if you didn’t illegally claim those children for a total of $15,000 in excess refund dollars.  When the IRS catches up with you, they will demand their $15,000 plus another $11,250 for the penalty which would make your balance due $26,250.  Add to that the interest you’d be charged and you see how costly this is.

What makes this even worse is that if you are charged with civil fraud the IRS can then turn the case over to the Criminal Investigation Division for prosecution.  You could face both civil and criminal penalties at the same time—meaning they put your butt in jail, levy your bank account and put a lien on your house and any other property you own.

Most people who get caught for EIC fraud don’t have the money to pay back the tax owed, not to mention the added fines.  And of course, the higher the dollar amount owed to the IRS, the higher the likelihood of criminal charges.  So you really don’t want to hear the word “fraud” if the IRS comes calling.

But that’s the worst case scenario, fraud is pretty dangerous stuff, and they have to be able to build a case for it.  One of the key points of fraud is that you knew you were doing it.  I once spoke to a potential client over the phone, she had received an IRS letter and they were charging her penalties for fraud.  As she explained her case, she kept insisting that “she didn’t know.”   I thought there might be a case for her so I asked, “You mean you didn’t know it was wrong to claim someone else’s child?”  She said, “No, I didn’t know I could get caught.”  That’s not going to get you off of fraud charges.  I gave her the name of an attorney—if there’s a possibility of criminal charges, you’ll want the tax attorney over the EA or CPA.  (EAs and CPAs have client privilege for tax issues only, for criminal cases, only an attorney has privilege—meaning what you tell them, they can’t tell on you.)

In most cases though, a much more likely scenario is an accuracy related penalty—that would be 20% of the under-reporting.  Let’s say you live with your girlfriend, she has a kid, she said you could claim the kid; you don’t know it’s illegal but you get caught.  You’ll have to pay back the EIC plus the accuracy related penalty.  If the EIC difference was $5000, then you’d add another $1250 making the balance due $6,250.  The IRS would add interest to that as well.

Generally, if you lose an EIC audit, you’ll also be banned from claiming EIC for somewhere between 2 and 10 years depending upon the severity of the case.  That’s probably the worst penalty for most people.  Many of the people who get in trouble for EIC generally are able to claim EIC in other years.  Being banned from EIC for 10 years can cost a person over $50,000.  That’s a lot of money.

Accuracy penalties usually involve amounts of over $5,000.  If your EIC under-reporting is less than that, you’re more likely to pay “late payment” penalties which are equal to ½ of one percent per month.  For example, you file your return in February of 2008, in March of 2010 they catch up with you.  This means that the penalties have been adding up for 24 months, you’ll pay 12% for the penalty, plus the interest owed.  Let’s say you only got an extra $1000 for falsely claiming EIC, you’d have to pay back $1,120 plus interest of course.  The IRS will always get their interest payment.

But what if it’s not my fault? That’s a very common question.  What if it really isn’t your fault?  What happens if you went to a preparer that didn’t know any better and claimed EIC for you when she shouldn’t have.  Or worse, you had a crooked preparer.  (These things really do happen.)

You’ll have to report the preparer.  There are serious fines and penalties for tax preparers associated with EIC negligence and fraud.  The smallest, yet the easiest to prove, is the EIC due diligence paperwork.  For every tax return that has EIC on it, a paid preparer must have a form 8867.  Here’s a link to see what it looks like:  http://www.irs.gov/pub/irs-pdf/f8867.pdf

The link is to the official IRS form.  In my office, my computer software actually uses the same form but I’m required to sign it and have my client sign it as well basically stating that everything on the EIC form is true.  Here’s the thing—the IRS can call up any tax office at any time and say, “Hey, we’re coming to audit your 8867 EIC forms.”  As the owner of a tax business, I have to be able to pull them all and have them ready for inspection.  If I don’t have an 8867 form for every EIC tax return I prepare, its $100 for each one I’m missing.  Guess what, I’m not going to be missing any of those forms.   I can’t afford it and I don’t prepare that many EIC returns.  You can bet that an office with lots of EIC returns has itself covered in the forms department.

So here’s where I’m going with this, if your preparer really is crooked, do report him to the IRS, it’s the right thing to do.  But if you lied to your preparer about your relationship to the child you claimed or some other EIC offense, and the IRS goes to the preparer’s office and pulls the 8867 forms, and they find a signed affidavit with your signature saying that you are the actual parent of the child—now you’ve just proved that you committed a fraud.  That’s the last thing you want to do.  Remember, a plain error costs a lot less than fraud and there’s no jail time involved.

So what should I do if I receive an EIC audit letter?  If you have the rightful claim to EIC, fight it.  If you’re not sure, maybe you do, maybe you don’t—seek professional help.  I’ve seen innocent people lose EIC audits because they didn’t know the rules.  Don’t take chances, it’s too costly.  If you know for a fact that you should not have claimed a child, pay up and get it over with as quickly as possible.  It won’t be easy, but in the long run it will be better for you.

If you know that you’ve illegally claimed EIC, don’t wait for the IRS to come after you.  File an amended return and pay the tax.  You’ll definitely have to pay interest, but by filing an amended return and paying before you get an IRS letter, you have a very good chance of avoiding the penalties.  You’ll probably sleep better too.

_______________________________________________________________________

Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

 

Posted on by Jan Roberg

I Can’t Pay My Taxes, What Do I Do Now?

debt resolutionThe deadline is coming up, you’ve done your tax return and you’ve got a balance due.  Problem is:  you don’t have the cash to pay.  What can you do?

First, if you can’t pay the whole thing, pay as much as you can now.  The more you pay towards your tax, the less you’ll have to pay in interest and penalties.  Let’s say you owe $5000, you don’t have that much but you can scrape together $2000, mail in a check for the $2000.  Then you’re only dealing with interest and penalties on $3000 instead of $5000.  I find that paying something also helps you when you have to deal with the IRS.   They open their file and see that you paid something towards your account, it gives you credibility.

In a few weeks, you’ll get a letter from the IRS telling you that you owe them money.  When you get the letter, call the number on the letter and talk to the IRS.  (Use your good respectful voice that your mother taught you, I’m very serious about that.  If you curse at them or threaten them, it will go into your record.  It makes it much harder for me to save you after you’ve done that.)  When you talk to the IRS, these are going to be your options:

  1.  You may qualify to take up to 120 additional days to pay with no extra fee.  They will still charge interest.  If it’s possible for you to come up with the cash within 4 months, this is your best option.
  2. If you know that you won’t be able to pay off the debt within 120 days, you can apply for an installment agreement.  You pay a fee of $105 and set up a monthly payment schedule.  Generally, they like to set up a plan that has you pay off the money within two years.  You can make arrangements to pay the amount over 5 years.  Using that $5000 figure, if you pay it over 5 years it would be 5000 divided by 60 months = $83.33.  They will round it up to $85.  The problem with that is the interest will continue to accrue each month.  If you can pay it off faster, do so.

 You can apply for an installment agreement yourself online.  Go to the IRS website :  http://www.irs.gov/individuals/article/0,,id=149373,00.html

What about those ads I see for about settling your tax debt for “pennies on the dollar?”  Generally, those ads refer to something known as an offer in compromise.  Generally, the IRS will not accept an offer if it believes that you are capable of paying your debt.  For example, I once received a phone call from a fellow who said that he owed $20,000 in tax debt and he wanted me to prepare an offer in compromise for him.   I started asking some questions and found out that he made $200,000 a year, had substantial cash assets, and plenty of equity in his home.  I asked him why he didn’t just pay the tax, he told me “He didn’t want to.”   You have to be a good candidate for an offer in compromise before any reputable firm will make one for you.  That fellow would never qualify for an offer in compromise, the best he’d get is a monthly payment agreement and he could do that himself for free.

If you are truly in a situation where you cannot pay your tax debt, please get professional assistance.  Even if you don’t qualify for an offer in compromise, you may qualify for a reduced payment schedule until your situation improves.  Be sure to ask your accountant, “Do you handle debt resolution issues?”   Your corner tax store preparer is not trained to prepare the forms for an offer in compromise, and many CPAs don’t want to handle those issues.  Look for the phrase “debt resolution” when hiring this type of assistance.  Roberg Tax Solutions does debt resolution.  (Just thought I should make that point!)

Posted on by Jan Roberg

Crime and Taxes

Tax fraud in prison

Tim Robbins and Morgan Freeman in Shawshank Redemption

In the Shawshank Redemption, Tim Robbins plays Andy, a banker falsely imprisoned for a crime he didn’t commit.  While in prison, he begins preparing tax returns for the prison guards which leads him to maintaining illegal books for the warden.  As Andy says to Morgan Freemans’ character, Red, “I never commited a crime until I went to prison.”

One of the more interesting aspects of the US tax code is that according to our tax law, you are required to report all of your income, even if it is from an illegal activity.  Anyone who’s seen the Untouchables knows that they got Al Capone for income tax evasion and not for any of the murders and other crimes he committed.  (Or am I supposed to say allegedly committed like they do on TV?)    Anyway, and I’m not making this up, the IRS  requires all thieves to report the fair market value of the items they stole on their tax returns.   Really.

But seriously, the crime I want to talk about is tax fraud.  In 2010, the number of fraudulent income tax returns increased by 50%.  That’s huge!  It’s estimated that 50,000 of those fraudulent returns were filed by prison inmates.  The IRS was able to catch about 4,500 of those forms because of falsely claimed Earned Income Credits.  EIC fraud is usually the easiest type of fraud to discover quickly because the IRS gets a conflicting tax return pointing out the fraud.  

Currently, state and federal prisons are not required to report the status of inmates to the IRS.  This makes it tougher for the IRS to catch the fraudulent prison returns and that hurts taxpayers who bear the tax burden while the fraud continues.   Of course, not all tax returns filed by prison inmates are fraudulent.  There are many legitimate tax returns that should be filed by prisoners.  For example:  a man is incarcerated in January but he had a full year of working on the outside and caring for his family before going to prison, that’s a very legitimate tax return. 

If the IRS had access to inmate status though, it would be much easier to determine which returns were for legitimate work,  and which returns were fraudulent.  While I’m not inclined to make life easier for IRS agents, this is one case where I think they deserve to have access to the tools that they need to do their job properly.

Posted on by Jan Roberg

Is it Taxable?

Is it taxable?
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 Have you ever watched the David Letterman show when he does the “Will it float?” routine?  They pick some ridiculous item and drop it into a huge tub of water to see if it will float.  It’s probably the singularly most stupid thing on television, but I can’t turn it off.  I don’t think they do it anymore, but I loved it when they used to have it.   As a child, my best friend and I would fill up the sink and test all sorts of stuff to see if it would float or not.  I guess Dave was just doing the same thing (on a much bigger scale!) 

Anyway, that’s how I feel about taxable versus non-taxable income.  Will it float?  Do I gotta pay taxes on the money or not?  For me, most of the time, I already know the answer, it’s what I do for a living.  But there’s always some new challenge, something I haven’t seen before.  Figuing out if various types of income are taxable or not is my personal little “Will it Float?” contest.  And let’s face it; I always like to find money that you don’t have to pay taxes on.

Here’s a list of some of the things you do not have to pay taxes on:

  • Child support payments
  • Gifts, bequests and inheritances—you may have heard of estate taxes, but if Uncle Joe dies and leaves you cash money, you don’t pay tax on that.  If Uncle Joe dies and leaves you his IRA, those distributions are taxable, it’s different from just being left cash.
  • Workers’ compensation benefits
  • Meals and lodging for the convenience of your employer – let’s say your boss sends you to Chicago for a business trip and you put the trip on your credit card.  Your boss reimburses you for your hotel stay and your food, you don’t pay tax on that.
  • Compensatory Damages awarded in a lawsuit.  Compensatory damages are to “make you whole.”  Let’s say you sued your neighbor because he ran over you with his car.  If the damages awarded to you are to cover your hospital costs, that would be compensatory damages and they wouldn’t be taxed.  If you sued for lost wages because you couldn’t work, that would be a different type of damages and that part of your lawsuit award would be taxed.  I’ve worked on tax returns dealing with lawsuits that awarded several different types of income from damages.  We’d have to split them into the correct categories for tax purposes.
  • Welfare benefits are not taxed.
  • Cash rebates from a dealer or manufacturer.
  • Adoption expense reimbursements for qualifying expenses are not taxed either.

Some things are kind of iffy, they’re taxed in some cases and not in others.  Here are some examples of “maybe yes, and maybe no.”

  • Life insurance- if somebody dies and you are paid death benefits, that’s not taxable.  If you surrender a life insurance policy for case, any proceeds that are more than what you paid for the policy will be taxable.
  • Scholarship or Fellowship Grants- If you are a degree candidate, then you can exclude from your taxable income amounts that you receive as a qualified scholarship.  If you get one of those super scholarships where they pay for your room and board, that doesn’t qualify as tax free and you will be taxed on that part.

Most other items count as taxable:  wages, salaries, tips, unemployment, self employment, pensions, interest, stock sales, etc.

There’s an IRS publication that goes into complete detail of what is and isn’t taxable.  It’s 43 pages long and it goes into some serious detail over what is and isn’t taxable.  For example:  did you know that death payments for astronauts dying in the line of duty after 2002 are not taxable?  That one was new to me, I just learned it now trying to pick up the link to the website.  The alphabetical list of types of income and whether it’s taxable or not begins on page 31.  http://www.irs.gov/pub/irs-pdf/p525.pdf

When in doubt, it’s probably taxable.  There’s actually a line in the tax code that says, if something isn’t specifically listed in the tax code as being not taxed, then it is taxable.  (They don’t actually phrase it that way, to be honest, if you read the actual paragraph you may not even know what they’re saying.  I took some liberties with the language, but the meaning is head on.  If you discover a new type of income, and there’s no mention of it anywhere, then by default the IRS taxes it.

Posted on by Jan Roberg

How to Stick it to My Ex with the IRS – divorce issues

Photo by Dr. John Bullas

You wouldn’t believe how often I am asked, “How can I stick it to my ex?”  People going through a divorce or breakup are so angry and hurting that it’s natural to want to strike back.  While I feel deeply for peoples’ pain and suffering, the best advice I can give to that question is don’t.  Here’s why.

The easiest way to mess up someone else’s tax return is to claim their children on your tax return before they can file theirs.  It’s that simple.  Once the children’s social security numbers have been claimed on a tax return, they can’t be used on another return.  That means your ex can’t e-file a return and can’t get the refund she’d get with the kids.  It sounds pretty nasty, but there’s a very important downside.

First, if don’t have custody of the children and they haven’t lived with you for at least six months, well then you’d be committing tax fraud.  Depending upon the severity of the fraud (especially if you received an Earned Income Credit) it’s even possible that you could see some jail time.  How badly do you want to mess with your ex?

But let’s forget the possible jail time.  Let’s examine what would happen in a regular dependency dispute.  Your ex, if she were smart (or had at least hired someone like me), would still submit her tax return claiming the children.  She’d have to mail the return in, because e-file would no longer be available to her.  Then because there would be two returns claiming the same children the IRS would issue dependency audits to both of you.  That audit letter is around eleven pages long listing several items that you’re going to have to come up with to prove that you are really the custodial parent.  The information is fairly easy for a custodial parent to access, downright impossible if you’re not.

So, although you’ve dealt your blow and messed up her refund temporarily, in the end she’ll get the money and you’ll lose the audit.  Not only will you have to pay back the tax money you received from the IRS, there will be fines, penalties, and you’ll probably be forbidden from claiming and Earned Income credit in the future (even if you would really be entitled to it.)

So, back to the original question, “Is there a way to stick it to my ex?”  The answer is yes, but it will hurt you worse.