The IRS issues a list of the top twelve tax scams each year that can be found here. Here are five tax scams they highlight this summer.
- Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the forms of e-mails, tweets, or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound , the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim's identity, access bank accounts, run up credit card charges or apply for loans in the victim's name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov an enter the keyword phishing for additional information.
- Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court.
- Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients' refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
- Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes, by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
- Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
The Wall Street Journal posted an article yesterday, Too Rich to Live?coincidentally it also happened to be the same day George Steinbrenner passed away. The article and the passing of George Steinbrenner bring to light a major, and very difficult dilemma for many families in regards to when is the right time to die - this year or next.
Because of the estate-tax and the laws that Congress passed previously, they have created a very difficult dilemma for many families to grapple with. In 2001 Congress made several changes to the tax laws including a change to the estate-tax, aka the "death tax." Over the past 9 years the amount exempted from the estate tax increased from $675,000 per person to $3.5 million per person and and the tax percentage decreased from 55% to 45%.
Although, there are very few families and estates that are the size of George Steinbrenner's, his passing illustrates how significant this oddity in the estate-tax is this year. Forbes recently estimated George Steinbrenner's net worth at $1.1 billion. If he had passed away next year, the estate tax on his assets would have been approximately $600 million. If he passed away in 2009 his estate tax would have been around $500 million. Because he passed away in 2010, a year where there is currently no estate tax, his estate tax is zero.
The wall street article does a great job highlighting this dilemma.
Advisers say the estate-tax dilemma is especially awkward for heirs. "At least in December 2009, people wanted to keep their relatives alive," says Ronald Aucutt, an estate-tax attorney with McGuire Woods in Washington area. Now he and others are worried that heirs may be tempted to pull the plugs on Dec 31. Economist might call the taking of a life to reap a tax advantage a "perverse incentive." District Attorneys might call it homicide.
Needless to say, if not resolved, the estate-tax issue will present some very difficult end-of-life decisions for some families. Senator Lincoln and Senator Kyl just introduced a proposal to amend H.R. 5297, the Small Business Lending bill, to permanently fix the estate-tax and set it at 35% with a $5 million exemption. The $5 million exemption amount would be phased in over 10 years. However, unless the tax law is retroactive this year, families could be left with a macabre end-of-life decisions for their loved one.
In a previous post Welcome to Healthcare Tax Compliance Hell, a little known clause that was slipped into the Health Care legislation, was highlighted. This clause required that any taxpayer, with business income, is required to issue a 1099 form to any, and all vendors that they purchase goods or services from, and spend more than $600 per year with.
As highlighted previously, this means that when a painter or contractor goes to Home Depot or Lowes and purchases goods that total more than $600 in a year, they must issue Lowes or Home Depot a 1099. This is applicable to all individuals that generate business income regardless of how small they are.
The IRS is starting to come to grips with how extensive and onerous this new law is for individual taxpayers, small business owners and large businesses.
As always there are unintended consequences when laws such as this are implemented. One significant unintended consequence is that a number of companies may scale back on the number of vendors they use in order to minimize the number of vendors they have to track and issue 1099s to.
Neil deMause, in an article posted on CNN money.com, IRS Starts Mopping up Congress's tax reporting mess, highlights information from a report released by National Taxpayer Advocate Nina Olson.
An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships.
The article goes onto comment how Nina Olson is concerned with the new requirement.
Like may who have delved into the new rules, Olson is concerned about the far-reaching scope and potential unintended consequences.
"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate with any resulting improvement in tax compliance," the taxpayer advocate wrote in a report released this week.
The intent of the law is to create a paper trail for all business transactions. However, the massive burden and requirements for small business owners to comply may outweigh the benefits. In the CNNMoney article, they highlight how Pennsylvania business networking organization, SMC Business Councils, surveyed its members and found the requirement for issuing 1099s will increase on average from 10 to over 200.
In a previous post, Does Your Business Accept Credit Cards, If so, be Aware of What Awaits You in 2011, we highlighted how starting in 2011, credit card companies will be required to issue merchants a 1099. The purpose is so the IRS can track income to a business from credit card sales. This was a little known provision slipped into the Housing Assistance Tax Act of 2008.
IRS commissioner, Douglas Shulman, announced in May that credit card and debit card transactions to vendors would be exempt from this new 1099 reporting requirement. The reason, being is that the IRS will be capable to track the information based on the 1099s issued from the credit card companies.
This could be a a big boost to credit card processing companies, as more companies may use debit or credit cards in an effort to minimize the 1099s required to be issued. However, it could also drive up costs, since credit card processing fees are typically 2%-3%. of the purchase price. At some point in time, these costs will be passed on, in the form of higher prices.
In addition, it would also be likely that a number of business that use a number of different vendors, would try and consolidate to fewer vendors in order to reduce the reporting requirements. Finally, this law promises to drive up administrative and record keeping costs for businesses in order for the businesses to comply with the new regulations and filing requirements.
All of these new reporting requirements are all about tracking revenue and identifying businesses that are underreporting income. With the issuance of 1099s by the credit card companies, and taxpayers who generate business income, the IRS can cross reference the 1099 payments to reported business income listed on the year-end tax return for that business. If there is a disparity between the 1099s issued to that business and the reported income on the tax return, the return could be flagged.
In 2008 SC passed a law to address the issue of businesses placing illegal workers on the payroll as employees. The law is being implemented in two phases. The first phase was for larger businesses (those with greater than 100 employees) and the second phase is for businesses with less than 100 employees.
The law requires that a business check all new hires to to verify that they are either a citizen of the US or have a right to work in the US legally. Although the bill applies to checking the new hires, there is a proviosn for existing employees. If a business discovers they may have an employee that does not have a right to work in the US, they must investigate and fire any persons they find working illegally.
Businesses that do not comply can face fines of up to $1,000 per illegal employee. Approximately, 200 violations statewide, through May, were found in violation of the law according to The Department of Labor Licensing and Regulation.
As the law goes into effect this week, for all busineses, it will be closely watched to see its impact on the issue if illegal workers.