IRS e-File Crash May Delay Some Refunds

If you’re planning to file your federal income tax returns in the hope of receiving an early refund, you might have to wait a day or two longer to receive your money. A hardware failure knocked several IRS.gov services offline February 3, 2016. According to a statement on the IRS.gov website, delays resulting from the outage are expected to be slight, and the agency still anticipates thatit will be able to process most refunds within normal time lines. The message that appeared on the IRS webpage read as follows:

statementThe outage itself was brief. As of February 4, the IRS.gov website displayed the following message on its Modernized e-File (MeF) Status Page: “The Modernized e-File Production and Assurance Testing Systems are now operational. Please resume sending federal and state submissions, sending state acknowledgements and retrieving federal and state acknowledgements. We thank you for your patience and apologize for the inconvenience.”

During the outage, taxpayers were instructed to continue to file their returns electronically through their e-file providers. However, providers were instructed to hold the returns rather than forward them to the IRS. The “Where’s My Refund?” service was also affected by the outage, but was also back online as of February 4.

freefileThis year, the IRS launched a new version of its FreeFile system, along with expanding eligibility to taxpayers earning $62,000 or less annually, an increase of $2,000 over the limit for last year’s returns. The system includes additional safeguards put into place to prevent a repeat of the embarrassing data breach in 2015, which exposed the information of more than 300,000 taxpayers nationwide.

The previous data breach was blamed on Russian hackers. However, a statement issued on the IRS website on Feb 3 did not name a source for the most recent crash, stating instead “the IRS is still assessing the scope of the outage.”

Taxpayers whose returns were filed before the February 3 outage were not affected, and should not re-file their returns.

ACA Increases Penalties for Uninsured Americans

Millions of previously uninsured Americans have obtained health insurance coverage, thanks to the Affordable Care Act – commonly known as Obamacare. However, many individuals and households remain uninsured. Many of those taxpayers face significant financial penalties from the IRS for failing to obtain insurance under the individual mandate of the ACA – unless they can claim an exemption.AffordableCareAct

The Penalty Wasn’t Really $95 

During 2014, the first year health insurance coverage was required under the ACA, many individuals chose to remain uninsured. They figured that paying $95 as a penalty for failing to obtain and maintain coverage would be far less expensive than the premium for any policy they could obtain. Many people experienced sticker shock when they realized how large their penalties would be.

That’s because the penalty for 2014 wasn’t $95. The actual penalty was $95 for each adult age 18 or over plus $47.50 for each child under 18, with a maximum penalty of $285 — or 1% of the total household income above the threshold for filing federal tax returns, whichever was larger. The maximum penalty for all households was capped at the national annual cost of an individual bronze tier insurance plan in 2014, which was $2,448, regardless of income and household size.

For example, the penalty for a single taxpayer who earned $45,000 in 2014 and remained uninsured for the entire year would be $348.50. That’s the result of subtracting the minimum income for being required to file a federal income tax return ($10,150 in 2014) from $45,000, for a result of $34,850, and then multiplying that figure by 1%. Ouch.

Penalty Increases for 2015 and 2016

afforadable-care-act-penaltiesIndividual mandate penalties for 2015 are even higher, increasing to $325 per adult plus $162.50 per child, for a maximum of $975 – or 2% of household income, whichever is larger. As in 2014, the maximum penalty for all households has been capped at the 2015 national annual cost of an individual bronze tier plan.

Remaining uninsured in 2016 will take an even bigger financial bite out of taxpayers’ pocketbooks. The penalty has been set for a hefty $695 per adult and $347.50 per child, with a maximum per household of $2,085 dollars. As an alternative, the penalty will be 2.5% of household income, with a maximum of the average annual premium of an individual Bronze tier health insurance plan sold through the marketplace. Taxpayers will pay whichever calculation results in the higher penalty.

Exemptions to the Individual Mandate Penalty

Taxpayers hoping to avoid the individual mandate penalty by obtaining health insurance coverage late in the year will most likely only be able to reduce the penalty rather than eliminate it. However, there are a number of exemptions based on personal circumstances and financial hardships that allow some taxpayers to avoid the penalty. To claim total or partial exemptions, taxpayers must file an application with Healthcare.gov. Taxpayers whose applications are approved receive an Electronic Confirmation Number (ECN) to claim the exemption on their federal income tax returns.

Personal Exemptionsexempt-tax-penalty

The list below represents an overview of personal exemptions to the individual mandate penalty. A full list of exemptions is available at Healthcare.gov.Unaffordable Coverage: Lowest-price Marketplace plans exceed 9.5% of adjusted gross income, or employer-provided healthcare plans exceed 8% of AGI.

  • Low Income: Individuals or households with incomes below the minimum threshold for filing federal income tax returns are automatically exempt.
  • Short Coverage Gap: Gaps in coverage of less than three consecutive months are exempt. Taxpayers who purchased coverage anytime during open enrollment in 2014 are also exempt; even they remained uninsured until May 1.
  • Religious Conscience: This exemption is administered through the Social Security Administration.
  • Health Care Sharing Ministry: Members of recognized health care sharing ministries are also exempt.
  • Citizens Living Abroad: U.S. citizens who reside abroad at least 330 days during a 12 month period are exempt.
  • Participants in AmeriCorps State and National, VISTA, or NCCC: Participants with short term program provided coverage or self-funded coverage are exempt.
  • Undocumented: Undocumented residents are not eligible to purchase insurance through the exchanges and are exempt from the penalty.affordable-care-act
  • Incarcerated: Incarcerated individuals are exempt.
  • Native Americans: Members of federally recognized tribes are exempt.

Hardship Exemptions

For most hardship exemptions, taxpayers must file supporting documentation; others are automatic. Some taxpayers who qualify for hardship exemptions may be allowed to purchase catastrophic health insurance policies; others may qualify for a special enrollment period outside of open enrollment. The list below briefly describes hardship exemptions along with required documentation. A complete description of hardship exemptions and relevant forms are available through Healthcare.gov.

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Dealing with Penalties Now – and Avoiding Future Penalties

maxresdefaultThe best way to avoid the individual mandate penalty is to obtain health insurance coverage – either through the Marketplace, an employer or another health insurance plan that meets the minimum guidelines for the ACA. Many taxpayers who obtain insurance through the Marketplace are eligible for tax subsidies that significantly reduce premium payments or provide refundable tax credits. Other taxpayers will qualify for an additional cost-sharing subsidy that can be applied to Silver tier plans to lower the overall cost of deductibles, copays and coinsurance.

Individuals who have questions about their eligibility for tax credits, the individual mandate or any penalties they might owe can obtain assistance through Healthcare.gov.   Specially trained Navigators can also assist individuals one-on-one, either in person or over the phone, with selecting appropriate coverage. Taxpayers facing large individual mandate penalties should consult with an accountant or with an attorney specializing in tax law.

IRS “Courtesy Disconnects” Skyrocket During 2015 Tax Filing Season

During this year’s tax filing season, the IRS processed 126.1 million individual federal income tax returns and issued 91.8 million refunds, compared with 125.6 million income tax returns processed and 94.8 million refunds issued the previous year. Taxpayers also received larger refunds from the IRS in 2015hold – averaging $2,711 compared with an average refund of $2,686 last year.

However, many taxpayers faced significant challenges in filing their returns due to new filing requirements related to the Affordable Care Act and other changes in the tax code. Unfortunately, millions of taxpayers who attempted to contact the IRS by telephone for assistance with their tax returns encountered long wait times. Nearly 9 million taxpayers who called the IRS seeking assistance encountered a dial tone instead.

New Challenges, Less Funding

In her mid-year report to Congress, National Taxpayer Advocate Nina E. Olson declared that the IRS generally had a successful tax filing season for 2015, at least for taxpayers who were able to file their own returns without assistance from the IRS. This was despite the fact that the IRS was forced to operate with a budget about 17 percent smaller than the allotted funds for fiscal year 2010 – when adjusted for inflation. In addition, the 2015 tax filing season was the first to occur after the full implementation of the ACA. In 2015, the IRS also began implementing major portions of the Foreign Account Tax Compliance Act (FATCA).

“Courtesy Disconnects”

During the busiest periods of the tax filing season, the IRS switchboard can become overloaded. During such periods, taxpayers could be subjected to what is known as a “courtesy disconnect” – essentially having their calls disconnected without being answered. In 2014, the IRS executed about 544,000 “courtesy disconnects.” During the 2015 tax filing season that number shot up to an eye popping 8.8 million, an increase of more than 1500 percent over the previous year.

In her report, Olson wrote “For the segment of taxpayers who required help from the IRS, the (2015) filing season was by far the worst in memory.”

More Calls Dialed, Fewer Answered

olsonAccording to Olson’s most recent report, taxpayer calls referred to telephone agents increased by 41 percent during the most recent tax filing season, with an average call duration 10 percent longer than the year before. The number of calls actually answered by IRS agents plunged by 26 percent – only 37 percent of all telephone calls placed by taxpayers, with an average hold time of 23 minutes. This is in sharp contrast to the 2014 tax filing season, when the IRS answered 71 percent of calls from taxpayers, with an average hold time of 14 minutes.

Only 39 percent of calls placed to the National Taxpayer Advocate toll-free hotline were answered by the IRS, with an average wait time of 19 minutes. About 45 percent of calls placed by practitioners to the Practitioner Priority line were answered by the IRS, with hold times averaging an astonishing 45 minutes. The news was worse concerning calls from taxpayers who called the IRS after being notified that their tax returns had been blocked by the Taxpayer Protection Program because of suspected identity theft. Only 17 percent of those calls were answered by the IRS, with an average hold time of 28 minutes. For three consecutive weeks during the tax filing season, the IRS answered fewer than 10 percent of such calls.

Rethinking the IRS Mission

Much of the blame for this sharp decline in service can be attributed to cuts imposed by Congress on the IRS’ operating budget. But the IRS also bears some responsibility. For instance, IRS Taxpayer Assistance Centers and outlet partners such as local libraries and post offices did not receive paper forms until February 28. Facilities that ran out of forms could not order more – and many outlets never offered paper forms at all. Such limited availability of paper forms hampered taxpayers with limited access to personal computers or the Internet, many of whom traditionally collect significant tax refunds.

national-taxpayer-advocate-american-expats-692x300Olson also cited continued IRS emphasis on enforcement and ensuring compliance instead of providing customer service as a contributing factor to the agency’s woes. Despite occasional splashy headlines generated by prosecution of big-time tax cheats, less than 2 percent of all revenues collected by the IRS are gained through enforcement efforts. The remaining 98 percent of tax revenues are paid voluntarily – and in timely fashion. According to Olson’s report, focusing the limited resources of the IRS on snaring tax cheats makes it more difficult for honest taxpayers to navigate the system. The effort could actually be detrimental to the overall efficiency of the operation of the IRS.

“This focus has all sorts of consequences for the vast majority of taxpayers who are willing to comply, not the least of which is that they bear an increased burden in navigating processes designed for evaders. That is unwise, counterproductive, and expensive,” Olson wrote.

The IRS Response

Volume 2 of the 2015 Taxpayer Advocate’s report includes IRS responses to the Taxpayer Advocate’s 2014 report, along with additional comments. The 2014 report made 93 recommendations. According to the IRS, 45 of those recommendations have been or will be implemented, although additional resources would be required to fulfill some of the recommendations. With luck, taxpayers seeking assistance during the 2016 tax return season will receive answers – rather than a dial tone.

Tax Fraud: How Do You Protect Yourself From Something You Don’t Know Exists?

You’ve always filed your income tax returns electronically in the past. Your returns were less vulnerable to calculation errors and you received your tax refund much quicker than you did filing paper returns. But this year, when you attempted to e-file your federal income tax return, the IRS rejected your submission, issuing a statement that a previously filed return using your Social Security number was already on file. How could such a thing happen?

Welcome to the world of identity theft, tax fraud style. Scammers filing falsified returns reap millions for their fraudulent efforts, spending the money from their ill-gotten gains long before the IRS – or their victims – become privy to the fact that a crime has even been committed. Many victims only learn that they’ve been targeted after receiving an audit notice from the IRS. In the meantime, fines, fees, penalties and interest from tax return fraud have accumulated, – and it’s largely up to victims to straighten out the mess.

tax fraud“Drops” and Bling

Ironically, the same e-filing system that cuts weeks from the time needed to process federal income tax returns and refunds also facilitates tax return fraud. Known as “drops” in many urban areas, this form of tax fraud identity theft involves using victims’ Social Security numbers, to file fraudulent electronic income tax returns claiming substantial tax refunds. This eliminates the need to attempt to forge victims’ physical signatures on paper tax returns.

Another ironic consequence of the dramatic rise in “drops” is a corresponding decline in street crime, particularly the drug trade. Many small-time drug dealers and even large volume drug traders find that executing “drops” is less legally hazardous, not to mention more lucrative. Another ironic consequence is a reduction in demand for assistance from food banks or even government food stamps: tax fraud artists don’t need the help. In fact, the expensive cars with pricey rims, the fancy clothes and the other “bling” flaunted by many tax fraud artists, fuels resentment amongst honest residents in low-income neighborhoods who struggle to make ends meet on a daily basis.

How Victims are Targeted

Have you ever provided your Social Security number to anyone? Then you are potentially a target for tax fraud identity theft. Many legitimate transactions: opening a bank account, applying for a mortgage or filling out a job application require individuals to supply Social Security Numbers. Unscrupulous employees harvest Social Security numbers from such transactions, which they use themselves or sell to the highest bidder. Tax fraud artists also comb death notices, create Trojan viruses or phishing email attempts or simply rummage through trash for the information they seek.

Funds from these fraudulent returns are commonly issued on proprietary debit cards issued by companies providing e-filing services, making it easy for fraud artists to access their ill-gotten gains. Paperwork backlogs and personnel shortages within the IRS exacerbate the issue. Especially during the busy tax filing season, the emphasis of the IRS is on processing returns and refunds as quickly as possible. By the time the IRS initiates inquires on questionable returns, money from fraudulently obtained refunds has often long since been spent.

Protecting Yourself from Tax Return Fraud

The best way to protect yourself from tax return fraud is by limiting access to your Social Security number. A bit of vigilance will protect you from many fraudulent attempts to obtain your Social Security number. Don’t carry your Social Security card unless you need to provide a copy for a job application or a similar purpose. Protect sensitive information on your computer by maintaining up-to-date antivirus and antispyware software and firewalls.

Think twice before responding to unsolicited “pre-approved credit” offers received online or in the mail. Never supply sensitive personal or financial information unless you have initiated the transaction or conversation – or unless you are 110 percent sure that the person on the phone or the website you’re dealing with is the real deal. If you receive questionable communication requesting (or demanding) sensitive financial or personal information from a company you’ve done business with, contact the company directly to check verify that it is indeed them requesting the information.

If you receive unsolicited email, social media or text messages claiming to be from the IRS, there is a 100 percent probability that they’re fake. The IRS only initiates communications with taxpayers by regular mail or by telephone – period. Do not respond directly to such communications in any way. Instead, report suspicious IRS-related communications to phishing@irs.gov or call 1-800-366-4484.

If You’ve Been Victimized by Tax Return Fraudtax_fraud

The first indication that you’ve been victimized by tax return fraud often comes in the form of an inquiry from the IRS about discrepancies in your return. You may be questioned about returns issued in your name which you never received or wages earned for companies you’ve never even heard of. You may also be assessed additional taxes or tax return offsets for years that you didn’t file a tax return at all. Another telltale sign is a notice from the IRS that multiple returns have been filed during a single year using your Social Security number.

Once you become aware that you’ve been targeted by tax return fraud, you must act quickly to limit the damage. File a complaint with the Federal Trade Commission and a police report with your local law enforcement agency. Contact one or more of the three major credit reporting bureaus (TransUnion, Equifax or Experian) to have a fraud alert placed on your credit report. Close any credit card or other accounts that have been compromised or opened without your knowledge. Also, check your earnings report annually with the Social Security Administration to endure that there is no fraudulent activity.

If your federal tax refund has been stolen or you have other unresolved tax-fraud related issues, contact the IRS Identity Protection Specialized Unit at (800)908-4490. You can protect yourself from further tax return fraud attempts by filing “Form 14039 – Identity Theft Affidavit” with the IRS. It’s likely that you’ll be required to file a paper return for the present tax year and it may take months to resolve your case, as well as restore any refunds to which you’re rightfully entitled.

However, the IRS will issue you a unique IP PIN that will replace your Social Security number and which will allow you to e-file future federal income tax returns safely. Do not use this IP PIN for any other reason – including state income tax returns.

Don’t Hang On: Check Out IRS.gov for Tax-Related Information

IRS building

This coming week which includes the Presidents Day holiday, is traditionally one of the busiest periods of the year for the IRS, with long wait times for individuals attempting to contact the IRS by phone. This year promises to be no exception. If anything, wait times should be even longer, if an earlier report from the IRS Taxpayer Advocate is to be believed.

 

Potential Long Telephone Hold Times For Taxpayers

on hold

According to the report, the IRS has been severely hampered in its ability to respond to telephone inquires from taxpayers due to cuts mandated by the sequester. Coupled with the expected surge in phone calls during the Presidents Day holiday period, the result could be extremely long waits for anyone hoping to reach an IRS agent by phone. The advice from the IRS is simple: don’t call us.

Instead, the IRS advises taxpayers that many of the answers they seek are available through the IRS.gov website, which operates 24/7 with no holds and no waiting. In fact, the IRS.gov website contains a wealth of information on subjects ranging from tax refunds to resolving overdue tax bills. The following list includes topics covered by IRS.gov. By checking out its resources, including 1040 Central and the IRS Services guide, you may save yourself from the frustrating experience of waiting, and waiting — and waiting – to attempt to reach an IRS agent by phone.

Where’s My Refund?   wheres my refund

If it’s been less than 21 days since you filed your federal income tax return, don’t expect an IRS representative to respond to inquiries concerning the status of your refund. Instead check out the Where’s My Refund tool on IRS.gov or via the free IRS2Go Smartphone app, available for iOS and Android mobile devices. Plug in info on your current, pending refund to obtain its current status. Status updates for “Where’s My Refund?” occur once every 24 hours, usually overnight, so checking once each day is sufficient.

No W-2? Try This Before Calling The IRS

By law, employers are required to supply workers with W-2 forms on or before January 31 each year. If you haven’t received yours by the middle of February, check with your employer to determine if your correct mailing address is on file. If appeals to your employer don’t yield your W-2 form, by all means, contact the IRS, which will issue a letter to your employer. But it’s best to wait until after the Presidents’ Day rush if possible. In the meantime, you can begin working on your tax return by using information from your final pay stub from 2014.

Need Help Preparing Your Tax Return? Volunteers And Free File Have Your Back

help

If you’re tearing your hair out trying to complete your tax return, but cannot afford a commercial tax preparer, don’t despair. Check out IRS.gov for a listing of volunteer tax assistance available to low income taxpayers and seniors. The Volunteer Income Tax Assistance (VITA) program provides assistance to taxpayers with income of 53,000 dollars or less, disabled individuals, seniors and taxpayers with limited or no English speaking ability. The Tax Counseling for the Elderly (TCE) provides assistance to all taxpayers, especially seniors age 60 or older, who have questions about pensions and retirement-related issues. Information on both programs is available through IRS.gov.

Can’t Pay Your Tax Bill? Don’t Panic

bill

Individual taxpayers who owe 50,000 dollars or less or businesses that owe 25,000 dollars or less in combined taxes, penalties and interest are eligible to establish an installment agreement through the Online Payment Arrangement Application available on the IRS.gov website. The fee for establishing an installment agreement is 52 dollars for direct debit, 120 dollars for standard or payroll deductions or 43 dollars for low income taxpayers. The system is available from Monday through Friday from 6:00 a.m. to 12:30 a.m., Saturday from 6:00 a.m. to 10:00 p.m. and on Sunday from 6 p.m. to Midnight. All times listed are Eastern Time.

If you don’t qualify to apply online, you can still request an installment agreement by completing Form 9465 – Installment Agreement Request and Form 433-F – Collection Information Statement. Submit the complete forms, along with the fee by mail. You can also contact the IRS by phone at 1-800-829-4933, but again, it’s best to wait until after the holiday period to make the call. Even then, expect a lengthy wait.

If you wish to establish an Offer in Compromise, the process is more complex. But you can determine whether you should even undertake the effort by utilizing the Offer in Compromise Qualifier available through the IRS.gov website. Bear in mind that even if the results indicate that you may be eligible, there is no guarantee that an Offer in Compromise will be approved.

Missing Tax Return? Request A Copy Or A Tax Transcript Online

irs-logo

If you are missing crucial information from a prior year tax return, you can request a replacement copy from the IRS by submitting Form 4506 – for a cool 50 dollar fee, not to mention a lengthy wait of up to 75 calendar days before your request is processed. Ouch. If you need an actual photocopy of your return, you’ll have to bite the bullet and pay the price.

But in many cases, you can obtain the same information from a tax transcript — for no charge and on the spot via IRS.gov or the IRS2Go app. You can also go the old-school route and submit Form 4506-T by mail. Expect to wait five to 10 calendar days for your transcript to arrive. The following list indicates the types of transcripts that are available.

  • Tax Return Transcript: Available online and by mail, a Tax Return Transcript includes most of the information from Form 1040-EZ, Form 1040-A and Form 1040. A Tax Return Transcript is usually sufficient for applications from mortgages lenders and commercial student loans.
  • Tax Account Transcript: Available online and by mail, a Tax Account Transcript includes basic information such as return type, marital status, adjusted gross income, taxable income, credits and payments. It also indicates estimated payments or prior year overpayments applied to the current year tax return.
  • Record of Account Transcript: Available only online, a Record of Account Transcript combines information from the Tax Return Transcript and the Tax Account Transcript.
  • Wage and Income Transcript: Available only online, a Wage and Income Transcript includes income date from W-2s, Form 1099 and Form 1098. Information for the current year is generally not available before July.
  • Verification of Non Filing Letter: Available only online, a Verification of Non Filing Letter only indicates that you did not file a federal tax return for a particular year, not whether or not you are required to file a return for that year. Verification of Non Filing Letters for the current year are only available after July 15.

Have General Tax Related Questions? Check Out Publication 17, Tele-Tax Or The Tax Map

guide

Publication 17, published annually, is a searchable income tax guide that addresses questions such as who can be claimed as a dependent or whether you are eligible for the Earned Income Tax Credit. The Tax Map allows keyword searches for single-topic queries. The Tele-Tax line (1-800-829-4477) provides recorded information on a range of tax topics 24/7, with no wait.

 

Make IRS.gov Your Go-To Site For Tax-Related Information

IRS-website

As the above list indicates, IRS.gov is a rich resource of information and assistance. Content on the site is updated frequently, including download links for nearly all the forms needed to file tax returns and carry out tax-related functions. You can resolve many of your tax-related issues efficiently by utilizing the tools available. If your questions aren’t answered there, you can always consult one of the experts at Optima Tax Relief to resolve your tax-related issues.

 

 

How Taxpayers Loaned $192 Billion To The Government In 2013

Very few people enjoy paying taxes, and even fewer wish to overpay on their federal income tax returns. But 80 percent of taxpayers voluntarily do just that each year. Many of these same taxpayers celebrate when they receive large refund checks, failing to realize that they are merely recovering their own money.

According to an April 2014 article in the Washington Post, federal income tax over-payments by individual taxpayers totaled an eye-popping $192 billion last year. This figure represents the equivalent to one quarter of the entire federal budget deficit for 2013. By overpaying on their tax returns, taxpayers essentially provide the government with an annual 12-month interest free loan, a deal which the IRS does not reciprocate.

Regions with the Highest Rates of Income Tax Refunds

refundsThe regions with the highest rates of taxpayers receiving refunds are found in Appalachia and the Deep South. For instance, in Chattahoochee County, Georgia, an astonishing 95 percent of taxpayers received federal tax refunds during the previous year, according to the Post. It is no coincidence that these regions are also among the most impoverished in the country. Taxpayers in these regions of the country often have low or no federal tax obligation.

Many taxpayers in these areas also benefit from deductions and credits like the Earned Income Tax Credit (EITC), which is a refundable credit. Taxpayers who qualify for the EITC can receive some or all of the credits in the form of a tax refund check, even if they have no federal income tax obligation. The refunds of many low-income taxpayers in this region and elsewhere in the country are drawn from the EITC.

Areas with High Proportions of Taxpayers Owing Tax

dueAn additional 15 percent of taxpayers nationwide owed money to Uncle Sam, with an average tax obligation of $4,656, the Post reports. These taxpayers were largely concentrated in metropolitan areas on the East and West coasts, and in the Plains states. Many of these individuals were self employed entrepreneurs, ranchers and farmers, filing Schedule C, E or F along with their federal income tax returns.

 

New England and the Plains States

In Liberty County, Montana, only 38 percent of taxpayers received federal income tax refunds. Another 32 percent of taxpayers in Liberty County essentially broke even with Uncle Sam, neither receiving refunds nor owing additional federal income taxes. Liberty County is representative of the states in the upper Plains region, which featured a high concentration of break-even taxpayers. Other states with high numbers of break-even taxpayers include Michigan, Pennsylvania and Vermont, according to the Post.

Lending to Uncle Sam at Zero Interest

uncle_samIn 2012, the average tax refund was a whopping $2,742 according to the Post. And while many taxpayers enjoyed receiving those large checks, a broad consensus of financial experts agrees that it’s actually a bad financial deal. Taxpayers receive no interest on their refunds unless the IRS delays the processing of their refunds by at least 45 days after the filing date of their federal income tax returns. The amount of interest paid is adjusted quarterly. For 2014, the quarterly interest rate paid by the IRS on delayed tax refunds was a paltry 3 percent.

The IRS is not nearly so generous with taxpayers in arrears. Even if you file your return on time, if you don’t pay your full federal income tax obligation, the IRS tacks on a failure-to-pay penalty of ½ of 1 percent on the amount due EVERY MONTH or partial month after the filing due date. The total penalty can equal 25 percent of the amount owed. Taxpayers who request an automatic extension of time to file do not automatically escape the failure-to-pay penalty. These taxpayers must pay at least 90 percent of what they owe by the ORIGINAL due date to escape the penalty.

Neither a Borrower nor a Lender Be

moneyMost taxpayers understandably don’t want to owe money at tax time, so they hedge their bets by overpaying. While it’s a good idea to allow for a small cushion to cover income tax withholdings, the IRS also cuts taxpayers who honestly underestimate their tax obligations a bit of slack. You can escape what the IRS calls the underpayment of estimated tax if your total federal tax obligation is less than $1,000. You may also escape the penalty by paying 90 percent of the current year’s federal tax obligation or 100 percent of your tax obligation for the previous year, whichever is smaller. Wage earners can make adjustments in the withholdings listed on W4 forms. Self-employed workers can meet this obligation through quarterly estimated tax payments.

Many taxpayers enjoy receiving their refunds in a lump sum rather than as small additions to their paychecks. That’s understandable as well, but it’s not necessary to overpay Uncle Sam to achieve that goal. Simply divide your average tax return by the number of paychecks you receive. Open a savings account or money market account and deposit the resulting amount into your account with each paycheck. If you want, you can make periodic transfers from your account into a Certificate of Deposit or other investment instrument. At the end of the year, you will have accumulated a tidy sum that equals or exceeds what you would have received as a tax refund.

Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

Why Am I Being Audited By The IRS?

Statistically, your odds of being audited by the IRS range somewhere between slim and none. Very few people actually receive those dreaded notices. But there are circumstances that can boost your odds of being audited considerably. In many cases, honesty is the best policy for avoiding an audit. But sometimes, there is little or nothing that you can do to reduce your odds.

Your Return Triggered an Audit Flag

red flag

You’ve probably seen at least one list of common “audit flags” to avoid. For instance, tax returns for people who are paid largely or entirely in cash, such as wait staff, are often flagged for audits. People who make large charitable contributions (and claim large charitable deductions) may also trigger an audit flag.

The problem is that many common audit flags are legitimate tax deductions or credits. For instance, if you are a consultant or entrepreneur with a legitimate home office, you’re entitled to claim the home office deduction. Likewise, if you are entitled to the Earned Income Tax Credit, it’s financially unwise to leave that money on the table.

You may not even realize that you have tripped an audit flag. For example, according to a 2013 report from the IRS Taxpayer Advocate Service, an astonishing 90 percent of tax returns for adoptive parents who claimed the adoption tax credit were flagged for review. Almost 70 percent of taxpayers claiming the adoption tax credit were subjected to at least a partial audit.
The take-home lesson here is that if your return stands out from the ordinary, you may very well trigger an inquiry from the IRS. But that’s no reason to skip out on legitimate tax breaks. Instead, maintain meticulous records so that you can justify your claims.

Someone Ratted You Out

Yes, it’s true, people really do turn in their spouses, friends and co-workers to the IRS, sometimes out of spite, but also from greed. The IRS Whistleblower-Informant Award pays informants up to 30 percent of all tax penalties and other funds collected as a result of provided tips. Even people who are involved in tax evasion schemes may collect rewards under the program. They must voluntarily provide information and their rewards may be reduced, but they still get paid.

Someone You Do Business With Was Audited

IRS audit

Do you do business with someone who has been audited? You may very well be next. At the very least the IRS may request clarification about your dealings with the person being audited. If your records are in order, you shouldn’t have any reason to worry.

You Filed Your Return Late (or Not at All)

Requesting an automatic extension for time to file your federal income tax return does not count as filing your return late, nor does requesting an extension trigger an audit flag, so relax. On the other hand, filing your return after April 15 without having requested an extension does make your return more likely to be flagged for an audit. If you fail to file a return, the IRS may file one for you – minus many tax breaks to which you may rightfully be entitled. If you file a late return, the IRS will hit you with a hefty penalty of 5 percent of the taxes that you owe every month for up to 5 months. Ouch.

You’re Really Rich

wealthy

If you are a wage-earner who files a return with W-2 forms and reports income of less than $200,000, your chances of being audited in 2013 were a miniscule 0.4%, according to Forbes. During the same period, the IRS audited the tax returns of 1.2 percent of entrepreneurs and self-employed workers who earned less than $200,000. By contrast, the IRS tagged 12.1 percent of taxpayers with incomes over $1 million in 2013 and 17.1 percent of taxpayers with assets in excess of $10 million.

You Drew the Short Straw

The IRS selects a certain number of returns for audit strictly by random. But the recession and budget cuts have reduced the number of random audits in recent years. The number of random audits was likely further reduced during 2013 because of the sequester, according to Forbes.

Renting out a Spare Room? Don’t Forget Uncle Sam.

Tax Tips For Landlords

If you have decided to join the sharing society and rent out part of your home,either through a service like AirBnB or independently, you have several tasks ahead of you.

You’ll most likely want to spruce up the place with comfy furnishings and linens, and maybe a fresh coat of paint. You will also want to avoid legal dust-ups like Über, Lyft and AirBnB have recently experienced in cities like New York and San Francisco.

And of course, Uncle Sam wants his share. Running afoul of the IRS can potentially wipe out any financial gains you may reap from opening your home to complete strangers. Fortunately, you can reduce your potential tax bite – with diligent record keeping.

The Magic Number? 14 (Days)

The most convenient and potentially lucrative scenario would be to completely avoid reporting or paying income taxes on the income you earn from renting out your couch or your spare room. Well, you can, if you meet two relatively easy requirements set by the IRS.

First, you must use the residence as a home at least 14 days out of each calendar year. Second, you must limit the time that you rent any part of the residence that you use as a home to 14 days or less each tax year. That’s it.

So if you have a primary residence plus a vacation home where you spend at least two weeks of the same year, you could rent out rooms in both and collect rental revenue for 28 days (14 days for each residence) completely tax free. It gets better: the IRS places no upper limit on how much income you earn as long as you don’t exceed 14 total days of rental per property. (IRS.gov)

If you live near the town where the All-Star game for a major sport is being played that year, you could rent out one room or the entire place for the week, rake in major cash and never report a dime on your tax return. Pretty sweet. But if a renter burns a hole in your floor, you’re stuck paying for the repairs.

Renting Beyond 14 Days Annually

Should you exceed the 14-day threshold, matters become somewhat more complex. First, you must determine whether you or one or more family members resides in the residence or uses it for personal purposes for at least 10 percent of the time that you rent at fair rental price. You don’t have to be there at the same time you’re renting, but your time in the residence must equal at least 10 percent of the total rental time.

So if you rent out your vacation home for 300 days each year, you or another qualifying person will need to live there for at least 30 days during the same year for the IRS to qualify the residence as a home. For the purposes of this article, the assumption will be that the residence qualifies as a home for IRS purposes. (IRS.gov)

The rules differ for rental properties that are used for what the IRS calls “personal purposes” rather than as residences. There are also different regulations that apply if you use the rental property as a residence, but don’t live there enough of the time for the residence to qualify as a home. To sort out those types of issues issues, consult with a professional such as an attorney with Optima Tax Relief.

IRS Tax Forms for Contractors

As a contractor with AirBnB living within the United States, you would complete Form W-9, Request for Taxpayer Identification Number and Certification. You would also receive Form 1099, Miscellaneous Income before you file your federal income tax return for the following year. (International contractors complete different forms.) If you operate as an independent, you will need to maintain your own records for rental income and expenses, preferably separate from your personal household expenses.

If you provide sleeping space, but no frills, report income and losses on Schedule E, Supplemental Income and Loss, attached to Form 1040, Form 1040NR or Form 1041. If you splash out on fluffy towels, turn-down service, and catered breakfast in bed for your guests, report income and expenses through Schedule C, Profit or Loss from Business, also filed with Form 1040, Form 1040NR or Form 1041.

In either case, you are also allowed to deduct the costs of repairs, depreciation (by filing Form 4562, Depreciation and Amortization), uncollected rents and actual operating expenses. But if a renter trashes the place and you file Schedule E, you would also need to complete Form 6198, At-Risk Limitations or Form 8582, Passive Activity Loss Limitations. If you’re not sure which form you should complete, consulting a tax professional is your best strategy.

Fair Rental Price and the Hobby Loss Rule

If you live in the heart of Manhattan or in a condo overlooking Lake Michigan in Chicago, you might think that setting your rents at bargain basement levels would help you beat the competition. If you set your prices too low, you may well attract the unfavorable attention of the IRS.

That doesn’t mean that you must charge exactly what every other landlord or private renter in your area charges for rent. It does mean that you must set prices for your rental that are comparable to the going rent for similar properties in your area – what the IRS calls “fair rental price.”

If you fail to charge fair rental prices or if you never report a profit from your rental, the IRS may decide that you’re not serious about making money. You don’t have to show a profit every year, but he IRS assumes that you have a genuine profit-making motive if you show gains during at least 3 of the most recent 5 years, including the current year. (IRS.gov)

Otherwise, you could you could be hit by the so-called “hobby loss rule,” which prevents you from using losses related from your venture to offset other income on your federal tax return. Instead, you use must losses related to your rental activities as itemized deduction on Schedule A. Deductions would be limited to the following strict limitations.

  • Deductions such as mortgage interest and taxes are allowed in full
  • Deductions like advertising, insurance and premiums are allowed only to the extent that gross income exceeds deductions from the first category
  • Deductions such as depreciation and amortization are allowed only to the extent that gross income exceeds the amount of deductions taken for both of the prior two categories.

Participating in the Sharing Economy

This article is not intended to discourage you from renting space in your home or otherwise participating in the sharing economy. It’s a potentially exciting way to meet interesting people from all over the country or even other parts of the world.

But just as you want your house or apartment to look its best, you’ll also want your financial house to be in order, too. That way you can concentrate on being the best host you can be, without being hit with unpleasant surprises at tax time.

Covered under the Affordable Care Act? Meet Form 1095-A

More than 5 million people have received subsides to help reduce their health care insurance premiums, thanks to the Affordable Care Act. For many of these individuals, these subsidies have meant the difference between being able to afford health insurance and going without coverage. But this good news has a potential drawback – possible delays for tax filers in 2015.

Under the ACA, individuals who are eligible for subsidies have the option to apply some or all of the credit directly to reduce monthly health insurance premiums for policies originated through the Healthcare.gov and state-administered insurance exchanges. As an alternative, eligible taxpayers may opt to receive the credit as a tax refund. But people who choose to receive their credits as a refund may have to wait even longer than they had planned to receive their cash.

Meet Form 1095-A and Form 8962

The IRS has developed two new forms in conjunction with administering tax credits for policies issued through federal and state health care exchanges: Form 1095-A and Form 8962. Presumably Form 8962 will be available on the IRS website as well as through public libraries and included in online and computer software tax filing programs. Form 1095-A is scheduled to be mailed to taxpayers by January 31, 2015.

Form 1095-A provides information taxpayers need to report credits received or due to them through the ACA. In this respect, Form 1095-A functions much like Form W-2 for wage earners or Form 1099 for independent contractors, unemployed workers and others who receive non-wage income. Form 8962 functions much like Schedule A or Schedule C and must be attached to Form 1040, Form 1040A or Form 1040NR. As of September 2014, both Form 1095-A and Form 8962 are still in draft mode.

Will There Be Delays in Processing Tax Returns?

After the government shutdown in 2013, the IRS delayed processing tax returns for the 2013 tax year for several weeks. This delay had the knock-on effect of delaying the processing of tax refunds. Further complicating the process is that open enrollment for health insurance policies scheduled to take effect during 2015 will also be underway through the Healthcare.gov and state exchanges during the same period.

These factors alone could result in delays in processing tax refunds. If the final versions of either Form 1095-A, Form 8962 are not ready by the end of 2014, it is almost certain that the IRS will once again delay the processing of federal income tax returns. A delay in processing tax returns equals a delay in issuing income tax refunds, at least for taxpayers who file their federal returns early.

Will Refund Anticipation Loans Fill the Gap?

Many people who file their tax returns early expect to receive tax refunds that are often sizable. As of April 2014, the average tax refund totaled more than $2,800. It is reasonable to believe that the average refund for the 2014 tax year could top that figure. Many low-income taxpayers are entitled to health insurance subsides equaling thousands of dollars.

Delays in processing tax returns due to delays in issuing the final versions of Form 1095-A and Form 8962 could have serious consequences for such taxpayers, who often count on tax refunds to fill substantial holes in their budgets.

For taxpayers struggling with limited resources, waiting weeks for federal income tax refund checks can cause serious hardship.

In the late 1980s and early 1990s, tax anticipation loans became wildly popular among such taxpayers. These high interest loans allowed primarily low-income taxpayers to receive at least some cash from their federal and state income tax refunds without waiting weeks for the processing of paper forms. (Responsible Lending)

Online filing for federal and state income tax returns and direct deposit for tax refunds greatly sped up the process – cutting the average wait time from six weeks or more to two weeks or less. As a result, refund anticipation loans waned in popularity. But if the IRS delays processing returns and issuing refunds for the 2015 tax season, such loans may very wall see resurgence.

Hoping for the Best

For its part, the IRS has not announced delays for issuing the final versions of either Form 1095-A or Form 8962. Also, since this is the second time around for the open enrollment season for the Healthcare.gov website, it is reasonable to assume that the process will go much more smoothly than the disastrous first few months. But taxpayers who are hoping to receive a refund next year might need to brace themselves for a potentially bumpy upcoming tax season.