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New Year, New You: Invest in Your Identity Wellness

The holiday season is now a thing of the past and now, New Year’s resolutions are the hot topic of conversation. The ultra-motivated will have a ten-part list covering everything from weight loss goals to finding a new hobby. And then there will of course be some outliers (16% of us according to a Neilson sruvey) that will admit that resolutions just aren’t for them. Wherever your ambitions lie on the spectrum, the one area of your life that can’t afford to be brushed off is your identity wellness.

Though often overlooked, your identity wellness deserves the kind of attention that people tend to put towards their health at the start of each new year. Your identity wellness encompasses everything from your financial security, credit profile, and credit score to digital privacy.

The New Year is the perfect time to make proactive identity protection a part of your everyday life. With these tips, you’ll be on your way to a smarter, safer, and more identity-secure you:

  • Check your bank and credit accounts frequently. It’s best to catch fraud as early as possible so that you can take action immediately; this minimizes damage and makes the resolution process easier.
  • Check your credit report regularly. Federal law requires the three major credit bureaus (Equifax, Experian, and TransUnion) to provide you with a free credit report once a year. You can stagger these free reports every four months from each bureau so that you’re seeing your report pretty often. This is why credit monitoring services are so valuable: alerts are sent at the first sign of suspicious activity on your credit profile.
  • Stop connecting to public Wi-Fi. It’s convenient, of course, but frequently it’s unsecure. This means that any information you input while connected could be accessible by someone else. So if you must, just be sure to never access your financial accounts or any other sites that require a password when using public Wi-Fi.
  • Don’t click the “Remember Me” box on your digital accounts. If your computer, laptop, or smartphone ever got into the wrong hands, the perpetrator could have a field day accessing your accounts and gathering important personal information. Even worse, they could log into your bank or credit accounts.
  • Keep your firewall and anti-malware up to date. Firewalls block unauthorized access to your computer’s information, while anti-malware prevents malicious software from being downloaded to it. You must be sure to keep them up to date though, as hackers are constantly creating new ways to infiltrate your computer.
  • Update your passwords or look into a password manager. We all know by now that we should change our passwords often with strong, secure ones. Let’s face it though: most of us don’t. An easier solution might be to keep all of them together in a password manager so that you can use complex ones – without forgetting!
  • Shred your documents before tossing them. This includes your credit card/bank statements, pre-approved credit card offers, utility bills, and anything else that contains your personal information.

Of course nothing beats having a comprehensive identity protection provider that is there 24/7 for when the unexpected happens. Services like credit and identity monitoring send alerts if any suspicious activity is found so that you can take action immediately. To find out how you can protect your identity with Optima’s Protection Plans, visit optimatax.idprotectiononline.com.

10 Tips for 1099 Filers and Small Business Owners

It’s tax time again and the growth of the Gig Economy is about to strain an already overburdened IRS. The proliferation of freelance or part time employees driven by job cutbacks from the recession and the rise of opportunities like Uber and others means that more Americans than ever will file 1099s in 2016.

However, while many 1099 filers are exceptional in their chosen line of work, they also lack familiarity with the form and tax requirements of the designation itself. 1099 essentially creates a tax trap for these individuals because they are lured by an increase in income only to realize a year later that they will likely earn less. Even worse, that means they likely were unaware of how much they needed to properly budget for and save for taxes.

As a result, tax experts expect that both the form itself and the tax implications of working in the new 1099 Economy will inevitably lead to a rash of questions for the IRS and its customer service teams. Unfortunately, the IRS has said it’s unprepared to handle even the standard amount of inquiries this tax season. Last year, roughly 35% of calls to the IRS were answered while the rest experienced “courtesy” hang-ups after wait times of more than 2+hours. The IRS has already forecasted more problems this year as staffing is reduced, more uncertainty looms with tax codes, and downsizing is in the air. This spells frustration and little help for the millions of Americans that are expected to file 1099s and that could turn to the IRS for answers to their tax assistance this year.

So how should small business owners and 1099 filers avoid this logjam on the phones? By understanding the unique challenges of filing as a 1099 workers and adhering to basic best practices in filing strategies, individuals and business owners should be able to avoid many of the most common questions this year. These ten tips should help you plan ahead of time for your tax needs and avoid long waits on the phone.

1.  Income and Self-Employment Tax

As a traditional W-2 filer, workers have taxes removed from their paycheck before they receive it. With a 1099, a filer is responsible for paying their own income taxes and self-employment taxes out of their income. If not properly budgeted for, this can create a much larger tax burden at the end of the year. Only proper budgeting will save the filer from this potentially crushing obligation.

 2.  Be Aware of Deadlines

Missing the 2015 tax year filing deadline of April 18th and owing taxes can result in particularly high “failure to file” penalties as much as 25%. Make sure to track your deadline and file on time.

 3.  Get Organized

Small business owners can be notoriously bad record keepers, but this puts you or your tax preparer at a huge disadvantage comes tax season. Being organized will save you a significant amount of time and money.

4.  Documented Expenses & Deductions

As an independent contractor, a 1099 earner is able to deduct the costs of earning the money from the total amount earned. The challenge is that filers rarely keep detailed records, making it difficult for the tax preparer and creating a potential loss of income because of lost or forgotten deductions.  An example is a mileage deduction, which requires that the filer accurately record the miles they drove in service to their job over the course of a year. One way to get ahead of this is to work with your tax preparer to devise a preferred system of record-keeping or to learn which deductions are allowed in the coming year.

 5.  The At Home Work Deduction

If you have a qualified home office, you can deduct expenses that are normally not eligible such as portions of home insurance and utilities. The IRS has made it even easier by simplifying this to a maximum of $1,500 or $5 per square foot.

6.  Be Careful if Showing a “Loss”

Generally, the IRS considers your business a “hobby” if you are not able to turn a profit in three out of five consecutive years.  If you are reporting a loss in an effort to avoid taxes, you may want to double-check your records prior to filing.

 7.  Increase in Audits

Beyond a loss of possible deductions, an even more harmful potential result of this poor record keeping is an IRS audit. Self employed individuals are subject to audits because the deductions they have taken are not adequately documented or not backed up with saved receipts.

 8.  To Insure or Not Insure?

All individuals and families are required to hold health insurance as required by the Affordable Healthcare Act, or pay a fine for not carrying insurance. Self employed individuals without health coverage will face much bigger penalties this year, as much as $325 per adult in 2015. If you are uninsured, look into obtaining a qualified coverage to avoid penalties of up to $695 per adult in 2016.

9.  Health Insurance Requirements

The ACA includes an income verification component as part of its insurance requirement. This income verification is somewhat relaxed for 1099 filers because the IRS will actually reconcile your tax return with your ACA application at tax time. Because of this, it is always better to estimate your income higher (rather than lower) on your application because any over-estimation will result in a refund. If the reverse is true and you underestimate, then you will have to pay back a portion of the subsidy credit you received come tax time. An inaccurate guess either way will not incur penalties, but knowingly providing false information can result in fines or even criminal charges.

10.  Consider a “Silver” ACA Plan

ACA plans are ranked as bronze, silver, gold, or platinum, based on their out-of-pocket costs. They all come with the same benefit, but cheaper plans that come with high out-of-pocket costs can present a challenge for independent workers who might have long gaps with little or no income. If you qualify for a cost-sharing reductions based on your income and enroll in a silver plan you get the best of both worlds:  A fairly low premium, plus a lower deductible and other out-of-pocket costs.

 

If you do all the above and still need to call the IRS, remember to be professional and to the point. Agents have limited time to chat about issues unrelated to them and our own staff always get better results when they are polite and treat them professionally.

And above all, be honest. It is against the law to willfully disclose fraudulent information to the IRS and can result in some serious penalties.  The IRS takes notes on every conversation and it is always best to say that you are “unsure” if you are asked a direct question that you do not know how to answer.  If you communicate financial information that is erroneous or commit to a payment that you may not be able to afford it can cause problems later.  Consider hiring a Tax Attorney who has attorney/client privilege if you feel that you are in over your head.

 

About David King

David King is CEO of Optima Tax Relief.  David brings with him 12 years of experience in growing and running financial services firms. As a member of Optima’s founding leadership team, David’s emphasis on customer service and a “Client First” approach has been integral to developing Optima’s industry-leading tax resolution services.

 

New Consumer Warning Issued by the IRS Talks of Recent Surge in e-mail Schemes for 2016 Tax Season

Tax season is once again in full swing, and while that thought alone can be frightening to some, the renewed threat of scammers that are popping up recently is even more alarming. While tax schemes and phishing attempts have long been an unfortunate risk to citizens trying to do the right thing and stay on the “good side” of the IRS, this tax year has already seen a dramatic increase in their nefarious existence.

IRSPhishingThe Internal Revenue Service just released a warning to citizens to beware of suspicious emails after already seeing an approximate 400% increase in these phishing and malware incidents so far this tax season alone. These emails are designed to fool taxpayers into thinking that they are official written communication coming directly from the IRS or other tax authority representatives, including tax software companies.

“This dramatic jump in these scams comes at the busiest time of tax season,” said IRS Commissioner John Koskinen. “Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

This year’s steep increase in this fraudulent activity has officials very concerned. They are not only using the traditional phone and email methods of communicating with would-be victims, but are also now reaching people via text messaging. The messages appear to be legitimate and ask taxpayers to provide a wide variety of information. Some requests inquire about filing status, requests to verify PIN information, or verification of refund information, while others seek to confirm personal information or even order official transcripts.

So what do fraudsters do with this information?

They can actually use the stolen information to be able to file false tax returns, amongst other things. When an unknowing victim clicks on one of these emails, they are redirected to websites that look very legitimate and often imitate official web pages like one might find at IRS.gov or on other real websites. These fraudulent sites then ask for social security numbers and other personal information that thieves can use to file false income tax returns.

Many of these sites also contain malware, which can infect your computer and allow criminals to access your files or obtain additional information, such as passwords and logins, by tracking your keystrokes.

According to the official news release, the IRS has seen an increase in reported phishing and malware schemes, including:scam-alert

  • There were 1,026 incidents reported in January, up from 254 a year earlier.
  • The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
  • This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

As the email scams increase, the IRS is working with other leaders in the tax industry to find a resolution for this issue.

“While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. “We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns.”Phishing_magnifying_glass_fi

One way the IRS, state revenue departments and other tax organizations are trying to protect taxpayers, is by providing them with as much knowledge of the situation as possible. Combining forces to form the “Taxes. Security. Together” campaign, they hope to educate consumers and help keep them away from these potential scammers that could cause financial devastation to many tax payers.

What should you do if you think you have received a phony or questionable email or text message from the IRS?

If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, they are urged to report it by sending it to phishing@irs.gov.

Recent email examples the IRS has seen include subject lines and underlying text referencing:

  • Numerous variations about people’s tax refund.
  • Update your filing details, which can include references to W-2.
  • Confirm your personal information.
  • Get my IP Pin.
  • Get my E-file Pin.
  • Order a transcript.
  • Complete your tax return information.

Also, it is important to keep in mind that the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

To learn more about this latest warning, you can visit their website or call the IRS if you feel you have been a victim of these very crafty and cunning criminals.

IRS Completes the “Dirty Dozen” Tax Scams for 2015

irs-says-phone-scams-continue-to-beThe Internal Revenue Service recently presented its list of the 2015 “Dirty Dozen” list of tax scams with a warning to taxpayers about aggressive telephone scams continuing coast-to-coast. Scam artists use flyers, advertisements, phony storefronts and word of mouth via community groups and churches to seek victims. Scams are especially common during tax filing season, but can occur any time of the year.

“We are doing everything we can to help taxpayers avoid scams as the tax season continues,” said IRS Commissioner John Koskinen. “Whether it’s a phone scam or scheme to steal a taxpayer’s identity, there are simple steps to take to help stop these con artists. We urge taxpayers to visit IRS.gov for more information and to be wary of these dozen tax scams.”

The list below represents the list of this year’s “Dirty Dozen” tax-related scams:

Phone Scams

Aggressive and threatening phone calls by scam artists posing as IRS agents remain an ongoing threat to taxpayers. There has been a surge of these scams — threatening arrest, deportation, license revocation and other adverse consequences. The IRS reminds taxpayers that the IRS will never solicit personal information by email or by phone calls not initiated by taxpayers.

Phishing

The IRS never sends taxpayers unsolicited emails or refunds. If you receive such a message; it is almost certainly a scam. Taxpayers should be wary of clicking links contained in strange emails and websites. They may be attempts to steal your personal information.

UntitledIdentity Theft

Attempts at identity theft are especially common during tax filing season. A common tactic is filing fraudulent returns using someone else’s Social Security number. The IRS aggressively pursues identity theft attempts, but taxpayers must also practice due diligence in protecting their information.

Return Preparer Fraud

Return preparers are a vital part of the U.S. tax system. About 60% of taxpayers use tax professionals to prepare their returns. Although the vast majority of tax professionals provide honest high-quality service, dishonest preparers set up shop each filing season to perpetrate refund fraud, identity theft and other scams. Taxpayers must be wary of such bad actors.

Offshore Tax Avoidance

Offshore_Tax_Evasion_1_.54d100778feac

As the recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows, it’s a losing bet to attempt to shelter income and assets offshore. Taxpayers are best served by taking advantage of the IRS Offshore Voluntary Disclosure Program (OVDP) to get their federal income tax affairs in order.

Inflated Refund Claims

Taxpayers should be wary of preparers promising inflated refunds — especially before looking at their financial records, and refuse to sign blank returns. Taxpayers should also be wary of preparers who charge fees based on a percentage of the refund. For more information on selecting paid tax preparers, see the Choosing a Tax Professional page on IRS.gov.

Fake Charities173572251_Charity scam

Especially during the holiday season, taxpayers should be on guard against fake charitable organizations. Check out the group to ensure that hard-earned cash isn’t filtered into a sham operation BEFORE making a contribution. IRS.gov has tools taxpayers need to check out the status of charitable organizations. Be especially wary of charities with names that are similar to familiar or nationally known organizations.

Hiding Income with Fake Documents

The mere suggestion by paid preparers that taxpayers should falsify to reduce tax bills or inflate tax refunds is a huge red flag. The IRS reminds taxpayers who might be tempted to allow paid preparers to cut corners that they are legally responsible their returns regardless of who prepares them.

Abusive Tax Shelters

While the vast majority of taxpayers voluntarily pay their fair share, the IRS is committed to stopping abusive tax shelters and prosecuting the people who create and sell them. Taxpayers should be wary for tax breaks that sound too good to be true. When in doubt, seek an independent opinion regarding questionable offers before making a commitment.

Falsifying Income to Claim Credits

Unscrupulous tax preparers sometimes persuade otherwise honest taxpayers to artificially inflate their income to erroneously claim tax credits. While taxpayers are entitled to take advantage of all legal tax breaks, avoiding questionable credits and deductions is the best policy in the long run. If the IRS discovers a discrepancy, the taxpayer is legally responsible, even if someone else preparedthe return.

tax_1557323c

Excessive Claims for Fuel Tax Credits

Unlike the mileage tax credit, the fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers. Nonetheless, the IRS routinely encounters unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim fuel tax credits to inflate their refunds.

Frivolous Tax Arguments

Taxpayers are entitled to present legitimate disputes about tax liabilities. However, despite routinely being thrown out of court, there are unscrupulous taxpayers who insist on making outlandish claims to avoid paying taxes they rightfully owe. The IRS reminds taxpayers who are tempted to file frivolous returns that the penalty for doing so is $5,000. Additional information about tax scams is available on IRS social media sites, including YouTube and Tumblr, where people can search “scam” to find scam-related posts.

Tax Scams: Just Don’t Do Ittax-fraud

Illegal scams can lead to significant penalties and interest for taxpayers, as well as possible criminal prosecution. Taxpayers should also remember that they are legally responsible for the content of their tax returns even if they are prepared by someone else. The IRS Criminal Investigation division works closely with the Department of Justice to prosecute criminals who perpetrate tax scams.

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.

IRS Criminal Investigation Releases Fiscal Year 2014 Annual Report

The Internal Revenue Service announced the release of its IRS Criminal Investigation (CI) annual report for fiscal year 2014.   IRS CI initiated 4,297 cases in FY 2014, focusing on international tax fraud, return preparer and questionable refund fraud, identity theft, public corruption, bank secrecy act violations, significant money laundering investigations and terrorist financing cases.

BN-IG445_IRSCYB_J_20150505144950“There is no doubt that we have had to be creative to overcome some of the budget challenges this year,” said Richard Weber, Chief, IRS Criminal Investigation Division. “But in so doing, we maintained a steady focus on what is important. Our highest priority is to enforce our country’s tax laws and support tax administration to ensure compliance with the law and combat fraud.”

 

Historical Snapshot and Agency Priorities

The annual report highlights the agency’s successes while providing a historical snapshot of the makeup and priorities of the organization. Lincoln Irey, the first chief of IRS CI, released an annual report every year during his tenure, which extended from 1919 to 1946.

As the only federal law enforcement agency with jurisdiction over federal tax crimes, CI boasted the highest federal law enforcement conviction rate in FY 2014 — an impressive 93.4%. Prosecutors nationwide routinely call on IRS CI to lead financial investigations for financial crimes ranging from identity theft to international tax evasion and transnational organized crime.

“We are incredibly proud of our conviction rate,” said Weber. “As a federal law enforcement agency, that conviction rate reflects the pride of our agents and the quality of our case work. We are the best financial investigators in the world and I am extremely proud of our special agents and professional staff.”

Big Wins for IRS CI

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in an effort to generate confidence in the tax system and encourage compliance with the law. The 40-page report includes case summaries on a range of tax crimes, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes. The report also reflects the diversity and complexity of CI investigations, which touch almost every part of the world.

511aa8b798600.preview-620For example, two of the biggest tax fraud stories of the year — Credit Suisse and Bank Leumi — are included in the report. In the largest tax fraud case ever filed, Credit Suisse pleaded guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and agreed to pay a total of 2.6 billion dollars. CI also led the investigation against Bank Leumi Group, a major Israeli international bank that admitted conspiring to aid and assist U.S. taxpayers to prepare and present false tax returns and agreed to pay 270 million dollars. Bank Leumi also pledged to cease providing banking and investment services for accounts held or beneficially owned by American taxpayers. The Bank Leumi Group case marks the first time an Israeli bank has admitted to such criminal conduct.

“The budget challenges facing our agency are nothing new. In the past five years, CI’s staff has been reduced approximately 11 percent bringing staffing to 1970’s levels. This trend cannot continue,” Weber added. “We will continue to remain focused on finding and investigating great cases that make a real difference in compliance of our nation’s tax laws.”

2016 Tax Season Forecast: Doom and Gloom if You Want Help from the IRS

During the 2015 income tax filing season, increased compliance requirements combined with budget cuts to produce one of the worst tax seasons in history, at least for taxpayers who sought assistance from the IRS. More than 137 million tax returns were filed, with more than 83 million taxpayers contacting the IRS toll-free customer service line at least once seeking assistance.

Hold, Please

Out of the 80 million-plus calls initiated, a miserable 37.6 percent were actually answered by an IRS agent, with remaining callers receiving what the IRS has named “courtesy” hang-ups after extended hold times. This figure is in sharp contrast to the more than 70 percent of taxpayer calls to the taxpayer toll-free IRS call center that were handled by an agent in 2014. Wait times for all callers averaged more than 23 minutes. Taxpayers who sought in-person assistance at Taxpayer Assistance Centers also experienced lengthy waits; funding for TACs was cut by 4 percent in 2015.

With no significant increases in funding assigned to the IRS in 2015, all indicators point to the availability of assistance by telephone being just as dreadful for the 2016 tax season. A number of factors are involved, many of which are repeats from earlier years. Several examples are outlined below.

Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (ACA), also known as Obamacare, went into full effect for individual taxpayers in 2014. One of the most misunderstood provisions of the ACA is the individual mandate which requires a majority of individuals to purchase health insurance that fulfills federal guidelines – or face a penalty. Many individuals had the mistaken impression that the penalty was 96 dollars across the board, and only learned differently when they prepared their 2014 tax returns.

For 2016, the penalty has increased dramatically, which will come as a surprise to still more taxpayers. Increased incentives related to the ACA almost undoubtedly mean that the number of returns filed will likely hold steady or even increase. More tax returns generates the knock-on effect of more taxpayer calls to the IRS – many of them going unanswered, just as they did in 2015. In addition, businesses with at the equivalent of 50 full-time employees will be required to provide health insurance to their workers. However, that requirement does not extend to part-time workers or to the families of full-time workers, which points to the likelihood of even more confusion for taxpayers preparing their 2015 federal tax returns.

Last Minute Tax Provisions

For the past several years, there has been suspense about whether particular tax provisions will be extended by Congress. The final determination often occurs right before the end of the year, which does not allow the IRS sufficient time to prepare its forms and instructions and have them ready by the customary January 1 opening date for tax season, resulting in delays in processing tax refunds. For instance, in 2014, Congress enacted last minute tax provisions on December 16, just two weeks before the end of the calendar year. As a result, the IRS delayed the acceptance of the first tax return until January 20, 2015.

Given the present divisiveness in Congress, it should come as no surprise that 2015 has proven to be no different than 2014. Although the Senate Finance Committee passed a set of 56 temporary tax breaks in July 2015, as of early December 2015 the full House and Senate had not taken action on the package. Expectations are that Congress will act on the provisions before they leave for the year, and as of this writing, there was no announcement of a delay for filing tax returns in 2016. However, depending on what Congress finally does or does not due, the possibility remains that a delay will occur for the beginning of the 2016 federal tax filing season, with subsequent delays in processing tax returns and issuing tax refunds.

Tax Fraud

tax_fraudThe IRS takes tax fraud very seriously. Nonetheless, in May 2015, the IRS reported that they had identified more than 163,000 fraudulent or potentially fraudulent tax returns, claiming more than 900 million dollars in refunds, with 787 million dollars in fraudulent refunds actually paid. In a related incident, the IRS reported in May 2015 that approximately 100,000 taxpayer accounts had been compromised through its online “Get Transcript” service. In response, the IRS suspended the ability to order transcripts online. Taxpayers can still order transcripts by mail, which the IRS states requires five to 10 calendar days for processing.

To reduce future incidents of tax fraud and data breaches, the IRS has boosted filters and screening – which will likely translate to delays in processing income tax returns as well as issuing tax refund checks during the 2016 tax season.

Earned Income Tax Credit

EITC_grnThe Earned Income Tax Credit (EITC) provides workers with modest incomes with a refundable tax credit. It is also a popular target for attempted tax fraud. The IRS has created a due diligence checklist for the Earned Income Tax Credit that it stresses paid tax preparers to use. However, there will be additional efforts by the IRS to require individual taxpayers to use the checklist as well. This development is almost guaranteed to increase confusion among taxpayers, with the domino effect of delayed tax refunds.

Easing the Pain of Tax Filing Season

The IRS.gov website contains extensive information for individuals and business owners filing their own tax returns – or preparing documentation for paid tax preparers. News, informational articles and downloadable forms are readily available. Taxpayer related information is also available through the U.S. Treasury, Treasury Inspector General for Tax Administration and USA.gov websites.

However, taxpayers with complex income tax returns – or anyone who has questions about completing their tax returns – can’t count on receiving assistance from the IRS for the upcoming tax filing season. One alternative is to turn to the professionals at Optima Tax Relief. In addition to answering tax inquiries, they can assist you with any issue or dispute you may have with your federal or state tax returns – without a 20 minute wait to speak with an agent.

Historical Highlights of the IRS

Every taxpayer knows about the existence of the IRS, but many people do not realize that the United States only began collecting income taxes from individuals in 1862. The following timeline documents the history and intriguing development of the collection arm of the Treasury department.

The First Income Taxtax

1862 – President Lincoln issued a revenue-raising measure into law to help pay for Civil War expenses. The measure also created a Commissioner of Internal Revenue along with the nation’s first income tax. An additional 3 percent tax was levied on incomes between 600 and 10,000 dollars and a 5 percent tax on incomes of more than 10,000 dollars

1867 – Facing stiff public opposition, Congress cuts the income tax rate. As a result, from 1868 until 1913, 90 percent of all national revenue came from taxes on liquor, beer, wine and tobacco.

1872 – Income tax repealed.

Creation of the Bureau of Internal Revenue

1894 – The Wilson Tariff Act revived the income tax and created an income tax division within the Bureau of Internal Revenue.

1895 – The new tax was ruled unconstitutional by the Supreme Court on the grounds that it was a direct tax, not apportioned among the states on the basis of population. As a result, the income tax division was disbanded.

Ratification of the 16th Amendment and World War I

16th ammendment1909 – President Taft requested Congress to propose a constitutional amendment giving the government power to tax incomes directly. Congress also levied a 1 percent tax on net corporate incomes of more than 5,000 dollars.

1913 – Under the looming threat of World War I, Wyoming became the crucial 36th state to ratify the 16th Amendment. The amendment stated, “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Later, Congress adopted a 1 percent tax on net personal income of more than 3,000 dollars with a surtax of 6 percent on incomes of more than 500,000 dollars. Congress also repealed the 1909 corporate income tax. The first Form 1040 was introduced the same year.

1918 – The Revenue Act of 1918 raised more money to finance the World War I effort. The Act also codified all existing tax laws and imposed a progressive income tax structure, with rates up to 77 percent.

Prohibition and Taxationprohibition

1919 – The 18th Amendment was ratified, barring the manufacture, sale or transport of intoxicating beverages. Congress also passed the Volstead Act, granting the Commissioner of Internal Revenue primary responsibility for enforcement of Prohibition. The Department of Justice assumed primary prohibition enforcement duties eleven years later.

1931 – An undercover agent employed by the IRS Intelligence Unit gathered evidence against gangster Al Capone. The evidence was used to convict Capone of tax evasion. He died in prison before serving out his 11 year sentence.

1933 – Prohibition repealed. IRS resumed responsibility for alcohol taxation the following year, along with administration of the National Firearms Act. Enforcement of the tobacco tax was added later.

Individual Deductions and Employer Tax Withholding

1942 – The Revenue Act of 1942 which FDR hailed as “the greatest tax bill in American history,” passed Congress. The Act increased taxes along with the number of Americans required to pay income tax. The Act also created deductions for medical and investment expenses.

1943 – Current Tax Payment Act, which required employers to withhold taxes from employees’ wages and remit them quarterly was passed by Congress

1944 – Congress passed the Individual Income Tax Act, creating standard deductions on Form 1040.

The Creation of the IRS

IRS1952 – Reorganization Plan No. 1 proposed by President Truman. The Plan, designed to restore public confidence in the agency, replaced the patronage system at the IRS with a career civil service system and decentralized service to taxpayers.

1953 – Truman’s reorganization plan endorsed by President Eisenhower, who changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.

Mid Century Modifications

1954 – Filing deadline for individual tax returns changed from March 15 to April 15.

1961 – The dedication of the National Computer Center at Martinsburg, W.Va. heralded the beginning of the computer age for the IRS

1965 – First toll-free telephone number instituted for the IRS.

1972 – The division of Alcohol, Tobacco and Firearms separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

1974 – Congress passed the Employee Retirement and Income Security Act, assigning the IRS regulatory responsibilities for employee benefit plans.

Electronic Filingefile

1986 – First year for limited electronic filing. President Reagan signed the Tax Reform Act, containing 300 provisions and requiring three years to implement. As the most significant piece of tax legislation in 30 years, the Act codified federal tax laws for the third time since the Revenue Act of 1918.

1992 – Taxpayers owing money to the IRS were allowed to file returns electronically.

21st Century Reform

1998 – Congress passed the IRS Restructuring and Reform Act, expanding taxpayer rights reorganizing the agency into four operating divisions aligned to address taxpayer needs.

2000 – IRS ended its geographic-based structure and instituted four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. This change represented the most sweeping adjustment to the IRS since 1953.

Mid-Year Refunds Initiated

tax-refund2001 – Mid-year tax refund program to provide advance payments of a tax rate reduction administered by the IRS

2003 – A second mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit was administered by the IRS. During this same year, electronic filing reached 52.9 million tax returns, representing more than 40 percent of all individual tax returns — a new high.

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.

hardship

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.

Data Breach: Tax-Related Information for Taxpayers

A data breach is the intentional or unintentional release or theft of secure information. It can be the improper disposal of personally identifiable information in the trash or a sophisticated cyber-attack on corporate computers by criminals. It can affect companies large or small.  The one common link is the victim, the person whose identity, financial or personal information has been compromised.

data-breachWhat You Should Know About Data Breaches

Tax-related identity theft is when someone uses your Social Security number to file a false tax return claiming a fraudulent refund. Your tax account is most at risk if the data breach involves both your SSN and financial data, such as wages.

The Internal Revenue Service is committed to working with taxpayers to ensure that all tax accounts remain secure.  The IRS stops the vast majority of fraudulent tax returns.  If fraud is suspected, the IRS will contact you via mail with instructions.  However, some unfortunate taxpayers may discover they have been victimized by a data breach when they attempt to file electronically and have their returns rejected by the IRS as duplicates.

It’s important to note that not every data breach results in identity theft, and not every identity theft is tax-related identity theft.  Data breaches involving just credit card numbers, health records without SSNs or even driver’s  license numbers, while certainly serious, will not affect your federal or state tax return.

What to Do If You Are the Victim of a Data Breach

Determine what type of Personally Identifiable Information (PII) has been lost or stolen. It is important to know what kind of information has been stolen so you can take the appropriate steps. For example, a stolen credit card number will not affect your IRS tax account.  Regardless of the nature of the breach, you should stay in touch with the company that lost your data. Companies sometimes offer special services, such as credit monitoring services, to assist victims. In addition, you should take the following steps recommended by the Federal Trade Commission.

  • File a police report
  • File a complaint with the FTC
  • Notify at least one of the three major credit bureaus in writing — Equifax, Experian and TransUnion —  (preferably all three) to place a fraud alert on your credit file
  • Close any accounts opened without your permission

If you received IRS correspondence or your e-file tax return was rejected as a duplicate, take these additional steps with the IRS:

  • Submit an IRS Form 14039, Identity Theft Affidavit
  • File your tax return (most likely by paper) and attach Form 14039
  • Watch for any follow-up correspondence from the IRS and respond quickly.

Who Should File Form 14039?

Form 14039 — Identity Theft Affidavit should be used if your Social Security number has been compromised and IRS has informed you that you may be a victim of identity theft tax fraud or your e-file return was rejected as a duplicate. The fillable form is available at IRS.gov. Follow the instructions exactly. You can fax or mail it or submit it with your paper tax return if you have been prevented from filing because someone else has already filed a return using your SSN. You only need to file the form once. After the form is processed, you will receive a special number to use in place of your Social Security number to file your federal income tax returns.  This number can be used with electronic filing — but should only be used with your federal tax returns, not with your state tax returns.