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Optima’s 2017 Annual Food Drive for Second Harvest Food Bank of OC

Cheers to the completion of another successful food drive supporting the Second Harvest Food Bank of Orange County! Our staff set an all-time record by donating 3,500 pounds of food and household supplies, beating the previous record of 2,000 pounds set by our staff last year.

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The wonderful people at Second Harvest informed us that our donation will provide for over 2,800 meals! We’re truly honored to be able to partner with Second Harvest to make this food drive an annual tradition and an important part of our culture at Optima.

Of course, our donation is just a drop in the bucket when compared to the enormity of Second Harvest’s mission. In Orange County alone, Second Harvest serves over 300,000 people, a third of which are children, who struggle with food insecurity. To learn more about their amazing organization and how you can help support them in their fight to end hunger here in Orange County, visit Second Harvest’s website at feedoc.org and be sure to “like” them on Facebook at facebook.com/SecondHarvestFoodBankOC/. There you’ll see the vital programs they run, such as the Kids Café Program, the School Pantry Program, the Senior Grocery Program and much more.

And if you live outside Orange County and want to support the local food banks near you, simply visit feedingamerica.org. There you can look up the non-profits and food banks that are doing this important work in your community. Together we can end hunger!

Tax Season Is Here…And So Are The Scammers

The start of each new year typically brings renewed resolve to get healthy, strengthened desires for personal improvement, and of course, tax season.

Tax season can mean different things to a lot of people. Some look forward to a large refund; for others, it’s one more thing to tack onto their to-do list. For the scammers out there, it means the annual opportunity to rake in fraudulent refunds has finally arrived. Tax scammers are ruthless. They’re unaffected by the thought of families and individuals dependent upon what is likely their biggest check of the year being denied this financial relief.

If there’s one thing we can be sure of, it’s that there will be scams this tax season. Fortunately, there are safeguards you can take to stay protected this tax season.

  • Schedule time with your tax preparer now so you can get your taxes done as early as possible. This will help decrease the chances that a fraudster will get your refund before you do.
  • Sign up for Scam Alerts from the FTC to stay abreast of all the dirty tricks scammers are currently using.
  • Talk to someone in your HR department to see if you can get your W-2 before it’s mailed out. This will help ensure that you actually receive it so you don’t have to risk it being lost or stolen in the mail.
  • Never send emails with personally identifiable information (PII) attached. It’s best to never send them through email at all, but if you must, you should encrypt your message by making a change in your email’s security settings.
  • Beware of computer scams. These can come via email or as popups on your computer asking for your personal information. The IRS saw an approximate 400% surge in phishing and malware incidents in the 2016 tax season.
  • Always use a professional, trustworthy tax preparer. Sometimes, even national tax preparation chains can scam you out of your money or use less-than-secure procedures when it comes to handling your personal information. Make sure you use someone you trust.
  • Never provide any personal information over the phone to someone who says they are from the IRS. The IRS will never contact you via phone, email or social media.

Tax season is stress enough as it is; worrying about tax fraud shouldn’t have to be a part of it. Maintain a peace of mind by filing taxes as early as possible and by enrolling in an Optima Protection Plan at optimatax.idprotectiononline.com.

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.

 

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.”

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.

70 Foreign Countries Agree To Share Tax Information With IRS

The Internal Revenue Service recently received a significant boost in its quest to collect the dues which it is rightfully owed. In an important bit of IRS Tax News, 77,000 foreign financial institutions in nearly 70 countries agreed to share tax information with the IRS. This historic announcement marks a milestone in the agency’s quest to combat international tax evasion.

As part of the agreement, banks and investment funds agreed to share information with the IRS about American citizens who own accounts at their institutions. The participating institutions include banks from Switzerland, the Bahamas and the Cayman Islands, each of which has a reputation for being tax havens. As of March 2015, these institutions began sharing names, account numbers and balances for U.S. account holders with the IRS.

Surprisingly, 515 Russian institutions are part of the agreement. This inclusion is despite the fact that these institutions were required to apply directly to the IRS to be part of the agreement because of halted communications stemming from the Ukraine conflict. The number of cooperating institutions is expected to rise in the coming weeks.

irs-logoWhat It Means for You

Honest taxpayers are unlikely to be directly impacted by this agreement. After all, tax evasion is illegal. Nonetheless, the agreement could have significant indirect consequences for all U.S. taxpayers. Specifically, this agreement should free up IRS employees investigating tax evasion internationally, providing more resources to seek out domestic instances of tax fraud. The knock-on effect result in more closely examined tax returns and more frequent audits. That said, honest taxpayers have little to fear, especially those with incomes under $200,000.

On the other hand, this news seems to signal the beginning of a commitment by the IRS to work more closely with foreign institutions regarding international tax issues. In an increasingly globalized world, more of today’s workforce completes assignments for international employers and clients. Anyone who has ever worked with or for a foreign company understands the hoops taxpayers must jump through come tax time. But with continued international cooperation, these hoops could diminish. That’s good news.

However the situation plays out, it bears monitoring. For now, all we know is that despite recent foreign political challenges, the U.S. government and its agencies – including the IRS – are willing to work with their international counterparts on lowering financial crimes. That’s even more good news.

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 Tips: What does the IRS look for in an audit?

Almost no one wants to pay more in income taxes than they absolutely must. That’s not only understandable, it’s completely legal. On the other hand, the IRS is diligent about collecting the revenue that to which it is entitled. High-worth taxpayers and corporations that park their money in overseas tax havens have found themselves increasingly targeted for collection efforts by the IRS. And perpetuating a straight up tax scam can land you in jail. Just ask actor Wesley Snipes.

Ordinary taxpayers who are targeted for audits by IRS can be placed into one of three categories: declaring too little income, claiming improper deductions and mislabeling hobbies as businesses.This does not mean that you should forego claiming legitimate deductions or voluntarily overpay income taxes. It does mean that you should be diligent about properly documenting any claims made on your income tax returns. 

Declaring Too Little Income

If you have one job and your employer provides a W-2 form to the IRS, you are unlikely to significantly underreport your income, and the IRS knows that. But people who receive tips, such as service workers, are prone to receive special scrutiny if the IRS suspects income underreporting. Self employed entrepreneurs and small business owners are also subject to increased scrutiny, especially if their income tax returns show little or no income sustained over several years.Anyone who receives a significant proportion of his or her income in cash may also be targeted for an IRS audit.

Claiming Improper Deductions

Two divorced or separated parents filing separately who each claim the same children as dependents on their income tax returns may each find themselves being audited by the IRS. Refundable tax credits and charitable deductions are also a frequent target for abuse. The Earned Income Tax Credit (EITC) is especially vulnerable to improper claims. As a result, a large proportion of IRS audits are triggered by questionable EITC claims.Homeowners who rent their homes rather than attempting to sell them in a depressed housing market frequently neglect to file Schedule E – which leaves them vulnerable to IRS inquiries, or even full-blown audits.

Mislabeling Hobbies as Businesses

Do you collect stamps or baseball cards? Have you sold anything on eBay or Craigslist? Awesome! But making the occasional sale online or at a collectors’ show does not entitle you to call yourself an entrepreneur. Don’t try to claim out-of-pocket expenses related to your hobby as business deductions. If you attempt to write off your expenses via Schedule C, don’t be surprised if the IRS comes knocking. If the IRS ultimately disallows your deductions, your hobby could become just that much more expensive.

Additional Tax Topics:

The IRS Criminal Investigation Process
IRS penalty and interest rates
What to do during an IRS Audit

5 Questions to Ask Your Tax Adviser Now

The end of another year is rolling up fast. With the year-end comes your last opportunities to minimize your 2013 tax bill and make changes to your benefit plans for 2014. Here are some questions, posed by Forbes magazine, to ask your financial and tax adviser while there is still time.

1. Should you defer income or accelerate it in 2013? What about deductions?

The answer depends on whether you expect to be in a higher tax bracket next year. Tax rates stayed the same for 2014, but tax brackets are altered. Take a look at the new tax brackets and see if your situation has changed.

Higher bracket next year: Consider accelerating your income, pulling it into 2013, to minimize your current year tax.

Lower bracket next year: You may want to defer income if possible to pay less taxes in 2014. If you are age 70 ½ or older, you could save taxes by taking only the minimum required IRA distribution in 2013, and wait till January to take more. You can also prepay 2014 deductions – like property tax and estimated state income tax – and claim them in 2013 while your tax bracket is higher.

2. Should you recognize gains and losses now?

If you have gains on investments and you’re in a lower tax bracket this year than next, this might be an advantageous time to sell. If you are in the 10% or 15% tax bracket, you’ll pay zero capital gains tax.

If you are in a higher tax bracket this year, taking your unrealized losses now should reduce your 2013 tax bill.

3. Should you convert a traditional IRA to a Roth IRA?

Roth IRAs require you to pay tax on your contributions now, but distributions are tax-free. If your tax bracket in 2013 is lower, and you can afford it, pay the tax now. That will set you up for tax-free retirement funds later. Just remember, if you convert to a Roth IRA you’ll need to pay all the tax on those tax-deferred contributions you’ve made. So ask your tax adviser to run the numbers before you decide.

4. What about year-end charitable giving?

You already know you can lower your tax bill by making charitable gifts before January. However, if you expect a higher tax bracket next year, the donation will benefit you more in 2014. Consider holding your donation till January.

If you are at least 70 ½ years old , you can donate up to $100,000 directly from your IRA to a charity. This doesn’t give you a charitable deduction on your taxes, but it will allow you to avoid the required minimum distribution, up to $100,000. Note: This tax provision may disappear after 2013 unless Congress acts to renew it.

5. Should you change your benefit plans?

If you have a flexible spending account, now might be a good time to increase your contributions to the max, which is $2,500. Chances are with rising deductibles, co-pays and premiums expected for all of us, you’ll need the financial help of paying for these expenses with pre-tax dollars. Also make full use of your childcare flexible spending account (maximum of $5,000) to save some tax money and evenly spread out the cost of childcare.

A good tax/financial adviser can steer you in the right direction when preparing for 2014. Contact Optima Tax Relief for help with these important matters before it’s too late.

One more thing: as the year ends, fraud ramps up. You may get unwelcome offers from “financial advisers” who promise “guaranteed” “risk free” or “secret” investment deals. If that happens, don’t walk away… run! To ensure you are dealing with a legitimate adviser, use FINRA’s Broker Check.

Photo: Dave Dugdale