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

Tax Relief Scams: How to Protect Yourself

You’ve seen the ads. You’ve heard the commercials. “Settle your tax debt for pennies on the dollar,” they claim. “We are the country’s largest tax resolution firm,” they explain. “We are a publicly traded corporation,” they proclaim. Well Enron was a very large publicly traded company as well, and they weren’t exactly trustworthy, were they? Some of these same firms have been sued by Attorney Generals for consumer fraud and theft. Others have over 1,000 complaints with the Better Business Bureau for their tax resolution scams.

Unfortunately, the Tax Relief Industry has attracted circling vultures waiting to prey on those who are weakened by the threat of IRS action. Arm yourself with the tools necessary to defend against their self-serving actions. Start by informing yourself about some of the common tax relief scams below and reading our tips on how to protect yourself.

 

Top Tax Relief Scams

Tax Relief Scam #1 – Non-Refundable Upfront Payments Without Any Guarantees

The most common scam performed by these companies is to charge money upfront while promising to get results that they know are unpredictable, if not impossible, to achieve.

The company may ask you to commit a very large sum of money upfront before an investigation is conducted or before the IRS side of the story is pulled (through the Master Transcript).

These are the companies that are the sour apples in the industry because they are focused more on driving upfront revenue than actually helping their clients.

Tax Relief Scam #2 – Misrepresenting Potential Outcomes

Related to the above, our second scam comes from aggressive sales people who try to reel in clients by dangling anecdotal stories of ‘pennies on the dollar’ Offer in Compromise tax settlements. The reality is that very few taxpayers qualify for an Offer in Compromise (about  25% to 33% of applicants).

But the scam companies out there won’t tell you that. They may string you along and make you think you are being taken care of only to discover that, when all is said and done, you did not qualify for the Offer in Compromise. At which point the tax settlement scams company will conveniently assert that it was because the IRS did not approve it, and it was not their (the company’s) fault.

There are multiple factors the IRS considers in an Offer in Compromise application such as the taxpayer’s ability to pay, income, expenses and asset equity. The truth is that most taxpayers don’t qualify.

When you are dealing with a new tax resolution company, ask yourself; does the company make a thorough assessment of the factors above? Do they emphasize the importance of these qualifications? Do they make it clear that an Offer in Compromise is difficult to obtain? If the answer to any of these questions is no, you may be dealing with a company who does not have your best interests in mind.

Tax Relief Scam #3 – Marketing Companies Posing as Service Providers

There are a lot of Companies that advertise tax relief services, but do nothing more than sell the customer’s information to other service providers.

A consumer will be led to believe they are working directly with the company that is doing the marketing, but in actuality their information will be sold to other service providers or outsourced independent contractors.  The companies doing the marketing have no control over the quality of the product or the service levels given.  In the worst cases, they sign up a consumer, with no intention of servicing the client whatsoever.

Tax Relief Scam #4 – The Outright Fraudsters

Unfortunately, there are some firms who have outright cheated and stole from their clients. These are the firms that are being targeted and shut down by the Attorney Generals and who have tarnished the industry.  In these cases, the unscrupulous companies will enroll many clients into a program and collect their money without providing adequate services. Some don’t even send the necessary paperwork to the IRS.

As soon as there are too many complaints or upset consumers, the Company will simply change their name and start preying on consumers all over again. Adding insult to injury, many of these companies don’t provide refunds and leave people even further in debt.

 


Tax Relief Scam Companies Charged for Fraud in Recent Years

Tax Master’s

TaxMasters-Tax Relief ScamsOn March 30, 2012, Tax Master’s was ordered along with its founder, Patrick Cox, to pay $195 million on charges that it defrauded customers nationwide. A few weeks prior, the tax relief firm filed for bankruptcy “in an apparent effort to avoid the state’s enforcement action,” explained the Texas Attorney general.

Tax Master’s unlawfully misled customers about their service contract terms, failed to disclose its no-refunds policy, and falsely claimed that the firm’s employees would immediately begin work on a case – despite the fact that Tax Master’s did not actually start to work on a case until its customers paid in full for services, even if that delayed response meant taxpayers missed significant IRS deadlines.

Roni “Tax Lady” Deutch

ronideuch Tax Relief Scams

In August 2010, former tax attorney Roni Deutch was hit with a $34 million lawsuit for allegedly defrauding thousands of customers seeking tax advice. Then California Attorney General Jerry Brown (now Governor of California) accused her of airing misleading advertisements about her services and engaging in heavy-handed sales techniques to pressure clients. Included in the allegations were charges that Deutch’s firm not only did not provide the services promised to clients but that she refused to refund fees.

An order was issued in August of 2011 prohibiting Deutch from destroying any evidence related to the case. According to the current attorney general of California, Kamala D. Harris, however, Deutch began shredding documents immediately. The attorney general’s office alleges in its complaint that Deutch shredded nearly 2,000 pounds of the firm’s documents, or about 200,000 pages the day after the order was issued.

J.K. Harris

jkharris Tax Relief ScamsThe company has been sued by a number of U.S. Attorneys General after receiving numerous consumer complaints settlement of a class-action lawsuit that had been brought against JK Harris by the Attorneys General of 18 states, including the AG of South Carolina, home to JK Harris’ headquarters.about misleading business and advertising practices. In July 2007 a South Carolina judge approved a $6 million settlement of a class-action lawsuit that had been brought against JK Harris by the Attorneys General of 18 states, including the AG of South Carolina, home to JK Harris’ headquarters.

The suit claimed that JK Harris & Company was charging customers fees for resolving back tax debts, but then failed to deliver on their promises, and engaged in deceptive marketing and advertising practices, such as promoting that their regional offices were staffed by tax experts when they were often only sales representatives.

American Tax Relief

tax relief scamThe FTC filed charges against American Tax Relief in September 2010. The defendants allegedly defrauded consumers out of a whopping $100 million during a short period of time in business! A summary judgement in favor of the FTC found that American Tax Relief falsely claimed they already had significantly reduced the tax debts of thousands of people and falsely told individual consumers they qualified for tax resolution programs that would significantly reduce their tax debts.

In February 2013, the defendants were found personally liable and settled  the matter under an agreement with the Federal Trade Commission. The settlement order imposes a $103.3 million judgment against ATR, Hahn, and Joo HyunPark.  It also imposes judgments of $18 million and $595,000, respectively, against Young Soon Park and Il Kon Park, Joo Park’s parents, who were found by the court to have received significant sums from the scheme’s earnings.The judgments will be suspended once the defendants and relief defendants have surrendered assets that total more than $15 million, including cash, a home in Beverly Hills and a condo in Los Angeles, jewelry and gold items and a 2005 Ferrari.

 


How to Protect Yourself

Do Your Research

Thankfully we now live in a world with Google and it’s very easy to find out if a firm is one of the good guys or bad guys.  To find out if the firm you are dealing with is trustworthy just look them up through the Better Business Bureau or other similar sites. Below are some of the best places to do your research.

1)      Better Business Bureau (BBB) – www.bbb.org/us/Find-Business-Reviews

2)      Rip Off Report – www.ripoffreport.com

3)      Complaints.com – www.complaintsboard.com

Ask The Right Questions

Do you require upfront payments for services?

Firms that make you pay for their services upfront should be avoided. These are the most common tax relief scams. The reputable firms in this industry will be paid their fees after they have rendered their services. Some firms will include a nominal “discovery fee” for them to assign a tax professional to your case and do the research necessary to provide their recommended course of action.  This is preferable to working with a firm that assesses all payments due upfront without knowing the specifics of your case.

What is your refund policy?

If you’re still considering working with a firm that is charging for their services upfront, you’ll want to at least work with a firm that has a formal refund policy. If they are not able to deliver what they claim, you’ll be able to get some or all of your money back.

Do you have any guarantees?

Ask them to put their money where their mouth is. A reputable firm will be willing to guarantee their performance.

Do you service your own clients?

Many firms are just marketing affiliates taking a cut for referring clients to larger backend companies. Ideally, you’ll want to work with a company that services their own clients with an in-house team of CPA’s and tax negotiators.

About Optima Tax Relief

Comprised of Tax Professionals with over 25 years of experience, Optima Tax Relief is a full service Tax Resolution firm that can handle almost any IRS or State Tax Issue. We are one of the few large tax relief companies to be accredited with the Better Business Bureau.

Optima Tax Relief Our most important asset is our clients, and our team is driven to achieve optimal results while providing a professional customer service experience. Every client is matched with their own, personal, designated Case Manager that helps navigate their file to the most beneficial resolution possible, to help ensure your success.

Our Immediate Action team is on hand to provide quick representation and answers for clients that are impacted by garnishments, bank levies, liens and many other challenges.

Additionally, we don’t assess resolution fees upfront until we’ve had a chance to perform an in depth investigation into your tax issues with the IRS. At that time we’ll let you know our estimated fees but you won’t pay until we get the work done. Furthermore, we stand behind our work with a 15-Day Money Back Satisfaction Guarantee on any fees assess for the professional investigation process.

Please don’t fall for any tax relief scams. If you have an issue with the IRS, contact us today to talk to a professional tax relief advisor you can trust.

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