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IRS Hacked, 104,000 Taxpayers Impacted and Nearly $50 million Stolen: What Should You Do to Protect Yourself?

The IRS announced on Tuesday (5/26/2015) that identity thieves had attempted to access the accounts of 200,000 taxpayers through the IRS’s “Get Transcript” online application. The scary part is that the IRS has admitted that more than 104,000 of those attempts were successful. The hackers’ operation started in February and ran through mid-May. All in all, the IRS was tricked into sending nearly $50 million in refunds for fraudulent returns.

The IRS has started an investigation in the breach and has temporarily closed down the “Get Transcript” application, a service that allows taxpayers gain access to their information. Taxpayers who need access to old tax returns to apply for mortgage or college loans can now request them by snail mail.

irs_data_breachThe IRS is notifying the 200,000 taxpayers whose accounts were tampered with that their Social Security numbers and other personal financial information is in the hands of hackers. It is also offering complimentary credit monitoring to the 104,000 whose “Get Transcript” accounts were accessed to ensure their private information is not used by criminals to fill in bogus bank loans and credit card applications.

This is by no means the first time the IRS has been the victim of online crime. According to a report published by the U.S. Government Accountability Office in January 2015, identity thieves cheated the IRS out of $5.8 billion in falsely claimed refunds during 2013 alone.

Who Stole from the IRS?
According to Peter Roskam, Illinois republican and chairman of a House subcommittee that supervises the IRS, the IRS Commissioner John Koskinen said to him in a telephone call that the theft originated from within Russia. The IRS’s investigation is still ongoing and IRS officials have neither confirmed nor denied Roskam’s statement.

John Koskinen, the IRS commissioner, did say to the press that he was confident they weren’t dealing with amateurs. “These actually are organized crime syndicates that not only we but everybody in the financial industry are dealing with.”

How Did Identity Thieves Steal $50 Million from Taxpayers?
When you think of hackers stealing money from big corporations or government agencies you probably have the image of shady programmers strong-arming the security protocols of their victims’ servers with their sophisticated code; but this isn’t what happened here. Strictly speaking the IRS wasn’t hacked. The identity thieves didn’t need to hack their way into the IRS, because they had all the answers to the IRS’s identification confirmation questions.

As Peter Roskam put it, the identity thieves “went into the front door of the IRS and unlocked it with the key.” The hackers had already obtained personal information on taxpayers, such as their date of birth, address and Social Security information, from previous hacking heists. With that information thieves were able to clear the IRS’s multi-step authentication process, including several personal verification questions that usually only the taxpayer can answer.

What Should You Do?
First, don’t panic. Your personal information is already out there. A motivated hacker can easily obtain it for a few dollars. But this doesn’t mean you should sit on your hands. Consumers can, and should, make things harder for criminals. You could compare it to your home’s front door. No matter how much you spend on security, a professional burglar could break in, but that doesn’t mean you should leave the door open or that you shouldn’t invest in a decent security system.

Here are four things you can do right now to protect yourself after the IRS breach:

1.) Change your passwords again. This is an obvious but often overlooked measure after major breaches. Don’t use your name or words that can be found in a dictionary. The first thing hackers do is use programs that test every word in the dictionary. Instead, create your own secret codes by using anagrams or substituting letters from common words with numbers.

2.) Turn on multi-level authentication. Only use sites that offer you the option of confirming access by receiving a one-time code either via a phone message or email.

3.) Lie on security questions. With the advent of social networks and our propensity to over-share, most security questions are easy to hack. Finding out where someone went to high-school or their mother’s maiden name just isn’t that difficult anymore. Instead of offering truthful answers, provide a second password as your answer. This will make it much harder for hackers to guess your security answers.

4.) Monitor your credit. There are no fail proof security measures against identity theft. You can try to make it harder for criminals but the chances are you will fall victim to identity thieves sooner or later. You can minimize the damage of these attacks by regularly monitoring your credit by scanning your credit history with the three major credit reporting agencies.

Congress Extends “Temporary” Tax Cuts

As 2014 drew to a close, Congress voted to extend 54 “temporary” tax cuts for the 2014 tax year. The Senate vote finally passed the week after Congress was supposed to adjourn for the year, producing a collective sigh of relief among taxpayers. The numerous cuts will benefit a wide range of taxpayers, ranging from large businesses and corporations to struggling homeowners. The list below describes eight of the most popular deductions that were extended.

tax-cuts

  • Tuition deduction. Whether you itemize your taxes or not, this tax cut allows you to deduct up to $4,000 in tuition, fees and related expenses for post-secondary education for yourself or your dependents.
  • Mortgage insurance premiums. If you are required to pay mortgage insurance to your lender, this deduction allows you to deduct the cost of your premiums if you itemize your tax return.
  • Mortgage debt exclusion. The mortgage crisis has forced many homeowners into foreclosure or a short sale. If your house was sold for less than you owe, the bank will often forgive the debt. However, the IRS considers the amount forgiven to be taxable income. This deduction allows you to exclude the forgiven amount from your income.
  • Teachers’ deduction. Whether a teacher itemizes their tax return or not, this tax cut allows him or her to deduct up to $250 in out-of-pocket expenses for classroom supplies.
  • Commuting costs. Commuters can reduce their pre-tax income based on their commuting costs. People who drive to work and pay to park may deduct $250 per month. Commuters using mass transit may deduct $130 per month.
  • Sales tax. If you itemize your tax return, this measure allows you to deduct the state and local sales taxes you’ve paid in 2014 instead of state income taxes. This deduction especially benefits individuals living in one of seven states that do not have a state income tax.
  • Energy credit. You can deduct up to 10 percent of the cost of qualified energy-efficient products (between $50 and $500) purchased for your home in 2014. This deduction does not apply to new homes. The qualified product must have been bought and installed into your primary residence in 2014.
  • IRA withdrawals for charity. If you are over 70 1/2 years old, you may make a tax-free charitable contribution from your IRA up to $100,000. The contribution will not count as a deduction, but it will decrease your taxable income.

congressAs advantageous as these tax breaks may be in preparing your 2014 tax returns, don’t get used to them. They technically expired as of December 31, 2014, which means Congress will go through the same process at the end of this year. And while these cuts benefit millions of individuals, analysts estimate the extensions will add $42 billion to the national debt over the next 10 years.  Don’t be surprised if Congress allows many, if not all of these tax breaks to expire as a result.

 

Credit Administration Needs Better Oversight

The Treasury Inspector General for Tax Administration says that a quarter of all of Earned Income Tax Credit payments made in 2012 were not proper payments. Is this announcement from the Inspector General  IRS tax news or an indication of more deeply rooted problems? Either way, it appears the agency needs better oversight in administering EITC credits, which benefit so many low and moderate-income taxpayers and their families.

A Change In Payment Protocols Is Needed

Many EITC payments were made to people who were not entitled to them, while some legitimate recipients received the wrong amount. The total amount of improper EITC payments totaled an astonishing $14.5 billion of the $63 billion in credits paid, according to the report. It appears that the EITC represents one of the biggest risks for placing billions of dollars in the wrong hands.

The federal watchdog agency that monitors the Internal Revenue Service (IRS) operates under the Improper Payment Elimination Recovery Act of 2010. Its most recent report notes that agency oversight is seriously lacking. The amounts of those incorrect payments, unacceptably high at 25%, are significant and considerably above the government expectations for an error rate of 2.5%. Lax oversight is a major contributing factor to the total shortfall, estimated to total between $124 billion to $148 billion.

A Change In The System

A high level of mismanagement also occurs with the Additional Child Tax Credit, intended to assist larger low-income families in reducing their tax burden. Improper credits by the IRS totaled 25% to 30% of the program’s total payouts. These improperly administered credits amount to between $5.9 billion to $7.1 billion in total.

Auditors from the watchdog agency contend that the IRS needs to make significant changes in their existing systems. Clearly the present protocols have failed in preventing errors and improper payments

The watchdog agency recommended expanding IRS authority to allow the agency to make corrections in tax returns it receives to prevent improper payment of refundable tax credits. This change alone could avoid improper payments totaling more than $1.7 billion, according to the auditor.  While the IRS reported agreed with the watchdog agency’s recommendations, recent budget cuts continue to make it difficult — if not impossible — to effectively enforce compliance.

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

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

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

Meet Form 1095-A and Form 8962

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

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

Will There Be Delays in Processing Tax Returns?

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

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

Will Refund Anticipation Loans Fill the Gap?

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

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

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

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

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

Hoping for the Best

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

Jersey Shore Star Michael Sorrentino Charged with $9M Tax Fraud

Michael Sorrentino, better known as “The Situation,” made his fortune starring on the reality television show, “Jersey Shore.” And for all six seasons, he earned approximately $150,000 per episode. But now, Sorrentino has found himself in a situation he would rather have avoided.

“The Situation” Failed to Pay Taxes on $9M Income

Sorrentino and his older brother and business manager, Marc Sorrentino, were arrested and indicted early Septtember 24th, on a total of 7 different charges involving tax fraud. The pair was each charged with one count of conspiring to defraud the United States. In addition, Marc was charged with three counts of filing false tax returns for 2010-2012. Mike was charged with two of the same counts for that time period, along with being accused of failing to file a tax return in 2011, when he reportedly earned nearly $2 million. (Yahoo News)

The older brother and manager, Marc Sorrentino faces up to 14 years in prison for his charges, while Mike is facing up to 11 years along with up to $600,000.00 worth of fines. The pair plead not guilty in a Newark, NJ federal court yesterday, and are currently out on a $250,000 bond. Their next court appearance is scheduled for October 6, 2014.

These federal charges stem from the pair allegedly failing to pay taxes on nearly $9 million worth of income earned between 2010 and 2012. The indictment names the two individuals along with several companies reported to be owned by the pair. These companies include MPS Entertainment, Situation Nation, and Situation Productions.

Another Celebrity Caught by the IRS

The income, totaling $8.9 million dollars, reportedly was earned from a variety of sources besides the Jersey Shore. Personal and television appearances, ownership of an online clothing business, the publication of an autobiography and a comic book featuring the Situation as a superhero are just a few. Also, as he grew to be nearly as popular as co-star Snooki, his name was put on DVDs, clothing lines, jewelry, tuxedos, and designer sunglasses.

“The brothers allegedly claimed costly clothes and cars as business expenses and funneled company money into personal accounts,” claimed the U.S. Attorney. He went on to say “The law is absolutely clear: telling the truth to the IRS is not optional.” – Justice.gov

Sorrentino popularized the phrase, “Gym, Tan, Laundry” when he referred to the pre-party ritual of he and his housemates on Jersey Shore. His popularity on the show and his reputation for drinking heavily also lead him to many endorsement deals, including one with Devotion Vodka. He was also well known for showing off his finely toned abdominal muscles, leading him to release a work-out DVD and gain an endorsement with GNC Vitamins. He appeared on Season 11 of “Dancing With The Stars” but was eliminated after just the 4th round.

This makes him yet another well-paid celebrity, like Vanessa Williams and Conan O’Brien, has been targeted by the IRS.

When asked for a comment on his tax woes, Sorrentino reportedly said, “The situation will sort itself out.”

Corporate Tax Inversion: The Tax Strategy That’s Losing the IRS Big Bucks

During much of 2014, tax inversion stories were prominent in the news. Companies with household names like Pfizer, Walgreens and Burger King attempted, aborted or accomplished corporate maneuvers designed to create corporate tax inversions. Despite the firestorm of protest from lawmakers and the general public, all indications point to a continuation of corporations opting for the tax-saving strategy.

A corporate tax inversion is a method by which companies try to reduce their corporate tax bills by re-establishing headquarters overseas, typically through an acquisition. – Chicago Tribune

If you’re not familiar with the concept, the term “tax inversion” might send you running for an umbrella and a gas mask. In reality, what you might want to protect is your wallet. According to a May 2014 report issued by Deloitte, corporate tax inversion could result in a loss of nearly $20 billion in federal tax revenue from 2015 through 2024. Fewer corporate tax revenues may well translate to cuts in services or increases in taxes, fees and other expenses for individual taxpayers.

A More Agreeable (Tax) Climate

Have you noticed that many American companies are incorporated in Delaware, even though they have few or no actual operations there? That’s because Delaware has very liberal incorporation laws. Delaware is also considered one of the most tax-friendly states for corporations to set up their legal bases of operations. But for some companies, even Delaware is not tax-friendly enough.

Corporate tax inversion occurs when American companies purchase or merge with foreign companies and move their corporate headquarters to the foreign country where the other company is located.

This allows the American company to reduce its corporate tax burden on the operations located in its corporate headquarters, because the corporate income tax rate for many foreign countries is significantly lower than the 35 percent imposed by the United States. At the same time, the company retains access to its American customer base. Business as usual, but major tax savings.

Earnings Stripping and Hopscotching

Corporations must pay taxes on profits earned within the US. But corporate tax inversion may generate tax savings on domestic revenues as well. The process is called “earnings stripping,” and it works like this.

The newly established foreign headquarters grants a “loan” to its American division. The payments that the American division makes to the foreign headquarters are subtracted from its taxable profits.

According to an August 2014 report in Newsday, American corporations are hoarding more than $2 billion overseas. Hopscotching involves US based companies funneling profits earned overseas through a foreign headquarters. This tactic allows companies to invest those earnings without paying US corporate income tax.

Related article: Should We Abolish Corporate Income Taxes?

Have It Your Way, Eh?

Tech heavyweight Seagate and Stanley, a 170-year-old tool stalwart, are just two companies that relocated their headquarters outside the US in the opening years of the 21st century. A parade of American companies, including Tyco International, Fruit of the Loom and Ingersoll-Rand either considered or executed moving their headquarters outside the U.S. to cut corporate taxes during that period.

The legislative response was a 2004 law designed to put a halt to corporate defections. The 2004 law prohibited American companies from skirting US corporate income taxes by moving their headquarters overseas but leaving the same leadership and shareholders in place. Instead, American companies would be required to acquire or merge with a foreign company. Shareholders of the foreign company must acquire at least 20 percent of the shares for the new parent company. (International Tax Review)

The most recent wave of corporate defections was designed to follow the 2004 anti-inversion law. Pfizer launched a failed bid to purchase AstraZeneca and move its headquarters to London. Walgreens announced plans to acquire remaining 55 percent of Alliance Boots GmbH, a European drug store chain, but nixed plans to move its base of operations to Switzerland under intense criticism. (Des Moines Register)

The latest defector, Burger King, made an August 2014 announcement of its plans to acquire Canadian doughnut and coffee chain Tim Horton’s and move its corporate headquarters north of the border. The move allows Burger King to trim the corporate tax burden for its headquarters to 15 percent federal tax and 11.5 percent Ontario provincial tax. It is worth noting that Prime Minister Stephen Harper lowered Canada’s federal corporate tax rate from 28 percent to 15 percent after taking office in 2006.

What Congress (Won’t Likely) Do About Inversion

During the period between 2002 and 2004, anti-inversion legislation enjoyed strong bipartisan support in both houses of Congress. Such support is absent in the highly partisan environment of the 113th Congress. So, despite an anti-inversion bill introduced in May 2014 by Representative Sander Levin and Senator Carl Levin, it is unlikely that any substantive action will occur to address corporate tax inversions. That is, at least before the November 2014 election.

The Silver Lining: You Won’t Lose Your Job

Despite the fact that American corporations seem primed to continue announcing and carrying out corporate tax inversions, there is a silver lining. Unlike off shoring or outsourcing, tax inversions do not usually involve wholesale shipping of American jobs overseas.

So at least American workers won’t lose their jobs, even if American taxpayers eventually foot the bill to fill the hole created by corporate tax inversions.

Vanessa Williams Hit with $370,000 IRS Tax Lien

Singer, actress and former Miss America Vanessa Williams is the latest in a progression of celebrities to be hit by the IRS hammer. According to various news reports, the IRS filed a lien against Williams for $369,249 against the entertainer’s 2011 federal income tax return. Williams reportedly failed to pay an IRS assessment posted in 2012, which prompted the IRS to file the lien on August 13, 2014.

During the Hollywood segment of the Doug Banks Radio Show, the talk show hosts raise a good question: “How does this happen to celebrities?” After all, during the 2011 period of the lien, Williams had just finished Ugly Betty and was starring in Desperate Housewives. The money  was flowing, so why wasn’t the IRS paid?


Maybe it was the accountant’s error and Williams wasn’t even aware of the lien, similar to Conan O’Brien’s brush with the IRS earlier this year.

Here She Is . . .

This is not the first time the 51 year old Williams has had a brush with scandal. Soon after being crowned the first black Miss America in September 1983, nude photographs of the beauty queen that had been taken before her pageant days surfaced. The photos were published without her consent in Penthouse magazine. As a result of the scandal, Williams relinquished her crown to Suzette Charles.

Williams rebounded from the scandal, moving on to a successful recording career. Her debut album The Right Stuff, released in 1988, went gold, along with earning three Grammy nominations for Williams, including Best New Artist. Her third album, Save the Best for Last, released in 1994, went platinum. Williams has also enjoyed success on the silver screen and on television.

In Good Company

The notice for the lien was reportedly delivered to the office of Williams’s accountant in New York City, although Williams lives in Chappaqua, New York. There was no public statement from Williams or her accountant concerning whether Williams was aware of the lien or of her plans to handle the matter. (Comedian and talk show host Conan O’Brien nearly lost his house in Westerly, Rhode Island this year when notice of $8,000 in delinquent county taxes was delivered to the wrong address.)

Other celebrities who have run into trouble with the IRS over unpaid federal income taxes include Lauryn Hill, former lead singer for the Fugees, Courtney Love, widow of grunge rocker Kurt Cobain and singer for the group Hole; soul singer Lionel Richie, rapper Flo Rida and action star Wesley Snipes. Both Hill and Snipes served time in federal prison for failure to pay federal income taxes. At present, there is no indication that criminal charges are pending against Williams.

Conan O’Brien Pays Back Taxes, Avoids Home Auction

In the 2003 film House of Sand and Fog, Jennifer Connolly’s character loses her house due to nonpayment of a relatively small amount of delinquent county property taxes. Ben Kingsley’s character purchases the house at auction for a fraction of its appraised value and begins making renovations to the property. The movie ends with tragic loss of life – and Connolly’s character never gets her house back.

Comedian Conan O’Brien didn’t face tragedy on this scale, but he did come within days of losing his house, valued at more than $720, 000, due to $8,000 in delinquent taxes. The home was one of several that were slated for auction on Tuesday, June 24 by the town of Westerly, Rhode Island, where the house is located. (Source: USAToday)

Lost in the Mail

O’Brien, whose late night talk show on TBS has been renewed through 2018, was not facing financial difficulties that prevented him from paying the tax bill. Instead, the bill was apparently mailed to the wrong address and never reached his accountant in Los Angeles. O’Brien only learned of the risk of losing his house through a reporter’s story published in the Westerly Sun. O’Brien paid the bill on June 20 – as soon as he learned about the mix-up.

The heads-up from the local newspaper came just in time. As soon as O’Brien posted payment on the house, it was pulled from the auction list. Other homeowners who have gotten into arrears with their property taxes have not been nearly so fortunate.

Other celebrities in the news for tax troubles: Lauryn Hill, Courtney Love, Teresa Guidice

Search and Seizure

The story depicted in House of Sand and Fog was highly dramatized in the interest of drawing an audience. But the circumstances surrounding Connolly’s character losing her home and Kingsley’s character being able to purchase it for cheap were fairly accurate. Like the Treasury Department and the IRS, local municipalities and counties are serious about collecting tax revenues. Even when the collection process involves conducting fire sales of property owned by delinquent taxpayers.

Local and county governments routinely seize and sell properties due to unpaid property taxes that total only a fraction of the value of the homes that have been seized. While the execution of the policy can appear borderline ridiculous at times, the principle behind the practice is understandable. After all, a significant portion of the revenue of a city, town or county is derived from property taxes. No property tax collections=no revenue.

Want to know how ridiculous? Earlier this year, Pennsylvania widow Eileen Battisti lost her $280,000 home over a measly $6.30 tax bill. That’s right, six bucks.

Due Diligence

O’Brien’s near-loss of his home also illustrates the need for taxpayers to take a proactive approach to managing their affairs. In O’Brien’s case, the mistake was not made by him or by his accountant. Nonetheless, to learn about your own tax troubles in the news is risky. Had he not paid the amount in arrears in time, he would have lost the house because of a bit of lost mail.

It is possible that O’Brien could have taken legal action had the auction gone ahead. But the process would have been complex and messy, especially if his house had been purchased by a good faith purchaser in the interim. You can bet that O’Brien and his accountant will examine his financial affairs with a fine tooth comb going forward to prevent a similar incident in the future.