Tax

Would You Cheat on Your Taxes?

Would you cheat on your taxes? If you said “no,” count yourself in the majority.

According to the 2012 Taxpayer Attitude Survey, a hefty 87 percent of 1,500 respondents found that deliberately using fraudulent means to avoid paying income taxes was unacceptable. Only 11 percent agreed with the statement that cheating “a little here and there or as much as possible” was OK.

Think that if you look honest, you can get away with fudging your taxes? Think again.

However, actual revenues collected by the Internal Revenue Service tell a somewhat different story. The so-called “tax gap” is defined as the difference between the total income tax liability and the amount of income tax payments that are made voluntarily and on a timely basis.This tax gap totaled $450 billion in 2008, but shrank to $385 billion after late payments were posted.

Taxpayers across the country under-reported their income by an estimated $376 billion the same year, while underpayments amounted to $46 billion, and $28 billion was owed by non filers – people who did not complete tax returns at all. All told, the compliance rate in 2008 on the estimated $2.66 trillion tax obligation was about 83 percent.

Under-reported Income

Most taxpayers are diligent about paying taxes on income reported on W-2 forms. After all, the IRS receives the same information, so skipping out on paying what is owed is fairly difficult. Self-employed workers who receive 1099 forms have somewhat more latitude about how much total income they report due to legitimate business-related expenses. Nonetheless, earnings listed on 1099 forms are also reported to the IRS; therefore most self-employed workers at least acknowledge those earnings.

On the other hand, a significant amount of cash income is never reported to the IRS. If you were paid $100 to fix someone’s computer, you will probably get by with not reporting that income. However, if you collect a cool $5,000 on the side through your online storefront, you shouldn’t expect to fly under the IRS radar if you don’t acknowledge the sum on the following year’s tax return.

Questionable Deductions

There is nothing wrong with claiming every penny to which you are entitled through legitimate tax credits and deductions. If you are self-employed and you have established an authentic home office, you should absolutely claim the home office deduction. If you are a wage earner whose boss expects you to call on out-of-town clients on your own dime, go ahead and claim the deduction for work-related travel. As long as you can document your claim, you’re fine – even if you are audited by the IRS.

On the other hand, taking a vacation in Hawaii and claiming a deduction because you attended a Donald Trump seminar during the trip likely won’t pass muster with the IRS. Likewise, the cost of your daily commute from your home to your cubicle is also unlikely to be deductible. If you have doubts about whether a deduction or credit is legitimate, it’s best to check with a tax attorney or with a certified public accountant to be sure.

Discredited Tax Protests

A persistent movement exists among a small group of individuals who claim that federal income taxes are unconstitutional because the Sixteenth Amendment to the Constitution (which was ratified in 1913) was improperly ratified. These tax protesters insist that they are exempt from paying income taxes as a result. The IRS has repeatedly dismissed such claims, frequently charging delinquent taxpayers with filing frivolous returns.

One of the more prominent figures snagged for adhering to discredited tax protester claims is actor Wesley Snipes. Snipes was released from federal prison in 2013 after serving nearly three years for misdemeanor charges related to willfully failing to file tax returns. Snipes claimed that he was misled into believing that his actions were legal by his co-defendants, tax-protesters Eddie Kahn and Douglas Rosile. Federal prosecutors had also pursued felony charges against the three for tax fraud and conspiracy, alleging that Snipes had shipped more than $15 million overseas in an illegal bid to avoid paying taxes. Kahn and Rosile were convicted of those charges, but Snipes was acquitted.

Straight-Up Scams

While the actions described above can be described as questionable claims and gray-area tax-related behavior by otherwise honest citizens, straight up tax evasion scams are also prevalent. Such tactics as strictly paying employees in cash and setting up questionable business and family trusts are among the more common tax evasion schemes attempted by both individuals and companies attempting to skirt paying income taxes.

While a case can sometimes be made for leniency concerning unwitting tax evasion, the IRS frequently takes a dim view of defendants that in its view have deliberately attempted to commit fraud. Outright scams, once uncovered by the IRS, are likely to result in criminal tax evasion charges and long prison sentences upon conviction. This is in contrast to civil tax evasion, which can carry hefty fines but no jail time.

Just (Don’t) Do It

Even if you get away with underpaying your taxes (or failing to file returns at all) for a short period, the odds are good that you will be caught eventually. The statute of limitations for federal tax audits is doubled from three to six years if you fail to report at least 25 percent of your income, or if you have income on undisclosed foreign assets that totals $5,000 or more. There is no statute of limitations on IRS audits for filing fraudulent returns or unlawfully failing to file tax returns, which means that you could be looking over your shoulder for years – or even the rest of your life.

Don’t Fear IRS Form 1099-C Cancellation of Debt

The most feared and least understood document ever published by the IRS – quite the accomplishment considering the competition– is Form 1099-C Cancellation of Debt.

This form is sent to people who were so deep in debt, even their creditors agreed to give them a break and either reduce or cancel their debt altogether. Think foreclosures, short sales, credit card debt settlements and similar debt consolidation methods.

Only that in the eyes of the IRS the cancelled debt has not disappeared. Instead, it has transformed into a new source of taxable income: debt income — the ultimate oxymoron. Who said tax collectors don’t have a sense of humor?

Why Do You Have to Pay Taxes on Cancelled Debt?

If you have received a IRS Form 1099-C, your first reaction was probably disbelief. It does seem counterintuitive to have to pay taxes on cancelled debt.

The IRS’ response is that when you borrowed that money you did not have to pay taxes on it because you were bound by contract to pay it back. If you had repaid the debt, it would have been as if you had never really owned the money. However, when a creditor releases you of debt, you are in effect receiving a payment you did not return, which is the very definition of income.

On the question of why the IRS thinks you will be able to pay taxes on a debt you could not afford to settle in the first place, I have no comeback.

1099-C Disputes

Creditors who cancel a debt of $600 or more are required by law to report the debt discharge to the IRS by filling in a 1099-C and sending a copy to the debtor.

This is worth repeating. Creditors, not the IRS, send 1099-Cs. They can write whatever they want on that form. Therefore, if you do not agree with the amount listed on the form, you need to contact the creditor.

Maybe the debt was discharged long ago during a bankruptcy; or the debt amount is correct but the fair market value of the debt’s security is way off. It could be you have no record or recollection of a debt cancellation. Whatever the issue is, you need to contact the creditors and try to resolve the discrepancy.

The address and telephone number of the creditor should be on the top left box of the form. If it turns out the creditor made a mistake, they can issue a new 1099-C with the correct information.

Discrepancies and Tax Audits

It is worth highlighting that the IRS also receives a copy of the information on your 1099-C. If you fail to declare taxable debt income, you may have to pay an additional negligence penalty as well as interest on your taxes, as well as other sanctions.

If you do not agree with the debt income amount and you cannot resolve the issue with the creditor, things get tricky. You can make a note in your tax return. However, a word to the wise, discrepancies between your tax return and 1099-C forms, even when accompanied by explanatory notes, are tax audit magnets. Don’t be shocked if the IRS wants a closer look at your accounts.

Thank Goodness for Exceptions and Exclusions

Not all types of unpaid debt are taxable, and you may qualify for exclusions that could either reduce or even cancel your tax liability.

IRS Form 4681 discusses the subject of debt income exceptions and exclusions in detail.  If you qualify for any of these exceptions, you need to fill in ad attach IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness to your tax return.

Exceptions and Exclusions

  • Gifts. Debts canceled as a gift, a bequest or as part of an inheritance are generally not considered income.
  • Student loans. Student cancelled in exchange for working for certain employers. For instance, the Nurse Corps Loan Repayment Program that pays up to 60% of the student loans of nurses willing to serve in hospitals and clinics in some of America’s neediest communities.
  • Bankruptcy. Debts canceled during a title 11 bankruptcy are excluded from gross income. To prove debt income reported in a 1099-C was discharged as part of a bankruptcy, complete and attach Form 982 to your tax return and make sure you check the box on line 1a.
  • Insolvency. If your debts were cancelled due to insolvency – because your debts were greater than your total assets – some or even all of your cancelled debt may not be taxable. For instance, if your total assets amounted to $10,000 and your total debt was $15,000, you may not have to pay taxes on debt income of $5,000 or less. If you were insolvent when your debt was forgiven, check box 1b in Part 1 of Form 982 and attach it to your tax return. Form 982 includes an insolvency worksheet you can use to determine how much of the debt you can exclude from your debt income.
  • Principal Residence. If the cancelled debt was on your principal residence, you can exclude up to $2 million of the debt, or $1 million if married filing separately. Mind you, this does not apply to investment or vacation homes.

Don’t Panic, You May Be Exempt

If you receive a 1099-C Form, try not to panic. You may be exempt from paying taxes on the debt income, and if not, you probably can exclude a big chunk of it.

However, negotiating debt income matters with creditors and the IRS is a complex matter and hiring a tax professional with experience in debt income cases may save you a lot of cash, time and grey hairs in the end. Consider hiring a qualified tax advisor with experience in debt income matters. She can determine whether your cancelled debt is taxable; help you calculate how much you can exclude; and manage negotiations with creditors.

Photo: Getoutofdebt.org

Are You Leaving Unclaimed Tax Money on the Table?

We could all use a few extra bucks now and then, and at times face incredible hardships just to make ends meet. But few of us realize just how much unclaimed tax money that may very well have our name on it.

Unclaimed Tax Money Total = $60 billion

According to a 2013 article on CNN Money, there is currently close to $60 billion in unclaimed cash and benefits out there waiting to be collected. The Federal government is sitting on a total of $18 billion that belongs to its citizens, while State and Local governments hold close to $42 billion. This astonishing figure is comprised of a collection of many different types of forgotten funds including abandoned bank accounts, retirement funds that go unclaimed, un-cashed paychecks, unclaimed tax refunds, insurance payouts, and many others.

One of the largest amounts of unclaimed money being held by the US treasury is from people not cashing in their savings bonds, currently close to $16 billion worth. Additionally, the IRS recently estimated the amount of tax refunds that have not been collected by hard working Americans at $917 million for the 2009 tax year alone.

Get Your Billion Back

We all know that the IRS can be relentless when it comes to collecting tax money that is owed, but they are considerably less assertive when it comes to trying to reach people who have unclaimed tax refunds. The majority of this unclaimed tax refund money comes from people who don’t think they need to file a tax return because they did not earn much, or from people overlooking some of the many tax credits that are now in effect.

But you had better act fast if you think some of this money might belong to you, because the government has imposed a law stating that the IRS only has to have a 3 year waiting period to hold these unclaimed funds. If you do not file a tax return to try to collect within those 3 years, your refund officially becomes property of the US Treasury.

“We’re not talking about free money here,” said Peter Sepp, Executive VP of the National Taxpayers’ Union. “This was money that an individual or a family earned and gave too much of to the federal government. They should get it back.” This sentiment has been echoed by many and has even prompted H&R Block to launch their newest campaign, urging Americans to “Get your billion back”. They have aired numerous commercials as well as other marketing for this campaign, offering assistance in retrieving some of this lost cash and putting it back in the pockets of the hard working citizens that it belongs to.

Unclaimed Property Recovery Programs

According to The National Association of Unclaimed Property Administrators (NAUPA), unclaimed property laws have been around since the 1930’s, but have only recently become broader and stricter in enforcement. Property becomes “unclaimed” when an organization loses contact with the owner of the property for a period of one year or longer. At that point, these organizations are required to turn over these funds to a State Official who is responsible for trying to find the rightful owner.

These State Officials have developed many programs to try to reunite the owner with their lost money, including developing a national database missingmoney.com. This program alone is responsible for getting nearly $2 billion a year back to its rightful owners.

While there are numerous companies out there that offer services to help you reclaim some of your potential missing cash, beware of those that offer this service after paying a fee. There are plenty of organizations that offer this assistance free of charge, such as the website Unclaimed.org which is managed by the NAUPA. From their site you can find links to begin your search of any of the 50 states unclaimed property databases to see if you have money out there waiting to be claimed.

Savings Bonds, Pensions, and Forgotten Funds

The Treasury Department has a website where you can search to see if you have any matured yet unredeemed savings bonds. All you will need to perform a simple search is your social security number (or the SS# of the person who gave you the savings bond as a gift). Additionally, the FDIC has a website available to search for unclaimed funds from closed banks at www2.fdic.gov/funds/index.asp, where you can search by name and state for any money that might be waiting with your name on it.

The Pension Benefit Guaranty Corporation is the US Government Agency that is responsible for paying benefits on failed pension plans. You can search their website to see if you have any unclaimed pension or retirement funds. The United States Department of Labor can also help with locating lost or forgotten retirement funds.

Claim Your Money–It’s Yours

Searching for lost or unclaimed money in your name isn’t difficult and doesn’t take long. The results can be considerably beneficial to those who find forgotten funds. Just think of all the wonderful things you could do if you had some extra money in your pocket right now. After all, you won’t have anything to lose once you search to find what you’ve already forgotten!

Taxpayer Advocate, “The Voice of the People”

Tax season can be a very confusing and frustrating time for many Americans, especially in recent years as the IRS has implemented several changes that have impacted United States taxpayers.

Since 2010 the IRS has had its funding cut by 8%, including an 87% drop in their training budget, and have cut nearly 8,000 full time positions. Congress has meanwhile increased the responsibilities of the IRS which now plays a key role in the administration of Obamacare. When you also factor in the complications of last October’s government shutdown and automatic spending cuts imposed, it’s no wonder that many Americans dread having to have any dealings with the IRS.

The Taxpayer Advocate Report

But fortunately taxpayers have a resource fighting on their behalf in the Office of the Taxpayer Advocate, an independent office within the IRS that was created under the Taxpayer Bill of Rights 2 in 1996.  Nina Olson, current US Taxpayer Advocate, identifies the major problems that taxpayers face throughout the year and offers ideas and solutions for each of them in an annual report which is released each December. In addition to reporting these findings to the IRS, Olson is also the only IRS employee authorized to make legislative proposals directly to Congress.

In Olson’s most recent Taxpayer Advocate Service (TAS) report released last month, she identified the most serious problem that taxpayers face is trying to comprehend the complex and often changing IRS tax code. The TAS analyzed IRS data and found that taxpayers spend around 6.1 billion hours a year in attempting to comply with filing requirements. The report states that “if tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the ‘tax industry’ requires the equivalent of more than three million full-time workers.”

The report also states that “according to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day.” This constantly evolving set of rules and regulations makes it difficult for honest taxpayers to keep up with the latest laws and much easier for criminals to commit tax fraud. The TAS report has suggested to both the IRS and Congress for a number of years that the current complex tax code needs to be simplified, and since it has been 28 years since the last fundamental tax reform enacted by Congress, it is perhaps long overdue.

Another major problem the TAS report addresses involves the impact of the IRS budget cuts on their ability to serve the American taxpayers. Because of the funding shortages that the IRS is dealing with, they are unable to answer millions of taxpayer’s phone calls each year, and only able to respond to about 47% of correspondence submitted by taxpayers. Last year the IRS was only able to field about 61% of their incoming phone calls and the average wait time to get through to a representative was nearly 18 minutes.

“The IRS mails over 200 million pieces of correspondence to taxpayers each year, yet it does not track how much of this mail is annually returned as “undeliverable as addressed.” — National Advocate Report

TAS Recommendations

The TAS report recommends that Congress establish new guidelines when setting the IRS budget, and significantly increase their current operating budget to allow better customer service to taxpayers who are honestly trying to file their return. This recommendation is critical due to the fact that the US tax system is based on voluntary compliance, and the IRS has a moral obligation to taxpayers to make compliance as simple as possible. The fact that nearly 43 million phone calls to the IRS go unanswered each year, and that 53% of written correspondence to the IRS is ignored, is unacceptable and fails to serve the needs of the very people who are attempting to honestly comply with IRS regulations.

The report also points out the fact that since the IRS is essentially the “Accounts Receivable” department of the United States government, it is crucial that this department have sufficient funding to perform its duties. In 2013 the IRS had a budget of only $11.2 billion yet it collected a total of $2.86 trillion tax dollars – translating roughly to a rate of return of $255 for every $1 spent. This demonstrates the significance of how an increase in budget levels could impact potential increases in revenue collection and could even help reduce the overall economic deficit that America is dealing with today.

Another serious and growing problem facing American taxpayers these days is tax-related identity theft. In 2012 the IRS received almost 450,000 cases claiming issues surrounding stolen identity. Usually, a tax-related identity theft occurs when someone uses the personal information of another person without their knowledge or permission to collect a fraudulent refund. This causes a series of major problems which could take many months to resolve.

In order to address the increasing problem of tax-related identity theft, the IRS created the Identity Protection Specialized Unit (IPSU) in October of 2008. While the original intent of this unit was to provide a central point of contact for identity theft victims to resolve their tax-related issues quickly and efficiently, the results that taxpayers receive are anything but effective and timely.

The time required to have identity theft related tax cases resolved by the IRS averages 312 days, delaying proper refunds to victims, causing problems to overlap tax years, and requiring a number of different units within the IPSU to be involved before a final solution can be found. There are currently more than 20 separate divisions within the IPSU that are required to coordinate and pass information along to each other in order for a case to be resolved. While the original intent of creating the IPSU was to provide a stream-lining of sorts for these types of cases, its internal complexity of different units has only made the process more time consuming.

The TAS report recommends that the IRS review the structure of the IPSU and make appropriate changes so that the process of addressing identity theft can truly be stream-lined as the unit was originally intended. In addition, the report recommends increasing the funding to this division of the IRS so that the increasing volume of cases coming in can be resolved in a more timely manner.

Conclusion

Dealing with the IRS can be a dreadful time for many taxpayers each year. Whether it’s trying to keep up with the always changing tax-code, resolving identity theft issues, or attempting to contact the IRS with questions, there are many hurdles that Americans face when attempting to comply with US tax requirements. Fortunately, the Taxpayer Advocate Service exists for the sole purpose of serving as the “voice of the people,” offering assistance to taxpayers while making recommendations for improvement to the IRS and Congress.

For more information about the Taxpayer Advocate Service or to view the full 2012 TAS report, visit http://www.taxpayeradvocate.irs.gov.

Photo: PRWeb

How to Spot a Shady Tax Preparer

According to the IRS, about 60 percent of taxpayers use tax professionals each year. While most are honest and well-trained, this is an area ripe for fraud if you choose poorly. After all, getting your taxes done by someone else means handing over a lot of personal information, your Social Security number (the Holy Grail for thieves), and those of your spouse and dependents, possibly your birth date, and your bank account information. The IRS wants you to remember, even if you hire someone to do your taxes, you bear the responsibility for what is in your return.

Until recently, anyone could hang out a shingle calling themselves a tax/financial professional, with zero experience or qualifications.  That’s why the IRS now requires tax preparers to get an IRS-issued Preparer Tax Identification Number (PTIN).  This helps, but where thieves smell money, there will always be unscrupulous people who slither past the rules. No determined thief is going to let a little thing like an IRS requirement stop him or her from scamming you.

But it’s not too difficult nowadays to spot a shady tax preparer and avoid them altogether.

Here are three red flags the IRS wants you to watch for:

  1. Is the preparer willing to provide you with his or her PTIN?
  2. Is the preparer willing to sign your return and provide his/her PTIN?
  3. Will the preparer ask you to sign an incomplete return? The IRS warns, a reputable preparer will never do this.

If the answers to any of these questions are unsatisfactory, don’t walk away. Run!

Others Points to Watch For

Ask the preparer about his or her qualifications.

  • Where did you get your training, and have you stayed up with the tax changes through continuing education?
  • How long have you been doing this?
  • What professional groups do you belong to?

Get a full list of the fees you will pay.

  • A reputable preparer will be upfront about fees.  You need to be upfront too, by explaining the extent of your return. If you have multiple small businesses, special credits which require extra forms, or a fistful of W-2s, say so.
  • Your fee should never be a percentage of your expected refund.  That encourages unscrupulous preparers to fraudulently jack up your refund. The preparer may initiate the fraud, but again, you are ultimately responsible and will be left holding the bag.
  • What is the expected time frame till your return is done?
  • Will the preparer review the completed return with you?
  • Will he/she be available for questions after the tax season?
  • If you are due a refund, will it be issued in your name?  Beware a preparer who says the refund will be issued to him/her, and you will be paid in cash. There’s no way for you to know if the refund was actually much larger than what you are paid.  If it’s a cash-only set up, say no and find another preparer.

Your prospective tax preparer needs to pass your inspection. If you feel uncomfortable during the initial meeting, trust your instincts and go elsewhere. You can do a simple background check of a preparer by contacting your local Better Business Bureau. If you have doubts, check the standing of a CPA by contacting the state board of accountancy. For attorneys, contact your state bar association, and for Enrolled Agents, check with the IRS Office of Enrollment.

You can read more about how to spot a shady tax preparer by checking with the IRS. If you feel you have stumbled upon a bad apple tax preparer, you can report the individual with the IRS by clicking here.

“If you feel that you have been a victim of a bad tax preparer or you feel that the IRS may flag a return you filed for inaccuracies, you may want to contact a professional to review your situation,” says David King, President of Optima Tax Relief. “Remember, the IRS is much more accommodating to individuals/businesses that voluntarily amend a past return as opposed to them amending it themselves.”

Photo: Commercial Appeal

The Rich Pay All the Taxes and Then Some

If you thought Mitt Romney’s comment during the 2013 presidential campaign that 47 percent of Americans don’t pay taxes was controversial, you’re going to want to check out this gem from the latest report on tax burdens published by the Congressional Budget Office Report (CBO).

According to the report, the rich don’t just pay more taxes, they pay them all. On page 13 of The Distribution of Household Income and Federal Taxes report of 2010, it clearly states that the richest 40 percent of American earners paid 106 percent of individual income taxes.

Negative Tax Rate?

These figures, which are based on 2010 IRS census data, show that the bottom 40 percent didn’t pay anything toward income taxes. In fact, they paid a negative 9 percent. How do you pay less than 0 percent? The formula used by the CBO gives a negative percentage to taxpayers who get back in benefits more than what they pay in income taxes.

To illustrate, according to the same report, in 2010, the poorest 20 percent earned an average of $8,100 but also received $25,000 in federal benefits. Actually, a quarter of the taxpayers in this group had a -15% tax rate. That means that for every $100 they paid, they received $115 back in benefits.

Fair Analysis?

Do these statistics give a fair picture of America’s tax code? According to the Center on Budget and Policy Priorities the significance and policy implications of figures like these, are unfair and widely misunderstood.

For instance, although much is made from the fact that the poorest taxpayers do not earn enough to pay federal income tax, this doesn’t mean they don’t pay toward other federal taxes. Based on data from the same CBO report, the bottom 40% paid 15.4 percent of all Social Insurance taxes, 4.8% of corporate income taxes and 28.8% of all federal excise taxes, such as fuel, communications and environmental taxes. Once you take into account these other taxes, the bottom 40 percent of taxpayers paid 4.2 percent of all federal taxes in 2010; which doesn’t seem so outrageous, particularly when you consider they only earned a 9.7 percent share of the market income.

Reports that highlight the fact that that low-income households don’t pay federal income taxes generally fail to mention the taxes they do have to pay, such as state and local taxes. According to data from the Institute on Taxation and Economic Policy, in 2011, the poorest fifth of American households paid 12.3 percent of their income toward state and local taxes. If you include federal, state and local taxes, the percentage of their income dedicated to paying for taxes is 16 percent. A stunning figure when you consider how modest their wages are to start with.

The Bottom Line

Yes, the richest 20 percent do pay nearly 93 percent of all federal income taxes. And yes, the poorest 40 percent pay less in income taxes than they get back in federal benefits; but only if you choose to ignore what they pay in payroll, excise and corporate taxes. A rather arbitrary way of presenting the data when you consider that payroll taxes are used to fund federal benefits, such as Social Security and Medicare.

The bottom line is that the rich do pay the lion’s share of taxes. However, when you consider the top 20 percent earns over half the total market income and the wealthiest 1% saw their income grow by 16% — compared to the 1% increase most taxpayers experienced –it’s hard to feel too sorry for the poor rich folk.

Photo: Chicago Now

The Top 500 Delinquent Taxpayers in California

When you’re more than $132 billion in the red, you have to get creative with your revenue. The California Tax Franchise Board certainly has. In 2007 it started compiling a list of individuals and corporations who owe at least $100,000 in California state taxes. The list started as a top-250 list but in April of 2012 expanded to 500.

The Top 500 Delinquent Taxpayers in California

Last year, the list received much more attention. Probably because it included celebrities such as actress and model Pamela Anderson, film director Nick Cassavetes, and Halsey Minor, the co-founder of CNET, who topped the list with nearly $11 million in back taxes.

This year the list lacks any big showbiz names. Instead it is dominated by lawyers, contractors, realtors, doctors and dentists, which isn’t going to sell many tabloids. As of December 2013, California’s top tax delinquents are Mon B. and Mimi Hom of Los Angeles, who owe a whopping $6.3 million in personal state income tax. The Corporation with the largest tax debt is Sharon A. Bogerty, M.D., Inc of San Jose, which owes nearly $3.4 million in corporate income taxes.

By law, the Franchise Tax Board is required to include the names and status of any professional licenses held by tax evaders on the list. In the case of corporations, the FTB must include the names and titles of the officers of the businesses on the list.

Additional Incentives

Naming and shaming is not the only method the Tax Franchise Board has to motivate delinquent taxpayers. New legislation passed last fall, the Delinquent Taxpayer Accountability Act, gives the Tax Franchise Board new powers, which give it the ability to inflict some serious pain.

These powers allow the Tax Franchise Board to suspend the occupational, professional and even driver’s licenses of delinquent taxpayers that make it on the list. This means you could lose your CPA license, medical license, or even your driver’s license if you don’t pay your taxes. Top 500 delinquent taxpayers are also banned from entering into contracts for providing services and goods to state agencies.

State Reciprocal Agreements

The Delinquent Taxpayer Accountability Act also grants the California Tax Franchise Board with the authority to enter into reciprocal agreements with its counterparts in other states. These agreements allow California to collect from taxpayers who live in other states by using their tax refunds in other states to offset the tax debts in California.

As of December 2013, the only state California has such an agreement with is New York. However there are plans to expand this to other states, such as Illinois. These “I’ll scratch your back if you scratch mine” deals allow states to target state income tax evaders who jump state after accruing large tax debts.

Naming and Shaming Works

Naming and shaming has reaped significant results. According to the Tax Franchise Board, more than $166 million have been recovered since 2007 through the Top 500 program. Further evidence of the program’s success is that celebrities who appeared in the 2012 list have since put their affairs in order with the taxman.

The Delinquent Taxpayer Accountability Act requires the California Tax Franchise Board to notify candidates they have 30 days to resolve their accounts to avoid appearing on the list. Many delinquent taxpayers provide the Tax Franchise Board with proof of hardship, set up an installment payment agreement or pay their debt in full, and their names are not published. This is why if you ever visit the TFB’s Top 500 list you won’t see 500 names.

If your name is on the list, Optima Tax Relief can help you make arrangements to resolve the issue or correct any mistakes. Contact us today at 1+800-965-3192.

Photo: BlueRobot

Tax Tip: Hire Veterans for the Work Opportunity Tax Credit

Get a Hefty Tax Credit if You Act Fast

What business can’t use a tax credit? As the year comes to a close, smart business-people take advantage of the waning days of December to minimize their tax bills for the year. If you are planning to hire soon and you choose a qualified veteran to fill that position, you could scoop up a tax credit worth up to $9,600. It’s called the federal Work Opportunity Tax Credit (WOTC). There is a catch, however. Unless Congress acts to renew this credit, you will lose the chance to take advantage of it when the calendar flips to 2014.

Here’s what you need to know about this valuable credit

The WOTC was originally part of the American Taxpayer Relief Act of 2012. The intention was to stimulate employers to hire from two groups: veterans and disadvantaged individuals. Later the law was extended through 2013 (though only for veterans). So far, Congress has not moved to extend the credit into 2014 and beyond, but they still may.

  • Employers who operate taxable businesses and hire qualified veterans before January 2014 may be eligible for a credit of up to $9,600 per eligible veteran.
  • Tax-exempt businesses can also get the credit, but it is limited to $6,240.
  • The credit can be carried back or carried forward.
  • The amount of the credit depends on certain factors, including: the veteran’s wages on your payroll during the year, how many hours the vet works for you, and how long he or she was unemployed before being hired by you.
  • Employers who hire disabled veterans may qualify for the maximum credit.

How do you know if the veteran you are considering is qualified?

Generally the individual must have served for at least 180 days on active duty. An exception may apply if the vetsustains a service-related injury and is therefore released early. The 180 day period does not include basic training.

If this hurdle is met, you must:

Start by filling out Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This form is a questionnaire, which you submit to your state employment security agency. It requires input from both you and the veteran.

Ideally, you should submit it before you hire the individual. Regardless, it must be sent within 28 days of the hire date. If the request is rejected, the state agency must tell you why it was rejected. Then, you have the right to appeal.

Assuming your request is accepted, when you file your business tax return for the year you will also fill out and submit Form 5884, Work Opportunity Credit. You can also submit it with an amended return if you prefer.

There are five basic categories of qualified veterans, which partially determine the amount of the credit available. The maximum credit in each category depends on the number of hours worked.
  1. Veterans who are members of families receiving “supplemental nutrition assistance,” subject to certain time limits. Maximum credit: $2,400.
  2. Veterans unemployed for 4 weeks to 6 months. Maximum credit: $2,400.
  3. Disabled veterans hired within one year after discharge or release from active duty. Maximum credit: $4,800.
  4. Veterans unemployed for at least six months, aggregate, in the year before hiring. Maximum credit: $5,600.
  5. Disabled veterans unemployed for at least six months, aggregate, in the year before hiring. Maximum credit: $9,600.
You can learn more about the Work Opportunity Tax Credit by visiting the U.S. Department of Labor WOTC Website.

Boxer Fights Tax Wars on Two Shores

Manny Pacquiao battles BIR and IRS

Filipino boxing phenom Manny Pacquiao is hard to beat in the ring. Named the “fighter of the decade” in 2010 he’s a force to be reckoned with. Now, he can’t seem to catch a break. He’s in the ring with two formidable foes, the Bureau of Internal Revenue (BIR)in the Philippines as well as the IRS. The BIR says he owes 2.2 billion pesos (equivalent to $50.2 million) for income earned in 2008 and 2009.

Paquiao says that money was earned in bouts that occurred in the United States, and maintains he paid the taxes he owed on those amounts, to the IRS, as required. Thanks to a tax agreement between the two countries, taxpayers are not subject to double taxation, which is Pacquiao’s defense.

Tax commissioner Kim Henares, however, says that in two years, the boxer has provided no documentation, proving that he made U.S. payments. She told ABS-CBN television news, “2.2 billion (pesos) is what Pacquiao owes now because of surcharges and interest.” She added, even if he did pay the taxes due in the United States, he would owe more to the Philippines because their tax rate was higher at the time.

While he works to clear up the mess, his accounts in the Philippines have been frozen and a lien has been placed on his property worth millions, leaving him unable to pay his staff. If he does not pay the taxes owed, said Henares, the authorities could take the payments by stripping away his assets.

Now to the IRS

Pacquiao’s promoter, Bob Arum and his attorney, Tranquil Salvador maintain the U.S. taxes was paid and that proof is on the way. But in recent days, the IRS states he failed to pay income tax on his earnings from 11 fights in 2006 to 2010, leaving a tax debt of $18,313,668.79.

Pacquiao’s representatives say certified documents are on the way, which prove his U.S. tax liabilities were paid (at least for 2008 and 2009, the years in question by Filipino authorities). But they say they will not give the proof to the BIR, preferring to fight the charges in court.

To fight back against the tax authorities he went on a public campaign on all of the major TV networks in the Philippines, accusing the BIR of harassment. “I’m not a criminal or a thief. I am not hiding anything. I will face my problems as they come.”

Avoiding the U.S.?

As Pacquiao fights this battle on two fronts, the only thing that is clear is that he needs serious legal help to untangle the tax mess. Meanwhile, Arum has told reporters his client may never fight in the U.S. again because the tax burden is too heavy. Whatever he earns in the United States, 39.6 percent comes off the top. And depending on the state where the fight is held, another tax bite might be taken.

“Manny can go back to Las Vegas and make $25 million, but how much of it will he end up with — $15 million?” His client can fight in China for a smaller purse, $20 million, and keep all of it.” Arum added, “He’d have to be a lunatic” to fight in the United States and let his winnings disappear that way.

Tax matters can be complex even for those without foreign income issues. Toss in foreign tax agreements and the issues grow sticky pretty fast. Individuals with who have foreign income issues are advised to seek tax representation from professionals with vast experience untangling the tax web.

IRS to Employers: Hire Veterans by Dec. 31 and Save on Taxes

If you plan to hire soon, consider hiring veterans. If you do, you may be able to claim the federal Work Opportunity Tax Credit worth thousands of dollars.

You must act soon. The WOTC is available to employers that hire qualified veterans before the new year.

Here are six key facts about the WOTC:

  1. Hiring Deadline. Employers hiring qualified veterans before Jan. 1, 2014, may be able to claim the WOTC. The credit was set to expire at the end of 2012. The American Taxpayer Relief Act of 2012 extended it for one year.
  2. Maximum Credit. The tax credit limit is $9,600 per worker for employers that operate a taxable business. The limit for tax-exempt employers is $6,240 per worker.
  3. Credit Factors. The credit amount depends on a number of factors. They include the length of time a veteran was unemployed, the number of hours worked and the amount of the wages paid during the first year of employment.
  4. Disabled Veterans. Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.
  5. State Certification. Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. They must file the form within 28 days after the qualified veteran starts work. For more information, visit the U.S. Department of Labor’s WOTC website.
  6. E-file. Some states accept Form 8850 electronically.