Avoiding ID theft during tax season

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Come tax season, there is a heightened threat to financial safety due to identity theft. According to the IRS, identity thieves use a taxpayer's identity to fraudulently file a tax return and claim a refund. Legitimate taxpayers find out that something is wrong only when they go to file their return. Over the last decade, identity theft topped the annual list of consumer complaints received by the Federal Trade Commission.  This number is on the rise because an increasing number of people choose to e-file, but don't take steps necessary to protect their information. 

All of us have at some point or other received emails that talk about a "change in the tax laws" or an "IRS audit". Victims will either be directed to a fake website that will ask for personal and banking information or instructed to download a file (usually a .pdf document) that  will outline the latest changes. The document will contain malware, such as keyloggers, that infects your PC.

Be wary of phone calls from thieves posing as IRS representatives asking to verify information that includes citizenship status, personal data or banking information prior to a tax refund being sent. They may give a reason for verification that states the victim was sent a previous check that no one has cashed.There may also be emails promising refunds that may or may not be legally forthcoming. Once again, the victim will be directed to a fake website that will ask for personal and banking information.

Protecting yourself from tax season ID theft scams are similar to those methods that can protect you all year long. It should include protecting your computer, having the latest anti-spyware and anti-virus software installed and updated.  Files should also be password protected and the wireless connection must be secure.

When you engage the services of a tax preparer, know who you're hiring. There are many fake tax preparation companies that spring up during tax season with intent to steal tax refunds. Check out the credentials of a tax preparation service prior to giving them your personal data.

Forward suspicious IRS emails to phishing@irs.gov. For suspicious phone calls, call 1-800-829-1040 and inquire about the call that you just received.Once you receive a refund, the IRS will not need any additional information from you. Also, normal tax preparation forms ask for all the needed information to process a tax return. You are not required to fill out additional forms or provide additional information in order to release a refund.Use secure paper mail practices when communicating with the IRS. Never send out personal information through a regular public mailbox or from your home mailbox – use your local Post Office.

Remember to file early.The earlier you file your taxes, the less likely you are to be a victim of tax return identity theft. By waiting until the last minute, thieves could have weeks or months to get away with identity theft before you are even aware of it.

Tax season can be stressful enough without the added problems connected with identity theft. Be diligent and aware of potential risks and enjoy your refund when the tax season is over.To learn more, please email info@gkmtax.com.

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IRS Audit Rate Nears 30% for Those Making $10 Million and Up

The Internal Revenue Service in 2011 audited 29.93 percent of taxpayers who reported more than $10 million of income, according to statistics released today.

That’s up from an audit rate of 18.38 percent in 2010 and 10.60 percent in 2009 for a group that consists of 0.01 percent of taxpayers. Overall, the agency’s rate of audits for individual taxpayers stayed constant at 1.11 percent.

Joe Perry, partner-in-charge of tax services at the accounting firm Marcum LLP in New York, said he has seen a ten- fold increase in clients being audited, including at least five under the more intense scrutiny of a new IRS task force that is targeting high net-worth taxpayers.

"Those are very time consuming and costly¸" said Perry, who represents several clients with incomes exceeding $10 million. "It´s worse than a root canal."

The IRS statistics cover audits conducted in fiscal year 2011¸ which generally corresponds to returns filed during 2010.

For U.S. taxpayers with adjusted gross incomes between $5 million and $10 million, the audit rate rose to 20.75 percent from 11.55 percent. People making between $200,000 and $500,000 were audited at a 2.66 percent rate.

Quicker to Audit

The IRS is quicker to audit individual returns than in the past, sometimes contacting people within months of their return being filed, Perry said.

In some cases, the IRS requires taxpayers to produce and prove every item on their return including such things as their children’s Social Security numbers. Perry said the firm has also seen an increase in so-called correspondence audits, where the IRS will send a letter asking a taxpayer to verify a specific item on the return such as charitable deductions.

In 2009, the IRS created a special unit to examine the tax returns of high-wealth individuals.

"We will take a unified look at the entire web of business entities controlled by a high-wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system," IRS Commissioner Douglas Shulman said in a December 2009 speech. "We want to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise."

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Margaret Collins in New York at mcollins45@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

How to know if an IRS audit is round the corner?

With ever improving improved detection systems and computerized checks, the IRS can more easily identify red flags that trigger audits.

Contact typically starts with a letter requesting more information and can lead to in-person meetings. It is usually triggered by a tax return that contains something unusual, such as an above-average deduction or change in income from previous years. As long as the taxpayer can defend his filings with the proper paperwork and logic, he has nothing to worry about--other than the time it takes to respond.

Here are a few of the signs you need to take note of:

1. Earning a lot less money last year.

The IRS looks out for any major changes in income, which can signify that a taxpayer is under-reporting his earnings. As the IRS tracks historic data, people who suddenly start reporting much less income can be flagged for an audit.

2. High incomes.

According to IRS 2010 enforcement results, your chance of being audited triples once your income crosses $200,000.

3. Over-sized medical expenses.

Medical expenses - You only can deduct these costs to the extent they're greater than 7.5 percent of your adjusted gross income, and it's important to have detailed records.

Any higher-than-average deduction in any category will send out a signal to the IRS that all is not right.

4. You work for yourself. 

It might not seem fair, but being self-employed can raise red flags for the IRS, especially if you claim your home office and other costs as business expenses but don't earn much income. The best advice is to keep careful track of all paperwork so you can defend any deductions and credits you take.

Home offices -  You can only take a home office deduction if you regularly and exclusively use part of your home as your principal place of business. If your office doubles as the kids' playroom, forget about it. For details, see IRS Publication 587.

5. You claim losses from a hobby. 

While writing off business expenses can be legitimate, it's illegal to pretend a hobby is a business and then write off the related expenses. For example, if you enjoy woodworking, you might practice the craft on the weekends for fun. Doing so does not enable you to write off the cost of wood and tools. (If you were selling those creations online, that would be a different story.) The difference between a small business and a hobby is that a business "must be entered into and conducted with the reasonable expectation of making a profit."

6. Deducing home office (or car) expenses. 

While plenty of people can legitimately claim home office expenses on their taxes, some people do so incorrectly. Merely checking email from home after work, for example, does not justify a home office deduction. In order to qualify, the home office must be used for work only. Likewise, claiming a car as a business expense can also raise red flags; taxpayers doing this need to keep careful track of how much they use the car for business versus personal use.

7. You included expensive meals and entertainment costs among your deductions.

The IRS often double-checks these types of claims to make sure they are legitimate business expenses, says Perry.

8. You were particularly generous this year. 

The IRS is on the lookout for people who inflate their charitable donations, and the agency takes a close look at taxpayers who say they donated $500 or just under, since anyone who donates more than that amount must file form 8283. (And if you do donate more than $500, be sure to file that form.)

Charitable deductions. - You'll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require a written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you'll need an expert appraisal to back up your claim.

9. You maintain an overseas bank account. 

The IRS has added more reporting requirements this year for people with money in foreign accounts. Failing to report one could trigger an audit.

10. Your numbers don't match. 

If numbers on various forms don't match or add up correctly, the IRS is likely to notice and look into any disparities. So treat your taxes like a final exam in algebra and check over all the numbers before submitting.

As long as you know you filed your paperwork properly, you can sit back and enjoy any refunds coming your way.

For more on getting through an IRS audit, refer to our earlier blogpost http://gkminc.blogspot.in/2011/11/how-to-get-through-irs-audit.html.

Best tax preparation help for you

In the upcoming weeks, the World Wide Web will be flooded with articles relating to finding the right tax professional for your return preparation.

You will be hearing terms such as CPA, RTRP, EA, ERO – what not beside the tax professionals’ names in advertising. What do they all mean?

First and foremost, to prepare a tax return, a preparer needs a PTIN (Preparer Tax Identification Number). This is issued by the IRS to paid preparers so that they need not use the Social Security Numbers on the prepared returns.

As of now, for acquiring a PTIN, no training is needed. However, it is expected that by 2013, a pass in a specially designed minimum competency test will be mandatory for preparation of tax returns.

An RTRP (Registered Tax Return Preparer) will also be required to spend 15 hours annually in tax related continuous education measures. The new program will also include a mandatory background check on tax preparation applicants so as to dig out those with a criminal record. By 2013m, any tax preparation aspirant will need to pass the competency test and get through the background check to acquire the PTIN.

A CPA (Certified Public Accountant) will have an accounting degree. The accountant will have served under a CPA for a specified period and taken up extensive tests. The state issue the CPA certificate, and the requirements vary from state to state. They also need to meet annual continual assessment tests in all areas of accountancy including tax and audit.

A JD (Attorney) is a law school graduate, having passed the state bar exam for practicing law in that state.  They need to have continuing education in all areas of law including taxation.

A preparer, by working for the IRS or taking comprehensive tests in all areas relating to tax qualifies to be an EA (Enrolled Agent). Their continuing education requirement will specifically pertain to taxation for 3 years spread over 72 hours, and can practice in any state.

An ERO is an Electronic Return Originator who can electronically file tax returns. For taxpayers who have prepared their own return or for tax preparers who do not offer e-filing, this is applicable. In case the ERO is also a qualified CPA / RTRP / JD / EA, they can prepare the return too apart from filing it.

So, from the above listed specialists, whom do you need?

If you need to just e-file your return, all you need is the ERO.

If you are looking for a preparer, here are a few pointers to keep in mind:

Ø      Who is recommended? | Check on the IRS certification

Ø      Check out the fee charged | pre-determine how much you can spend

Ø      Ensure accessibility of preparer | what does the preparer have to say?

Ø      List down your other specific requirements

If you mark the 3^rd party designee box on the return, in case issues arise with the IRS, a general preparer can help you on accounting & audit issues. An EA, CPA or JD can represent you on any issue thrown up by the IRS.

These are the major tax preparation options available. Choose what suits you best, good luck with your taxes!

How to get through an IRS audit?

A majority of us manage to get through the tax season with only the refund check from the IRS. A few not-so-lucky ones end up getting audited – nothing is more alarming for taxpayers than a letter from the IRS asking for more information on their tax returns, asking for proof of income or deductions. In some cases, a meeting with an IRS agent is required, and most taxpayers just press the ‘panic’ button then.

What are the odds of you getting picked for a tax audit? Factors such as your earnings, your profession, the type of return filed, nature of transactions reported are a few specific triggers contributing to an audit. Here are a few reasons why the IRS will want to audit you:

• Huge business expenses (Travel & Entertainment for instance)
• High deductions for employee business expenses
• Large deductions under charity
• Erroneous representation while reporting on your tax forms
• Covering up of cash receipts
• Complex business / investment dealings
• Prior history of tax issues / audits
• Informants
• Your relationship to a taxpayer who is under audit

What do you need to do incase you are singled out for a tax audit?

Have a long hard look at your return, understand all its contents, and then collate the records of items in question.

To stay afloat on tax matters, here are tips best cultivated into a year-long habit:

1. Collect and organize your records through at least three years – it will make tax return preparation easier, and will greatly reduce the probability of errors.

2. Maintain and sort out all your purchase receipts through the year.

3. Retain your checkbook stubs.

4. Organize all bills, and keep track of all reportable and deductible items on your tax return.

5. If you have invested in real estate, keep all documentation such as cost basis, settlement / sale statements handy.

1. First and foremost, do not ignore the IRS letter – respond to it at the earliest, requesting for reasonable time to get back after collecting the necessary paperwork.
2. Most times, the letter from the IRS simply requests for more information / clarity on an item on your return – say, it wants you to send in receipts for the entertainment expenses you deducted. Then, just mailing across the required receipts will suffice, there is no need for bringing in a professional, say your lawyer or your accountant.
3. In case you are unable to locate the information asked for and a meeting with an IRS agent has been scheduled, you are best equipped with professional help at hand. Bringing in an expert to represent you does not necessarily mean you are guilty, rather, it will be mutually beneficial as the agent will prefer to deal with the organized and detached ways of an accountant than an emotionally charged individual.
4. On most instances, the IRS will have very explicit questions for you to answer with necessary document back-up. So, the best approach would be to hand over all necessary forms / receipts as required, and use the opportunity to convince the agent that there is no case of understating income earned. The IRS has kind of decided on your case, and you need to satisfactorily explain why the decision to audit is off beam. Do not volunteer to share additional records / overshare – you will only be subjecting yourself to a fresh audit then. It will only go on to cost you. If the agent happens to question you on an off-the-record item, refuse in a firm but polite manner to answer until a formal request on the specific information is filed. Do not give the agent additional or lesser information than that is requested for.

5. At the end of the meeting, the examiner will present a reassessment in case of underpayment of taxes. Then, you can either pay the additional tax or fight it out in a tax court in case you feel it is unjustified. However, bear in mind that the IRS will usually conduct a tax audit only if it is confident of invalid deductions / expenses thus resulting in a tax bill. 

Whether your tax return was self-prepared, or by a paid preparer, you are finally responsible for its contents as you sign on the dotted line. Hence, review the items on the tax return to your complete satisfaction and check out any unclear items with the preparer thoroughly before signing it.

Around 2% of filed tax returns are picked for IRS audits. In case yours is one, do not panic, de-stress and bear in mind that an organized tax portfolio and a clear, uncluttered communication protocol will get you through the audit with ease.