Dirty Dozen Tax Scams for 2012

With tax season upon us, the IRS reminds taxpayers to use caution to protect themselves against schemes ranging from identity theft to return preparer fraud that peak during tax season. I'll be touching on some of these items in more detail on future posts.  My immediate advise is to file your tax return early and use a reputable tax professional--a CPA, or a well known company like Jackson Hewitt or H&R Block. If you have any doubts or questions about tax returns you filed in the past, it's strongly recommended you seek a second professional opinion to review those returns. No one likes to receive a letter from IRS in the future stating they owe significant monies and penalities.

Dirty Dozen tax scams for 2012 are:

1.  Identity theft, where thieves try to use a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent refund. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
2.  Phishing, where an unsolicited email or a fake website that poses as a legitimate site tries to get valuable personal and financial information. The IRS does not contact taxpayers by email to request personal or financial information. Unsolicited emails that appear to be from the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, should be reported to phishing@irs.gov.
3. Fraudulent tax preparers profit off of the 60 percent of U.S. taxpayers who enlist tax professionals to file their tax returns. Fraudsters take a percentage of their clients' refunds and charge exorbitant rates. Hold your tax preparer accountable by entering his or her Preparer Tax Identification Number on your returns. Refer to the IRS's Tips For Choosing A Tax Preparer before entrusting someone with your most confidential information.
4. Hiding income offshore.
5. “Free money” from the IRS & tax scams involving Social Security, where scammers claim taxpayer can file a tax return with little or no documentation or when scammers promise nonexistent Social Security refunds or rebates.
6. False or inflated income and expenses, which could result in repaying the erroneous refunds, including interest and penalties, and in some cases, prosecution.  For exmaple, some taxpayers lie about income and expenses in order to qualify for tax breaks such as the Earned Income Tax Credit.
7. Falsyfing Form 1099 refund claims, where the perpetrator files a fake information tax return to justify a false refund claim on a tax return.
8. Some taxpayers pick fights with the IRS in order to get out of paying certain taxes. Check out this list of frivolous tax arguments that have been deemed false and have been "thrown out in court."
9.  Falsely claiming zero wages.
10.  Abuse of charities and deductions, including arrangements that improperly shield income or assets from taxation and attempts by donors to control donated assets or income from donated property.
11. Disguised corporate ownership.
12. Misuse of trusts, where highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.

Tax Audits on the Rise

In the olden days, you were likely to meet with the tax man for an audit by the IRS. These days with budget cuts, you're now almost four times as likely to conduct your tax audit by mail. Of the more than 1.6 million Americans who were slapped with audits last year, 78% dealt with correspondence audits, while only 22% were asked to come in for an in-person examination.

That is a 13% rise in audits-by-mail from 2009, and a 93% jump compared to 2003. In 2000, the chances of getting a correspondence audit were less than 2 to 1.

When people think of audits, they think of being in an office and going to war with someone from the IRS," said Thomas Cooke, a professor of accounting and business law at Georgetown University. "Years ago you could almost guarantee you would have to go in and see someone to do it, but this isn't the case anymore."
Why the shift? Because correspondence audits are cheaper for the IRS. Plus, Cooke said many people take action as soon as they get the audit notice in the mail, in hopes that it won't escalate to a visit from Uncle Sam.

"People are scared to death when they get these letters, so they do everything they can to resolve the problem right away to make it not go further," he said.

While a face-to-face examination with an IRS agent can involve going through an entire return, correspondence audits usually ask taxpayers to provide information about very specific items on a tax return, like income, expenses or deductions.

"It's an effort to try to cut costs and focus their efforts, and there are pluses and minuses to it," said Ed Smith, a tax partner at BDO. "A plus would be if there are only one or two items the IRS is interested in, because they can focus their time and effort on those items and it's more efficient for both parties. On the other hand, depending on the complexity and detail needed to support something, it may be difficult for the taxpayer to respond to a correspondence audit and easier to go over things in person."

Even if the information the IRS is requesting is basic, the complicated jargon often makes it hard for people to understand that the letter they have opened is even an audit.

Out of a sample of 754 taxpayers who claimed the Earned Income Tax Credit and were audited, more than a quarter of them had no idea they were even being audited, the Taxpayer Advocate Service's most recent survey found. Nearly 40% of the same respondents didn't know what information the IRS was asking them to provide.

And that's if they even received the audit in the first place. The IRS rarely checks to make sure letters have been sent to the correct addresses -- and about 10% of overall mail from the IRS is undeliverable, TAS has found.

In addition, 70% of people surveyed by TAS said they prefer not to communicate with the IRS through correspondence audit, and would rather communicate in-person or over the phone.

But the IRS argues that resolving tax-return issues by mail can really benefit both taxpayers and the IRS, saying that mail audits are mainly sent when there are fewer issues with a return and a full in-person audit isn't required.

"In comparison to other audits, correspondence examinations require fewer resources from either the IRS or taxpayers, are considerably less invasive for taxpayers, and effectively contribute to the tax administration objectives of fostering voluntary compliance and reducing the Tax Gap," the IRS stated in response to a recommendation from TAS to conduct fewer mail audits.

And the fact that the IRS is "vastly understaffed" and currently looking at possible budget cuts that would strip the agency of $600 million in funding is only likely to cause mail audits to continue to rise, said Olson.
"I would love to see the IRS go back to doing more field audits -- in most cases, it's less burdensome for taxpayers if they have someone they can talk to," she said. "But the IRS is moving in the opposite direction, and now with proposed budget cuts, there will be greater pressure to use more automation."

It's important to have a dedicated tax preparer when you are audited by the IRS, just like a family doctor who knows you and your medical history.  Going to a professional is the safer route. In my opinion, it's too risky to take shortcuts with your health and IRS.  Invest that money in a good doctor and tax preparer. While I try to support mom-and-pop businesses, often they can't help you with an IRS audit.  It's like having a good lawyer. It's good "to have people".

Let me help you simply your life and finances.
Elizabeth
lizandrade@juno.com

Claiming Adult Children on Your Taxes

Watching our children grow up and leave the nest brings mixed emotions. Alas the prolonged economic downturn has forced thousands of young adults to move in with their parents until their job prospects improve.

On the cusp of tax season, a lot of parents are grappling with an issue: Can you claim an adult child as a dependent? For 2011, each dependent reduces your taxable income by $3,700. For a family in the 25% tax bracket, that works out to a tax savings of $925, which buys a lot of groceries.

Unfortunately, the fact the you provide a roof and food for an adult child does not automatically mean you can claim that individual as a dependent. There's a four point litmus test to determine if your child meets the IRS definition of "qualifying child".

1. Relationship. The individual must be your child, stepchild, foster child, sibling, stepsibling or a descendant of one of those (such as a grandchild).

2. Age. They must have been under age 19 at year's end, or under 24 if the child was a full-time student for at least five months of the year.

3. Residence. The child must have lived with you for more than half of the year. There are some exceptions for children of parents who are separated or divorced.

4. Support. You must have paid more than half of the child's support during the year. To calculate how much you spend on support, you can include your child's college costs, food, clothing and medical and dental expenses.  If your child is on your health insurance plan,  you can include a portion of your premium.  You can also include a percentage of your ongoing household expenses when calculating the amount you spend on support.  For example, if  five people live in your home and one is an adult child, you can include one-fifth of your utility bills.  As long as your child's income doesn't exceed the amount you spent on support, and meets the other criteria, you can claim the child as a dependent.

For example, if your son graduated from college in May, found a job in September and earned $20,000. As long as the amount you spent on his education exceeded $20,000, you can claim his as a dependent. However, if you claim your child as a dependent, he can NOT claim personal exemption on his own tax return.

Qualifying Relative
The increasing trend of adult children living with parents is not limited to recent college graduates.  Thousands of adult children who have been out of college for a year or more have been forced to move in with their parents because they can't find a job, or lost their job or homes or both.

If you're supporting an adult child who fails the age test, you may still be able to claim him or her as a "qualifying relative".  Be advised, though, that the standard for qualifying relative is much higher.

In addition to the "Support" and "Residence" criteria,  the qualifying relative must have earned less than the amount of the personal exemption.  This income test prevents a lot of parents from claiming older adult children as dependents because even a part-time job will render the child ineligible.

At the other end of the generational spectrum, hard times have also forced many families to take in older parents, or provide them with financial support. Claiming a parent as a dependent may be easier than claiming an older child for two reasons:

1. Social Security isn't included in the gross income test.  If Social Security is your parent's sole source of income, the income test isn't a problem for you. However, you can't claim a parent who earns $3,700 or more from other sources, such as a pension, interest of dividends.parent

2. Your parent doesn't have to live with you. Suppose your parent lives in an apartment or assisted-living facility, but you pay most of the bills. You can claim that parent as a dependent, as long as the other tests are met.


If you are in a similar situation but are unsure and need to ask questions, contact me for a consultation.
Keep Life Simple.
Liz

4 Financial Tips You Should Ignore

Have you heard the one about houses being a sure-fire investment? Or the tip that you should close all your credit card accounts? Bad financial advice can circle the web faster than the latest e-mail scam from Nigeria, and some of it originates from personal finance gurus themselves (although their words are often twisted). Here are four popular financial tips you should ignore:

1. A house is always a good investment. The man who calls himself "Frank Curmudgeon" built a popular website around what he considers to be terrible financial advice. Ask him what the worst is, and he'll tell you it's the idea that "you should borrow up to your eyeballs to buy the biggest house you can, because houses are the magic asset that never lose value." Pre-housing crisis, he says, "just about every mass market personal financial guru out there" advocated some form of that advice. Many people who took it to heart later found themselves unable to afford the houses they had bought, he adds.

My personal advice--never by a house or car or other purchase if it means living on the edge. Always leave yourself a cushion for emergencies, vacations, unexpected purchases.  Many self-made millionaires were frugal and saved and lived below their means for years before investment. A little sacrifice over years can amass to wealth later.

2. Avoid credit cards. Contrary to popular myth, credit cards do not spread the plague. In fact, people who take the "credit cards are evil" message to heart can find themselves in trouble when they want to borrow money for a house or car, since lenders want to see some experience with credit.

My 25-year-old daughter ran into the same problem when she tried to take out a loan for the purchase of her first, new vehicle and lenders turned her down. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn't use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a loan. The bottom line: You have to use credit to be able to take out loans. They key is be responsible in paying off the debts. Take time to sit down with your high school children and teach them the values of money. 

3. All student loan debt is good debt. Zac Bissonnette, author of Debt-Free U, calls this the worst advice ever: "Borrow whatever it takes to go the best school you can. It's an investment in your future." Instead, he urges college students (and their parents) to avoid loans, reject the hype of expensive, private schools, and instead pay for more affordable colleges through a combination of hard work and being savvy.

4. Use home equity loans to pay off credit card debt. In pure mathematical terms, this proposition can make sense, since interest rates on credit cards are usually much higher than home equity rates. But here's why it's a bad idea, as many people, including MSN's Liz Pulliam Weston and Jeremy Vohwinkle of GenXFinance.com, have pointed out: Home equity loans can not only enable a debt-fueled lifestyle, but they can also leave you more vulnerable to foreclosure, bankruptcy, and other over-spending problems.

Have any tips you'd like to share from personal experience? Click on comments below.

20 Tax Law Changes You Need to Know

Several important tax changes took effect in 2011 that will impact federal income tax returns filed this April. While some of the changes are straightforward, such as the standard mileage rates, others, including the tax handling of foreign financial assets, may be more complicated. Following is a list of the tax law changes for 2011 Federal tax returns.

Alternative Minimum Tax The alternative minimum tax (AMT) exemption amount increases for tax year 2011 to the following levels:

• $48,450 for singles and heads of household (up from $47,450 in 2010)
• $37,225 for married filing separately (up from $36,225)
• $74,450 for married filing jointly, and qualifying widows or widowers (up from $72,450)

Alternative Motor Vehicle Credit The alternative motor vehicle credit cannot be claimed for a vehicle bought after 2010, unless it is a new fuel cell motor vehicle.

Capital Gains and Dividends Lower rates for long-term capital gains and dividends remain in effect for 2011 and 2012. The rate on long-term capital gains and dividends remains at zero for those taxpayers in the 15% income tax bracket and below; the rate is 15% for taxpayers in the 25% bracket and above. Most taxpayers will use new Form 8949 to report capital gain and loss transactions. Schedule D, the form that has been traditionally filed to show these transactions, is now used as a summary sheet.

Child Tax CreditThe 2010 Tax Relief Act extended the credit of $1,000 per eligible child through 2012.

Designated Roth Accounts Taxpayers who rolled over an amount from a 401(k) or 403(b) plan to a designated Roth account during 2010 and did not elect to report the taxable amount on a 2010 return must report half on the 2011 return and the rest on the 2012 return.

Due Date of Tax Return Because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia, tax returns are due on Apr. 17, 2012.

Estate Tax For individuals who died after 2010, the federal estate tax provides a $5 million exemption and a maximum 35% rate. These estate tax rules are scheduled to end following 2012.

First-Time Homebuyer Credit In order to claim the first-time homebuyer credit for 2011, a taxpayer (or their spouse, if married) must have been "a member of the uniformed services or Foreign Service, or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010." For more, check out Top Tips For First-Time Home Buyers.

Foreign Financial Assets For tax years beginning after Mar. 18, 2010, certain taxpayers may have to file the new Form 8938 with their returns. Form 8938 is used to report the ownership of specified foreign financial assets (including any financial account maintained by a foreign financial institution) if the total value exceeds a specified threshold. The threshold amount varies depending on if the individual resides in the U.S. and if the tax return is filed jointly with a spouse. It is a separate form and does not replace existing requirements for reporting foreign assets to the Treasury Department using Form TD F 90-22.1.

Health Savings Accounts and Archer MSAs Beginning in 2011, the additional tax on health-savings account and Archer medical savings account distributions not used for qualified medical expenses has increased to 20% (up from 10% for HSAs and 15% for Archer MSAs). Also, starting in 2011, only prescribed drugs and insulin are considered qualified medical expenses.

Income Tax RatesThe 2011 rates carry over from 2010, but the income brackets are higher to account for inflation. The 2011 tax rate schedule can be found on page 273 of IRS Publication 17 "Your Federal Income Tax: Tax Guide 2011 For Individuals."

Mailing Your Return The mailing address for paper returns may have changed because the IRS has changed the filing location for several regions. Taxpayers are advised by the IRS to read the "Where Do You File?" page at the end of the 1040 instruction booklet.

Making Work Pay Tax CreditThe making work pay tax credit has expired and cannot be claimed on the 2011 return.

Energy Tax Credits for Homeowners The "25(C)" credit for energy-efficient improvements has been extended, but the amount of the credit has been reduced to a maximum of $500 per taxpayer per lifetime. Taxpayers who took the maximum $1,500 credit in 2010 are not eligible.

Personal Exemptions The amount one can deduct for each exemption has increased to $3,700 (up from $3,650 in 2010).

Repayment of First-Time Homebuyer Credit Taxpayers who must repay the credit may be able to do so without using Form 5405.

Roth IRAs Unlike 2010 conversions, all income resulting from a 2011 conversion must be included in that year's return. For 2010 conversions, half of the resulting income must be reported in the 2011 return, and the rest in the 2012 return.

Self-Employed Health Insurance Deduction For 2011, qualified self-employed taxpayers and S corporation shareholders can use the self-employed health insurance deduction to reduce income tax liability. The taxpayer must not be eligible to participate in an employer-sponsored health plan, and the insurance plan must be set up under the taxpayer's business. Premiums paid for health insurance for the taxpayer, spouse and dependents typically qualify for the deduction. The deduction is taken on Form 1040 Line 29. The deduction from self-employment income for determining self-employment tax, available for tax year 2010, no longer applies.

Standard Deduction Increased The standard deduction for certain taxpayers who do not itemize their deductions on Schedule A of Form 1040 has been increased. The amount of the deduction depends on the taxpayer's filing status. The standard deduction for most people is $5,800 for single or married filing separately, $11,600 for married filing jointly or for qualifying widow or widower with a dependent child and $8,500 for heads of household.

Standard Mileage Rates The standard mileage rate for the business use of a car, van, pick-up or panel truck has increased to 51 cents a mile for the first half of 2011, and 55.5 cents per mile for the second half.

The Bottom Line The Internal Revenue Service's website provides detailed information on these important tax law changes. If you have questions about these changes or about your 2011 tax return, please consult a qualified tax professional.

Please note: While every attempt has been made to provide timely and accurate information, this article should not be considered a definitive tax guide, nor should it replace the advice of a qualified tax professional.

Liz's 5 New Year Financial Tips

Happy New Year! This time of year brings hope to everyone, even those who are struggling or out of work. We all need hope.  But sometimes we find ourselves in financially difficulty due to lack of discipline and lack of planning. Yes ladies and gentlemen, being financially fit is just as important as being physically fit. So we all need to be mindful to slim that excess spending line and boost bottom line! Right?! Right.

To protect and prepare yourself, here are a few resolutions to consider:

1. If you have small children, start funding college 529 plans early. A coveted education at Harvard University this year cost $53,000 and college costs never go down. Start saving for Bobby and Bonnie in a tax-deferred 529 as early as possible, preferably right after they're born.

2. Here's an easy one. Start teaching your children about the importance of hard work and money when they are small. House chores and an allowance go hand in hand and are great tools for setting the foundation for "responsibility". I see today's children demanding and getting. When parents easily give them without teaching, explaining and discipline, it's much harder down the road when that parent loses a job and children don't understand and are still demanding. It places tremendous anxiety on the parent. Don't let your children fall into that "entitled group".  When I was a single mother with two daughters, and struggling, my eldest daughter understood. When she started working after college, she helped me with the mortgage. We had few luxuries and no vacations and no eating out, but we had a home and food and eachother and more importantly no debt or creditors breathing down our necks. Our stress levels were better than most people in our situation, and so was hour health, thank God.

3. Lower your mortgage payments. Interest rates remain at historically low levels, with the 30-year fix-rate mortgage now below 4% for qualified buyers. If you haven't already, now is the time to lower your monthly payment by refinancing our current mortgage at a lower rate.  Homeowners, even those in hard-hit markets such as Florida, Arizona and Nevada who owe more on a mortgage than their home is worth, will have a better chance to refinance through the government's Home Affordable Refinance Program, or HARP, which has been enhanced and extended through the end of 2013. Even one percentage point can save you roughly $140 a month ona $250,000 mortgage.

4. Save More for Retirement. My customers who have been with me for years knew this was coming. Disappearing are pensions, and stock in companies are devaluing and that is dangerous if you placed all your eggs in one basket.  The government has boosted the maximum you can set aside in a tax-deferred 401(k) account in 2012 by $500 to $17,000.  How to do this? Raise the percentage taken out of your paycheck to ensure you take advantage of the new higher savings limit.  If you get a raise, or received a bonus, deposit it straight away into 401(k) if you have not reached your maximum. 

Other solutions: Stop spending foolishly.  You don't need the latest iphone or flatscreen TV  or video games or eat out every other night. Start saving money for emergencies like job loss or unexpected car repair or medical bill.  The recommendation is to save for three month's worth of expenses in case you lose your job. But in this recession, I recommend saving 6 months worth. Yes you can do it. It does take sacrifice.

If you're not disciplined enough to save, have the money deducted automatically from your paycheck into savings account.

5. Don't Invest on News Headlines.  Homework pays not headlines.  Constant homework and research will give you the advantage. By the time activity reaches the headlines, it's actually old news and millions of people have already bought or sold the stock. If you missed the boat, wait it out. Long-term usually sees a rebound. We can't promise but as you know the 20 year cycle of any stock sees gains.

I hope these tips helps. And please do not hesitate to contact me for upcoming tax season. Like my client's say "It's like getting a Mercedes at a Ford price". I'm a CPA that offers mom and pop prices. You have enough to worry about. I love accounting and numbers and so I can take the burden from your shoulders.

Liz
305-860-9903
or lizandrade@juno.com

Happy New Year!