Don’t panic! You can request a six-month extension. There are many reasons that taxpayers may decide to file for an extension. The IRS recognizes that taxpayers may not have necessary documents. Contrary to what many people believe, requesting an extension does not put some sort of flag on your return. It does not increase the likelihood that you will be audited. If you cannot prepare your tax return and file it by the due date, request an extension.
Keep in mind that the extension gives you more time to file. It does not extend your deadline to pay. If you owe taxes, you should go on and pay them.
Filing an extension is easy. You can follow the instructions on the IRS web page, or if you have already spent the money on tax software, there should be a menu option that will let you prepare an extension and submit it by mail or e-file. If you are already working with a tax professional, then he or she has probably already advised you if you will need to request an extension.
Tempted to boost your tax refund by adding a few extra deductions or claiming some additional business expenses? Be careful. Padding deductions is another one of the IRS Dirty Dozen. Most taxpayers file honestly each year. However, there are also taxpayers that overstate deductions or claim credits such as the Earned Income Tax Credit (EITC) or Child Tax Credit when they are not entitled to do so. This is not to say that you should not take legitimate deductions. If you made large charitable contributions, then you should claim them.
The penalties for filing incorrect returns can be significant. They can include:
20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
$5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.
It is also possible to face criminal charges for filing a fraudulent return. This could mean additional penalties and even a time in prison.
What can you do to make sure you file an accurate return? Begin with your documents. If you have legitimate deductions, by all means take them. If you have business expenses, you should claim them. If you have any doubt about what is permissible, contact a tax professional such as a CPA, Enrolled Agent, or a tax attorney. The IRS also has plenty of information available on its website.
Another one of the IRS Dirty Dozen is Preparer Fraud. The vast majority of tax preparers are honest. Sadly there are some preparers that take advantage of unsuspecting taxpayers. About 60 percent of taxpayers use professional tax preparers, so the opportunity for fraud is large. IRS Commissioner John Koskinen says,
Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected. Most preparers provide high-quality service but we run across cases each year where unscrupulous preparers steal from their clients and misfile their taxes.
One way to protect yourself is to check out your preparer. The IRS maintains a directory of preparers that are registered with the IRS. This includes:
Enrolled Retirement Plan Agents
Annual Filing Season Program participants
You can also ask your preparer if he or she has a professional certification such as enrolled agent (EA), certified public account (CPA), or attorney. Preparers registered with the IRS also have a PTIN which is a registration number.
A few things that you can do to protect yourself include reviewing your return before it is filed. You should also never sign a blank return. If you are the victim of an unscrupulous preparer, you should report him or her to the IRS.
Check out the IRS’ press release for more details about this Dirty Dozen Scam.
Every year, the IRS compiles a list of tax-related scams called the Dirty Dozen. I’ll highlight the scams over the next couple of weeks. One of the Dirty Dozen this year is falsely inflated refunds. While this sounds like something a taxpayer might do by claiming unwarranted exemptions, deductions, or credits, the scam is actually related to unscrupulous preparers. The IRS Commissioner reports:
Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you’ve never been able to claim before. If it sounds too good to be true, it probably is.
Every year, the IRS compiles a list of tax-related scams called the Dirty Dozen. I’ll highlight the scams over the next couple of weeks. One of the Dirty Dozen this year is fake charities. The IRS commissioner reports:
Fake charities set up by scam artists to steal your money or personal information are a recurring problem. Taxpayers should take the time to research organizations before giving their hard-earned money.
The IRS offers these tips if you make charitable contributions.
Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN.
Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.
Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
The IRS also notes that many people are defrauded by fake charities following disasters.
The scams work several ways. The most common is to persuade unsuspecting individuals to donate to bogus charities. Another is to use the appeal as a way to collect personal information that can be used for identity theft.
Please do not be dissuaded from continuing to contribute to worthy causes. However, be aware of the potential for fraud and be vigilant. There are resources to help you make good decisions about charitable contributions under the Resources tab on www.elycpa.com.
It seems simple enough. You give a gift or receive a gift. What about taxes? Do you have to pay taxes when you receive a gift? What if it is a lot of money? Do you pay taxes if you give a gift?
Before answering these questions, let’s figure out what qualifies as a gift. The IRS says:
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.
The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
Do you pay tax if you receive a gift?
Generally, no. Taxes are paid by the person giving the gift.
Do you pay taxes if you give a gift?
The answer to this question depends on the amount of the gift. The annual exclusion for 2014, 2015, 2016 and 2017 is $14,000. This amount is per individual per gift. As an example, if two parents wish to give a gift to their two children, then they can give each child $28,000 (2 X $14,000.) If the gifts are greater than the annual exclusion amount, then gift tax may apply. Taxpayers should file Form 709.
Still confused? See the link below for answers from the IRS, and contact your CPA or tax professional.
It is tax time, and that means that it is time for me to start answering client questions about income. Generally speaking, if you received money, property, or services, you have income. Examples of income include wages and fringe benefits, investment income such as interest, dividends, or capital gains, business income, and income from bartering. In some cases, your income may be documented. For example, if you have wages, then your employer will give you a W-2. Interest and dividends are reported on 1099s. If you are self-employed you may receive 1099-MISCs if the amounts paid you by clients are above a certain amount.
Not all income is documented.
If you run a business, it is up to you to keep track of revenues and expenses. If you are self-employed, some of your income will come from clients that will not be required to send you a 1099. Please avoid the temptation to forget to include this undocumented income when you are getting your books ready for filing your tax returns. The IRS is pretty good at comparing expenses to revenues and figuring out when income is not reported. If you are caught you will end up paying the taxes plus penalties and interest.
Not everything is taxable.
Income can either be taxable or nontaxable. For example, if you receive a gift, that is not normally taxable income. Keep in mind that depending on the size of the gift, the giver may have to pay gift tax. Some income such as interest from some municipal bonds may also be nontaxable. Nontaxable interest, however should be reported on a tax return.
Don’t forget your basis!
If you sell investments or your home, you will receive a Form 1099 for the gross proceeds. Be sure to figure out your cost basis, or what you paid. For example, if you have a stock portfolio, and you sell stocks worth $1,000 then you will receive a 1099 for that amount. However, your net income is the proceeds less whatever you paid for the stock. Don’t forget any reinvested dividends. The same thing applies if you sell your home. Depending on the circumstances, you may be able to exclude a lot of the gain. Be sure to talk to your tax pro if you have sold a home. If you complete your own tax return, read the instructions carefully.
In December, the IRS announced that Tax Season will begin January 23rd. That’s today. What the announcement means is that the IRS will begin accepting electronically filed, or e-filed, returns. If you happen to have all your documents, then you should be able to file a return today.
However, the first day of tax season is not like the first day of deer season or the fishing opener. You don’t have to do anything today. Instead, it makes sense to start preparing if you have not already done so. You should receive your W-2s or 1099s soon. You will want to gather up documentation for deductions, exemptions, and credits. If you are missing something, you have time to find it. Get everything together in one place and organized before you either take your documents to a professional or begin working on your return yourself.
The filing deadline is April 18 this year. Remember, the sooner you file, the sooner you will receive a refund if you overpaid your taxes. Taxpayers that claim Earned Income Tax Credits (EITC) or Additional Child Tax Credits (ACTC) will wait a little longer for their refunds because of anti-fraud provisions in legislation passed last year. Even so, the IRS expects to issue 90 percent of refunds within three weeks of receipt of the return.
This article on the IRS website contains more information about filing season.
It’s true. You can file your taxes for free. The IRS provides resources that allow most taxpayers to file their tax returns for free. If your income is less than $64,000, you can use Free File software that will enable you to file federal and state returns for free.
It may seem odd that a CPA firm is posting in a blog to tell potential clients that they can file their tax returns for free. It’s not. CPAs see themselves as trusted advisors. My firm, and the firms run by my CPA colleagues, focus on meeting client needs. That does not mean simply providing services for a fee. It means taking the time to work with clients to understand their needs. Most of us also work hard to make sure clients understand the reasons why things are done the way they are. That means taking the time to explain tax concepts. Seemingly simple terms such as income, deduction, exemption, or credit can be surprisingly complex. If your financial situation is very simple, you may find it advantageous to take advantage of free filing. On the other hand, your time has value, and you may want the peace of mind that working with a professional tax preparer such as a CPA can provide.
Is Free File for you? Only you can answer that. If your financial situation is simple, and you know what you are doing, Free File may be exactly what you need. Even if you choose to use Free File, you may still want to check with your trusted advisor.