Avoiding Identity Theft

In the last year several clients have run into the problem of identity theft. In particular one taxpayer simply filed their ordinary form 1040 with IRS as they have done for more than 25 years. The return claimed a refund. The IRS wrote to the taxpayer and advised that a return had already been filed and a refund issued to the same tax number. That’s how it starts at least with regard to tax filings. It was not simply a matter of the taxpayer revealing their true identity which got them eventually the return of their tax refund. So it is best to take steps to avoid identity theft. The IRS has suggested that individuals file their tax returns as early as possible to avoid hackers and thieves who attempt to file early in the tax season using stolen tax information. A recent client who is a musician told me that many of the vendors of her work require her Social Security number. The more a taxpayer gives out that number to numerous vendors the more likely identity theft can occur. My suggestion was to use an employer identification number for all of these business receipts. The EIN can be acquired by a sole proprietor who can use it for any number of businesses and there is no need to incorporate. The IRS website provides guidance for the use of EIN numbers. Recently IRS declared a national tax security awareness week which ended on December 1, 2017 in Revenue Bulletin 2017 – 193 issued November 27, 2017, IRS listed seven steps to help with online safety and protecting tax returns and refunds in 2018. These include the following

Shop at online retailers you know.. Sites using the S designation in HTTPS of the URL are secure; look for the lock icon in the browser’s URL bar

Avoid unprotected Wi-Fi. Unprotected public Wi-Fi may allow thieves to view transactions

Learn to recognize and avoid phishing emails. These emails often suggest a password is expiring or that an account needs to be updated. Phony contact from the IRS is now too common.

Use security software to protect against malware that may steal data and viruses make sure firewalls and browser defenses are always active and updated

Use passwords that are strong, long and unique. Experts say a minimum of 10 characters but longer is better. Use a combination of letters numbers and special characters

Use multifactor authentication which means users may need a security code usually sent as a text to a mobile phone in addition to usernames and passwords

Encrypt and password protect sensitive data if keeping financial records tax returns or any personally identifiable information on computers. This data should be encrypted and protected by a strong password.

IRS also suggests getting a free credit report from each of the three major credit bureaus once a year and creating a “My Social Security account” online with the Social Security Administration where a taxpayer can see how much income is attributed to their Social Security number which will help determine if someone else is using the number.

                

Love the IRS? ..... a Poem

The IRS

Does anybody love the IRS?

 No one that I know

Enjoys that day in April

When you send them all your dough;

It seems an awful waste,

 Money down the drain

Buying us a government

That hasn’t got a brain.

No matter how you slice it,

You’ve got better things to do

Like whipping up a tax return

IRS may just let thru;

“With taxes we buy civilization”

 The philosophers may extol,

But you and I both know

 The money‘s down a hole.

So when it’s that time again,

Months before the summer,

Be prepared, my friend,

 For life to be a bummer.

From: "Here's Rhyme in Your Eye"

By TMD

The Tax Bill Rush

The Tax Bill rush is on and now aiming at Thanksgiving. It’s sure to be a turkey with lots of gravy for some and not much for most. Limits on mortgage interest and state income taxes will make New Jersey, New York and the real estate industry shake for sure. No sense worrying about it just yet. Money plays a large part in the legislative process and lobbyists will be reminding legislators of that fact.

The "New" Tax Bill or Why Nobody Reads the IRS Tax Code

              Reading the tax code is no fun. I know you haven’t done it. Neither have I and I have spent my entire career in tax law. Sure we know the concepts and how to research the details, but nobody, nowhere, no how has ever read the entire Internal Revenue Code. If you have the entire document under your belt send me a note, I will buy you a drink or three. That’s just the way it is. We know what we know and don’t know what we don’t know. Senators and congressmen who will be working on the tax reform bill that the president is attempting to get through by Christmas (or is it Thanksgiving?)won’t read much either. A typical tax bill can run hundreds if not thousands of pages with explanations. They are not going to read it. Even if they did by chance read some they won’t understand it. But they will vote on it and do their best to get it enacted into law. The Senate took a significant step toward rewriting that tax code on October 19, 2017 with the passage of the budget blueprint that would protect the $1.5 trillion tax cut from the Democratic filibuster, so says the New York Times. But as a matter of fact no one on or off Capitol Hill has seen the tax overhaul bill that Republicans are drafting behind closed doors. The Times continues: the swift pace to complete, release and quickly vote on a tax cut is aimed at leaving little time for the type of dissent that has scuttled previous tax proposals. Senators have set up a rapid series of hearings and votes with the aim of getting a bill to Pres. Trump by Christmas.( Thanksgiving?) All of this is ridiculous. What is the rush? Why are we Americans not entitled to have our legislators at least think, discuss and at a minimum read some of the volumes that will become our new tax law? It’s all about idiotic campaign promises and midterm elections, not creating a better tax system. So at the moment all we have is the scuttlebutt of what changes could be included in this new tax world. They include individual tax brackets of 12%, 25% and 35%. Peeling back some deductions like interest on home mortgages and state and local income taxes are also up for grabs. A 25% top rate for owners of pass-through entities such as S corporations and sole proprietorships. A 20% corporate rate and the repeal of the estate tax perhaps in a phase out. I have written before about the danger of tempting taxpayers to disguise their wages as income from an S corporation or sole proprietorship to take advantage of the proposed lower tax rates. Republicans say they are working on ways to eliminate any abuse. That would include implementing a 70/30 wages to profit ratio taxing 70% of income at individual rates and 30% at the new pass-through rate. Pres. Trump on the other hand has talked about punishing taxpayers who attempt to evade their proper taxes using the pass-through scheme. “They should receive coal for Christmas. Not only would that be proper punishment, but it will also help to revive the coal industry at the same time.” Okay, that part is fake news but I couldn’t resist.

Chasing the Independent Contractor

             Round and round we go. Is the worker an employee or an independent contractor? IRS chasing employers, employers dodging IRS. Everyone is doing it or so it seems. But helping to sort out the rules is always welcome, so a recent Senate proposal on worker classification may bear fruit. The law, if passed, would create a safe harbor (we lawyers love that). It would be based on three criteria: the relationship between the respective parties, the existence of a written contract and the location of the services or the means by which the services are provided. You may know that companies like Uber are being characterized as the “gig” economy. Creating “freelance” relationships with what perhaps could be called employees is now the rage. In the old days a worker who described himself as "freelance" meant they were unemployed. As the situation gets more out of hand because of this gig economy legislation in this area is more likely. Included in the proposal will be necessary changes to the form 1099 reporting rules. Passage seems on track and is real.

Tax Reform- Alice and the Rabbit

1)      Boy, $1 trillion just isn’t what it used to be. I was tempted to write that amount down but I wasn’t sure how many zeros I would actually need. But we will soon be finding out. The architects of tax reform are talking about major tax reduction in order to meet the president’s campaign promise. Like everything this president seems to do, he wants things done quickly. If not correctly. So now Republicans are changing their tune with regard to fiscal debt. The federal debt topped $20 trillion earlier this month and is projected to grow by another 10 trillion over the next decade. It seems the tax reform idea and tax cuts are different than the Republican ideal of fiscal responsibility and discipline. That at one time included tax cuts that did not add to the federal deficit. Of course the idea is that economic growth will offset the loss of revenue… said Alice to the Rabbit. 

The SFR and the Tax Return Non Filer

           After more than forty years of experience I can tell you this: lots of people don’t file tax returns. Their excuses run the entire gamut from the simple: “I forgot” to “I didn’t have the money” or “My personal life was a mess.” The IRS is in a continual dance with non-filers. It is no surprise that many individuals and businesses slip through the cracks. In some cases the taxpayers are simply shocked that they never get IRS contact at all. Of course honest taxpayers must bear their undisclosed tax burden. The politics involved doesn’t lend itself to a general amnesty for these nonfilers. Instead Congress has provided and the Internal Revenue Code follows an administrative procedure for creating tax returns for taxpayers who refuse to do it themselves. On the surface this may not be a bad thing. IRS wants those returns, so it goes ahead and creates them itself. Once created by the IRS, the agency is free to begin collection of the dollars that may be due along with interest and penalties. This process is known as SFR, substitute for return. What taxpayers may not know is the difficulties they are about to encounter because of this process. Since no tax returns are filed by the taxpayer the statute of limitations never runs. Also in the calculation used by the IRS any tax information that has been sent to it will be used on the income side but no other deductions or allowances will be given. Thus if a taxpayer is actually entitled to sizable credits or losses and other deductions which would have reduced his tax liability to zero, none of them will be applied. These assessments based on the substitute for returns can result in enforced collection action including federal tax liens and seizures as well. Many clients discover that they had been subject to this SFR procedure only when a collection agent or Notice of Lien or Levy appears at their doorstep. The well advised are told to immediately create their own returns and file them with the IRS. In most cases those actual tax returns will be used for the basis of reducing any prior assessments. In a recent bankruptcy case a taxpayer learned some of the hardships that may be encountered because of this process. In Giacchi, 3^rd Cir. the IRS had created substitute for returns for the taxpayer. The taxpayer later filed his own forms 1040 which resulted in reduced taxes that he still owed. The taxpayer never paid those taxes. After several years the taxpayer filed for bankruptcy and argued that the tax liability should be discharged. The appeals court ruled that his filings after IRS had assessed the taxes were not an honest attempt to comply with the tax law. The court determined that they were not returns for bankruptcy purposes and therefore were not dischargeable. Bankruptcy, it will be remembered, is for honest taxpayers with honest debts. Nonfilers should attempt to obtain IRS transcripts to determine whether or not they have been made subject to the SFR procedure.