The IRS has two kinds of notices for incorrect business and personal tax returns:

The traditional notice of deficiency gives a recipient 90 days to petition for a review before the deficiency is assessed.

The math-error notice gives a recipient only 60 days to ask for an abatement or review.

Math-error notices should be only for arithmetical or clerical mistakes, but sometimes cover other issues, so they must be read carefully. Also, when a math-error notice is sent, IRS computers are set to automatically send a deficiency notice so many days later. To stop the notice, someone at the IRS must enter data in the computer. But the IRS moves slowly, so a deficiency notice can go out before the taxpayer’s response is processed. [Tax Notes Today]

If you receive a math-error notice, you should:

1.    respond promptly; and

2.    respond by certified mail, return receipt requested.

Failure to take either step increases the likelihood of getting involved with the IRS on who sent what to whom and when. The second step gives you the advantage of being able to prove that the response went back in time.

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.

2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.

3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

When Easter lands during tax-time, it is easy for us to lose sight of the importance of the holiday. The BIG DEADLINE takes precedence in our minds and on our to do lists.

However, we at Schoppe’s Bookkeeping & Tax Service, Inc. will be taking the weekend (Saturday and Sunday) to celebrate this holy holiday with our family. We wish each of you a very Happy Easter!!

We will be back in our office on Monday, ready to take on this last week of tax season!

 *photo by Denise

Reading the fine print

When a taxpayer signs their tax return to be filed to the IRS, they are confirming the information to be correct and, in cases when a tax preparer is filing the return for them, authorizing the preparer to electronically file the return.

However, many miss the fine print above their signature. It reads as follows:

Under penalties of perjury, I declare that I have examined a copy of my electronic individual income tax return and accompanying schedules and statements for the tax year ending December 31, 2011, and to the best of my knowledge and belief, it is true, correct, and complete.

I further declare that the amounts in Part I above are the amounts from my electronic income tax return. I consent to allow my intermediate service provider, transmitter, or electronic return originator (ERO) to send my return to the IRS and to receive from the IRS

(a) an acknowledgement of receipt or reason for rejection of the transmission,

(b) the reason for any delay in processing the return or refund, and

(c) the date of any refund.

If applicable, I authorize the U.S. Treasury and its designated Financial Agent to initiate an ACH electronic funds withdrawal (direct debit) entry to the financial institution account indicated in the tax preparation software for payment of my Federal taxes owed on this return and/or a payment of estimated tax, and the financial institution to debit the entry to this account. I further understand that this authorization may apply to future Federal tax payments that I direct to be debited through the Electronic Federal Tax Payment System (EFTPS). I authorize EFTPS to issue me a personal identification number (PIN) to access EFTPS. This authorization is to remain in full force and effect until I notify the U.S. Treasury Financial Agent to terminate the authorization.

To request that my PIN be mailed to me, or to revoke (cancel) a payment, I must contact the U.S. Treasury Financial Agent at 1-888-353-4537. Payment cancellation requests must be received no later than 2 business days prior to the payment (settlement) date.

I also authorize the financial institutions involved in the processing of the electronic payment of taxes to receive confidential information necessary to answer inquiries and resolve issues related to the payment. I further acknowledge that the personal identification number (PIN) below is my signature for my electronic income tax return and, if applicable, my Electronic Funds Withdrawal Consent.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

For Scams 1 – 6, visit our post from Wednesday!

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

For more details on all these scams, visit: http://www.irs.gov/newsroom/article/0%2c%2cid=254383%2c00.html

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

Identity Theft

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.

The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.  For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60% of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

• Do not sign the return or place a Preparer Tax identification Number on it. (In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.)
• Do not give you a copy of your tax return.
• Promise larger than normal tax refunds.
• Charge a percentage of the refund amount as preparation fee.
• Require you to split the refund to pay the preparation fee.
• Add forms to the return you have never filed before.
• Encourage you to place false information on your return, such as false income, expenses and/or credits.

 Hiding Income Offshore

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.  New foreign account reporting requirements being phased in over the next few years will make hiding income offshore increasingly difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

 “Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. Scammers prey on low income individuals and the elderly, building false hopes and charging people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone.

The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware. Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions.  This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

For more details on all these scams, visit: http://www.irs.gov/newsroom/article/0%2c%2cid=254383%2c00.html

Check back Friday for 7 – 12!

President Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012 on Wednesday, February 22, extending the current 4.2% Social Security Old-Age, Survivors, and Disability Insurance (OASDI) tax rate for employees through December 31, 2012.

• The employee Social Security tax rate was originally lowered from 6.2% to 4.2% in 2010, for the tax year 2011.
• The 4.2% rate was extended for employee wages up to $18,350 paid after December 31, 2011 and before March 1, 2012.
• The 4.2% employee OASDI rate is now effective from January 1, 2012 through December 31, 2012.
• The maximum OASDI tax an employee would pay in 2012 is $4,624.20.
• The provision that stated a 2% additional income tax would apply to wages over $18,350 in the first 2 months of 2012 has been repealed; there is no additional tax for wages over $18,350 up to $110,100 paid prior to March.

Because of the date of enactment, you may have already processed payrolls with March pay dates, using the 6.2% OASDI tax rate scheduled to go into effect March 1, 2012. Any over withholding will be automatically adjusted on your next payroll.

The employer portion of the Social Security tax remains unchanged at 6.2%, up to the taxable wage limit of $110,100 for each worker. Additionally, both the employee and employer tax rate for Medicare remains at 1.45% with no wage base limit.

If you have not yet received your refund, or your filed return does not show as being filed when you check the “Where’s My Refund?” tool on the IRS web-site, the IRS is aware of the problem and have released a statement regarding the issue:

We are aware that some taxpayers who have filed electronically and received an acknowledgement from the IRS are concerned when they visit “Where’s My Refund” and are told that we have no information regarding their return. This is a temporary situation, and we expect to resolve the matter in a few days. At that time, taxpayers will be able to get an expected refund date when they visit “Where’s My Refund.”

 If a taxpayer received an acknowledgment message that their e-filed tax return has been received, they can be assured that the IRS has the tax return even though “Where’s My Refund” does not reflect that. Taxpayers should not call the IRS unless specifically directed by “Where’s My Refund,” as there is no new information to give them.

 We expect the vast majority of tax refunds to continue to be issued within the historical range of 10 to 21 days. The IRS is taking steps to update information so that Where’s My Refund has current information. The IRS apologizes for any inconvenience and will provide updated information as soon as possible.

NOTE: Once a tax preparer files your return (or if you are an individual filing on your own using a home program or web-site), it is out of their (or your) hands as to how quickly the refund is issued. Upon acceptance by the IRS, it is in the IRS’s hands to process it and issue your refund.

Statement Link

A question we get almost every day is about refund status. The IRS does not notify a tax preparer as to when they’re going to deposit a client’s refund. However, the IRS DOES provide to taxpayers a tool to check their refund’s status.

Where’s My Refund is a tool available on the IRS website for taxpayers to check their refund status.

From the site: “Where’s My Refund?” will usually have information about your refund 72 hours after IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. Check back weekly, on Wednesdays, for any updates to your refund information.

Checking your refund status is quick and simple. You will need to have your tax return available for just a few pieces of information.

You’ll need your social security number (if its a joint return, it’ll be the person listed first on the return), filing status (single, married, head of household, etc.), and the amount of your refund. Click submit and you’ll be presented with your refund’s status!

With worries of identity theft, many look at giving their bank account information as a bad idea. However, when it comes to using direct deposit from the IRS, there are many reasons it’s the quickest and safest way to get your tax refund.

In fact, when a taxpayer combines e-file and direct deposit, the IRS will likely issue your refund in as few as 10 days!

Four reasons direct deposit is the way to go:

1. Can you believe that thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail? It’s true! However, direct deposit eliminates the possibility of your refund check being lost, stolen or returned to the IRS as undeliverable.

2. Ever find it hard to get to the bank during banking hours? Well, with direct deposit, the money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.

3. It’s so easy to sign up for direct deposit! When you’re preparing your return; simply follow the instructions on your return or in the tax software. Make sure you enter the correct bank account and bank routing numbers. (Most software will ask you to enter it twice to double check you did it right.)

4. Getting a big refund and you want to put a part of it in savings? Easy stuff! You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions! Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund.

Note: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.