How and when to pay estimated taxes

Certain taxpayers must make estimated tax payments throughout the year. Taxpayers must generally pay at least 90 percent of their taxes throughout the year through withholding, estimated tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty.

For tax-year 2018, the remaining estimated tax payment due dates are Sept. 17, 2018 and Jan. 15, 2019.

Estimated tax is the method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments. This other income includes unemployment compensation and the taxable part of Social Security benefits.

The IRS urges everyone who works as an employee and who also earns or has income from other sources to perform a Paycheck Checkup now. Doing so will help avoid an unexpected year-end tax bill and possibly a penalty when the taxpayer files their 2018 tax return next year. They can do a checkup using the Withholding Calculator on IRS.gov.

Here are some things to know for taxpayers who make estimated payments:

  • Taxpayers can pay their taxes throughout the year anytime. They must select the tax year and tax type or form when paying electronically.
  • Filers paying by check should make it out to the “United States Treasury” and indicate the tax year and type of taxes they are paying.
  • Taxpayers in presidentially-declared disaster areas may have more time to make these payments without penalty.
  • For easy and secure ways to make estimated tax payments, use is IRS Direct Pay or the Electronic Federal Tax Payment System. IRS.gov/payments has information on all payment options.
  • Taxpayers can find more information about tax withholding and estimated tax at the Pay As You Go page IRS.gov.
  • Publication 505, Tax Withholding and Estimated Tax, is another resource for taxpayers. Publication 505 has worksheets and examples, which can help taxpayers determine whether they should pay estimated tax.

More Information:
Form 1040-ES, Estimated Tax for Individuals
Tax Reform

SSA Impersonation Schemes

In a blog post on July 16th by  Andrew Cannarsa, OIG Communications Director, the Inspector General issued a warning about Social Security Administration (SSA) Impersonation Schemes.

SSA and the Office of the Inspector General (OIG) have recently received several reports of suspicious phone calls claiming to be from SSA.

From the blog post:

In one case, an automated recording states the person’s Social Security number (SSN) “has been suspended for suspicion of illegal activity,” and the person should contact a provided phone number immediately to resolve the issue. The call concludes by stating if the person does not contact the provided phone number, the person’s assets will be frozen until the alleged issue is resolved. In another case, a caller claims to be from “SSA headquarters” and waits for the person to provide personal information, such as an SSN, address, and date of birth. In January, the OIG shared similar information from the Federal Trade Commission, which reported an increase in reports of suspicious phone calls from people claiming to be SSA employees.

It should be noted that, SSA employees do occasionally reach out to citizens by telephone, but those calls would be for customer-service purposes.  If someone calling asks you to confirm personal information, and you do not already know that information will be requested, be suspicious. The need for personal information by someone calling from the Social Security Administration only happens in very few limited special situations.

Always avoid providing information such as your SSN or bank account numbers to unknown persons over the phone or internet.

If you have questions about any communication by the SSA, be it email, letter, text or phone call, contact your local Social Security office, or call Social Security’s toll-free customer service number at 1-800-772-1213, 7 a.m. to 7 p.m., Monday through Friday, to verify its legitimacy. (Those who are deaf or hard-of-hearing can call Social Security’s TTY number at 1-800-325-0778.)

If  you receive a suspicious call from someone alleging to be from SSA, please report that information to the Office of the Inspector General at 1-800-269-0271 or online via https://oig.ssa.gov/report.

 

Dos and Don’ts for Taxpayers Who Get a Letter from the IRS

Every year the IRS mails millions of letters to taxpayers for many reasons. Here are some tips and suggestions for taxpayers who receive one:

  • Don’t ignore it. Most IRS letters and notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do.
  • Don’t panic. The IRS and its authorized private collection agencies do send letters by mail. Most of the time all the taxpayer needs to do is read the letter carefully and take the appropriate action.
  • Do take timely action. A notice may reference changes to a taxpayer’s account, taxes owed, a payment request or a specific issue on a tax return. Taking action timely could minimize additional interest and penalty charges.
  • Do review the information. If a letter is about a changed or corrected tax return, the taxpayer should review the information and compare it with the original return. If the taxpayer agrees, they should make notes about the corrections on their personal copy of the tax return, and keep it for their records.
  • Don’t reply unless instructed to do so. There is usually no need for a taxpayer to reply to a notice unless specifically instructed to do so. On the other hand, taxpayers who owe should reply with a payment. IRS.gov has information about payment options.
  • Do respond to a disputed notice. If a taxpayer does not agree with the IRS, they should mail a letter explaining why they dispute the notice. They should mail it to the address on the contact stub at the bottom of the notice. The taxpayer should include information and documents for the IRS to review when considering the dispute. The taxpayer should allow at least 30 days for the IRS to respond.
  • Do remember that there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of the tax return and letter when calling.
  • Do avoid scams. The IRS will never initiate contact using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure if they owe money to the IRS can view their tax account information on IRS.gov.

IRS now billing those who filed but didn’t pay; Many payment options available

WASHINGTON — The Internal Revenue Service today advised those now receiving tax bills because they filed on time but didn’t pay in full that there are many easy options for paying what they owe to the IRS.

If a tax return was filed but the balance due remains unpaid, the taxpayer will receive a letter or notice in the mail from the IRS, usually within a few weeks. These notices, including the CP14 and CP501, both of which notify taxpayers that they have a balance due, are frequently mailed in the months of June and July.

How to pay

Taxpayers may pay taxes by electronic funds transfer, credit card, check, money order or cash:

  • Taxpayers can use Direct Pay to pay directly from a checking or savings account. This service is free.
  • Taxpayers can take advantage of the Electronic Federal Tax Payment System (EFTPS) to pay by phone or online. EFTPS® is a free service of the U.S. Department of Treasury.
  • Taxpayers may also initiate a debit or credit card payment. The IRS doesn’t charge a fee for this service but the processing company may. Fees vary by company.
  • Taxpayers may pay by check or money order made payable to the United States Treasury (or U.S. Treasury) either in person or through the mail.
  • Taxpayers should not send cash through the mail. They can pay cash at some IRS offices or at a participating PayNearMe location. Some restrictions apply.

Taxpayers who are unable to pay what they owe should contact the IRS as soon as possible. Several payment options are available including:

  • Online Payment Agreement — Individuals who owe $50,000 or less in combined income tax, penalties and interest and businesses that owe $25,000 or less in payroll tax and have filed all tax returns may qualify for an Online Payment Agreement. Most taxpayers qualify for this option, and an agreement can usually be set up in a matter of minutes. Online applications to establish tax payment plans, like online payment agreements and installment agreements, are available Monday – Friday., 6 a.m. to 12:30 a.m.; Saturday., 6 a.m. to 10 p.m.; Sunday, 6 p.m. to midnight.
  • Installment Agreement — Installment agreements paid by direct deposit from a bank account or a payroll deduction will help taxpayers avoid default on their agreements. It also reduces the burden of mailing payments and saves postage costs. Taxpayers who don’t qualify for a payment agreement may still pay by installment. Certain fees apply.
  • Delaying Collection — If the IRS determines a taxpayer is unable to pay, it may delay collection until the taxpayer’s financial condition improves.
  • Offer in Compromise — Some struggling taxpayers qualify to settle their tax bill for less than the amount they owe by submitting an offer in compromise. To help determine eligibility, use the Offer in Compromise Pre-Qualifier tool.

In addition, taxpayers can consider other options for payment, including getting a loan to pay the amount due. In many cases, loan costs may be lower than the combination of interest and penalties the IRS must charge under federal law.

Even if a taxpayer works out a payment solution with the IRS, the agency may still need to file a Notice of Federal Tax Lien to secure the government’s interest. Federal law requires the lien to establish priority as a creditor in competition with other creditors in certain situations, such as bankruptcy proceedings or sales of real estate. Once the IRS files a lien, it may appear on a taxpayer’s credit report and harm their credit rating. Therefore, it’s important that they work to resolve a tax liability as quickly as possible before lien filing becomes necessary. Once the IRS files a lien, the agency generally cannot issue a Certificate of Release of Federal Tax Lien until the taxpayer pays taxes, penalties, interest and recording fees in full.

Stay current

Taxpayers can take steps now to make sure they don’t fall behind on their taxes in the future. The IRS encourages several key groups of taxpayers to perform a “paycheck checkup” to check if they are having the right amount of tax withholding following recent tax-law changes.

Employees can increase their tax withholding by filling out a new Form W-4, Employee’s Withholding Allowance Certificate, and giving it to their employer. To have more tax withheld, claim fewer withholding allowances or ask the employer to take out a fixed amount of additional tax each pay period. To help figure the right amount to withhold, use the IRS Withholding Calculator on IRS.gov.

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https://www.irs.gov/newsroom/irs-now-billing-those-who-filed-but-didnt-pay-many-payment-options-available

2017 Tax Cuts Act: Impact on Families

The Tax Cuts and Jobs Act makes sweeping tax changes that impact virtually all taxpayers. For individual taxpayers and their families, changes include a decrease in the tax rates, repeal of the personal exemption, increase in the standard deduction, modification to itemized deductions, and doubling of the child tax credit.

Under the Tax Cuts and Jobs Act, personal exemptions are repealed ($4,050 in 2017) for 2018 through 2025. Instead, the Tax Cuts and Jobs Act provides for a near doubling of the standard deduction. For tax year 2018, it increases the standard deduction from $13,000 to $24,000 for married individuals filing a joint return; $9,550 to $18,000 for head-of-household filers; and $6,500 to $12,000 for all other individuals. These standard deduction amounts are indexed for inflation for tax years beginning after 2018. The additional standard deduction for the elderly and the blind ($1,300 for married taxpayers, $1,600 for single taxpayers) is retained.

Itemized deductions
Mortgage interest deduction. The Tax Cuts and Jobs Act limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), for tax years beginning 2018 through 2025. For acquisition indebtedness incurred before December 15, 2017, the Tax Cuts and Jobs Act allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately). Taxpayers may continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.

State and local taxes. The Tax Cuts and Jobs Act limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return) for 2018 through 2025. Sales taxes may be included as an alternative to claiming state and local income taxes.

Miscellaneous itemized deductions. The Tax Cuts and Jobs Act repeals all miscellaneous itemized deductions for tax years 2018 through 2025 that are subject to the two-percent floor under current law.

Medical expenses. The Tax Cuts and Jobs Act lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.

Casualty losses. For tax years 2018 through 2025, a casualty loss will only be allowed to the extent it is attributable to a federally declared disaster.

The phaseout of itemized deductions is suspended for tax years 2018 through 2025.

The doubling of the standard deduction and modifications to itemized deductions effectively eliminates many individuals from claiming itemized deductions other than higher-income taxpayers. For example, for the vast majority of married taxpayers filing jointly, only those with total allowable mortgage interest, state income and local income/property taxes (up to $10,000), and charitable deductions exceeding $24,000, would claim them as itemized deductions (absent extraordinary medical expenses).

In contrast, the enhanced child credit has been highlighted as one of the provisions that will lower overall tax liability for middle-class families. The Tax Cuts and Jobs Act temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount is refundable. The child tax credit is also expanded to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. More families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds, starting at $400,000 for joint filers ($200,000 for all others).

In addition to changes related to exemptions, the child tax credit and the standard and itemized deduction discussed above, the Tax Cuts and Jobs Act also makes changes to alternative minimum tax and the individual tax brackets. Because these tax provisions are interrelated, estimating the impact of these changes to the tax liability for any particular family is challenging. However, as with any tax reform, there will be winners and losers.

Example 1: Married Couple (both 45); AGI $100,000; 2 children (ages 8 and 12); mortgage interest $6,000; property tax $5,000; state income tax $3,000; charitable contributions $500

Example 2: Married Couple (both 45); AGI $200,000; 2 children (ages 19 and 22, both in college); mortgage interest $10,000; property tax $18,000; state income tax $6,000; charitable contributions $1,000

Example 3: Married couple (both 45); AGI $400,000; 2 children (ages 10 and 12); mortgage interest $12,500; property tax $25,000; state income tax $8,000; charitable contributions $7,500

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  1. Total itemized deductions in 2018 would remain the same at $14,500 which is less than the new standard deduction of $24,000.
  2. Deduction for total amount of property tax and sales tax would be limited to $10,000 in 2018. Therefore, total allowed itemized deductions of $21,000 would be less than the standard deduction of $24,000.
  3. Deduction for total amount of property tax and sales tax would be limited to $10,000 in 2018. Total allowed itemized deductions of $30,000 are not phased out and is more than the $24,000 standard deduction.

Keep in mind that many of the changes to the Internal Revenue Code in the Tax Cuts and Jobs Act are temporary. This is true especially with respect to the provisions impacting individuals. This decision was made in order to keep the tax reform within budgetary parameters, but with no guarantees that a future Congress would extend them. In future years, as the tax reform provisions expire, tax liability for individuals may be negatively affected.

2017 Tax Cuts Act: What it Means For Businesses

The Tax Cuts and Jobs Act was signed by President Trump on December 22. The Act makes sweeping changes to the U.S. tax code and impacts virtually every taxpayer. For businesses, tax benefits include a reduction in the corporate tax rate, increase in the bonus depreciation allowance, an enhancement to the Code Sec. 179 expense and repeal of the alternative minimum tax. Owners of partnerships, S corporations, and sole proprietorships are allowed a temporary deduction as a percentage of qualified income of pass-through entities, subject to a number of limitations and qualifications. On the other hand, numerous business tax preferences are eliminated.

Corporate Taxes
A reduced 21-percent corporate tax rate is permanent beginning in 2018. Also, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. The Tax Cuts and Jobs Act also repeals the alternative minimum tax on corporations.

Bonus Depreciation
The bonus depreciation rate has fluctuated wildly over the last 15 years, from as low as zero percent to as high as 100 percent. It is often seen as a means to incentivize business growth and job creation. The Tax Cuts and Jobs Act temporarily increases the 50-percent “bonus depreciation” allowance to 100 percent. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

Section 179 Expensing
The Tax Cuts and Jobs Act sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million. Although the differences between bonus depreciation and Code Sec. 179 expensing would now be narrowed if both offer 100-percent write-offs for new or used property, some advantages and disadvantages for each will remain. For example, Code Sec. 179 property is subject to recapture if business use of the property during a tax year falls to 50 percent or less; but Code Sec. 179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class.

Deductions and Credits
Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit. However, the Tax Cuts and Jobs Act leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.

Interest Deductions
In an attempt to “level the playing field” between businesses that capitalize through equity and those that borrow, the Tax Cuts and Jobs Act generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.

Pass-Through Businesses
Currently, up to the end of 2017, owners of partnerships, S corporations, and sole proprietorships – as “pass-through” entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The Tax Cuts and Jobs Act allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications.

The Tax Cuts and Jobs Act contains rules that will prevent pass-through owners—particularly service providers such as accountants, doctors, lawyers, etc.—from converting their compensation income taxed at higher rates into profits taxed at the lower rate.

Net Operating Losses
The Tax Cuts and Jobs Act modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.

These are just highlights of the changes and impact of the Tax Cuts and Jobs Act. There is much more than can be covered in this post.

Establishing Profit Motive for Business Activities

If you reported losses from one or more business activities, we would like to remind you that the IRS has rules that limit the deductibility of expenses and losses from a hobby or activity not engaged in for profit.


If the IRS determines that an activity is not profit-driven, deductions from the activity are limited to the amount of income the activity generates. Losses from such activities cannot be used to offset other income, such as salary or investments.

 

You must be prepared to show that an activity that generates deductions is a business from which you intend to profit. It is not necessary that the activity actually earns a profit, so long as a profit is one of the motives for participating in the activity.

 

The IRS assumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year, or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. Otherwise, the IRS applies non-exclusive tests and factors to the surrounding facts to judge whether activities are more like a business with a profit motive, or are for personal satisfaction.

 

To make sure you are properly claiming all of the deductions available to you, and to strengthen your position in the event of an IRS audit, it is important to consider all the facts and circumstances surrounding activities the IRS is likely to challenge.

10 Million Taxpayers Face an Estimated Tax Penalty Each Year; Act Now to Reduce or Avoid it for 2017

The IRS has seen an increasing number of taxpayer’s subject to estimated tax penalties, which apply when someone underpays their taxes. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. The penalty amount varies, but can be several hundred dollars.

The IRS urges taxpayers to check into their options to avoid these penalties. Adjusting withholding on their paychecks or the amount of their estimated tax payments can help prevent penalties. This is especially important for people in the sharing economy, those with more than one job and those with major changes in their life, like a recent marriage or a new child.

There are some simple tips to help taxpayers:

Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time.

Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

There are two ways to pay tax:

Withholding from your pay, your pension or certain government payments, such as Social Security.

Making quarterly estimated tax payments during the year.

This will help you avoid a surprise tax bill when you file your return. You can also avoid interest or the Estimated Tax Penalty for paying too little tax during the year. Ordinarily, you can avoid this penalty by paying at least 90 percent of your tax during the year.

Why you should change your withholding or make estimated tax payments:

If you want to avoid a large tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe. And if you work as an employee, you don’t have to make estimated tax payments if you have more tax withheld from your paycheck. This may be a convenient option if you also have a side job or a part-time business.

Some income is not subject to withholding. This includes some income from self-employment, the sharing economy or some rental activities. Be sure to make estimated tax payments on those sources of income throughout the year. You may also make estimated tax payments if the withholding from your salary, pension or other income doesn’t cover your income tax for the year.

You make your estimated payments based on the income you expect to earn and any credits you expect to receive in the year. You can use your prior year tax return as a guide and Form 1040-ES, Estimated Tax for Individuals has a worksheet to help you figure your estimated payments.

You can use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare).

Tax Consequences for Self-Employed Individuals

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming.

Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire.

If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at your earliest convenience to make an appointment.

Tax Issues for Higher-Income Individuals

We know that you have worked hard for your money and would like to reap the benefits to the greatest extent possible. Your ultimate goal is to sustain a successful wealth-building strategy while avoiding unnecessary and expensive tax consequences. We are interested in helping you achieve these objectives.

For the last few years, there has been talk of major tax reform that would place an increased tax burden on higher income individuals. President Trump proposed a tax reform plan that would reduce individual tax rates, abolish the alternative minimum tax (AMT) and federal estate tax, and more. Individual rates under the President’s proposal would be 10, 25 and 35 percent. At the same time, the President proposed to double the standard deduction and protect the home ownership and charitable gift tax deductions. The President also proposed to provide unspecified tax relief to families with children and dependents. The President’s proposal calls for a 15 percent corporate tax rate. The 15 percent rate would also be available to small and mid-size pass-through businesses, White House officials said.

Further, the President called for elimination of unspecified tax breaks for special interests. Democrats in Congress said the President’s plan favored high-income taxpayers and did not deliver enough tax breaks to lower and middle-income taxpayers. As tax reform moves into the latter half of 2017, the chances of a retroactive tax cut to include the 2017 tax year are lessened but not entirely removed from consideration. Tax planning for the balance of the year therefore should remain flexible.

Some of the issues that may impact your tax planning strategy for 2017 include:

  • your marginal tax rate;
  • personal exemption and itemized deduction phaseouts;
  • additional 0.9 percent Medicare tax on wages and self-employment income over threshold amounts;
  • net investment income tax of 3.8 percent for taxpayers with modified AGI exceeding threshold amounts;
  • a capital gain rate of 20 percent for taxpayers in the highest tax bracket;
  • gain exclusion for small business stock held for more than 5 years;
  • foreign account disclosure and reporting requirements and related enforcement penalties;
  • in-service rollovers to designated Roth accounts without the imposition of a 10-percent additional tax on early distributions;
  • IRA distributions to charity of up to $100,000;
  • strict rules about deducting passive activity losses (PALs); and
  • alternative minimum tax (AMT).

As you can see, the more complex issues faced by higher-income individuals create a challenging planning environment for the 2017 tax filing season.

 

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