Our Taxing Times

Preparer Conflict of Interest

It’s time to think taxes. W-2s and other forms are getting mailed and the airwaves are full of advertising for tax preparers and tax software. So I’d like to offer a bit of advice for those who are planning on letting someone else prepare their taxes. Think about conflict of interest.

All tax professionals have their own priorities when dealing with clients.

As an independent tax pro, I work for me. I provide services such as tax return preparation and audit assistance for clients. I’m not their employee. I limit what I do for clients based on my skills and my need to stay in business. Fudging expenses or not doing proper EIC due diligence may help the client get a bigger refund and get me a few more dollars now but it opens me up to all kinds of fines and possible loss of livelihood down the line. It’s not worth it to me. If I have a conflict with a client, following the law is better for me even if I lose the client. But as long as it’s legal, my priority it to prepare a correct return based on the info the client provides which results in the least legal tax.

Where taxpayers need to be very careful is with tax preparers where the preparation of a correct tax return seems to be part of another priority. There are a lot of firms which are more interested in loaning you money or selling you a car than preparing a tax return. But they will prepare a return to bring you in to their business. Their conflict of interest is that they want the refund from the return to help fund them more than they want to make sure they prepare a correct tax return. There are some very reputable preparers working for a car dealership or loan company but the taxpayer needs to check them out to make sure they are getting a correct return over a big refund.

Conflict of interest is to be expected in any business. We all have our priorities. But when someone prepares an incorrect return to maximize the refund, they potentially put their client in conflict with the IRS. That extra $1000 the preparer at the car dealership found the client will have to be paid back with interest and penalties if the IRS catches it. And they are getting better at catching fraud. And since the original preparer cared more for the car they could sell or the extra fees from a loan, they won’t care that their actions hurt the taxpayer.

Bottom line is that the taxpayer is always responsible for what is on the tax return. When looking for a tax pro, a taxpayer needs to visit with them about their priorities, procedures and licensing. Don’t assume they will help you fudge your return. And don’t assume they won’t fudge a return if they will gain. Most tax pros are honest people who follow the law and understand the consequences of their actions. Taxpayers simply need to make sure they are on the same wavelength as the preparer they use.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Disclosing Prisoner Returns

The American Taxpayer Relief Act of 2012 (ATRA) is not all about tax rates and extenders. I covered the highlights yesterday. But as I read the bill one section popped out at me; Section 209 – Improve and Make Permanent the Provision Authorizing the Internal Revenue Service to Disclose Certain Return and Return Information to Certain Prison Officials.

I’ll admit I missed the Temporary authorization but I’m glad to see Congress including this provision with the fiscal cliff bill.

Tax return fraud has become a big business in prison. It’s not surprising considering the number of tax credits which can be refunded to taxpayers. By the end of June 2010, 1295 prisoners had filed for the First Time Homebuyer’s Credit receiving refunds totaling over $9 million. This included over 240 inmates on death row.

Part of the problem in combating these fraudulent returns is the IRS confidentiality rules. This section of ATRA will allow the IRS to release prisoner returns to state and federal prison officials when tax fraud is suspected. This will allow the prison to investigate and take administrative action. This act applies to government run prisons and contractor run prisons.

Hopefully, this will help the IRS and prison officials reduce the number of fraudulent returns coming from the prison system.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Identity Theft PIN

Identity theft is a major problem and I am sure it is ruining Christmas for lots of people. If you have been a victim of identity theft and have not contacted the IRS you need to that ASAP. Besides using your SSN and other IDs to rack up debt, identity thieves will also file fake tax returns with your info. To start the IRS's process, you will need to submit to them a Form 14039 with copies of the police report and your IDs (SS card, driver's license, and passport. That will alert the IRS to a potential fraudulent return. They may also send you (and should send you if you have previously reported identity theft to them) a CP01a notice. This notice has a special 6 digit IP PIN number the victim will use when you file your 2012 tax return. This IP PIN is supposed to minimize processing delays by identifying the real taxpayer's return from a fraudulent one. If you get this notice, do not lose it. A lost CP01a and IP PIN cannot replaced. A new IP Pin will be issued each year until the issue is resolved.

The IRS has a special unit, the Identity Specialized Unit dealing with identity theft issues. They can be contacted toll-free at 800-908-4490. They also have a Taxpayer's Guide to Identity Theft with suggestions on what to do to protect yourself from identity theft.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Education Credits Form Changes

A couple of weeks ago, I discussed the changes to the EITC checklist (Form 8867). The changes were made in order to fight the fraud in that program. The IRS has also changed Form 8863 for Education Credits in hopes to reduce the fraud in the educational credits especially the American Opportunity Credit (AOC).

The first thing you’ll notice on the new Form 8863  (download) is that the second page has become the first page. Page one is now where the taxpayer calculates the credits to be taken to the 1040 or 1040A. Part I is for the refundable American Opportunity Credit and Part II calculates the non- refundable credits. The second page (Part III) documents the student and school information and the qualified educational expenses. School information, including the EIN and address will have to be listed. This page also has a checklist to make sure that the student does qualify for the credit. A separate page 2 is completed for each student.

I have a concern about the wording of line 23. I can see taxpayers who would qualify for the American Opportunity Credit but read this question as asking if the Hope or AOC had be taken in the last 4 years, checking “Yes” and denying themselves the credit. The question might be better worded, “Has the Hope or AOC been taken for this student 4 times on any taxpayer’s return?”

The changes to Form 8863 aren’t surprising considering the fraud with refundable credits.  But if someone is really trying to rip off the system, they’ll know how to lie on the form. The changes look to remind tax pros and taxpayers of the rules and to provide some info to match to the 1098T’s supplied by the school. This is scary considering how often those forms can be incorrect. Maybe the next step should be to teach the schools how to properly fill out the 1098T?

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

You Can't and You Shouldn't

I just took a call from someone asking if once he gets his final check for the year (and accompanying check stub) if he can file his tax return. No he can’t and neither can you.

The IRS requires that a copy of the W-2 must be attached with a paper filed return and a copy of the W-2 must be kept with the signature sheet of any electronically filed return. You have to wait until you receive all your W-2s and other informational documents to file your returns.

Once I tell a caller that, the next question is generally about an ad they’ve heard on television about a using a paystub to get a holiday loan. While I haven’t heard one yet this year, I’m sure there are or will be some companies offering that kind of program. But you want to understand they are not filing a return. The IRS won’t be accepting electronically filed returns until at least January 22.

Tax Preparation companies which offer these holiday loans use your paystub to estimate what your Federal tax refund will be and base a loan on that amount. The money comes from the bank or finance company with which they have an arrangement. You then pay the loan back by a specific date. You will still have to file a tax return once you have all your return documents.

If this is something you are interested in doing, please be very careful. Many of the companies doing holiday tax loans are reputable (while they might gouge you with high fees.) But they are other companies that will rip you off. Before you try a holiday tax loan, please look at Instant Tax Service. I wrote a couple of posts about them last year and there are links at the bottom of this post. The Department of Justice filed permanent injunctions against the company, owner and several franchisees. Besides their outrageously high fees, ITS also filed returns without the client’s permission based on fraudulent documents they (ITS) created. Many times, they left the client having to payback money they never received or fighting to straighten out the mess that ITS created.

I understand that most of us could use extra money this time of the year and it’s tempting to try to get an advance on your tax refund but using a holiday loan from a tax preparation company can cost you high fees. And if the firm isn’t reputable it can force you to deal with the IRS to straighten out the mess they create. Talk your local bank or credit union and see what they can do for you. It’ll be cheaper than any tax prep office.

 Instant Tax

More Instant Tax

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

New EIN?

Business owners there is a phishing scam targeting you. The e-mail states that you have to renewal/reaffirm your Employer ID Number within 14 days.

You don't need to renewal, so don't click on the link.

Remember if the IRS needs you do do something they will send you a letter. They don't initiate contact by e-mail.

Whistleblowing Taxes

Bradley Birkenfeld was a banker at UBS. That is until he spent some time in prison for helping a client evade income tax. But he’ll be even more famous for the $104 million he will be receiving from the IRS as part of the Whistleblower program. It’s the largest award that has been paid.

Mr. Birkenfeld provided the IRS with detailed info about how UBS helped Americans evade taxes. UBS paid $780 million to avoid criminal prosecution and gave the IRS account information on 4,700 of their American clients. It could be said that Birkenfeld’s actions led a major change in the Swiss banking system and resulted in 14,000 taxpayers taking advantage of the IRS’s tax amnesty program. That’s why he’s getting $104 million.

The IRS Whistleblower Office was established in 2006 under the Tax Relief and Health Care Act of 2006. It takes reports from individuals who spot a tax problem. The Whistleblower’s Office will investigate credible tips and if the IRS recovers money, the tipster could receive between 15 and 30% of the recovered tax. The recovered tax, penalties and interest must be over $2 million for the year and if the taxpayer is an individual they must have income of over $200,000 for the year.

If you think you have a tax cheat to report, you will need to fill out Form 211 (Application for Award for Original Information.) And if you do get an award, it will be subject to income tax (and withholding) like any other income.

IR 2007-201

NY Times Birkenfeld story.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Hacked Tax Returns?

The big tax news this week is that a group has announced that they have hacked from PricewaterhouseCopper’s Nashville office copies of Mitt Romney’s tax returns and are holding them for ransom. The asking price is $1million and the files will go to the first to pay. The deadline is September 26^th and if no payment has been received by then, the files will be made public.

According to a post on the website Pastebin, the thieves say they gained access to the 3^rd floor of the building on August 25^th by using someone working there. They then took over an empty office on the 2^nd floor and spent the night making copies of all available 1040 returns for Gov. Romney. Flash drives contain the returns and a cover letter with a scanned copy of Romney’s signature was sent to PWC and the local Democratic and Republican offices. The Secret Service is investigating the incident. Both the Democratic and Republican offices have turned over the flash drives and letters they received without accessing the materials. PWC is investigating internally and say that they haven’t found any evidence of a security breach.

There is a good chance that this is an extortion scam. I hope so. While I think the returns should be released by the Governor, I think he has the same right to privacy as an ordinary citizen and it should be his decision.

Tax office security is also an issue that the IRS takes seriously. I wrote last year about how the IRS is suggesting that each tax office create a security plan to protect client information. Pub 4557 contains a checklist that tax pros can use to evaluate their office and create a plan. Taxpayers should also check with their tax pro about how their personal info is safeguarded.

I really hope that this is a scam and that Gov. Romney’s tax returns never left PWC. But maybe it will draw some attention to tax return security.

Yahoo Coverage of the Story.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Phone Scam

We have frequent flyer miles, cash back rewards and punch cards that reward us for being a good customer. However, there is no reward for being a good citizen and paying your taxes.

The Craig, Colorado Police are warning about a phone scam which has hit their area. Taxpayers have been contacted by representatives of the “Government Tax Refund Service” who are ready to issue a special “faithful taxpayer reward” to the victims. The amount is in the thousands of dollars. All the taxpayer has to do is to pay a 10% service charge. The fee is to be wired or pre-paid into a Green Dot card. Once the money has been received, the victims will receive all their reward.

Sorry folks, there is no reward for paying your taxes. The IRS doesn’t initiate contact with taxpayers by phone. Let’s face it, if there was a special IRS program paying money to taxpayers, there would be a lot of media coverage, there wouldn’t be a service change and there would be a ton of paperwork to verify eligibility.

It doesn’t matter if you are contacted by phone, email or social media, be very careful of a scam to take your money or to get your personal information. The IRS only initiates contact by mail. You can read up on these scams and report them to the IRS. They have a dedicated webpage with all the information.

Thanks to Darrin T. Mish for the heads up on this scam.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Scams - Tax and Energy

My e-mail trash is full of phishing spam. Much saying it’s from the Internal Revenue Service. Nothing new there. The current spam tells me that my tax deposit/transfer has been rejected. Someone is always trying to scam taxpayers with bogus tax related e-mails. This specific type of phishing will be around for a while and then it will fade out for a while to be replaced by another tax scam. The bottom line is that the IRS doesn’t use e-mail to make primary contact with taxpayers. Unless you are working with the IRS on a specific issue and trading e-mails with a specific individual or department, IRS e-mails are probably phishing and should be trashed with extreme prejudice. If you want to report the phishing to the IRS, they have a special page on their website set up to do that.

While I’m talking scams, I received an e-mail from Alex Bishoff today. He publishes an energy website.  The impression I got was that he wanted to comment on a post and mention energy scams but I close comments after several months (due to comment spam) and he was unable to comment. Instead, he sent me an e-mail linking to his website; open4energy. In the left sidebar are links to 3 collections of energy scams. They debunk devices or programs which are supposed to save energy directly or indirectly. I would check it out if you are considering an energy saving/monitoring device.

The internet has made it easier to scam people. It doesn’t matter what the hook; taxes or energy. But it also makes it easier for us to check out what we find in our inboxes. It’s up to you.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.