Top IRS Challenges For Taxpayers in 2020

From refund delays and aging technology to confusing audit letters, here are the top 10 challenges filers face this year, according to the report:

1. Customer service

The IRS received roughly 100 million telephone calls in fiscal-year 2019, and customer service representatives answered just 29% of them, the report said. The solution? Congress needs to provide the necessary funding to the IRS for adequate staffing and a budget needed to provide better customer experience, the report said.

2. Aging technology

The IRS estimates that its current multi-year plan to improve its technology infrastructure will cost about $2.3 billion to $2.7 billion. The plan, if rolled out fully, would make the tax agency more efficient, the report said, but its success depends on the additional funding it receives. The IRS has spent $289.7 million implementing its plan in fiscal 2019. But the National Taxpayer Advocate says the IRS must have the funding to succeed.

3. Staffing

The IRS faces a shrinking budget. Its workforce has fallen, which has increased the workload for employees. The agency’s budget was cut by 20.4% between the 2010 and 2019 fiscal years, and the number of employees fell by more than 20% in that period.

4. Refund delays

The IRS has designed filters to prevent refund fraud, but they have delayed taxpayer refunds for legitimately filed returns, which could potentially cause financial hardship for some filers. The false-positive rates have been as high as 71%, the report said.

5. Free File frustrations

The IRS partners with Free File, a group of private-sector tax preparation providers, to offer free federal tax preparation software through IRS.gov to about 105 million eligible taxpayers. The rate of e-filing approached 90% for individual returns in the 2018 tax year, but less than 2% of them were filed using Free File software products, largely due to taxpayers’ dissatisfaction with the software, the report said.

6. Untrained preparers

The filing industry’s evolution has made it easier for untrained preparers to enter into the business without having knowledge of tax law, according to the report. Attorneys and certified public accountants are required to pass exams and satisfy education requirements. But there are currently no licensing requirements for federal unenrolled tax return preparers. More than 80 million individual tax returns were prepared by return preparers in the 2018 tax year.

7. Appeals process

The IRS’s Office of Appeals, which formed in 1927, aims to resolve disputes without litigation. The appeals office, however, includes its counsel and compliance teams in some conferences whether or not taxpayers consent. Appeals officers may have difficulty drawing independent conclusions that vary from positions that are advocated by the compliance teams, which undermines an independent appeals process for taxpayers, the National Tax Payer Advocate cautions.

8. Few multilingual notices

Federal agencies are required to implement a system that allows Americans with limited English proficiency access services. Still, those taxpayers frequently don’t receive IRS notices in their preferred languages, the report says. The IRS only translates some important notices into Spanish and none into languages other than English or Spanish.

9. Confusing audit letters

The IRS used a combination letter, which includes an initial contact letter and a 30-day notice, in roughly 16% of its audits during the 2015 to 2019 fiscal years. That’s insufficient time for filers to provide documentation and resolve questions, the report says.

10. Settling tax debts

The IRS’s “offer in compromise” program allows taxpayers to settle debt for less than the full amount they owe, a favorable option for those who can’t pay their full tax liability. The program, however, falls short of Congress’s expectations, the report says. The National Taxpayer Advocate urged the agency to adopt a more liberal acceptance policy to provide an incentive for taxpayers to file returns and pay taxes.

(Source: https://www.usatoday.com/story/money/2020/01/08/taxes-2020-top-10-issues-taxpayers-face-irs/2835065001/)

Don’t Be Duped By Clever Scammers

Article Highlights:

  • Scammers disguise e-mails to look legitimate.
  • Legitimate businesses and the IRS never request sensitive personal and financial information by e-mail.
  • Don’t become a victim.
  • Stop – Think – Delete
  • Be alert for phony letters and phone calls

You may think we harp on you a lot about protecting yourself against identity theft and tax scams. You are right… but we do it because having your identity stolen becomes an absolute financial nightmare, sometimes taking years to straighten out. Identity thieves are clever and relentless, and they are always coming up with new schemes to trick you. And all you have to do is slip up just once to compromise your identity, and your nightmare will begin.

What they try to do is trick you into divulging personal information such as your bank account numbers, passwords, credit card numbers, or Social Security number.

One of the most popular methods these unscrupulous people use is requesting your personal information by e-mail. They are pretty good at making their e-mails look as if they came from a legitimate source such as the IRS, your credit card company, or your bank.

You need to be very careful when responding to e-mails asking you to update things such as your account information, personal identification number (PIN), or password. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If one does, the e-mail should be deleted and ignored, just like spam e-mails.

We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies, and other pseudo-legitimate enterprises. The intent is to trick you and have you click through to a website that also appears legitimate, where they have you enter your secure information. Here are some examples:

  • E-mails that appear to be from the IRS indicating you have a refund coming and claiming that additional information is needed to process the refund. The IRS never initiates communication via e-mail! If you receive this type of e-mail, right away, you should know that it is bogus. If you are concerned, please free to call this office.
  • E-mails from a bank indicating that it is holding a wire transfer and needs your bank routing information and account number. Don’t respond; if in doubt, call your bank.
  • E-mails saying you have a foreign inheritance and that the sender needs your bank info to wire the funds. The funds that will get wired are yours going the other way. Remember: if it seems too good to be true, it generally is.

We have seen cases where elderly individuals have been duped out of hundreds of thousands of dollars, and sometimes their entire life savings. The scammers primarily rely on individuals’ fear of the IRS, coupled with a phony urgent need to make a payment to avoid arrest, foreclosure, or property seizure.

We could go on and on with examples. The key here is for you to be highly suspect of any e-mail requesting personal or financial information or requesting an immediate tax payment. Scammers will generally request payment be made by gift card, which should be an immediate RED FLAG!

A good rule of thumb is to STOP – THINK – DELETE.

If you receive electronic correspondence from the IRS, your state taxing agency, a credit card company, or a financial institution and feel uncomfortable ignoring it, call this office to check so you won’t need to worry.
Knowing that this is the time of year when the IRS sends correspondence to taxpayers, scammers will send fake letters to trick people into making payments on bogus tax liabilities. As a result, taxpayers need to be very careful to avoid being hoodwinked by these thieves. The best practice is to have a tax professional review any letter that you receive before you take any action. If the letter is real, then it will require a timely response, but if it is fake, it should be ignored.

Scammers have also been known to call individuals and threaten immediate arrest if a payment related to a phony liability is not immediately made. Just the threat of arrest is enough to know that the call is from a scammer, and you should immediately hang up.

Bottom line: you must be on guard against these scammers at all times. Your life can become a nightmare if your identity is stolen. Identity thieves will even file tax returns under your Social Security number, claiming huge refunds and leaving you with a horrendous mess to clean up with the IRS. Don’t be a victim. Please call this office if you believe your tax ID has been compromised.

New IRS Rule Will Help Lower Drug Costs

Life may get a bit easier for millions of Americans with chronic medical conditions who struggle to pay for their medical care.

The IRS recently released formal guidance that allows insurers who sponsor high-deductible health plans (HDHPs) linked to health savings accounts (HSAs) to cover 14 essential services used to treat chronic diseases like diabetes and asthma before patients hit their deductibles.

That’s a big, welcome change. Previously, insurance coverage did not kick in until most patients spent over a thousand dollars out of pocket. That’s right: While in the deductible phase, many people pay the full “retail” price for critically important—and often predictable—medical services.

Since up to 40% of Americans can’t afford an unexpected $400 bill, many people don’t visit their clinicians and stop filling their prescriptions for insulin, inhalers, statins and other common drugs that keep patients healthy and prevent expensive hospitalizations and surgeries.

By reducing out-of-pocket drug costs, this reform will make critical medications more accessible. That’ll improve health outcomes for millions of patients—and potentially reduce overall healthcare spending. Let’s hope insurers embrace this change so that chronic disease patients never have to pay full price for lifesaving medicines ever again.

HDHPs have become increasingly popular in recent years. It’s easy to see why. They offer lower premiums than traditional coverage by shifting costs to those who use medical care. And they enable consumers to open HSAs, a type of tax-advantaged savings and investment account.

By 2017, 25% of working-age adults with employer-sponsored coverage were enrolled in high-deductible plans, up from just 4% in 2007.

However, these plans don’t work well for many Americans with chronic diseases.

The plans subject patients to steep out of-pocket-costs, in addition to premiums. By law, enrollees must pay a minimum of $1,350 out-of-pocket before insurers step in to help. Some plans set deductibles even higher. This year, plans can require individuals to pay a maximum of $6,750 in out-of-pocket costs.

There’s an exception to this rule. Insurers can pay for “preventive” care before patients reach their deductibles, but until recently, preventive was narrowly defined. It included services such as flu shots or cancer screenings, but explicitly left out chronic disease treatments.

The new IRS guidance expanding what is considered preventive makes sense. For patients with chronic disease conditions, drugs and diagnostic tests are truly preventive. For instance, insulin can help diabetes patients avoid serious—and expensive—complications, including blindness and amputation.

Chronic disease patients enrolled in high-deductible plans could see their prescription expenses drop substantially. That’s welcome news, given the rising healthcare costs. Consider that between 2012 and 2016, patients with Type 1 diabetes saw their annual insulin costs nearly double to $5,700.

Patients who face high out-of-pocket costs often deviate from their doctor’s orders. Nearly a third of patients said they didn’t take their medicines as prescribed in the last year because of cost. Prescription non-adherence results in 125,000 deaths and costs our healthcare system up to $289 billion annually.

Each year, more and more Americans enroll in high-deductible plans. The new IRS guidance will help reduce non-adherence, improve health and potentially lower medical spending.

(Source: https://www.fiercehealthcare.com/payer/industry-voices-new-irs-rule-will-help-lower-drug-costs-for-those-chronic-conditions)

Key Lessons in IRS Response to Not Filing Your Taxes

Some people are late, and some seem to fall off the grid, with many years of failures. But the IRS usually catches up. At that point, taxes, interest and penalties can be crushing, and it can even mean jail in some cases. Once you fall behind, in filing returns, payments, or both, it can be tough to face the financial and other impediments to getting back on track. And it can seem like the IRS rules are stacked against you—the IRS files returns for you if don’t do it yourself.

That was one of the problems facing Harvard Law Professor.

The professor failed to file tax returns with the IRS for many years, and then went to tax court to dispute the taxes with the IRS.

In Sullivan v. Commissioner, the United States Tax Court held for the IRS. The professor failed to respond to many notices, and with the IRS, procedure is extremely important. That was one of the reasons he lost big. IRS records showed that Sullivan failed to file tax returns from 2005 to 2013. Eventually, the IRS caught up with him and was trying to collect an outstanding tax balance from 2012 and 2013. The amount due for just those two years was $1,231,775.

Did Sullivan file tax returns for those years? No, and Sullivan disputed that he owed it, saying “I did not (nor have I ever made) enough money to justify a $1.2M tax.” He claimed his real income was far less than the IRS said it was.

This is one of the key lessons of the case. He had not filed these returns, so the IRS pieced his income together based on records, such as Forms W-2 and 1099. The IRS can do this, preparing what the IRS calls “substitutes for returns” or SFRs. That was what the IRS did for 2012 and 2013. As you might expect, when the IRS does this, it usually does not work in your favor. Usually if you file yourself you will owe less, possibly much less. Here, after the IRS prepared these substitutes, the IRS started trying hard to collect. Once again, Sullivan did not follow IRS procedures. Eventually, though, when the IRS issued a Notice of Intent to Levy, Sullivan tried to object. Sullivan failed to respond to multiple requests that he provide evidence that the IRS incorrectly assessed his taxes, and the Tax Court easily ruled for the IRS, saying it was entitled to collect.

Over the course of 2017, the IRS sent Sullivan three letters informing him he would need to file his 2012, 2013, 2014, and 2015 returns in order to contest the amount he was required to pay. At one point, the assigned IRS settlement officer scheduled a date for a telephone hearing; Sullivan did not call in, nor did he provide financial documents, or tax returns. The IRS tried to prompt Sullivan at least seven times about his outstanding balance.

The Tax Court agreed that the IRS had followed the rules, that the amount of tax was fixed, and that the IRS could collect. Of course, Sullivan might well have been right that his proper taxes for 2012 and 2013 should actually have been much less. But he lost the chance to prove it. Filing tax returns is key, even if you can’t pay. And once you start to receive notices, responding on a timely basis and keeping your procedural rights alive is too. That could have made all the difference.

(Source: https://www.forbes.com/sites/robertwood/2019/11/25/harvard-law-prof-skips-decade-of-filing-taxes-key-lessons-in-irs-response/#7c7582a43c41)

National Tax Security Awareness Week Begins

IR-2019-192, December 2, 2019

WASHINGTON — The Internal Revenue Service and the Security Summit partners opened this year’s National Tax Security Awareness Week with a warning for holiday shoppers on Cyber Monday to secure their computers and mobile phones to reduce the threat of identity theft.

During the holiday season, criminals take advantage of large numbers of people shopping online to steal identities and money – as well as sensitive tax and financial data that can be used to file fraudulent tax returns when the filing season opens in early 2020.

“The holidays may mean the shopping season to consumers, but it’s the hunting season for online thieves,” said IRS Commissioner Chuck Rettig. “Identity thieves are looking for your information to help them file fraudulent tax returns. A few simple steps can help protect you and your valuable information during the holiday season and at tax time.”

The IRS, state tax agencies and the nation’s tax industry – working together as the Security Summit — mark today’s opening of fourth annual National Tax Security Awareness Week with tips on basic safeguards everyone should take, but especially for those shopping online via computer or mobile phone.

The week continues through Dec. 6 with a series of special educational efforts taking place at more than 25 partner events across the country to raise awareness about protecting taxpayers and tax professionals from identity theft. The week includes special social media efforts on platforms including Twitter and Instagram, including a special Twitter chat on @IRSnews and #TaxSecurity on Thursday.

“While you’re preparing for the holidays, thieves are preparing for the tax season, gathering up names, addresses, Social Security numbers and other bits of data that they can use to try filing a fraudulent tax return” Rettig said. “Everyone should take a few basic steps to help protect their identities, their financial accounts, their computers and their mobile phones.”

When shopping online, the IRS and Summit partners remind taxpayers to protect themselves with these tips:

  • Shop at sites where the web address begins with “https” – the “s” is for secure communications over the computer network. This is an added layer of protection when sharing credit card numbers for a purchase. Keep in mind that scam sites also can use “https,” so people should ensure they are shopping at a legitimate retailer’s website.
  • Don’t shop on unsecured public Wi-Fi in places like a mall. Remember, thieves can eavesdrop.
  • At home, secure home Wi-Fis with a password. As homes become more connected to the web, secured systems become more important, from wireless printers, wireless door locks to wireless thermometers. These can be access points for identity thieves.
  • Don’t forget to use security software for computers and mobile phones – and keep it updated. Make sure purchased anti-virus software has a feature to stop malware, and there is a firewall that can prevent intrusions.
  • Protect personal information; don’t hand it out to just anyone. Phishing scams – like imposter emails, calls and texts — are the No. 1 way thieves steal personal data. Don’t open links or attachments on suspicious emails.
  • Use strong and unique passwords for online accounts. Use a phrase or series of words that can be easily remembered.
  • Use two-factor authentication whenever possible. Many email providers and social media sites offer this feature. It helps prevents thieves from easily hacking accounts.
  • Back up files on computers and mobile phones. A cloud service or an external hard drive can be used to copy information from computers or phones – providing an important place to recover financial or tax data.

In addition, the Summit partners note these security measures include mobile phones – an area that people sometimes can overlook. Thieves have become more adept at compromising mobile phones. Phone users also are more prone to open a scam email from their phone than from their computer.

Taxpayers can check out security recommendations for their specific mobile phone by reviewing the Federal Communications Commission’s Smartphone Security Checker. Since phones are used for shopping and even for doing taxes, remember to make sure phones and tablets are just as secure as computers.

The IRS, state tax agencies, the private sector tax industry, including tax professionals, work in partnership as the Security Summit to help protect taxpayers from identity theft and refund fraud.

This is the first in a week-long series of tips to raise awareness about identity theft. See IRS.gov/securitysummit for more details.

IRS Encourages Taxpayers to be ready for Tax Filing Season

Get Ready for Taxes:  Get ready today to file 2019 federal income tax returns

The Internal Revenue Service today urged taxpayers to act now to avoid a tax-time surprise and ensure smooth processing of their 2019 federal tax return.

This is the first in a series of reminders to help taxpayers get ready for the upcoming tax filing season.  To that end, a special page, newly updated and available on IRS.gov, outlines things taxpayers can do now to prepare for the 2020 tax season ahead.

Adjust withholding; Make estimated or additional tax payments

The IRS urges everyone to use the Tax Withholding Estimator to perform a  paycheck or pension income checkup. This is even more important for those who received a smaller refund than expected or owed an unexpected tax bill last year.

It’s also a good idea for anyone who had a key life event, such as getting married, getting divorced, having or adopting a child, retiring, buying a home or starting college.

If the Tax Withholding Estimator recommends a change, an employee can then submit a new Form W-4, Employee’s Withholding Allowance Certificate, to their employer. Don’t send this form to the IRS.

Similarly, recipients of pension or annuity income can use the results from the estimator to complete a Form W-4P, Withholding Certificate for Pension or Annuity Payments, and give it to their payer.

Taxpayers who receive a substantial amount of non-wage income should make quarterly estimated tax payments. This can include self-employment income, investment income (including gain from the sale, exchange or other disposition of virtual currency), taxable Social Security benefits and in some instances, pension and annuity income. Making estimated tax payments can also help a wage-earner cover an unexpected withholding shortfall.

Estimated tax payments are due quarterly, with the last payment for 2019 due on Jan. 15, 2020. Form 1040-ES, Estimated Tax for Individuals, has a worksheet to help figure these payments. Payment options can be found at IRS.gov/payments.

Workers and retirees who receive self-employment income or income from the gig economy, including payments in the form of virtual currency, should make sure to take these amounts into account when they fill out the Tax Withholding Estimator. Payments received in virtual currency by independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC. Similarly, wages paid using virtual currency are taxable to the employee, subject to withholding, and must be reported by the employer on a Form W-2.

People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes those who owe alternative minimum tax or various other taxes, and people with long-term capital gains or qualified dividends.

Gather documents and organize tax records

The IRS urges all taxpayers to develop a recordkeeping system − electronic or paper − that keeps important information in one place. Keep copies of filed tax returns and all supporting documents for at least three years. This includes year-end Forms W-2 from employers, Forms 1099 from banks and other payers, other income documents, records documenting all virtual currency transactions, and Forms 1095-A for those claiming the Premium Tax Credit. Add tax records to the files as they are received. Having complete and timely records can help any taxpayer file a complete and accurate return.

Taxpayers should confirm that each employer, bank or other payer has a current mailing address or email address. Typically, year-end forms start arriving by mail – or are available online – in January. Review them carefully and, if any of the information shown is inaccurate, contact the payer right away for a correction.

To avoid refund delays, be sure to gather all year-end income documents before filing a 2019 return. Filing too early, before receiving a key document, often means a taxpayer must file an amended return to report additional income or claim a refund. It can take up to 16 weeks to get an amended return refund.

Anyone using a software product for the first time may need the Adjusted Gross Income (AGI) amount shown on Line 7 of their 2018 return to file their 2019 return electronically. Consult the taxpayer’s copy of last year’s return, or alternatively, visit the View Your Tax Account link on IRS.gov. Learn more about verifying identity and electronically signing a return at Validating Your Electronically Filed Tax Return.

Notify the IRS of address changes and notify the Social Security Administration of a legal name change to avoid refund delays.

Renew expiring tax ID numbers

Taxpayers with expiring Individual Taxpayer Identification Numbers can get their ITINs renewed more quickly and avoid refund delays next year by submitting their renewal application soon.

An ITIN is a tax ID number used by any taxpayer who doesn’t qualify to get a Social Security number. Any ITIN with middle digits 83, 84, 85, 86 or 87 will expire at the end of this year. In addition, any ITIN not used on a tax return in the past three years will expire. ITINs with middle digits 70 through 82 that expired in 2016, 2017 or 2018 can also be renewed.

The IRS urges anyone affected to file a complete renewal application, Form W-7, Application for IRS Individual Taxpayer Identification Number, as soon as possible. Be sure to include all required ID and residency documents. Failure to do so will delay processing until the IRS receives these documents.

Once a completed form is filed, it typically takes about seven weeks to receive an ITIN assignment letter from the IRS. But it can take longer — nine to 11 weeks — if an applicant waits until the peak of the filing season to submit this form or sends it from overseas.

Taxpayers who fail to renew an ITIN before filing a tax return next year could face a delayed refund and may be ineligible for certain tax credits. With nearly 2 million taxpayer households impacted, applying now will help avoid the rush as well as refund and processing delays in 2020. For more information, visit the ITIN information page on IRS.gov.

Be prepared to file electronically; Use Direct Deposit for refunds

Filing electronically is easy, safe and the most accurate way to file taxes. There are a variety of free electronic filing options for most taxpayers including using IRS Free File for taxpayers with income below $66,000, or Fillable Forms for taxpayers who earn more. Taxpayers who generally earn $56,000 or less can have their return prepared at a Volunteer Income Tax Assistance site. Tax Counseling for the Elderly sites offer free tax help for all taxpayers, particularly those who are 60 years of age and older.

Combining Direct Deposit with electronic filing is the fastest way to get a refund. With Direct Deposit, a refund goes directly into the taxpayer’s bank account. No need to worry about a lost, stolen or undeliverable refund check. This is the same electronic transfer system used to deposit nearly 98% of all Social Security and Veterans Affairs benefits. Nearly four out of five federal tax refunds are deposited directly.

Direct Deposit is easy to use. Taxpayers select it as their refund method through tax software or let their tax preparer know they want direct deposit. Taxpayers can even choose Direct Deposit on a paper return. Be sure to have bank account and routing numbers handy and double check entries to avoid errors.

Direct Deposit also saves taxpayer dollars. It costs the nation’s taxpayers more than $1 for every paper refund check issued but only a dime for each Direct Deposit.

By law, the IRS cannot issue refunds for people claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund − even the portion not associated with EITC or ACTC. This law change, which took effect in 2017, helps ensure that taxpayers receive the refund they’re due by giving the IRS more time to detect and prevent fraud.

The IRS cautions taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Some returns may require additional review and may take longer. For example, the IRS, along with its partners in the tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud.

Start with IRS.gov for help that includes tools, filing options and other services and resources. Taxpayers increasingly use IRS.gov as their first resource for tax matters. Information in languages other than English is available under the “Language” tab on IRS.gov.

The Let Us Help You page on IRS.gov features links to information and resources on a wide range of topics.

The IRS Is Hot on the Trail of Unreported Virtual Currency Transactions

Article Highlights:

  • Coinbase Disclosure
  • IRS Compliance Letters
  • New 1040 Question
  • Reporting under Penalty of Perjury
  • Treated as Property
  • Employee Payments
  • Independent Contractor Income
  • Information Reporting
  • New IRS Guidance

Back in 2018, Coinbase, a company handling virtual currency (also referred to as cryptocurrency) transactions, released the data of 14,000 of its users to the IRS after the information was subpoenaed, and virtual currency traders held their breath about what the IRS would do with the information related to those 14,000 users.

Although it took some time, after analyzing the Coinbase data, the IRS recently issued letters to more than 10,000 taxpayers whom they suspect have not been properly reporting their virtual currency transactions, and not all of the letters were the same. In fact, one letter was quite frightening. The following is a synopsis of each of the three letters:

  • Letter 6173 – This letter required a response from the taxpayer, by either providing a statement to the IRS that they have already complied with the required reporting or by filing a return that reports their virtual currency transactions. For situations in which the taxpayer had already filed a return but had left off the virtual currency transactions, they will need to file an amended return (Form 1040X). Taxpayers who have received this letter and ignored it may face a full-blown audit by the IRS and could be subject to substantial penalties.
  • Letter 6174 – This was a “soft notice” that did not require a response, and the IRS says it won’t be following up on it. However, the notice also warns that the taxpayer will be in hot water if they had virtual currency gains and fail to amend their return or continue to be noncompliant on future returns despite receiving the letter.
  • Letter 6174-A – The taxpayer isn’t required to respond to the letter but does need to correct their prior returns in which virtual currency transactions were omitted. The IRS warns of future enforcement action if the taxpayer doesn’t amend their return(s) or file their delinquent returns. After receiving the letter, the taxpayer can’t use an excuse of not knowing the law for failing to report their virtual currency gains.

Of course, Coinbase is not the only company handling virtual currency transactions, so others are not on the IRS’s radar – at least, not yet. The draft of the 2019 Form 1040 tax return was recently released, and it includes a new question…

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtually currency? Yes or No.”

And for those who have not read the fine print in the signature area of the 1040, it reads as follows:

“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

Those taxpayers who have virtual currency transactions and fail to answer the question or answer it “no” have committed perjury and can be subject to some very serious penalties. As you can see, the IRS is definitely ramping up its compliance efforts.

Virtual currency is treated as property, so whenever it is sold, traded, or used to pay for services or to make a purchase, it constitutes a reportable tax transaction, just like selling a stock, where a gain or loss must be determined for each transaction.

Example: Taxpayer buys Bitcoin (BTC) so he can use it to make online purchases without the need for a credit card. He buys one BTC for $2,425 and later uses it to buy goods worth $500 (BTC was trading at $2,500 when he made his purchase). He has a $75 ($2,500 − $2,425) reportable capital gain. This is the same result that would have occurred if he had sold the BTC at the time of the purchase and used cash to purchase the goods. This example points to the complicated record-keeping requirement of tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of BTC had been less than $2,425 when the goods were purchased.

Bitcoin is the most well-known of the over 4,000 variations of virtual currency, and although its value fluctuates, Bitcoin’s value has increased about 14 times in value from September 2016 to October 15, 2019. Many have purchased virtual currencies as a long-term investment, have never sold or traded their investment, and thus have no tax-reporting requirements. However, those who have acquired and then sold or exchanged virtual currency need to report their transactions to avoid some substantial penalties.

Using virtual currency to pay for goods and services in a business creates additional tax reporting issues, all of which include substantial penalties for non-compliance.

Paying Employees – The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax (Social Security and Medicare A), and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. Of course, these amounts are to be reported in U.S. dollars.

Independent Contractor Payments – The fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to self-employment tax.

Information Reporting – A payment made using virtual currency is subject to information reporting, to the same extent as any other payment made in property. For example, a person who, in the course of a trade or business, makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee.

New Guidance from the IRS – The IRS recently released new guidance about virtual currency – the first in 5 years –which mainly dealt with whether taxpayers have gross income from two cryptocurrency events: hard forks of cryptocurrency the taxpayer owns and an airdrop of a new cryptocurrency following a hard fork, if the taxpayer receives units of new cryptocurrency. If you own virtual currency, no matter whether these terms sound like a foreign language to you or you are familiar with them, you may need to account for these events on your tax return for the year when they occur.

If you have unreported virtual currency transactions or need assistance understanding the new IRS guidance, you are encouraged to contact us as soon as possible so that you might bring your virtual currency transactions into tax compliance before you hear from the IRS.

3 Common Personal Income Tax Problems & How to Respond

Tax problems aren’t just a worry that hang over people’s heads from January through April every year. Many of them go far beyond the numbers that you report, and they can require additional evidence that your bank statements and paychecks can’t provide. Additionally, the IRS isn’t the only source of those problems: state tax authorities are hungry for revenue, and if you divide your time among different states, you may find it difficult to establish nexus and may even have to file taxes in multiple states.

Below are some of the most common personal income tax issues people are likely to face.

1. You didn’t make (or underpaid) estimated tax payments.

Self-employment is the most common cause of this. When you’re used to having taxes withheld from your paychecks at work, it can be a shock to have to pay taxes yourself. You can end up owing not just a large amount of self-employment and income taxes, but also penalties for not making tax payments on time. Estimates must be deposited quarterly, or you will face an underpayment penalty.

If your total tax due when you go to file is under $1,000, you won’t have to worry about getting smacked with an underpayment penalty. However, it’s a good idea to set aside at least 25%-30% of your income for estimated tax payments and commit to paying this amount every month if quarterly taxes are too complicated to figure out.

Other situations like freelancing on the side or rental income while you’re still employed can also cause you to fall short at tax time, so make sure to have extra taxes withheld from your paycheck if you don’t want to make estimated payments. State tax payments also shouldn’t be neglected.

2. You didn’t correctly file state tax returns after moving.

Moving to a state with little or no income taxes like Nevada or Florida can be appealing if your bank account feels squeezed in high-tax states like New York or California. Many people divide their time between multiple states for work or personal reasons, and if it’s not just a two- or three-week creative retreat or corporate assignment, it can make nexus difficult to determine in some cases.

With the prospect of a lower tax burden becoming even more appealing, it seems logical to just move to the tax-haven state you’ve been eyeing. But even after you file for a change of address with the postal service, change your voter registration, and get recognized as a resident by your new state, the high-tax state that you left is likely to also still treat you as one.

Typically, you must spend at least 183 days of the year in the other state and maintain a primary residence there. Simply having property in another state won’t do if the rest of your family doesn’t also live and wait there for you after your work or travel. Where you spend time outside of work also matters because where you sleep every night is ultimately what counts.

If your move is indeed permanent and your residency is valid, you may have to file a part-year resident tax return for the final months you stayed in the old state. You won’t need to worry about it for following years, but keep track of how many days were spent in each state before and after moving day.

3. You neglected to file state income tax returns as a nonresident.

If you have business or rental income in another state, you may be required to file state tax returns as a nonresident. If this income is significant, it can end up producing a large tax bill if you’re unprepared.

If you have an out-of-state job, chances are that your payroll provider may also be incorrectly withholding taxes for the appropriate state and/or city. In concentrated regions like the tri-state area, especially for New York City and Philadelphia residents, ensure that city taxes are being correctly withheld if you are a resident, and that withholding curtails if that is no the longer the case. There are usually reciprocity agreements among states and municipalities in areas where state lines cross, but you should carefully check to make sure you don’t owe nonresident taxes in addition to what you owe your home state.

Failure to make tax payments on time, and to the right agency, are income tax problems that are often overlooked and can quickly spiral out of control. To avoid these issues and many more, contact our office so we can consult you on your state and local taxation, as well as rules for establishing nexus.

Crowdfunding Can Have Unexpected Consequences

  • Gifts
  • Charitable Gifts
  • Business Ventures
  • SEC Registration

Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. A number of sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign.

Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.

On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.

A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $15,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.

Gifts to specific individuals, regardless of the need are not considered a charitable contribution under tax law. An example is raising funds to help pay for someone’s funeral expenses. Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.

Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:

  • Contribution Less Than $250 – To claim a deduction for a contribution of less than $250, the taxpayer must have a cancelled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
  • Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
    o The amount of cash contributed;o Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and

    o A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.

Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.

  • No Business Ownership Interest Given – This applies when the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
  • Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment. When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations carve out a special exemption for crowdfunding:

    o Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC is $1.07 million in a 12-month period. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate.

    o Contributor Maximum – The amount an individual can invest through crowdfunding in any 12-month period is limited:

    • If the individual’s annual income or net worth is less than $107,000, his or her equity investment through crowdfunding is limited to the greater of $2,200 or 5% of the investor’s annual net worth.
    • If the individual’s annual income or net worth is at least $107,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $107,000.

On the bright side, even if the money raised is income to the business, it will probably net out to zero taxable if it is spent on tax deductible business expenses.

Does the IRS Track Crowdfunding? – Maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (credit card, PayPal, etc.). These third-party processers are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. Question is, will the third party follow the de minimis rule?

If you have questions about crowdfunding-related tax issues, please give this office a call.

Taxpayers Should Beware of Property Lien Scam

With scam artists hard at work all year, taxpayers should watch for new versions of tax-related scams. One such scam involves fake property liens. It threatens taxpayers with a tax bill from a fictional government agency.

Here are some details about the property lien scam that will help taxpayers recognize it:

  • This scheme involves a letter threatening an IRS lien or levy.
  • The scammer mails the letter to a taxpayer.
  • The lien or levy is based on bogus overdue taxes owed to a non-existent agency.
  • The non-existent agencies might have a legitimate-sounding name like the “Bureau of Tax Enforcement.” There is no such agency.
  • This scam may also reference the IRS to confuse potential victims into thinking the letter is from a real agency.

Taxpayers who do owe tax or think they might owe should:

  • Review their tax account information and payment options at IRS.gov. Reviewing tax account information online will show the taxpayer if they indeed owe the IRS and how much. This is the fastest way to get this information.
  • Call the IRS at 800-829-1040 to confirm the notice if they’re still not sure they owe.
  • Call IRS Problem Solvers to help you resolve your tax problem.
Anyone who doesn’t owe taxes and has no reason to think they do should: