December 18

Electronic communication is a wonderful thing when used appropriately for a legitimate purpose. Emailing a friend or business associate is much quicker, and sometimes more reliable, than mail. The ability to electronically file your tax return results in quicker processing and faster refunds. It is also easier because you do not need to stand in line at the post office to receive stamped confirmation of mailing your return.

But, electronic communication carries greater risks, especially during tax season. While scams are always present in today’s society, the risk of a scam rises during tax season. Scams directed towards taxpayers are constantly evolving after taxpayers and the Internal Revenue Service catch on to the last scam. Taxpayers must be especially vigilant at spotting a scam during tax season. The Internal Revenue Service advises taxpayers that scammers use specific methods to perpetrate scams and provides the following information to help spot a scam.

SSN Scam of the Season

It seems that each year scam artists devise a new plan to glean information or even extract financial data from unwitting people by calling them and posing as an agent of the IRS or the Department of Treasury. Most calls will include a demand for payment or a request for personal information such as your social security number. Obtaining a social security number is very powerful for these unscrupulous actors in achieving their thievery objective. The newest scam involves robocalls alerting a potential victim to suspension of their social security number and directing them to push a number to speak with an operator. This fear tactic is also generally associated with a required payment to a specific account that they control. This is clearly an SSN scam – your social security number will NEVER be suspended. You should always hang up on these calls immediately. In addition, make a note of the actual phone number that called you because this will help in shutting down the number. The IRS encourages reporting these calls as soon as possible. Taxpayer scams are a real problem for the Service and they are serious about prosecuting these thieves who are using the power of the federal government to dupe individuals into compliance with their demands.

The IRS Will Not Call You for Payment

This is worth repeating: THE IRS WILL NOT CALL YOU AND DEMAND PAYMENT! The first rule when dealing with the Internal Revenue Service is to understand that the Service will not call anyone on the phone and demand payment of any type. The agency will typically send a letter stating that they have made a change to your return and you owe additional tax or you have unpaid taxes for a tax year or you are being audited. The letter will always provide a phone number and address to contact the Service if the taxpayer wants to discuss the issue. The letter will also always provides a time limit for responding to the Service. If you receive a letter or notice from the IRS and doubt its authenticity, you can contact the IRS, a tax attorney or an accountant for further guidance.

Any individual who has received a call or other form of communication where the caller is acting like an agent of the government should report the incident to the Treasury Inspector General for Tax Administration and also email information, including your contact information, to the IRS at [email protected]. This will assist the Service in tracking and shutting down the scammers. You should also report a phone call to the Federal Trade Commission. While no one ever really wants to communicate with the Internal Revenue Service, reporting scams is of great help to others who may be targeted and assists the Service in shutting down these operations. The Service is clearly your best advocate in stopping taxpayer scams.

The preceding is solely intended for informational purposes and is not intended as legal or tax advice. It is important for taxpayers to consult with an experienced tax attorney or Certified Public Accountant. Contact our office if you would like to further discuss your taxes

December 2

Understanding Tax Estimation

No one enjoys paying taxes at tax time, and the thought of paying taxes in advance is even worse. But, the real truth is that savvy business managers and investors are required to make allowances for taxes from the very beginning of the year. While the typical worker who is a company employee will have money withheld from their earnings throughout the year, then receiving a W-2 form at the end of the year stating how much money they have contributed toward their tax obligations, business operators and investors will allow for taxes first. Individuals or married couples who work regular jobs and operate side businesses have a tax concern as well. Married couples may actually want to file separately, or at least separate from the business. Taxpayers with investments who receive dividends each quarter will also often pay additional estimated taxes as the year progresses. And of course, most small business taxes are filed every three months. Everyone should give their tax burden some forethought, and especially those who are self-employed and have a considerable income.

Deciding on an Estimated Contribution

All taxpayers and small businesses need to estimate first how much money they expect to receive in annual income and then calculate their small business estimated taxes. Married couples may need to evaluate their filing status as well, as there could be benefits to filing either jointly or separately. This will depend on the individual situation. Some self-employed people who run businesses actually pay themselves just as any other worker and make their personal tax contributions in the traditional tax deduction format. Other self-employed individuals will opt to keep what they earn and pay taxes quarterly, while others may pay in small business estimated taxes during the year to their IRS account and then file annually. And of course, there are still those who wait until the end of the year and file traditionally, taking the hit for the extra tax obligations at the end of the year. The problem for these individuals is that they may be required to pay an underpayment penalty for failing to meet their obligations throughout the year, which can be avoided by making estimated tax payments during the year. This is actually a requirement for those who expect their tax debt to be in excess of $1000 for the year.

Percentages and Amounts to Avoid a Penalty

A good general rule for many taxpayers is estimating tax requirements in $1000 increments using a 90% rule regarding tax obligations. Those who expect their tax deductions to be within 90% of their total annual tax debt will often choose to pay extra at the end of the year, and those who pay each quarter could opt to pay an additional amount with their regular tax payments. Individuals with significant wealth will have the means to pay the entire tax bill annually, but this would also mean they could still pay estimated amounts in advance to avoid any subsequent penalty. It is not uncommon for a business of significant size to calculate their annual taxes going forward at the beginning of the year as a necessary business expense and then look for strategies to reduce the tax burden during the year. Annual tax returns can apply to businesses as well as individual workers, and they will assuredly be paid when small business taxes are not questioned when appropriately filed.

Any taxpayer who works a regular job and operates a side business always has the option of requesting additional tax deductions be withheld from their regular earnings. Most employers have no problem with this choice, as they are not required to match deductions as in Social Security tax obligations. This works well for those who will have a small tax obligation from their personal business operation and have a significant income from regular employment. And it is an easy method of ensuring there are adequate resources already in place when the final tax burden is calculated. This clearly depends on the individual situation. However, it is always best to be “better safe than sorry” when dealing with the Internal Revenue Service. The IRS may want to present a more amiable attitude towards taxpayers, but make no mistake about the fact that agents are very serious about collecting the government’s share, whether it be fair or not. It is always best to be prepared beforehand, and sometimes required by law.