“Dirty Dozen” Tax Scams

IRS Commissioner Doug Shulman recently stated “taxpayers should be careful and avoid falling into a trap with the Dirty Dozen. Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

The Dirty Dozen are the 12 most prevalent scams detected by the IRS. Taxpayers should take precautions to avoid these and other suspicious activities of scam artists. The following scams make up the IRS’s 2012 “Dirty Dozen” listing.

  1. Identity Theft. Topping this year’s list is identity theft. The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
  2. Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims and prompt them to provide valuable personal and financial information that can be used to commit identity or financial theft.
  3. Return Preparer Fraud. Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services, and attract new clients by promising guaranteed or inflated refunds.
  4. Hiding Income Offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in off-shore accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or insurance plans.
  5. “Free Money.” Scammers have been preying on low-income individuals and the elderly by posting flyers in community churches promising that tax returns can be filed with little or no documentation to receive “free money” from the IRS or Social Security Administration.
  6. False/Inflated Income and Expenses. This tactic is used by scam artists who file false or misleading returns to claim refunds they are not entitled to receive. One popular scam is to report income that was never earned to obtain refundable credits.
  7. False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return reporting false with-holding amounts that are subsequently used to file erroneous refund claims.
  8. Frivolous Arguments. Frivolous scheme promoters encourage people to make unreasonable and unfounded claims to avoid paying taxes.
  9. Falsely Claiming Zero Wages. Filing a phony wage-related or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.
  10. Abuse of Charitable Organizations and Deductions. Misuses of tax-exempt organizations include arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property.
  11. Disguised Corporate Ownership. In this scam, domestic corporations and other entities are formed to disguise the ownership of a business. They are then used to under-report income, claim fictitious deductions, avoid the filing of tax returns, or participate in listed transactions, money laundering, financial crimes, and even terrorist financing.
  12. Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduced taxable income, deductions for personal expenses, and reduced estate or gift taxes that don’t deliver as promised.

Maximizing the Deduction for Start-Up Expenses

Individuals starting a new business or acquiring the assets of an existing business often incur start-up expenses, which can be considerable, in the investigation and acquisition phase before actual business operations begin.  Most start-up expenditures can be segregated into two broad categories (a) investigatory expenses and (b) business pre-opening costs.

Taxpayers can immediately deduct up to $5,000 of start-up expenses in the year when active conduct of a business begins. However, the $5,000 instant deduction allowance is reduced dollar for dollar by cumulative start-up expenses in excess of $50,000 for the business in question. Start-up expenses that cannot be immediately deducted in the year a business begins must be capitalized and amortized over 180 months on a straight-line basis. In many cases, start-up expenses for small businesses will be modest enough to qualify for immediate deduction under the $5,000 instant deduction allowance in the year when active conduct of business commences.

Example: Claiming the deduction for start-up expenses.

Suzie (a calendar-year taxpayer) incurs $4,200 of start-up expenses in 2012 before opening her new car wash in November of 2012. Suzie’s 2012 deduction is $4,200. Since her start-up expenses did not exceed $50,000, she can deduct the entire $4,200 in 2012.

Note: A taxpayer is not considered to be engaged in carrying on a trade or business until the business has begun to function as a going concern and has performed the activities for which it was organized.

4th Quarter 2012 US Federal Estimates

Timing is everything and the IRS has chosen a particularly inauspicious time to close the Atlanta lock boxes used by taxpayers living in Georgia, South Carolina, Alabama, Tennessee, Kentucky, North Carolina, Missouri, New Jersey, and Virginia to mail their federal estimated tax payments. The IRS has recently announced that effective January 1, 2013, the Atlanta lockbox will be closed and all those taxpayers will mail payments to a lockbox located in Louisville, Kentucky instead.  For those of you with nothing to file until your 2012 Form 1040 is completed, there is nothing to worry about.  The filing instructions you receive with your return will reflect the correct Louisville address.

If you have a fourth quarter 2012 federal estimated payment due by January 15, 2013, the transmittal letter we provided to you has the old address and should not be used.  Instead, you should mail your fourth quarter federal estimated payment to:

Internal Revenue Service
P.O. Box 1100
Louisville, KY 40293-1100

If you forget and mail the estimated payment to the Atlanta lock box, it should be forwarded, but it could arrive late.  Please note that this change only affects your federal estimated payment. There has been no mailing address change for state estimated payments.

Bona Fide Residence (BFR) Due Date

If you did not qualify for the Foreign Earned Income Exclusion (www.2555exclusion.com) with the carryover of a prior year BFR (www.bona-fide-residence.com) or a current year Physical Presence Test ‘PPT’ (www.physical-presence-test.com) and were forced to wait through all of 2012 to qualify under the Bona Fide Residence (BFR) test, then your deadline has finally arrived.  That is, if your qualifying period is January 1, 2012 to December 31, 2012 and if you are still on assignment, then you can file your return as soon as January 1, 2013.

Don’t delay, contact your accountant today as your filling deadline is likely January 31, 2013.

Tax Rate Update

For the past several years, year-end tax planning has been a challenge for so many people.  Trying to anticipate whether Congress will act to extend some or all of the Bush tax cuts has been the cause of many a sleepless night for tax advisors.  The HIRE Act had small business in an uproar over the possibility of expanded reporting requirements on Form 1099.  Not only would businesses have to report payments to service providers and a few other limited transaction types, they would have been required to report on product purchases, as well.  Then came the Patient Protection and Affordable Care Act (Obamacare).   In this mammoth piece of legislation, we are seeing a series of new taxes that are to be implemented over several years.  As with the ultimate repeal of the expanded Form 1099 reporting in the HIRE Act, there is afoot an effort to repeal some of the new taxes from Obamacare.  Success in repeal will more than likely be far less successful.

THE RUNDOWN:

Bush Tax Cuts – The inevitability of the Bush tax cuts has to be that taxes will go up, whether 1) it is across the board, because Congress again will not come to an agreement or 2) They do agree and extend the cuts for taxpayers in all but the highest bracket.  Following is a comparison of the tax brackets, with and without the Bush cuts:

  Current After Lapse
Wages 10% 15%
  25% 28%
  28% 31%
  33% 36%
  35% 39.6%
     
Qualified Dividends 15% Taxpayer’s Highest Marginal Wage Rate
     
Capital Gains 0 or 15% Maximum 20%

In addition, the Child Tax Credit will drop from $1000 to $500 per child, and the Personal Exemption phase out will be reinstated on income above $122,500.

Obamacare – Following are the tax increases slated for implementation under this legislation for tax year 2013:

Medical Device Manufacturers – This one is similar to the infamous tanning bed tax.  It is a 2.3% excise tax that will be imposed on sales by manufacturers of medical devices.  This, in effect, acts like a national sales tax, because it is imposed on the gross receipts of a transaction regardless of the profitability of the company.

Medical Expense Deduction – The longstanding deduction for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income will now be limited to amounts that exceed 10% of adjusted gross income.   The increase does not apply to taxpayers over the age of 65, until the year 2016.

Flexible Spending Accounts (FSA) – If your company has an FSA, through which you can contribute pre-tax dollars for otherwise unreimbursed medical expenses, those contributions will be limited to $2500.

Investment Income Surtax – For households earning greater than $250,000 per year ($200,000 for single taxpayers), there will be a 3.8% surtax on the lower of investment income or income that exceeds the aforementioned earnings.  Generally speaking, investment income consists of interest, dividends and capital gains.  Keep in mind the above discussion regarding the lapse of the Bush tax cuts.  If the Bush tax cuts lapse, high income taxpayers’ tax rates on dividends and capital gains could be 43.4% and 23.8% respectively.

Medicare Payroll Tax – Currently, wage earners and self-employed taxpayers are subject to the Medicare tax, alongside the Social Security tax.  Beginning in 2013, those with wage or self-employment earnings greater than – you guessed it – $250,000 married ($200,000 single) will see the overall Medicare tax increase from 2.9% to 3.8%.

Other – The Payroll tax holiday is over, as well.  For the past two years, everyone subject to the Social Security tax has seen their share of Social Security contributions decreased from 6.2% to 4.2%.  Beginning in 2013, the 6.2% rate will be reinstated.

One good thing is that the 401K contribution limitations will increase from $17,000 to $17,500 and the catchup provision for taxpayers age 50 and over will increase from $5,000 to $5,500.  I presume this is of little consolation, given the rest.

TAKEAWAY:
This year could finally be the time to accelerate earnings at year end, the antithetical plan from what tax practitioners have advised for many years.