Wednesday, February 18, 2015

Beware of the IRS' "Dirty Dozen" Tax Scams

This just in from Neikirk, Mahoney & Smith, one of Louisville's leading accounting firms, the Internal Revenue Service wrapped up the 2015 "Dirty Dozen" list of tax scams today with a warning to taxpayers about aggressive telephone scams continuing coast-to-coast during the early weeks of this year's filing season.

The aggressive, threatening phone calls from scam artists continue to be seen on a daily basis in states across the nation. The IRS urged taxpayers not give out money or personal financial information as a result of these phone calls or from emails claiming to be from the IRS.

Phone scams and email phishing schemes are among the "Dirty Dozen" tax scams the IRS highlighted, for the first time, on 12 straight business days from Jan. 22 to Feb. 6. The IRS has also set up a special section on highlighting these 12 schemes for taxpayers.

"We are doing everything we can to help taxpayers avoid scams as the tax season continues," said IRS Commissioner John Koskinen. "Whether it's a phone scam or scheme to steal a taxpayer's identity, there are simple steps to take to help stop these con artists. We urge taxpayers to visit for more information and to be wary of these dozen tax scams."

Illegal scams can lead to significant penalties and interest for taxpayers, as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them. Taxpayers should remember that they are legally responsible for what is on their tax returns even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

Here is a recap of this year's "Dirty Dozen" scams:

Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent months as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season. (IR-2015-5)

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will not send you an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS that takes you by surprise. Taxpayers should be wary of clicking on strange emails and websites. They may be scams to steal your personal information. (IR-2015-6)

Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front but taxpayers still need to be extremely careful and do everything they can to avoid becoming a victim. (IR-2015-7)

Return Preparer Fraud: Taxpayers need to be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Return preparers are a vital part of the U.S. tax system. About 60 percent of taxpayers use tax professionals to prepare their returns. (IR-2015-8)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help people get their taxes in order. (IR-2015-09)

Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups and churches in seeking victims. (IR-2015-12)

Fake Charities: Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. has the tools taxpayers need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally known organizations. (IR-2015-16)

Hiding Income with Fake Documents: Hiding taxable income by filing false Form 1099s or other fake documents is a scam that taxpayers should always avoid and guard against. The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds is a huge red flag when using a paid tax return preparer. Taxpayers are legally responsible for what is on their returns regardless of who prepares the returns. (IR-2015-18)

Abusive Tax Shelters: Taxpayers should avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2015-19)

Falsifying Income to Claim Credits: Taxpayers should avoid inventing income to erroneously claim tax credits. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. (IR-2015-20)

Excessive Claims for Fuel Tax Credits: Taxpayers need to avoid improper claims for fuel tax credits. The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers. But yet, the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds. (IR-2015-21)

Frivolous Tax Arguments: Taxpayers should avoid using frivolous tax arguments to avoid paying their taxes. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2015-23)

Friday, February 13, 2015

The Death Tax - the issues pro and con

Unusually large amount of tax news coming out of Washington today and much of it deals with President Obama's proposed tax policy changes.

In short, your taxes are going to rise - dramatically - if Congress allows the president's recommendations to become law. This new Congress represents a Republican majority, making such substantive changes unlikely, but here is more information about the issue.

The President has proposed increasing what some people refer to as "death taxes," representing a fundamental change in tax policy that would limit what many Americans can leave to their heirs. The change would affect nearly everyone who has aging living parents, and are likely inherit a house, farm, property, items, etc. that might have value.

The administration is attempting to target the wealthy in making these recommendations but much of the affect of this new policy would hit America's middle class as well - people who aren’t wealthy enough to pay estate taxes, if their inherited assets have gained sharply enough in value.

Such taxes likely explain "the death of the family farm" and the rise of vast corporately owned farms.

Death Taxes - or inheritance taxes - are taxes imposed by the federal and/or state government on an estate after someone's death. These taxes are levied on the beneficiary that receives the property in the decedent's will; the tax amount is based on the property's value at the time of the owner's death relative to its value when accumulated or purchased.

Taxes which apply to estates or to inheritance in the United States trace back to the 18th century. According to the IRS, a temporary stamp tax in 1797 applied a tax of varying size depending on the size of the bequest, ranging from 25 cents for a bequest between $50–$100, to 1 dollar for each $500. The tax was repealed in 1802. In the 19th century, the Revenue Act of 1862 and the War Revenue Act of 1898 also imposed rates, but were each repealed shortly thereafter. The modern estate tax was enacted in 1916.

Estate taxes were temporarily phased out and repealed by tax legislation in 2001. This legislation gradually dropped the rates until they were eliminated in 2010. However, the law did not make these changes permanent and the estate tax returned in 2011. The 2010 legislation had a sunset clause so that in 2013 the estate tax would return to its 2001 level. But then on New Year's Day 2013, Congress made permanent an estate tax on estates in excess of $5 million at a rate of 40 percent.

In cases involving the inheritance of a home, under the proposed Obama plan, there would be a $200,000 exemption plus a $500,000 home exemption. An example cited was a $1 million home originally purchased for $250,000. In this case, $500,000 of the gain would be exempt and a federal tax of $70,000 would be owed on the remaining $250,000 appreciation.

The fairness of any form of estate tax is hotly debated and its status has been exhibited in recent years by the wide variation in policies, from the extended phase-out under President George W. Bush's administration, and its corresponding sunset clause, followed by continuing adjustments to the rates and exemptions under the presidency of Barack Obama. Generally the debate breaks down between a side which opposes any tax on inheritance, and another which considers the tax legitimate and necessary, with little dialogue about where a reasonable rate would be set.

Proponents of the estate tax argue that it is a rational point of taxation, with major benefits compared to other types of taxes such as income taxes, business taxes and sales taxes. By the same token, to tax earned income but not inheritance is seen to promote classism.

Today, death taxes have become a contentious social issue. Supporters consider this form of taxation as a way to level the playing field. In the 2006 documentary, The One Percent, Robert Reich commented, "If we continue to reduce the estate tax on the schedule we now have, it means that we are going to have the children of the wealthiest people in this country owning more and more of the assets of this country, and their children as well.... It's unfair; it's unjust; it's absurd."

"A group of wealthy businessmen petitioned Congress last week for a more progressive estate tax," Betsi Fores wrote. A letter signed by billionaires Warren Buffet and George Soros, says,“We believe it is right to have a significant tax on large estates when they are passed on to the next generation."

In arguing against the U.S. federal estate tax, the Investor's Business Daily has editorialized that "People should not be punished because they work hard, become successful and want to pass on the fruits of their labor, or even their ancestors' labor, to their children. As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day."

According to Phil Kerpen, writing in the Daily Caller, "there is no more vivid or offensive example of the 'you didn’t build that' philosophy on the books than the federal death tax, which supposes that when you die a hefty portion of everything you built up over a lifetime ought to go to government. It’s a vestige of the feudal days when all property was owned by the king.

"That’s probably why the death tax is the 'worst tax — that is, the least fair,' according to polling by the Tax Foundation. And it’s also why our founders thought the idea of seizing an estate at death so outrageous that they prohibited it as a penalty for treason in the U.S. Constitution (Article III, Section 3). And yet now, seizing more than half of it as a penalty for accomplishing the American dream is the preferred policy of Democrats in the United States Senate."

Some free market critics of the estate tax contend that proponents assume the superiority of socialist/collectivist economic models. Under this view, proponents of the tax commonly argue that "excess wealth" should be taxed without offering a definition of what "excess wealth" could possibly mean and why it would be undesirable if procured through legal efforts. Such statements are seen to exhibit a predilection for collectivist principles that opponents of the estate tax oppose.

Many countries have inheritance tax rates at or near zero. The disparity between rates has encouraged some wealthy individuals to relocate to avoid or minimize taxation moves thus moving the wealth – and all associated future tax revenue – outside the United States. As a result of transferring wealth abroad, the 'estimated' tax generation claimed by proponents of the estate tax will likely be far less than that claimed and will likely lower the future tax base within the United States.