As tax season gets into full swing, the IRS has been spreading its dragnet to catch tax fraudsters. This has been doing on since late January and involved the potential theft of thousands of identities and taxpayer refunds. The IRS intends to come down hard on identity theft and tax refund fraud this year and this action is clearly aimed at warning cheats and potential victims to beware this tax season. The IRS deputy commissioner for services and enforcement, Steven Miller said to reporters, “The timing is not coincidental. It’s the start of tax season, this is a large issue, and we want to send a message out there.”

The IRS initiative is being carried out nationwide and has thus far resulted in 80 complaints and indictments, 58 arrests (out of 105 people targeted in 23 states) and 939 criminal charges and counting. The operation saw the IRS working in tandem with the Justice Department’s Tax Department, US Postal services and local US Attorney’s offices. Some cases have been under investigation for months while some even for years.

The worst thing is to find out that someone beat you to filing your own tax return when you submit yours. At one Florida IRS office, at least a dozen tax filers had to spend hours in line to report someone had already filed their returns. Identity theft to fraudulently claim tax refunds was the biggest type of tax fraud. Tax cheats would usually steal your Social Security number at hospitals and schools to claim your tax refund.

And the worst thing is this problem is growing. Since 2008, the number of identity theft cases has increased by a staggering 500% from about 52,000 in 2008 to nearly 250,000 in 2010. Last year the IRS found 260,000 income tax returns with confirmed attempts at identity fraud and blocked the payment of refunds worth $1.4 billion. In 2010, the IRS says it detected identity fraud in 49,000 returns and prevented the payment of $247 million worth of bogus refunds.

As part of the crackdown on tax fraud, the IRS has also beefed up their filtering system. As a result, the IRS announced recently that some early taxpayers who filed their taxes on or before January 25 may have to wait a week longer than usual for their refunds because of new anti-fraud measures being installed on computer systems that required “fine-tuning.”

IRS Intensifies Crackdown on Tax Fraud is a post from: IRS Tax Problem Solver Blog - IRS Help

With the ongoing recession, it is not uncommon to find tax scams getting more widespread. Most tax scams are aimed at either stealing your identity online or claiming your tax refund. If you have not been a victim of any form of tax fraud, prevention is better than cure. And a huge part of prevention has to do with knowing the wiles of the scammers and their tactics. Here are some of the most common tax scam tactics you should be aware of.

Tax Preparation scams

Scammers act as tax preparers providing tax preparation services with the promise of obtaining large refunds. These scam artists make their money by either skimming a portion of your refunds or charging inflated tax preparation fees. Some scammers are willing to file fraudulent claims for you for refunds on items such as fuel tax credits to recover taxes paid in prior years. You should not hire such preparers, no matter how tempting it is to game the system. Appoint only reputable tax preparers or approach the government sponsored ones like the free Volunteer Income Tax Assistant (VITA) at VITA centers located nationwide.

Phishing scams

Phishing means stealing your personal identification details such as Social Security numbers, credit card or bank account details via email. Once such information is obtained, scammers would often empty your bank accounts electronically, steal your tax refunds or masquerade as you to apply for loans or rack up high charges on your credit cards. The IRS never contacts people via email, so if you receive an email purportedly from the IRS, you should report it to the IRS by forwarding it to phishing@irs.gov before deleting it.

Financial incentives scams

Sometimes, scammers bring you ‘news’ that you are entitled to a ‘rebate’ from the IRS but you have to divulge your bank account numbers to receive it. You may be informed by phone or email about this matter and if you are not willing to provide the details, you are told that you cannot receive the rebate unless the information is provided. But usually, if you are eligible for any form of refund, you will not have to do anything other than file your normal federal tax return.

Tax Scam Tactics is a post from: IRS Tax Problem Solver Blog - IRS Help

About a month ago, three officials from Wegelin, Switzerland’s oldest bank, were indicted for abetting tax evasion. Now the bank itself has gone down the same path as the Justice Department indicts Wegelin on charges of assisting wealthy American taxpayers hide their taxable income in offshore accounts with the bank. It is estimated that at least $1.2 billion has been hidden in bank accounts held in Wegelin, based in St Gallen.

The latest move by the Justice Department has certainly set off speculation as to which bank the US government will go after next. A private banker based in Geneva commented, “It seems the US is shooting at everything in sight and we don't know when it's going to stop. I think the chances of another bank being indicted are pretty big. After all, why should the U.S. stop? Switzerland is small, it’s an easy target, but a lot of money can be made out of it. When this whole thing started we didn't know how far the US would go, but now we've found out.”

The recent events have caused many Swiss private bankers to avoid stepping into the US, even for personal holidays for fear of being arrested. The events have also prompted the sale of the 270 year old bank, which took place last week.

Some quarters have blamed Wegelin’s outspoken Chief Executive Officer, Konrad Hummler of “brining the indictment himself” because of his unrestrained comments against the US in their hunt for tax evaders in offshore banking havens like Switzerland. Apparently, the Justice Department was irked by a “farewell, America” letter Hummler wrote to Wegelin clients in 2009, in which Hummler urged clients to sell any US securities they owned due to the increased Internal Revenue Service scrutiny of tax evaders.

Wegelin’s rival banks have largely regarded Hummler’s letter as a veiled invitation for clients to move their funds to Wegelin now that the US has begun its crackdown on tax evasion in Swiss banks like UBS Bank and Credit Suisse. Some in the Swiss banking circles deduced that Hummler’s mistake was thinking Wegelin would not be targeted by the IRS because the bank does not have any US branches.

In the Wegelin sale, the bank moved most of its employees, along with clients and assets worth 21 billion Swiss francs to Notenstein Privatbank, which was itself bought by Swiss cooperative bank Raiffeisen for an undisclosed sum.

The indictment of Wegelin bank coincides with the IRS’ latest offshore voluntary disclosure program in which the government allows taxpayers to confess to their tax evasion in exchange for a waiver of criminal prosecution.

US Government Indicts Wegelin for Tax Fraud is a post from: IRS Tax Problem Solver Blog - IRS Help

After collecting more than $4.4 billion in tax revenue from the first two voluntary offshore disclosure programs (VODP) in 2009 and 2011, the IRS has launched its third and latest disclosure program aimed at getting more taxpayers with offshore accounts to declare their assets therein. One prominent difference between the current VODP is that this newest one is going to be open indefinitely. The present VODP is similar to the ones held before with these following points:

1. Subject to change
While there is officially no deadline at this point, this does not give you the liberty to be lackadaisical about declaring your offshore taxable assets. The IRS said the indefinite status of the VODP may be changed at any time, as may the penalties under the VODP.

2. Inclusivity
If you have stepped forward to declare your taxable income since the close of the second VODP, you will be granted the same terms as the third VODP. This inclusive move was also done for those who confessed to their tax evasion between the first and second VODPs.

3. Increased penalty
To be fair to those who declared their assets in the earlier two VODPs, the penalty under this current one is increased to 27.5% of the highest total balance in your offshore bank accounts or value of your total foreign assets during eight years before your disclosure. The penalty rate for 2009 was 20% while that in 2011 was 25%.

4. Smaller offshore accounts rates
Those holding smaller offshore accounts (under $75,000 in any calendar year covered by the new VODP) will pay penalties of 12.5%. This rate is unchanged from the previous disclosure program. As under the prior programs, if you feel the penalty is disproportionate, you may opt instead to be examined.

5. Completion of returns and FBARs
As with previous VODPs, those participating in this one will have to submit their tax returns and FBARs, pay up all back taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties.

6. Option to opt out
You can declare your offshore assets without participating in the VODP. This means the IRS will deal with your case as an audit item. The plus side to this is that you have more options for appeal recourse (such as filing an appeal in the IRS Appeals Office) if you are not happy with the way things go.
The IRS will provide a list of Frequently Asked Question on the newest VODP to provide details on the program.

Details of Newest IRS Voluntary Offshore Disclosure Program is a post from: IRS Tax Problem Solver Blog - IRS Help

Tampa, Florida has been identified as one of the cities of high identity theft in the country, the others being Miami, Atlanta, Birmingham, AL, Washington D.C., Chicago, New York, Phoenix, and Los Angeles, according to the IRS. Tampa is one of the areas covered in a 23-state federal sweep targeting check-cashing operations and other businesses. The IRS says identity theft is most commonly carried out as stealing social security numbers from places like schools and hospitals.

In view of this, Hillsborough County Consumer Protection Agency Deputy Chief Investigator Eric Olsen advises people not to give out their Social Security numbers unless absolutely necessary. Olsen said, “If it's a routine application for a telephone, it may not be necessary. It may not even be required. Often times, the last four digits of a social security number will suffice.”

If you receive email purported to be from the IRS, you should not entertain them. The IRS never contacts you via email.

“Do not give any information to them,” Olsen said. “Then call the IRS, the local office, or whichever agency may be attempting to contact you, to verify whether that's the case.”

Last year, the IRS stopped about $1.4 billion of fraudulent claims as it now has new filters in place to stop fraudulent filings. Nevertheless, the safety measures in place do not seem to be good enough. Detectives from the Tampa Police Department say they have referred nearly 100 cases of suspected tax fraud to the IRS months ago, and yet till now federal charges still have not been filed.

If you receive an email supposedly from the IRS, it is likely an attempt to steal your personal data like Social Security number, bank account details etc. Do not open such emails and even if you do, do not click on any attachment or link therein. Report the incident to the IRS immediately by emailing phishing@irs.gov.

Identity Theft a Grave Problem in Tampa is a post from: IRS Tax Problem Solver Blog - IRS Help

Three men who are former UBS clients, were indicted on charges of hiding millions of dollars in taxable income from the IRS using their offshore accounts. Two of the three, Stephen M. Kerr and Michael Quiel, ran capital venture firms while the third is former San Diego lawyer, Christopher M. Rusch. Rusch was arrested January 29 after being expelled from Panama at the behest of the US government. The charges against Kerr and Quiel were for filing false tax returns in 2007 and 2008 and for failing to file Reports of Foreign Bank and Financial Accounts (FBAR) for those years.

Kerr ran capital venture firm CCN Worldwide Inc, hid more than $5.6 million in offshore accounts from the IRS in 2007. Similarly, Quiel who ran Legend Advisory Corp, had more than $2.6 million in taxable assets hidden in offshore accounts also in 2007. On the other hand, prosecutors revealed in the indictment that Rusch had signature authority over these accounts held by Kerr and Quiel, and helped facilitate their transactions. He also serviced others at UBS and a Panamanian bank.

Using a trust account he controlled, Rusch facilitated the transfer of money from Kerr and Quiel out of the US into their Swiss bank accounts and back again. Some of the money was used by Rusch to fund the purchase of a Colorado golf course for Kerr through a Panamanian entity he (Rusch) controlled.

Kerr and Quiel are not the first neither will they be the last that the IRS will charge in their efforts to catch tax evaders. Over the last few years, at least 40 US clients of various offshore banks including UBS and Credit Suisse Group AG, Switzerland’s two biggest banks, London-based HSBC Holding Plc, Europe’s biggest bank and other banks have been charged by the IRS on tax evasion-related charges. They also have charged at least 24 bankers, advisers and attorneys.

All three individuals, Kerr, Quiel and Rusch have been charged with conspiring to defraud the IRS. Rusch’s legal representative said Rusch will vigorously fight to defend his innocence and expects to be cleared of these charges.

Three Indicted of Tax Evasion using UBS is a post from: IRS Tax Problem Solver Blog - IRS Help

There is good news for foreign financial institutions – the IRS is reconsidering the Foreign Account Tax Compliance Act (FATCA). The FATCA requires all financial institutions to declare details of their American clients to the IRS for tax purposes. If any financial institution does not comply with the FATCA regulations, they are liable to a 30% penalty withholding tax that will be levied on the gross proceeds of any US assets. But upon reviewing the regulation, it was brought up that such a requirement may contravene privacy laws.

The original FATCA rules received vehement protests from banks and other financial institutions abroad who say that the requirements would cost them billions of dollars to implement. Latest developments have the IRS narrowing the scope of the FATCA to only involve larger accounts and at the same time require financial institutions to only declare details of American clients in accordance with existing money laundering rules.

Last week representatives of the US government met with their European counterparts in Paris to iron out a mutual agreement where European banks would transfer data on US citizens to their respective national authorities who would then pass them on to the US government.

The FATCA came about because of a slew of tax evasion cases involving wealthy American taxpayers who used offshore bank accounts and other financial instruments to hide their assets overseas. In 2009, the much-publicized spat between the US and Swiss governments over the role of Swiss bank UBS in abetting tax evasion by their American clients culminated in the Swiss bank paying a hefty $780 million fine to the IRS for their role in helping US taxpayers hide their taxable income in their bank accounts.

In addition, UBS had to surrender personal banking data on some 4,500 US clients suspected of tax evasion to the Swiss government who subsequently handed it over to the US government. Against this backdrop of events, the FATCA came into existence.

The original FATCA regulations were due to be enforced in January 2013 but in July 2011, the US Treasury and the IRS announced plans to defer the Foreign Account Tax Compliance Act reporting requirements by 12 months. As a result, the Treasury and the IRS has also come up with a phased timetable for firms to comply with the rules.

IRS Reconsidering FATCA Rules is a post from: IRS Tax Problem Solver Blog - IRS Help

The Earned Income Tax Credit (EITC) is for you if you earn $49,078 or less per year. Every year, the IRS gives publicity to the EITC and encourages those who are eligible to make their claims. According to IRS Commissioner Doug Shulman, “The EITC provides a financial boost for millions of hard-working Americans. But people can easily overlook this important credit, especially if their financial situation has changed”.

One-third of those who are eligible to claim the EITC experience changes in terms of their financial, marital and parental status. The amount you can receive under the EITC differs from person to person depending on income, filing status and size of your family. According to the IRS, one out of five persons who are eligible to claim the EITC does not receive it either because they did not claim it or did not file their tax return at all. To find out if you are eligible to claim the EITC, visit the IRS website and use the EITC Assistant feature. All you need to do is answer a few questions.

Generally, the EITC is for those who earn not more than $49,078 from wages, self-employment or farm income last year. If you are eligible for the EITC, you should be able to take home more in tax refunds. If you have three or more eligible children, it could amount to as much as $5,751 in credit.

Another great feature of the EITC is that it is a refundable credit, meaning even if you do not owe taxes, you can claim a tax refund, if you are eligible. Last year, the taxpayers who claimed the EITC took home an average of $2,200 per person.

In order to make a claim of the EITC, you must submit a tax return and make your claim even if you are not taxable. There are a three options open to you to submit your taxes.

You can utilize the Free File function of the IRS. The Free File function is in the IRS website (www.irs.gov) and uses free software that allows you to prepare your returns and claim credits and deductions for which you are eligible.

Alternatively, you can go to more than 12,000 Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) venues. There are volunteers who assist you in preparing your tax returns. To locate the VITA or TCE venue closest to you, call the IRS at call the IRS at 800-906-9887.
The third option in preparing and filing your taxes is going to the IRS office itself. Locations of IRS Taxpayer Assistance Centers are listed online at www.irs.gov.

Claimed Your Earned Income Tax Credit Yet? is a post from: IRS Tax Problem Solver Blog - IRS Help

Are you a hobbyist? In my previous article I shared some ways you can turn your hobby into a tax-deductible business. The four ways were:

1. Keep accurate records
2. Three in five profit ratio
3. Plan when you spend and get paid
4. Draw up a business plan
Here are some other things you ought to do:

5. Carry out your hobby/business full-time
The IRS flags anyone who claims expense deductions from a hobby against his or her 40-hour a week day job income. Here is a fact – the IRS considers what you do full-time as your vocation, so if you want to silence all questions from the IRS, consider carrying out your hobby as a full-time business.

6. Claim your deductions against business income
Remember the 3 in 5 profit ratio? If you can generate more income than expenses and offset those expenses from your income, then the IRS would more likely see your hobby as a business even though you carry it out part-time. So the key to achieving this is to make a net profit so that you do not claim expense deductions against your day job taxable salary.

7. Delay a profits determination
In order to show a profit, you can avail yourself to the special tax rule that allows you to defer the determination of profit motive until the fourth year of your business (or sixth year in the case of horse breeding). This will postpone the determination of whether you have met the three in five years profit presumption. The idea of the election is to give you time to ramp up and achieve a profit.

However, this may invite an audit by the IRS and may extend the statute of limitations beyond the normal three years so the IRS has a right to examine all the years in question after the deferral period has passed.

8. Hire expert help
If you can hire experts to help you in your hobby/business, it gives it a more business-like character. Alternatively, you could do extensive research yourself and keep good records of it so that you can show the IRS the amount of work you have done in becoming competent in your hobby/business.

9. Combine related activities
If you are involved in activities that are related to your hobby/business, you can combine their profits or losses together on a single Schedule C and make it more likely to show a combined profit three years out of five. For example, if you are a betta fish hobbyist who sells pet betta and you start another part-time business providing aquarium pumps, then you can legitimately combine these two activities and consider them one single business.

These are 9 ways to make your part-time hobby into a business that would satisfy the IRS and allow you to make expense related expense deductions when you file your taxes.

Claim Tax Deductions from your Hobby (part 2) is a post from: IRS Tax Problem Solver Blog - IRS Help

Can you claim deductible expenses from your hobby? You can if you make your hobby become your business. If you are spending a substantial amount of money on your hobby, you might as well turn it into a business. Look at it this way – suppose you spend $20,000 a year in your hobby, then you can report that loss on a Schedule C and write if off against your salary on your Form 1040. Assuming your combined state and federal income tax rate is 40%, maintaining your hobby will really only cost you $12,000, and the federal and state governments would have subsidized your hobby. Doesn’t that sound appealing?

However, this is only possible if you turn your hobby into a business. If you don’t, you are not allowed to claim a loss from it. But you must still report any income from any sales, but you can only deduct your expenses from your hobby to the extent of those sales. Moreover those expenses must be claimed as miscellaneous itemized deductions, provided they exceed 2% of your adjusted gross income.

So it does make sense to turn your hobby into a business. Here’s how to do it.

1. Keep accurate records
As in any business, record-keeping is a must. So you must make sure you keep accurate records of all your transactions (sales, expenses etc) relating to your hobby. This is a standard requirement whether or not you are making a profit.

2. Three in five profit ratio
The golden standard in the eyes of the government is making profit 3 years out of every 5 (if you hobby is horse breeding, the ratio falls to 2 out of 7 years). This gives your hobby the credibility to be considered a legitimate business. If you achieve this, then even if the IRS argues that your hobby is not a business, the onus is on them to prove otherwise.

3. Plan when you spend and get paid
To achieve the three in five profit ratio, you should make wise choices in how and when you spend money on your hobby/business. You can increase the expenses by lumping together similar expenses (for example by buying all your equipment in one year); likewise you can decrease your expenses by spreading them out over different years. Similarly, you can control your income to some extent (although this is more difficult than controlling your expenses). You could bill your customers at certain times to time your income just the way you want it. All these go towards achieving that 3 years profit out of 5 that the government wants to see.

4. Draw up a business plan
Make your hobby look business-like by coming up with a simple business plan. It does not matter if you stick to it, just have it available so that you can produce it to IRS agents if they come calling. Periodically revise your business plan so that it looks legit.

In the second part of this article, I will share more ways you can turn your hobby into a tax deductible business.

Claim Tax Deductions from your Hobby (part 1) is a post from: IRS Tax Problem Solver Blog - IRS Help