TAX TIPS FOR 2018
Tax Scams: Tips on How to Avoid Getting Scammed
With tax season approaching, the LITC wants to provide tips on how to avoid tax scams. Recently, one of the LITC’s clients was contacted by someone impersonating a fake IRS employee. In a follow-up call to the IRS, it was discovered that the phone number and name did not exist in the IRS’s database. Therefore, we were able to conclude that our client was contacted by an individual that performs tax scams. Many people pretend to be the IRS in order to scam money out of innocent people. Here are some pointers on how to detect these tax scams. A sure way to figure out if you are talking to a real or fake IRS employee is by the way they introduce themselves on the phone. Make sure to listen for a badge number—official IRS employees will always give their badge number when they introduce themselves. Also, when a client has a Power of Attorney filled out and is thus represented by a lawyer, the IRS is not allowed to call the client directly. Therefore, if you have lawyer representation and the “IRS” calls you, that could be a sign that it is a scam. Never give personal information over the phone such as credit card information!
Things to remember:
Who scammers target: Elderly individuals and people who have a lien against them. When an individual is issued a lien their phone number and other contact information becomes public, therefore we advise that those individuals are extra cautious when it comes to giving out their personal information.
What to look out for: People that ask for credit card information over the phone or being asked to pay by putting money on a gift card.
What to do if you become involved in a tax scam: Contact the LITC, the Taxpayer Advocate Service, or call the IRS.
Self Employed? Check Out These IRS Tax Tips
If you are self-employed, you normally carry on a trade or business. Sole proprietors and independent contractors are two types of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips from the IRS:
- SE Income. Self-employment can include income you received forpart-time work. This is in addition to income from your regular job.
- Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet certain other conditions. See the form instructions to find out if you can use the form.
- SE Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, attach the schedule to your federal tax return.
- Estimated Tax. You may need to make estimated tax payments. Try IRS Direct Pay. People typically make these payments on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough tax throughout the year, you may owe a penalty.
- Allowable Deductions. You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
- When to Deduct. In most cases, you can deduct expenses in the same year you paid, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Additional IRS Resources:
Form 1040-ES, Estimated Tax for Individuals
Publication 505, Tax Withholding and Estimated Tax
Publication 535, Business Expenses
IRS Tax Tip 2017-80, November 21, 2017
Five Things to Remember about Hobby Income and Expenses
From scrapbooking to glass blowing, many Americans enjoy hobbies that are also a source of income. A taxpayer must report income on their tax return even if it is made from a hobby.
However, the rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:
- Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby, and base their determination on all the facts and circumstances of their activity. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
- Allowable hobby deductions. Taxpayers can usually deduct ordinary and necessary hobby expenses within certain limits:
- Ordinary expense is common and accepted for the activity.
- Necessary expense is appropriate for the activity.
- Limits on hobby expenses. Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
- How to deduct hobby expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.
- Use IRS Free File. Hobby rules can be complex, and IRS Free File can make filing a tax return easier.
IRS Tax Tip 2017-78, November 16, 2017
Sevens Things to Do When a Letter Arrives from the IRS
The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:
1. Don’t panic. Simply responding will take care of most IRS letters and notices.
2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return.
4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.
When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:
- To minimize additional interest and penalty charges.
- To preserve appeal rights if the taxpayers doesn’t agree.
6. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.
7. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.
IRS Tax Tip 2017-70, November 2, 2017
Five Things to Know about Estimated Taxes and Withholding
With 10 million taxpayers a year facing estimated tax penalties, the IRS offers some simple tips to help prevent a surprise at tax time.
People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.
Taxpayers should make estimated tax payments if:
- The tax withheld from their income does not cover their tax for the year.
- They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.
Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:
- Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.
- Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.
- Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4 and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.
- Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.
- Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.
Don’t Lose Your Earned Income Credit
Are you claiming self-employment income for a small business? Make sure you have bookkeeping notes, receipts, bank statement, etc. to prove this income. Are you claiming dependents that you haven’t previously reported on your tax return? Be sure you can demonstrate that the dependent resided with you and you cared for the for 6 months to 1 year. The IRS will request the dependent’s school records, utility bills, medical records, etc. in an audit/examination. If you cannot prove that you were entitled to claim these dependents, the IRS can ban you from claiming the Earned Income Tax Credit (EITC) for two years. The EITC is the biggest refund generator. Being banned means your refund for the next two years could be reduced by thousands.
Choosing a Paid Tax Preparer – Be an Informed Consumer
The IRS funds organizations to provide free tax preparation to low income families. To find a free tax preparation site near you, call the IRS at 800-906-9887 or look at the IRS list of free tax preparers.
If you choose to pay someone to do your taxes, here are some helpful tips to help you choose a competent and qualified preparer.
Am I Being Promised a Larger Refund?
Your refund should be the same no matter who does your taxes. Be cautious of preparers who promise you a larger refund than another preparer. Ask the preparer to explain the reason for the larger refund. Additionally, avoid preparers who base their fees on a percentage of your refund.
Is My Refund Going to the Preparer?
If you have a refund due, always make sure the refund is coming to you by mail or to your bank account. A reputable preparer will not and should not deposit your refund into his/her own bank account.
Did the Preparer Ask Me For Records and Receipts?
A reputable preparer will ask you many questions to determine your income, expenses, and whether you qualify for deductions and credits. If you have business expenses, your tax preparer should ask you for records and receipts of those expenses. If the IRS audits your tax return, you must be able to prove your expenses. Make sure you keep your original records and receipts.
Did I Review My Return Before Signing, Ask Questions, and Receive a Copy?
It is your responsibility to make sure your tax return is accurate and correct before you sign it. You have a right to ask questions about any item on your return. Also, avoid preparers who ask you to sign a blank tax return. You cannot verify the information on a blank tax return.
Did the Preparer Sign and Include His/Her PTIN?
The IRS requires that all paid tax return preparers sign the return and to have a preparer tax identification number (PTIN). A reputable preparer will include his/her name, address, signature, and PTIN on your tax return.
Is the Preparer Available After the End of the Tax Season?
Ask your preparer if he/she will be available after the end of the filing season in case you receive a letter from the IRS about your return. A reputable preparer will be available to answer your call and questions.