Learning Center for Tax and Financial Insights

Article Highlights: Self-employed taxpayers Underreported income Unscrupulous tax preparers Phony deductions or credits Inflating the Earned Income Tax Credit Taking fake education credits Petty cheating Some refer to it as “creative accounting” or just “a little fudging here and there,” but if your tax return is missing some income that should have been reported or includes overstated deductions, regardless of whether you prepared your own return or had it prepared, you are the one who is ultimately responsible. If you get caught, there can be very unpleasant consequences – including substantial monetary penalties and the possibility of jail time for blatant cases. Those who fudge on their taxes may think that they are just cheating the government out of money. In actuality, however, the government is going to get the taxes it needs from somewhere, so those who fudge on their taxes are causing others to pay more. Currently, just short of 50% of all U.S. taxpayers pay no income tax. In fact, a large percentage of these folks actually get money back from the government because their income is low and they qualify for certain refundable tax credits. How many of those not paying any tax are doing so because they are either not reporting all of their income or exaggerating their deductions? There are no statistics on the issue, but it would seem to be a large number. One of the biggest areas of cheating involves self-employed individuals not reporting cash payments. Some will even go so far as to offer discounts for cash payments; these discounts, of course, are attractive, and customers often opt for them, thus enabling the self-employed individuals to cheat on their taxes. However, if self-employed individuals get caught – perhaps because their lifestyles aren’t supported by their reported income – they can end up with a nasty tax bill and penalties. Plus, when the IRS finds a cheater, it usually audits that person’s or company’s returns for other years. Especially troubling is knowing that some individuals who underreport their income are not just avoiding income taxes, but qualifying for low-income tax credits and other subsidies meant for those who really need them. Unscrupulous tax preparers also cheat, and you could end up being the victim. Here are some of the schemes they pull: Adding phony deductions or credits – They do your return correctly and tell you what your refund is. Then, before they e-file it, the preparer adds phony deductions or credits to inflate the refund. The refund amount you expect is direct-deposited to your account, but the extra amount is sent to their bank account. Inflating the Earned Income Tax Credit – Earned Income Tax Credit (EITC) is a refundable tax credit for low-income taxpayers that is based upon the amount of the taxpayer’s income from working (earned income). The credit increases up to a point as the taxpayer’s earned income increases, then phases out for higher-income taxpayers. This credit is the frequent target of scams, and one of the most common is to create earned income by fabricating self-employment income of an amount that will result in the maximum EITC. Even though this may create more taxes, the EITC is greater than the taxes, netting an increase in the taxpayer’s refund. Taking fake education credits – Another frequent scam is to claim a higher education tax credit, especially the partially refundable American Opportunity Tax Credit (AOTC), using made-up education expenses. The AOTC can be as much as $2,500, and $1,000 of that amount is refundable. If you were a victim of an unscrupulous tax preparer and need assistance, please call this office. Petty cheating is also prevalent. The following lists common areas of cheating and the steps that the IRS takes to counter them. Inflating the value of noncash goods donated to charity – This is probably one of the most commonly inflated tax deductions. IRS Countermeasures: The IRS requires documentation from the charity, and if the value of the donation is more than $500 for the year, a detailed list of the items that the taxpayer contributed. The IRS will generally include charitable contributions in every audit, no matter what triggered the audit in the first place. Claiming fictitious cash contributions – This typically involves claiming that cash was donated through a house of worship’s collection plate or holiday charity kettle. IRS Countermeasures: All cash contributions must be verified with a bank record or a written record from the charity. Without such a record, no deduction is allowed. Purchasing an item at a charity event – Generally, when you receive something of value for making a donation, the value of that item is not a deductible charitable contribution. Thus, the cost of pancake breakfasts, charity auctions, Girl Scout cookies, car washes, and the like are not deductible as charitable contributions. IRS Countermeasures: The IRS requires charities to include the value of goods or services provided to the donor on the charity’s receipt, making it easy for the IRS to detect when improper deductions are being taken when it examines the receipts during an audit. Donating cars to charity – At one time, individuals were donating vehicles that were close to being scrapped and then deducting the blue book value for the vehicle as if it were in good or better condition. This trend became so prevalent that Congress actually stepped in and limited the vehicle contribution to $500 (generally). IRS Countermeasures: The IRS now requires the charity to issue a Form 1098-C to the donor; this form includes the information that needs to be reported if the vehicle contribution meets the requirements for a contribution greater than $500. Using a business vehicle for personal purposes – Have you seen pickups and other trucks with company logos on their doors towing boats and trailers down the highway? There is a good chance that the drivers of these trucks are writing off the mileage through their businesses. IRS Countermeasures: The IRS generally requires businesses, especially closely held ones, to verify the business use of their vehicles (particularly those that are suitable for personal use) with a log, including the odometer readings for the start and finish of each business use. Deducting more home mortgage interest than entitled – Tax law limits the amount that can be deducted for home mortgage interest to the interest paid on $1 million in debt ($750,000 for debt incurred after December 15, 2017) from purchasing or improving a home. This limit applies to a taxpayer’s first and second homes only. Many taxpayers simply take the mortgage interest from the Form 1098 provided by the lender without any regard to these limitations. IRS Countermeasures: IRS Form 1098 requires lenders to include additional information that will allow the IRS computer to determine whether the limits have been exceeded. Making repairs on a personal home and deducting the expenses on a rental or business property – It is pretty easy for landlords or owners of business real estate to make repairs on their personal homes and then deduct those repairs on their rental or business properties. IRS Countermeasures: An auditor will look at the dates and addresses on receipts to ensure that they make sense. If an auditor catches such a violation, expect him or her to become very aggressive in other areas and to possibly invoke substantial penalties due to the intentional disregard of laws and regulations. Falsifying investment costs to minimize gain – Until a few years ago, it was up to taxpayers to track their basis in the securities they owned. Inflating the cost was prevalent before the IRS required brokers to begin tracking basis. IRS Countermeasures: The IRS modified Form 1099-B, issued by brokers when stocks, bonds, etc., are sold, to include the basis if known, and to indicate otherwise if basis was unknown. Then, the IRS developed Form 8949 to separate investment sales into those for which the broker was tracking the basis and those for which the broker did not know the basis or wasn’t required to track the basis. The information included on these forms allows the IRS to focus on those sales for which the taxpayer was tracking the basis.

If you made New Year’s resolutions this last January, you’ve probably had to revise them. No one knew what was coming when 2019 turned over to 2020. We hope that despite the turmoil and disruption of the last six months, you’ve managed to stay healthy and keep your small business running. It’s more important than ever to conscientiously record all of the money coming into your company and ensure that it gets deposited into your account(s). QuickBooks Online offers several ways to accomplish this. Whether you’re receiving payment on an invoice, documenting an instant sale, or selling on the road - the site provides tools to make certain that your receipt of the funds is entered in the correct place. Delayed Payments Do you send invoices for products and/or services? If so, there’s more than one way to record payments when they come in. You can, of course, just open the invoice and click Receive payment in the upper right corner. We find, though, that going to the All Sales screen gives us a chance to check the status of other pending transactions. Click Sales in the toolbar, then All Sales. If your list isn’t very long, you can just look for the invoice number. If not, you can use the Filter tool to find the original form. Click the down arrow next to Filter in the upper left to see your search options here (Status, Customer, etc.). If you have a lengthy list of sales transactions, you can search for the one(s) you want in this drop-down window. Once you’ve found the invoice, look down toward the end of that row. In the Action column, you’ll see Receive payment. (While you’re there, click the down arrow to familiarize yourself with the other options.) When the Receive Payment window opens, select the Payment method that applies. Leave the Deposit to field showing Undeposited Funds and look over the rest of the screen to make sure everything is accurate. Print it if you’d like and/or add an Attachment

The government has begun sending out its stimulus payments on debit cards mailed in plain white envelopes, which some people have discarded, thinking it was junk mail. Watch the video to earn more. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Once you get above a certain age, you start hearing about a magical thing called a credit score. You hear that everybody has one and that you need to do everything you can to bolster it. You hear that there are things you can do to hurt your credit score and that once you’ve messed up your credit score it will take a long time for it to recover. Unfortunately, amidst all of these vague references and warnings, there are very few real explanations of what a credit score actually is and what it has to do with your life. Let’s take a look at the basics so that you’ll have a better understanding going forward. 1. Your Credit Report and Your Credit Score are Similar, but Not the Same Your credit score is a single number that is a reflection of all of the factors contained in your credit report. Think of it like when you were in school: your final grade in a class may have been a B+, but your teacher had a file that reflected attendance, your scores on quizzes, tests and book reports, your class participation and any extra credit you may have done. Your credit score is like your grade, and your credit report is like that list of inputs that the teacher recorded throughout the semester. While your credit report details all of the credit cards you hold and how quickly or slowly you pay those and your other debt accounts how many applications for loans or credit cards you completed, as well as any bankruptcies, judgements or liens against you, your credit score is a calculation whose inputs weigh all of those factors. All of the recording and calculations are done by three credit bureaus, and each positive or negative input (such as paying your bills on time or, conversely, paying them late) will make your score go up or down. 2. The Five Core Factors That Determine Your Credit Score If you want to have a solid credit score, it helps to know the five financial actions that impact it. They are: How quickly or slowly you pay your bills. This is referred to as your payment history, and it represents 35% of your credit score. Pay your bills off each month and your credit score will be higher, but pay late each month and it will work against you. You know how your monthly credit card bills display the amount that you owe as well as the amount of credit that you have remaining? This is a reflection of your credit utilization for that individual card. Thirty percent of your credit score is determined by how much of your available credit you are actually using, with 30% or less considered optimal. Keep in mind that this doesn’t mean that each card has to be below 30% utilization for you to have a good credit score. The credit utilization portion of your credit score reflects your total usage of your total available credit. Have you had the same credit card or cards for as long as you can remember, or are you constantly trading in old cards for new ones? Keep in mind that 15% of your credit score reflects the average age of your credit accounts, and the older they are, the better your score will be. The credit bureaus view long-term history with an individual credit institution as a reflection of financial responsibility. If you want to leverage this particular factor but are also attracted by the benefits or points offered by a new credit card, do so but don’t close your old account. Just hold onto it. You don’t have to use the card to get this particular benefit from it. You may try to keep your debts to a minimum, but the credit bureaus actually like to see that you have a variety of types of accounts and loans. They view it as a signal that you can manage your debt. This element contributes 10% to your credit score. Every time you apply for a car loan, a mortgage or even just a retail store’s credit card, the credit bureaus see what is referred to as a hard pull – this is viewed by the credit bureau as someone trying to determine whether you are worthy of their trust in applying credit to you. When the credit bureaus see multiple inquiries, they view it as a negative, because applying for a bunch of lines of credit within a short period of time can be seen as an indication that you are unable to pay your bills, or that you are vulnerable to getting into too much debt for you to handle. Though this only has a 10% impact on your score, it is something for you to keep in mind when considering taking out new lines of credit. 3. Accessing Your Credit Report and Scores Doesn’t Cost A Penny There was once a time when it was difficult to get a copy of your credit score or credit report – in fact, people used to believe that if you made that inquiry, it would work against your credit score. Today it is much easier to request a copy of your annual credit report from any of the three major credit bureaus, and you can access that information free of charge once every four months. There are three different credit bureaus - Equifax, Experian and TransUnion – and if you rotate between the three of them for a full year worth of reports. The advantage of doing this is that if you regularly check the information in your credit report, you will have time to spot any mistakes or inaccuracies and get them corrected before they have an adverse impact on your credit score.

COVID-19 has had an unprecedented impact especially on small business owners. Watch this video for what you will need to take a pragmatic view of what has happened and what steps you are willing and able to take to bounce back. .embed-container { position: relative; padding-bottom: 56.25%; height: 0; overflow: hidden; max-width: 100%; } .embed-container iframe, .embed-container object, .embed-container embed { position: absolute; top: 0; left: 0; width: 100%; height: 100%; }

Article Highlights: Bureau of the Fiscal Service Allowable Refund Offsets Disputing an Offset Injured Spouse Claim We all look forward to receiving our tax refunds, but what if you were expecting a refund and it never arrived? It may be because you have outstanding federal or state debts—and not just tax-related debts. The Treasury Department’s Bureau of the Fiscal Service (BFS) issues federal tax refunds, and Congress authorizes BFS to reduce your refund through its Treasury Offset Program (TOP) to pay: Past-due child and parent support; Federal agency non-tax debts; State income tax obligations; or Certain unemployment compensation debts owed to a state (generally, these are debts for (1) compensation paid due to fraud or (2) contributions owed to a state fund that weren't paid). So, if you owe a debt that’s past due, all or part of your federal income tax refund may go to pay your outstanding federal or state debt if it has been submitted for tax refund offset by an agency of the federal or state government. BFS will send you a notice if an offset occurs reflecting the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency. BFS will notify the IRS of the amount taken from your refund once your refund date has passed. You should contact the agency shown on the notice if you believe you don't owe the debt or if you're disputing the amount taken from your refund. The IRS should be contacted only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return. If you don't receive a notice, contact the BFS's TOP call center at 800-304-3107 (or TTY/TDD 866-297-0517), Monday through Friday 7:30 a.m. to 5 p.m. CST. If you filed a joint tax return and only one spouse is responsible for the debt, the other spouse may be entitled to part or all of the refund. To request a refund for the spouse not responsible for the offset, you can file for an injured spouse allocation. The IRS will compute the injured spouse's share of the joint refund. If you lived in a community property state during the tax year, the IRS will divide the joint refund based upon state community property law. Not all debts are subject to a tax refund offset. In the future, if you have an outstanding debt and want to be proactive, you can contact the agency with which you have a debt to determine if your debt was submitted for a tax refund offset. Please contact this office if you have questions about refund offsets.