IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites and particularly e-mail. 

Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some e-mail scams contain attachments or links that, when clicked, download malicous code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or Web site. 

Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they’re accessing the genuine IRS Web site, IRS.gov. However, such sites have no connection to the IRS.

Scams

The IRS does not send taxpayers unsolicited e-mails about their tax accounts, tax situations or personal tax issues. If you receive such an e-mail, most likely it’s a scam.

IRS impersonation schemes flourish during

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 51 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. The IRS is requesting public comments on whether taxpayers should be allowed to use the business standard mileage rate in this circumstance.

Beginning in 2011, a taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxicabs.   

Also beginning in 2011, the standard mileage rates are announced in a separate notice, which also provides the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost for automobiles under a FAVR allowance.  The IRS plans to discontinue publishing the standard mileage rate revenue procedure annually but will publish modifications as required.

You are allowed to choose which will benefit you more—itemizing your deductions or taking the standard deduction.  If your itemized deductions do not add up to more than the standard deduction, you will want to take the standard deduction.

The standard deduction amounts for 2010 tax returns are as follows:

            Single                                                                                              $5700

            Married Filing Joint/Qualifying Widow(er)                     $11400

            Head of Household                                                                      $8400

           Married Filing Separately                                                          $5700

65 & over or blind each (MFJ, QW, MFS)                                         $1100

65 & over or blind (Single, HOH)                                                        $1400

 The following are among the more common itemized deductions.  If the total is more than the standard deduction, you will want to itemize.  (Your tax preparer can give you other items or details to maximize your deductions.)

 Medical deductions—subject to the 7.5% floor for the federal return.  All are allowed on the Arizona return.

1. 1. Prescriptions
   2. Payments to Doctors, dentists, acupuncturists, osteopathics, chiropractors, psychologists, etc.
   3. Some expenses you may not have known about:

                                                               i.      Contact lenses and the solutions for them

                                                             ii.      Hearing aids and the necessary batteries

                                                            iii.      Special diet—the costs of the special food above the costs of the normal diet when prescribed by a doctor

                                                           iv.      Laser eye surgery, including LASIK and radial keratotomy

                                                             v.      Insurance premiums, including Medicare Part A & B

                                                           vi.      Medical conferences  related to the chronic illness of the taxpayer, spouse, or dependent (Cannot deduct meals & lodging).

                                                          vii.      Swimming.  Prescribed therapeutic swimming costs including the cost of maintaining a pool at the taxpayer’s residence

                                                        viii.      Weight loss program as a treatment for a specific disease.  If the physician diagnoses obesity, it will qualify.  Foods for the program to not qualify (see above special diet)

                                                           ix.      Insulin and diabetic testing supplies, including blood monitor

                                                             x.      Mileage to and from physician’s office, labs, hospitals, clinics, etc. @ 18 cents per mile

                                                           xi.      Smoking cessation programs and prescribed drugs to alleviate nicotine withdrawal.

 State Income Tax or State/County/City Sales Tax

You have a choice of taking a deduction for your income taxes or the sales tax you paid.

 For most Arizonans income tax will be their choice.  If, however, you have made a major purchase this year, such as a home, boat, car, or RV (See list in Publication 600), you make have a larger deduction with the sales tax. 

The IRS has come up with sales tax tables.  These are found in IRS Publication 600.  They have the state sales tax.  Each locality/city’s sales tax should be added to the state sales tax using the chart provided on page 2 of Publication 600.

 For those who pay estimates, it may be beneficial to use the IRS’s chart one year and pay taxes for both years in the other year.  Discuss this with your preparer.

 Real Estate Taxes.

Although mortgage interest is limited to two properties, all real estate taxes are deductible.

Personal Property Taxes (Also known as DMV or MVD fees)

1.  
   1. Must be based on the value of the vehicle
   2. Must be personal property
   3. Must be charged on an annual basis

Mortgage Interest

1. 1. Can deduct mortgage interest on up to two homes
   2. Indebtedness is limited to $1,100,000 of deductible mortgage interest
   3. Home equity indebtedness is deductible up to $100,000 or the fair market value of the home minus total acquisition indebtedness, whichever is less.
   4. Points are deductible in the year of purchase or over the life of the loan.
   5. Refinance points must be deducted over the life of the loan.
   6. Late charges generally count as mortgage interest

 Investment Interest

Interest paid to purchase investment property (stocks, bonds, real estate) is deductible up to the amount of investment income received.

 Charitable Contributions

1. 1. Money or property given to

                                                               i.      churches, synagogues, temples, mosques, etc.

                                                             ii.      federal, state, or local governments for public purposes only

                                                            iii.      nonprofit schools, hospitals, and volunteer fire companies

                                                           iv.      Salvation Army, Red Cross, Goodwill, CARE, United Way, Boy/Girl Scouts, Boys & Girls Clubs

                                                             v.      War veterans groups

                                                           vi.      You must have a receipt for donations of more than $250 to an individual charity

1.  
   1. Charitable travel @ 14 cents per mile
   2. Out-of-pocket volunteer expenses (scout uniforms for troop leaders)
   3. Nondeductible Contributions include money or property given to

                                                               i.      Civic leagues, social, or sports clubs

                                                             ii.      Labor unions and chambers of commerce

                                                            iii.      Foreign organizations

                                                           iv.      Groups run for personal profit

                                                             v.      Groups whose purpose if lobbying for legislative changes

                                                           vi.      Homeowners associations

                                                          vii.      Individuals

                                                        viii.      Political groups or candidates for public office (Allowed as a deduction in some states)

                                                           ix.      Costs of raffle, bingo, or lottery tickets

                                                             x.      Value of blood given to blood banks

                                                           xi.      Value of time or services provided by the taxpayer

1.  
   1. Noncash Contributions

                                                               i.      You must determine the value of the things donated.  “It’s Deductible”, available on CD, guarantees that the values it lists will be accepted by the IRS.

                                                             ii.      Keep a list of items you are donating and get a receipt at the time of donation

                                                            iii.      Remember the new rules for donating vehicles—you can only deduct the value the charity receives upon sale (See prior handout for more detail.)

                                                           iv.      For items valued at more than $5000, you must have an appraisal.

                                                             v.      For contributions of stock, discuss deduction with your preparer.

1. Casualty/Theft Losses
   1. The loss is the lesser of the adjusted basis (usually the value) before the casualty/theft or the decrease in the fair market value as a result of the casualty or theft minus any insurance reimbursement.
   2. To arrive at the deduction, you must subtract $100 and 10% of your adjusted gross income from the figure above, so most of the time, no deduction is allowed.  These two deductions do not apply to business losses.
2. Miscellaneous Deductions
   1. Gambling losses up to the amount of gambling winnings
   2. Subject to the “2% floor”

                                                               i.      Employee business expenses

1. travel
2. 50% of business meals and entertainment
3. supplies
4. professional books and journals
5. home office deduction (If required by your employer)
6. tools, special shoes, equipment
7. Non-reimbursed mileage @ .55                                                            

1.   Hobby expenses to the extent of hobby income

                                                            iii.      Investment expenses

                                                           iv.      IRA, SEP, or SIMPLE fees paid directly

                                                             v.      Job-hunting expenses

                                                           vi.      Job-related education expenses

                                                          vii.      Professional and union dues

                                                        viii.      Safe deposit box

                                                           ix.      Tax preparation and other tax assistance expenses

                                                             x.      Work clothes and uniforms is required and not suitable for street wear.

 If we return to the tax rates of 2001, the highest tax bracket will increase from 35% to 39.5% and the maximum capital gains rate will go from 15% to 20%.  In addition, qualified dividends would no longer be taxed at the capital gains rates, but would be taxed at the higher ordinary income rate.

 Additionally, the estate tax, which disappeared this year, will come back at the 2001 rate, which allowed an exclusion of only one million dollars.  That would place many people who own a relatively modest home and a fair-sized retirement plan (certainly not the amount that financial planners are recommending these days) subject to estate tax.  A tax designed only for the super rich would ensnare many “ordinary” Americans.

 Assuming the anticipated changes take place, it would be advantageous to do some advanced tax and financial planning.  Please schedule a consultation with both your financial advisor and your tax advisor prior to implementing any of these suggestions.

 Capital Gains/Capital Losses

Review your capital gains and losses for 2010.  If you have a net gain, check your 2009 tax return to see whether you have a capital loss carryover that could offset 2010 gains.  Usually, we advise that you use your capital losses to offset gains to minimize the tax impact.  This year, however, you may want carry over as much of the loss as you can to use against probably-higher tax rates for 2011 and beyond.  In fact, this might be a good year to harvest capital gains while the rates are still low.  You might want to see stock, pay taxes at the current maximum of 15% anticipating that if you wait, you will in all likelihood pay at least 20%.  If you really like the stock, and it has done well for you, you can always re-purchase it and have the higher basis for the newly purchased stock.

 Retirement Income

If you are currently taking distributions from a retirement account, you may want to take a bit more in 2010 and then take less in 2011.  That way, you will pay less in tax on the amount you take out in 2010 for use in 2011.  Of course, you will still need to take the minimum required distribution.

 If you are over 59 ½ and under 70 ½  and, therefore, not subject to an early withdrawal penalty and not subject to required minimum distributions, you may want to take a distribution in 2010 so that it is taxed at the current rates and put it into an account that you do not tap until you reach 70 ½. 

Converting Roth IRAs

For this year (2010) only, if you convert a Roth IRA, you can elect to pay all the taxes for 2010 or defer the taxes and pay over two years–2011 and 2012.  In normal times, it would be suggested that you defer payment as long as possible, but if rates do go up, you will want to pay the entire tax at the lower 2010 rates.  (Some advisors believe that you will be taxed at the 2010 rate regardless of when you choose to pay, but the IRS has not issued regulations regarding how this will be handled.)

 Bonuses, Stock Options

As a rule, people defer income into a future year so that they pay taxes on that income in the future.  If, however, rates are going to go up, it would be advantageous to take your bonus in 2010 and exercise your stock options in 2010 while the rates are relatively low.  This is especially true for those in the higher tax brackets.

 Medicare Surtax

Although this does not go into effect until 2013, it is worthy of consideration now.  First, it is really two surtaxes.

 First, there is a 0.9% levy on earned income from both wages and self-employment for earnings over $200,000 (singles.  $250,000 married filing joint).   Rather, than the usual 2.9% Medicare tax, the tax will be 3.8% for those “high earners”.

 As an aside, those who are self-employed will not be allowed to deduct this surtax as part of their deduction of ½ of self-employment tax, resulting in higher income taxes.

 Second, there is a special 3.8% surtax on unearned ( dividends, rental income, interest, etc.) income of single filers with incomes over $300,000 and joint filers with incomes over $350,000.

 Although these increases disproportionately hit high wage earners, they will affect almost every tax payer.  This year, in particular, it will pay to plan ahead.

1. Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information.
2. Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
3. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
4. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
5. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court.

For the full list of 2010 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.

(1) Manner in which the taxpayer carries on the activity. – The fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records may indicate that the activity is engaged in for profit. Similarly, where an activity is carried on in a manner substantially similar to other activities of the same nature which are profitable, a profit motive may be indicated. A change of operating methods, adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive.

The examiner needs to inquire about the books and records maintained for the activity during the Initial Interview. The examiner should document in the workpapers regarding the sophistication of the taxpayer’s books and records. The examiner should determine if the taxpayer maintains checking accounts for the activity which are separate from the accounts used for the taxpayer’s personal living expenses.

Depending upon the volume, the examiner should obtain photocopies of the taxpayer’s entire set of books and records. If photocopying the entire set of books and records proves to be cost prohibitive, the examiner should only photocopy samples representative of the overall books and records.

The presence of sophisticated books and records does not automatically equate to profit motive. The taxpayer must be relying upon these records in order to operate the activity and make decisions or changes. The examiner needs to document how these records are utilized by the taxpayer.

The taxpayer should have a formal written Business Plan. This plan should demonstrate the taxpayer’s financial and economic forecast for the activity. The plan should not be a “fantasy profit and loss statement.” In other words, some taxpayers may wish to submit a business plan that is nothing more than a Schedule F or C, which unrealistically overstates the gross receipts and unrealistically understates the expenses for the activity.

The examiner should not request the business plan in the first IDR. Otherwise, the examiner will possibly receive a “canned” document. The examiner should inquire as to the business plan during the Initial Interview and follow-up with a subsequent appointment and/or IDR.

A business plan should show a short range and long range forecast for the activity. The forecast should allow for changes due to potential unforeseen and fortuitous circumstances.

The plan should be realistic. The examiner should perform quantitative analyses in order to determine the reasonableness of the projected gross receipts and various expense items. The examiner may consult with IRS economists in order to review the business plan.

The examiner should determine if the taxpayer followed the plan and if the original plan was not successful did the taxpayer made any amendments to the plan to increase profitability.

The examiner needs to document the taxpayer’s method of operation. The examiner should document the daily operation as well as the history of the activity’s operation in the workpapers. Denote changes in the method of operation over the years and indicate why these changes were initiated. Most of this information will be gathered during the Initial Interview.

The examiner needs to document the efficiency of the taxpayer’s operation. Denote the taxpayer’s use of any experts or specialists. Indicate if any changes were initiated and why. Obtain names, position titles, and addresses. Most of this information will be gathered during the Initial Interview.

The examiner will note whether the taxpayer is making changes to the operation that will result in improved operational efficiency.

The examiner needs to review the actual copy of any advertising in instances where the taxpayer has deducted such expenditures. Many taxpayers will buy advertising space for “vanity” ads. These spaces are sometimes purchased to place photographs of their children. These ads may wish the children “Best of luck” prior to upcoming competitions. The examiner should use professional judgment to determine whether the advertisements truly represent promotion of the taxpayer’s activity.

The examiner needs to be alert for the children’s activities being deducted on the parents’ tax return. The examiner needs to review reports and determine who actually competes in certain activities. The parents may contend that the children are promoting the activity through the competitions. The examiner needs to consider the substance of the facts.

Depreciation and Inventory can be viable issues for the examiner to consider as an aside from IRC § 183. The examiner should develop a clear understanding
of the taxpayer’s activity and verify that the proper tax treatment is used for the activity.

Summary of Factor 1

The examiner must document the manner in which the taxpayer carries on the activity. Most of this information will be gathered during the Initial Interview and the tour of the operation. It is important for the examiner to document a clear understanding of the activity. Assumptions should not be made that each activity operates the same as another similar activity.

This calculation applies to partnerships, S-corporations and sole proprietorships, all of which can be LLCs.

The first 5 year presumption period begins with the first profit year of 2001, but the benefit of the presumption does not begin until the third profit year of 2004. The presumption is not available for 2001 through 2003 because it does not apply until the third profit year. The presumption is available during the first presumption period only in 2004 and 2005. The second five year presumption period begins with the 2003 profit year and runs through 2007. The presumption applies to the third profit year of 2006 and will be of benefit to the taxpayer for 2006 and 2007.

Former IRS Tax Specialist Pleads Guilty to Tax Evasion

Baltimore (July 21, 2010)

John Venuti, a 62-year-old tax consultant, former principal at KPMG and former IRS tax specialist, has pleaded guilty to failing to file his tax returns for six years.

Venuti, of Harwood, Md., worked for KPMG from 2002 until January 2010 after working for the IRS from 1974 to 1983, including a period of three years during which he served as a division chief of the Tax Treaty and Technical Services Division.

For tax years 2001 to 2006, Venuti’s total gross income was $3,625,133. Although he filed for extensions for each of these years, and made payments along with his extension requests totaling $97,060, Venuti did not file the tax returns themselves. Accordingly, he ended up owing $789,629 in back taxes.

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Venuti did file his federal return for tax year 2007, however. In November 2007, the IRS contacted him about his failure to file his federal taxes for the previous six years, and in May 2008 he was advised that he was under criminal investigation. In July 2008, Venuti eventually submitted tax returns for the previous six years.

Venuti faces a maximum sentence of one year in prison for each of the three counts of failing to file tax returns. U.S. District Judge William M. Nickerson has scheduled sentencing for Nov. 2.

The Taxpayer Advocate Service is an independent organization within the Internal Revenue Service.  TAS helps taxpayers who are experiencing economic harm such as not being able to provide necessities like housing, transportation, or food, taxpayers who are seeking help in resolving problems with the IRS, and those who believe an IRS system or procedure is not working as it should.  Here are seven things every taxpayer should know about TAS.

1. The Taxpayer Advocate Service is your voice at the IRS.
2. TAS service is free, confidential, and tailored to meet your needs.
3. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn’t working as it should.
4. TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation.  This includes businesses as well as individuals.
5. TAS employees know the IRS and how to navigate it.  If you qualify for TAS help, your case will be assigned to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.
6. There is at least one local taxpayer advocate office in every state, the District of Columbia, and Puerto Rico.  You can call your local advocate, whose number is in your phone book, in Pub. 1546, Taxpayer Advocate Service — Your Voice at the IRS, and on the website at www.irs.gov/advocate.  You can also call toll-free number at 1-877-777-4778 or TTY/TDD 1-800-829-4059
7. You can learn about your rights and responsibilities as a taxpayer by visiting the TAS online tax toolkit at www.taxtoolkit.irs.gov.  You can get updates on hot tax topics by visiting the TAS YouTube channel at www.youtube.com/tasnta and the TAS Facebook page at http://www.facebook.com/YourVoiceAtIRS, or by following TAS tweets at http://twitter.com/YourVoiceatIRS.