Tax Fraud Back in the Limelight

Posted on February 15, 2016 by Kursti Nakagawa

The subject of tax fraud often makes the news headlines somewhere around the opening of tax season and it appears that Tax Season 2106 is no exception. Numerous state tax agencies, including Illinois, Hawaii, Utah and, most recently, South Carolina, have already announced tax refund delays due the threat of identity theft and tax refund fraud. Although the Internal Revenue Service has not issued any similar notices of delay, they have nonetheless issued bulletins warning taxpayers of potential fraudulent activity and suggesting precautions to take to combat it.

The refund delays announced by certain states are the result of increased security measures that have been put in place to prevent identity theft and other types of tax fraud. A spokesperson for the Illinois Department of Revenue, which has announced that they are unlikely to issue any tax refunds before the middle of March, has said that efforts used last year “illustrate the positive impact that additional delays and scrutiny have had in combating tax return and identity theft.” Other states have followed suit. The Hawaii Department of Taxation announced that refunds may be delayed by as much as 16 weeks while the Utah legislature actually passed a law prohibiting the issuing of tax refunds before March 1st unless all returns and required forms were submitted by January 31st. Veranda Smith of the Federation of Tax Administrators has said that the general trend for tax agencies will be to move in the direction longer lead times in order to allow more time for the matching of information sent from multiple sources.

In addition to the delays announced by certain states, the Internal Revenue Service continues to take steps to combat tax fraud. They have published security tips on their website and have met jointly with representatives of software companies and state tax agencies for the purpose of sharing data and standardizing online security protocol. On top of this, the software companies are taking their own steps to protect taxpayers from fraudulent activity. Some have published stepped up requirements for passwords while others, such as Turbo Tax, are requiring the use of a security code sent to the cellphone in order to log on to the tax software. While the 2105 Turbo Tax software required the use of this code for the initial use of theprogram, the 2016 version has increased this security measure by giving users the option of using the code each time they log in. All of these steps are part of a clear tend on the part of the IRS, state tax agencies and software companies to increase tax return security.

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Security Summit Focuses on Identity Theft

Posted on November 23, 2015 by Kursti Nakagawa

Security Summit Focuses on Identity Theft

In March of this year, all of the major players in the tax industry came together to focus on the problems of identity theft and tax refund fraud. Their aim was to have safeguards in place before the beginning of the 2016 filing season. This convocation, identified as the Security Summit, includes the IRS, state tax authorities, and representatives from the tax software and financial services industries. Tax Commissioner John Koskinen, who has called the Security Summit an “unprecedented effort,” maintains that income tax fraud “is not a battle the IRS can fight alone.” He went on to say that identity theft has “become a serious threat to the nation’s tax system” and one that must be dealt with aggressively.

Tax fraud has become an increasingly serious problem as the percentage of e-filed returns has multiplied. Currently, almost every business and tax professional, as well as a significant number of individual taxpayers, files electronically. With this increase in convenience, comes a whole host of associated problems surrounding the issues of taxpayer identification, the sharing of information and internet security. It is exactly these topics that are the focus of the Security Summit. According to remarks made by Koskinen at an October 20th press conference, the Security Summit “now covers virtually the entire population of taxpayers who e-file their tax returns.”

The Security Summit has made significant progress since their initial meeting in March. To date, they have identified and tested more than 20 security items related to the electronic filing of taxes. These items, which focus on all aspects of tax return and tax refund fraud, will be made available to both the IRS and State Tax Agencies to be used in the prevention of identity theft and are expected to be in place by the time the 2016 filing season opens. They target such things as the time it takes to produce a return and identifying instances where multiple returns are generated automatically. The Summit has announced that implementation of these measures is internal. While they will serve to enhance the security of the transmission process, they will not affect how taxes are filed.

In addition to measure designed to enhance the security of e-filed returns, the Security Summit has made recommendations in several other areas. In particular, the Tax Professional Work Group, which is one of the working committees of the larger effort, is investigating other means by which tax preparers themselves can contribute to the prevention of identity theft. On top of this, the United States Tax Commissioner has asked Congress to pass legislation requiring W-2s, 1099s and other information returns to be sent out earlier, thus allowing more time for the matching of these items with the information submitted on tax returns.

Charitable Contributions Require Documention

Posted on November 4, 2015 by Kursti Nakagawa

Charitable Contributions Require Documentation

Although charitable contributions can amount to a significant tax savings, they can also have the negative affect of flagging a return from audit when they are claimed in excess or not reported according to preset IRS guidelines. A case in point is that of Kunkel versus United States Tax Commissioner. In this 2011 United States Tax Court case, the court disallowed over $37,000 in noncash contributions due to lack of substantiation. While the Kunkels maintained that the value of each donation was less than $250, the court questioned the total amount of the contributions. They pointed out that the total donation amount could have only been achieved by making almost 100 trips to various donation sites. In addition, the Kunkels had no dated receipts from any of the receiving charities giving either a value or description of the property being donated.

In order to avoid a situation such as the one described above, it is important to follow the guidelines set by the Internal Revenue Service for reporting charitable contributions. According to these guidelines, increasingly strict documentation requirements are imposed on charitable donations above or below the following preset thresholds:

 Contributions of less than $250

Contributions of less than $250 require 1) the name and location of the charitable organization to which the donation is being made, 2) the date the donation is made and 3) a description of the property being donated. Although it is advisable to get a receipt from the organization to which the donation is being made, this is not required.

 Contributions in excess of $250

In addition to the documentation required for contributions of less than $250, those in excess of $250 must have a written receipt from the charitable organization to which the contribution is made. In addition to a description of the donated property, the receipt must include a good faith estimate of the property’s value as well as a statement indicating whether any goods or services were given in exchange for the contribution.

 Contributions in excess of $500

Charitable donations in excess of $500 require 1) a specific description of the property being donated, 2) the date the property was acquired, 3) the cost basis of the property, 4) the fair market value of the property at the time the donation is made and 5) a statement of the method used to calculate fair market value.

 Contributions in excess of $5000

In addition to all of the documentation required for donations in excess of $500, charitable contributions in excess of $5000 require a qualified appraisal.

With the end of the calendar year fast aproaching, now is as good a time as any to review the IRS guidelines for documenting charitable contributions. Although the IRS sometimes allows charitable deductions even when the reporting taxpayer lacks the required documentation, there is no good reason to take a chance on this being the case. It is better to be safe than sorry! Charitable contributions can amount to a significant savings of tax dollars but proper reporting is essential.

IRS Announces Online Security Breach

Posted on June 1, 2015 by Kursti Nakagawa

New IRS Security Breach

IRS Announces Online Security Breach

On Tuesday, May 26, 2015, the IRS announced the detection of a huge security breach affecting over 100,000 United States taxpayers. This appears to be a significant online breach that occurred during the course of the 2015 tax season. According to the IRS, thieves used an online IRS agency service to obtain the previous year’s tax return information for about 100,000 individuals and families.

These identity thieves have been very persistent and sophisticated. From February to May, they have been using stolen social security numbers and other relevant personal information to access tax agency systems in order to file tax returns and get refunds. IRS Commissioner John Koskinen issued a statement saying that approximately 200,000 tax transcripts were downloaded with approximately 104,000 of those successfully accessed. Apparently the attempts by the thieves to gain access to the remainder of the downloaded returns were unsuccessful. However, the IRS plans to inform all 200,000 taxpayers whose returns were in any way involved in the breach.

This is not a typical hack or data breach involving one account number or piece of personal information. Instead, these thieves are sitting on piles of personal information that they can use at any time. In order to access the desired accounts, they had to clear a multi-phase questionnaire which involved providing such information as the taxpayer’s social security number, birthdate, address and tax filing status. Even more puzzling is the fact that the thieves had to answer personal questions about such things as the maiden name of the taxpayer’s mother, their high school mascot and where they attended college. The IRS believes that the thieves obtained some of this information by looking at public social media sites.

The thieves were hoping that their criminal efforts would go undetected by the IRS and that they would gain access to full tax returns that would give them vital personal information to use in the future. However, their attempts to stay under the radar have failed. The IRS has identified, not only those 104,000 tax returns that were actually accessed, but also the 100,000 returns where access was attempted but unsuccessful. They have responded by providing free credit monitoring services to all of the taxpayers that were in any way affected by the breach. According to IRS officials, the budget cuts that they have recently experienced have made it increasingly difficult to fight the fraud issues that have been occurring at a rapid rate over the last several years.

Choose Your Tax Preparer Wisely

Posted on February 23, 2015 by Kursti Nakagawa

How To Choose a Tax Preparer

Choose Your Tax Preparer Wisely

Choose Your Tax Preparer Wisely: With over half of all taxpayers enlisting the services of a tax preparer, tax preparation has become a major industry. This being the case, the selection of a reputable tax preparer is a task at hand for many at this time of year. Although the services of a tax preparer can be an invaluable asset in saving tax dollars as well as meeting tax deadlines and compliance requirements, choosing one that is both competent and ethical and is often a difficult process.

When choosing a tax preparer, it is important to select a firm or an individual that has an established licensing history and a verifiable physical address. The absence of either of these could mean that the firm may not be around to answer questions and follow up if there are problems once the return has been filed. In terms of licensing it is important to use a preparer with a Preparer Tax Identification Number (PTIN). Since Certified Public Accountants and Enrolled Agents are the only preparers who can represent their clients before the IRS in all tax matters, it may be advisable to seek a preparer with one of these additional certifications if the return is difficult or presents unusual problems. It is also prudent to check out available reviews and ratings of any tax preparer under consideration in addition to making sure there are no registered complaints against that firm or individual.

In light of the points discussed in the previous paragraph, the following is a list of some things to avoid when selecting a tax preparer:

 Avoid any tax preparer who does not have a valid 2015 PTIN. Preparer Tax Identification Numbers are renewable each year so any reputable tax preparer should have a current PTIN number.

 Avoid tax preparers who want you to sign a blank return or do not sign the return themselves.

 Avoid tax preparers who ask you to mail in a paper return rather than filing your return electronically. Most preparers are required to file electronically so a request that you do otherwise should be a red flag.

 Avoid a tax preparer who suggests that you deposit a tax refund in to any account other than your own. This practice is not allowed by the Internal Revenue Service.

 Avoid tax preparers who base their fees on a percentage of the refund amount rather than on the type and complexity of the return.

 Avoid tax preparers who make promises that have no basis in reality such as guaranteeing a high refund without examining tax documents or promising a refund by a certain date.

In summary, the process of selecting a tax preparer should focus on choosing an established individual or tax preparation firm with good reviews and ratings and a verifiable licensing history. It should avoid those who do not meet these qualifications and make extravagant promises that they are unlikely to keep. While a competent tax preparer can be a great asset, choosing the wrong one can be worse than not having one at all!