Time Expiring to Claim Refunds for 2012 Tax Returns

Deadline to Claim Your Refund
If you did not file a tax return for 2012, you may be one of over 1,000,000 taxpayers who may be due a refund from that year.  The deadline for you to claim a refund, on a tax return in which one was owed to you, is 3 years from its due date (excluding extensions).  For example, if you were due a refund on your 2012 Income Tax Return (which was due April 15th 2013), you have until April 15th 2016 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury.

Note, there are no interest and penalties for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

Here are some of the facts you need to know about 2012 unclaimed refunds:

  • The unclaimed refunds apply to those who didn’t file a federal income tax return for 2012.
  • Some people, such as students, part-time workers or seasonal employees may not have filed because they thought they had too little income to require filing a tax return. However, if you did not have a filing requirement, you may still have a refund waiting if you had taxes withheld from your wages.  A refund could also apply if a taxpayer qualified for certain tax credits, such as the Earned Income Tax Credit.
  • The law requires that you properly address, mail and postmark your tax return by April 15th 2016  to claim your refund.
  • The IRS may hold your 2012 refund if you have not filed tax returns for 2013 and 2014. The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for 2012, you should ask for copies from your employer, bank or other payer. If you can’t get copies, get a free transcript showing that information by going to IRS.gov. You can also file Form 4506-T to get a transcript.

Need help filing that 2012 tax return?  Give us a call or visit the main page of our site.  We have the software to file tax returns going all the way back to 2004 so we’re sure we can help you out with 2012!

Top IRS Audit Red Flags

Every taxpayer dreads when they receive an envelope with those three bold letters on it; IRS. The situation gets worse when you find out that you’ve been selected for “examination” as the service likes to term it (i.e. audit). Have you ever wondered why some tax returns are selected for further review while most are ignored? For example, in 2013 (FY 2014 is the most recently available data) there were 145.2 million individual tax returns filed, of which 1.2 million were selected for review in 2014. Thus the effective audit rate was 0.86%. So the odds are pretty low that your return will be picked for review. However, those odds may change depending on if IRS computers detect any of the following “red flags” when your return passes their always watchful eyes.

Failing to Report All Taxable Income
All those 1099s and W-2s you receive; well the IRS gets copies of them as well. The IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch (e.g. too little or too much being reported) sends up a red flag. If it’s a computational error, the IRS will usually fix it and send you a letter with the changes and additional tax owed. If it’s a reporting error (meaning it was reported under your SSN but it didn’t belong to you), then you will want to contact the IRS/issuer so that it can be corrected.

Running a Small Business
Those who operate their small business as a “sole-proprietor” will report their activity on Schedule C. This form tends to be a treasure trove of tax deductions for sole-proprietors and a gold mine for IRS agents. Why? Well those at the service know that those filing the form sometimes claim excessive deductions or don’t report all of their income. Special scrutiny is typically given to cash-intensive businesses (taxis, car washes, bars, hair salons, barbers, etc.) and those who report substantial losses. Also, the audit rates increase depending on how much they earn. According to the FY2014 statistics, those businesses with gross receipts of $25,000 or less were audited at a rate of 1.01% while those with receipts between $100,000 and $200,000 saw that rate raises to 2.43%.

Claiming the Home Office Deduction
The IRS is drawn to returns that claim home office write-offs because it has historically been successful in reducing the deduction. Why? Well, if you have an office in your home, it has to be used “exclusively” for business in order to be claimed on the return. So if you have a 2nd bedroom that is used as the office, chances are you’ll survive the review. If it’s a family room or den? Good luck convincing the agent that its use is exclusive. However, if you do qualify for the deduction, know that you can deduct a percentage of your mortgage interest/rent, real estate taxes, utilities, phone bills, insurance and other costs.

Claiming the Earned Income Credit (EITC)
The Earned Income Credit (EITC or EIC) is a refundable tax credit for low-to moderate-income working individuals and couples; particularly those with children. The amount of EITC benefit depends on a recipient’s income and number of children. However, the EIC is also a great source of fraud. Why? Well, tax preparers and certain individuals know that there is a “sweet spot” in calculating the credit. If you get the income and dependents just right, you can receive a much larger credit that you are entitled to. Unfortunately, the IRS knows this but has been little combat the fraud. “The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in Fiscal Year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.” So above we said that businesses with gross receipts of $25,000 or less were audited at a rate of 1.01%. Well that rate was 1.78% if the EIC was involved as manipulating the “earned income” on the Schedule C can change the EIC amount.

Being a High Wage Earner
The 0.86% audit rate translates into about one in every 116 returns being selected for review. For people with incomes of $200,000 or higher the audit rates changes to 1.75%, or one in every 57 returns. Report $1 million or more of income? There’s a one-in-16 chance your return will be audited. Make less than $100,000? Only 0.52% of such returns were audited during 2014 or one out of every 192.

Claiming Rental Losses
If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. The problem is 1) some taxpayers claim the $25,000 deduction when they shouldn’t (i.e. multiunit dwellings in which they occupy a unit) and 2) they fail to satisfy the test of being a real estate professional. Thus, those with rental losses are prime candidates for the IRS to take a second look at.

Taking Higher-than-Average Deductions
If deductions on your return are disproportionately large compared with your income or profession, the IRS may pull your return for review. For example, if you are self-employed as an attorney and 35% of your gross receipts on Schedule C are spent on meals and entertainment, the computer may flag the return when the national average is only 10%. But when it’s discovered that you are an entertainment attorney in Los Angeles, all might be okay. In any instance, if you have the proper documentation for your deduction you shouldn’t be afraid to claim it.

Taking Large Charitable Deductions
Charitable contributions are a great write-off and help you feel all “do goodie” inside. But if your deductions are disproportionately large compared with your income, it raises a red flag. This is because the IRS knows what the average charitable donation is for folks at your level. Also, if you don’t get an appraisal for certain donations or fail to file Form 8283 for noncash donations over $500, you become an even bigger target.  With that said, be sure to keep all your supporting documents and follow these tips in case the IRS wants you to prove the number listed on your return.

Improper Reporting of Capital Gain/Loss Transactions
When you sale or dispose of a house, stocks, options, etc. the transaction will typically be reported to the IRS via Form 1099-S, 1099-A, 1099-B, etc. Well, if you don’t report the cost and selling prices correctly or in line with what the IRS has, then they will sometimes send you a letter. Not all of these items will result in more tax for you as the IRS amounts may not reflect the entire story. For example, if you sell stock for $10,000 but the cost/basis is shown as $0, the IRS will expect to see you report a $10,000 gain. But what if the cost/basis isn’t correct and you really paid $12,000 for the stock (which wasn’t reported to the IRS)? Well, your $10,000 gain is really a $2,000 loss and simply has to be proven/explained to them.

Can I Claim My Spouse As A Dependent?

It’s not uncommon for us to get this question.  However, because people sometimes don’t know the nuances of how a tax return is actually filed, this one can get lost in translation.  In this post on our sister site we discuss the filing status options for those who are married.  In summary, if you are legally married then your options are Married Filing Joint (together) or Married Filing Separate.  So where does this whole claiming a spouse as a dependent thing come in?  Read on.

When you file a tax return, you are allowed to claim an exemption, which will reduce your taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. For tax year 2015, the IRS recently announced that each exemption will be worth $4,000 on your 2015 tax return.  That means that if you file with your spouse and had no dependents, you would claim 2 exemptions.  If you had dependents, you would claim the 2 exemptions for you and your spouse and then 1 additional exemption for each dependent.  Clear right?  So now the question about your spouse being claimed as a dependent.

As we stated above, when you are married you only have two choices when it comes to filing status.  As such, your spouse is never considered your dependent.  Thus, on a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you would normally claim just the exemption for yourself.  However, if you’re filing a separate return, you may claim the exemption for your spouse only if the following three items apply:

  1. they had no gross income,
  2. are not filing a joint return,
  3. and were not the dependent of another taxpayer

We tell most taxpayers that it is usually advantageous for them to file together.  Why?  Because they will often pay less taxes by doing so due to the fact that the tax brackets for Married Filing Separate are much more narrow that even that of someone filing Single.  What we mean is that if you had taxable income of $160,000 and your spouse had $0, you would be in the 28% marginal tax bracket if you filed Married Filing Joint.  If you were single with the same income, you would also be in the same 28% bracket.  But if you filed Married Filing Separate, you get penalized and are thrown into the 33% tax bracket.  Makes sense to file with your spouse even if they have no income right?  That’s what we said!  However, there are certain instances when you wouldn’t want to file with your spouse.  Like when you are due a nice refund and they have a balance with the IRS from some time ago.  Then you will want to file separately do the IRS doesn’t take your refund and apply it to their balance due.

So in summary, you can never claim your spouse as a dependent.  However, if you are filing as Married Filing Separate, there are some instances when you can claim their personal exemption.

 

Is Unemployment Compensation Taxable?

smile!

The short answer is YES – now continue reading for some important details.

Whether you do (or don’t) have to file a tax return doesn’t have anything to do with if you were (or were not) employed.  It depends entirely on how much income you received during the year.  Thus, those who were unemployed AND earned more than the filing threshold should know that unemployment benefits do qualify as taxable income.  In other words, Uncle Sam will count unemployment payments received as taxable income.

How To Report Unemployment Benefits Received On Your Return
Around late January or early February of the year FOLLOWING the year in which you received your benefits, you should get a Form 1099-G.  Box 1 will contain the amount of benefits you received.  If there were any Federal or State taxes taken out, they will be listed as well.

When you file your return, report your unemployment income on line 19 of Form 1040 [U.S. Individual Income Tax Return], line 13 of Form 1040A [U.S. Individual Income Tax Return], or line 3 of Form 1040EZ [Income Tax Return for Single and Joint Filers with No Dependents], depending on which form you use.  The Federal withholding’s will be tabulated in the appropriate section and the net result will either be a refund or a balance due.

What If You Didn’t Have Enough Taken Out?
In this post on our sister site we discuss how taxes work and how the refund or balance due is derived.  If you are still unemployed and receiving benefits when you discover you didn’t have enough withheld, contact the paying agency ASAP.  Instruct them that you would like to increase your withholdings.  As discussed in the post above, you will probably have to simply complete Form W4 and submit it to them.

What If You Can’t Pay The Balance Due?
In this post, we discuss what you can do if you can’t pay all at once.  The general options are set up a payment plan or tell the IRS why you can’t pay (e.g. unemployed, it would cause an undue hardship, etc.).  Just note that with the latter, you will have to supply some paperwork as proof as to why you can’t pay.  What, you expected the IRS to just take your word for it?

If you find yourself in the predicament of needing to set up an installment agreement and owe less than $10,000, take a look at the Got IRS Debt? page for our current pricing to assist you.

Misclassified Employees & Taxes

Sometimes you take a job and it seems like it will be the best gig in the world.  The employer tells you that they will pay you weekly, that they won’t take taxes out and that they’ll even give you a 1099 at the end of the year so you can file your taxes.  But then you get that 1099, take it to your tax preparer and they tell you that you owe a bunch of money in taxes.  Wait?  How can this be?  Your preparer tells you that your 1099 causes you to be treated as an independent contractor or self-employed for tax purposes.  Self-employed?  That can’t be right.  I worked as an employee for that company for the entire year!  Thus, the problem at hand.

In this post on our sister site, we discuss how an employer is supposed to make the proper determination as well as what the tax differences are via being W2 versus 1099.  But when they improperly classify you as an independent contractor, it can cause you a whole lot of grief come tax time.  So how do you fix it?  Well, it’s really a two step process of trying to resolve the situation and filing the tax return.

Obtaining Proper Classification
The first thing you want to do is bring the matter to the attention of your employer.  Let them know that you don’t believe that the classification is correct and that you believe you were an employee.  This IRS site will give you a little assistance in making that determination.  If the employer is uncooperative or flat out refuses that you were an employee, you can ask the IRS to make the determination via filing form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  The employer will then need to respond to the IRS.  Once the IRS rules, they will send a determination to you and the employer.  If it is deemed that you were in fact an employee, the employer will then become liable for their share of the employment (payroll) taxes.  The unfortunate thing is that so will you.

Filing A Misclassified Employee Tax Return
Listed below are the steps on how to file your taxes if you are a misclassified employee and don’t have a W2.

  • File Form SS-8 so that you can begin the determination process.
  • Review Form 8919 Uncollected Social Security and Medicare Tax on Wages.
  • If you have a Form 1099-MISC from the employer, then you will have most of what you need to fill out columns A and B.  If you don’t have that form, then you will need to obtain the information from the employer (who may not want to give you their EIN if the two of you aren’t on good terms).
  • Tally up the amount of income that you received from the employer and enter it on line 6 of the form as well as line 7 of your Form 1040.
  • Use lines 7 through 12 to calculate your share of the Social Security and Medicare tax.  You will then enter this on line 58 of your Form 1040.

The downside to this is that you WILL have a liability with the IRS.  No income, Social Security or Medicare taxes were taken out.  But if you visit this page of our site, you can learn how we can help you resolve the issue with the IRS if you don’t want to tackle it on your own.

Top 3 Groups With IRS Debt

This form can be the death of you!

This form can be the death of you!

When it comes to running afoul of the IRS, certain generalities often come to mind regarding the types of people. Terms like deadbeat, scofflaw, tax evader, tax protester and the like tend to come to mind. But did you know that most of the people who generate IRS debt actually didn’t intend to? Furthermore, did you know that most of them (professionally) will fall into three categories? Let’s take a deeper look.

Independent Contractors. Working for yourself can be a dream. Whether it’s being a consultant or driving for Uber on the weekends, being your own boss can feel liberating. Oftentimes, when one is first approached with being a contractor, one of the things that will be “sold” to them is how no taxes will be taken out of your check. How can that be? We’ll that’s because most independent contractors are paid via Form 1099-MISC from a tax perspective. While earning a bigger check can sound wonderful at the onset, it’s a thing that come back to bite you come tax time.

Attorneys. If you’re an attorney who works in private practice for yourself, then you can suffer the same consequences as those who are independent contractors. This is because those who report compensation to attorney’s also tend to do so via Form 1099-MISC (see a trend here). If you look at the form, you will notice that box 14 is labeled “Gross proceeds paid to an attorney.”

Realtors. Realtors are another group that also tend to get into tax trouble with the IRS. Can you guess why? Correct; it’s because they receive their commissions via Form 1099-MISC!

The Problems Caused By Form 1099-MISC.
Being paid as a contractor is not an issue. They key is to know the difference in how an contractor deals with their taxes versus an employee. In this post on our sister site, one can learn some of the details. However, the summary version is that when you work as a contractor, YOU are the one who has to withhold AND remit the taxes to the IRS and state taxing authorities.  How do you do this? Via estimated tax payments.

Key Takeaways?

  • Those as independent contractors are at greater risk for running afoul of the IRS
  • If you will be paid via Form 1099-MISC, you need to consult with a tax professional
  • You will want to make sure that you are doing estimated tax payments (a.k.a. quarterlies)
  • If you don’t pay enough in estimated taxes, you can quickly generate a tax bill that you can’t satisfy.

Are you an independent contractor/freelancer who needs help staying in Uncle Sam’s good graces? Give us a call or shoot us an email. We’d be happy to tell you the steps you need to take and assist you if needed.

Revenue Agents vs. Officers

One item that taxpayers always get a little confused on is the difference between and IRS Revenue Agent and a Revenue Officer. The two are quite distinct despite the similarities in title. If you are dealing with tax debt, your case may be assigned to a Revenue Officer (RO) at some point. This post will help you understand the difference between the two positions.

Job Description & Duties
Revenue Agents primarily work for the Examination Division. Their job is to conduct tax audits of individuals and businesses as well as trusts and non-profit organizations. Revenue Agents generally conduct tax audits of the most complicated tax returns ranging from small “Schedule C” businesses to the largest multi-national corporations. They are also assigned to the IRS’ Offshore Voluntary Compliance Program to determine whether the failure to file a Form TDF 9-22.1, Foreign Bank Account Report (FBAR) and will be subject to FBAR penalties.

ROs on the other hand work for the Collection Division. Their job is to collect money, or more precisely, collect all that is available. In this post, we go into great depth about the entire collection process and where the RO fits into it.  ROs are assigned to the most difficult IRS tax debt cases. Those individuals or business whom the IRS has been unable to collect from through letters, phone calls and tax levies and garnishments generated by IRS computers are generally assigned to a RO after a period of time.

Qualifications
Revenue Agents have a college degree and are highly trained in all aspects of auditing, tax law, research, and report writing. The minimum requirement for the job generally includes having a bachelor’s degree or higher in accounting from an accredited college or university that included at least 30 semester hours in accounting.  While Revenue Agents are not required to be CPAs, a few of them are.

ROs also must have a have a college degree, but the requirements are different. A RO can have a bachelor of Fine Arts and be qualified for the job. This is why ROs initially engage in months of training and then weeks of training on an on-going basis. It’s no surprise that when it comes to the best ROs, the IRS has a lot of money and time invested in them.

Interested in a job in either role? Check out this additional info from the Bureau of Labor Statistics.

Interesting Facts About Revenue Officers

  • A RO doesn’t carry a badge. If someone flashes a gold badge and says they are from the IRS, that’s not a RO. That is an agent form the IRS Criminal Investigation Division (CID). This means that you are being investigated for a criminal matter and you need to reach out to an attorney! These cases may include tax evasion, fraudulent tax returns, large failure-to-file cases, money laundering, and false documents or statements submitted to the IRS under the penalties of perjury.
  • A RO cannot arrest you. If any CPA, attorney or enrolled agent tells you they can stop a RO from arresting you, find a new professional! ROs have no arresting authority. All a RO can do is make a “referral” to the CID. This means they lay out the facts why they think you should be arrested. Referrals are made when they align with the types of cases mentioned above and the CID only accepts a fraction of them.
  • A RO isn’t graded on how much money they collect. A RO does not get promoted for bringing in the most money. But rather, how many cases they successfully remove from their “inventory” of collections matters. A RO would rather you enter into a resolution option like an offer in compromise today, than be sandbagged for 2 years, even though you wind up paying in full.
  • A RO MUST attempt initial contact in person. Everyone thinks their RO is a total jerk for showing up, unannounced, to make first contact with a taxpayer. But little do most taxpayers know that Internal Revenue Manual Section 5.1.10.3 (Initial Contact) requires that they make first contact with a taxpayer in person. You may not have been home the first time they showed up, so if you are wondering why someone from the IRS left a card for you at your home or on your car, don’t ignore it. There will be further contact!
  • Many ROs are friendly and reasonable. Most employees working for the IRS are normal, hard working folks like you and I. They go to work, attempt to do a good job and then head home to relax just like we do. Thus, understand that they want to close your case and they need your help to do so. They will not “go away” if you ignore them and neither will your problem (it will just get shifted to another part of the process).

Needless to say, if you are uncomfortable dealing with an RO or simply don’t want to talk to them, then give us a call. We’d be happy to talk to them on your behalf and help you (and them) make your tax matter a thing of the past!

How To Assemble Your 1040 Income Tax Return

If you are filing an old tax return, then unfortunately, it must be sent to the Internal Revenue Service via paper (versus electronically).  As we’ve become accustomed to E-Filing returns, sometimes it seems that the nuances of assembling a paper return have become something of a lost art (even for us practitioners).  The IRS processes paper tax returns in a specific manner, but don’t worry about decoding their system.  After you’ve finished preparing your return, it will take you just a few minutes (by following the steps below) to have your tax forms organized and ready for mailing/processing.

Step 1
Check your return for completeness and errors.  We recommend reviewing the following:

  1. All of your personal information (e.g. name, address, etc)
  2. Be sure your Social Security number is entered correctly
  3. Ensure only one filing status is checked
  4. Ensure that an allowable exemption is entered for each dependent you are claiming
  5. Ensure that you’ve included a daytime phone number

Step 2
Sign your return. The IRS won’t accept your return for processing unless it’s signed. If you’re married and file a joint return, both of you must sign it. The person whose name appears first on the tax return must sign in the “Your Signature” box, and the spouse listed second signs in the “Spouse’s Signature” box.

Step 3
Prepare your refund or payment information. If you’re due a refund and want direct deposit, include your bank account information in the “Refund” section above the signature boxes. If you owe taxes, prepare Form 1040-V, the voucher used to make a payment.  Just make sure not to staple your payment or voucher to the return.

Step 4
Gather your tax forms and schedules for assembly. Place your Form 1040 on top and other forms and schedules for your return behind it. On the schedules and forms you’ll notice an “attachment sequence” number in the upper right corner.  Use the attachment sequence numbers as your guide, following them in numerical order, starting with the lowest number.

IRS Sequence Numbers

IRS Sequence Numbers

Step 5
Attach any additional statements that are needed.  In some cases, you might need more room to list deductions or report entries on your return. If you prepare an additional statement, write your Social Security number at the top of your statement and note which form the statement is supplementing. You’ll attach your statement behind the related IRS form in your tax return. For example, if you list additional investment expenses on your statement for Schedule A, you’ll write “Additional Statement for Schedule A”, write the line number and amount of expense you’re reporting and attach the statement behind your Schedule A.

Step 6
Staple all your forms and schedules together in the upper right corner.

Step 7
Attach W-2 and 1099 income documents. You’ll receive a few copies of each income document that’s mailed to you. Find the federal copy of each form and staple them to the front of your Form 1040 in the income section. Only staple these forms to the first page of your 1040 – do not allow your staple to go through all the forms in your return.

Step 8
Check this post for information on the addresses where the return should be mailed to.

Processing Times & Refund Status
If you file a complete and accurate paper tax return, your refund will usually be issued within six to eight weeks from the date it is received.

If it hasn’t been received in the time frame outlined above and you are wanting to know the status, feel free to check the Federal or State Where’s My Refund Page(s) outlined in this post.  You can also check by calling the IRS Refund Hotline at 800–829–1954. If you use the online tool or call, just be prepared to provide your Social Security number, your filing status and the exact whole dollar amount of the refund shown on your return.

 

How Long Should I Keep My Tax Records?

While the IRS will not tell a taxpayer how long they need to keep their tax records, it’s prudent to keep them anyway.  But just what should you keep and for how long? As a general rule of thumb, if you “attempted’ to file your return correctly, then you will want to keep everything for 3 years.  However, take a look at the two tables shown below for further details and items only applicable to certain situations.

Supporting Tax Documentation To Keep

Item Supporting Record
Income Form(s) W-2
Form(s) 1099 (INT, DIV, Etc.)
Bank statements
Form(s) K-1
Expenses Canceled checks or other proof of payment
Invoices
Receipts
Home Closing statements/HUD-1
Purchase and sales invoices
Proof of payment
Insurance records
Investments Brokerage statements
Mutual fund statements
Form(s) 1099
Form(s) 2439

 

Length Of Time One Should Keep Their Tax Documentation

Situation Retention Period
Owed tax and the subsequent three situations do not apply to you 3 years
Did not report income that is more than 25% of the gross income shown on the return you filed 6 years
Filed a fraudulent return Indefinite
Do not file a return Indefinite
File a claim for credit/refund after you filed your return 3 years or 2 years after tax was paid (whichever is later)
File a claim for a loss from worthless securities 7 years

 

How were the lengths of time determined?  Most of them coincide the the various IRS Statute of Limitations.  This is the length of time the IRS has to assess additional tax against a taxpayer, request further information or subject a return to audit.  Needless to say, one wants to make sure they have their “proof” for at least the length of the statute.  However, it may be advisable to keep your support indefinite.

For example, if you make contributions to your IRA, you will want to probably keep all of your tax returns.  Why?  Well, when it comes time for you to make your withdrawals come retirement, those that represent a return of the money you contributed are tax free.  How will you know how much you contributed?  Exactly; you’ll need the originally filed tax returns!  So keep those tax records as long as you think you may need to; you never know when you may have to reference them to prove your case.