Tax

Tax Rules for an Airbnb or Vacation Rental

Tax rules

Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year, it’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.

Reporting your Airbnb or vacation rental as income

The IRS requires that all payment processing companies (including Venmo, PayPal, and Airbnb) report gross earnings for all users within the US. If you earn $600 or more, and/or have 200 or more transactions for the year, Airbnb will issue Form 1099-K.

If you are not a US citizen but earned money from a vacation rental in the US, you will be provided Form W-8.

Withholding taxes from Airbnb payouts

You do have the option to withhold taxes from your Airbnb earnings, which is always recommended to avoid a large tax bill at the end of the year. You can also use a tax calculator to get an estimate of your earnings to save money for taxes.

Vacation home, rental, or personal use

To determine if your vacation property is a rental residence or being used for personal gain, you must identify how often the property is rented versus how often you reside there. Renting your property to someone that pays the fair market value while using the home as their primary residence would make it a rental property.

If you do not reside in the home and rent it frequently for short-term periods, it would be considered a vacation rental.

Should you find yourself residing in the home more frequently than you rent it, then you are using the home for personal use. The IRS requires that you still pay taxes on the money you earn from renting your property for 15 days or more out of the year.

Tax debt relief and filing assistance for Airbnb hosts

As a host, you may qualify for tax debt relief. Our tax professionals will review your case to determine the best course of action for your compliance. For a free consultation, you can call Optima at 800-536-0734.

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Investment Tips for College Students

investment tips

The world of investments can be intimidating, especially for young adults and college students. However, it is known that one of the best ways to build long-term wealth is to start investing early. Doing so will allow your money to compound interest for a longer period of time, and knowing additional investment tips will help you get started.  

Invest in a High-Yield Savings Account 

This investment tip is great for those who are just getting started and may be a bit hesitant to jump into stock trading. Like a traditional savings account, a high-yield savings account pays interest on your account balance. The main difference is that the rates of a high-yield savings account are far higher than those of a traditional account. In fact, the rates are 20-25 times the national average of traditional accounts. This investment is ideal for building an emergency fund or safety net because it is money that is not meant to be touched but is still easily accessible when needed.  

Open an Individual Retirement Account (IRA) 

College days may seem early to begin thinking about retirement, but the sooner you start saving the better. One of the best ways to begin retirement savings is through an IRA account. 

Traditional IRA accounts allow tax-deductible contributions on state and federal tax returns for the year the contribution was made. When you withdraw the money for retirement (beginning at 59 ½ years old), you will be taxed at that income tax rate. This is important to consider as some people will be in a higher tax bracket when they retire because of Social Security benefits, investment income, and more.  

Roth IRAs are usually more popular with young adults because the earnings and contributions to the account compound tax-free. In other words, you pay taxes on the money before you contribute so you don’t have to pay it at withdrawal. However, your contributions do not qualify as tax deductions. This option is also better for those who anticipate being in a higher tax bracket at retirement age.  

Invest with a Robo-Advisor 

This investment tip is ideal for those who want to invest through a brokerage account for cheap without doing a ton of research. Robo-advisors use artificial intelligence to create one-of-a-kind investment portfolios based on your goals, such as amount of time left before retirement and risk level. This option usually does not require paying fees for small accounts, so there is not much risk involved in getting started. However, you may be required to pay a small percentage of your assets each year once you reach a certain account balance.  

Tax Relief for Investors 

The best investment tip is to always ensure you are compliant with tax laws and to report your investment earnings each year. Reach out to us at 800-536-0734 for a free consultation today. 

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Tax Evasion, Fraud & the Statute of Limitations

Tax Evasion, Fraud & the Statute of Limitations on Tax Crimes

Tax evasion and fraud is not just a problem for white-collar crime criminals. Filing your taxes, particularly if you have considerable assets or run your own business, can be terribly complex. This means that the line between an aggressive – but legal – tax planning strategy and fraud is thinner than you might think.

Perfectly innocent mistakes may be interpreted by an IRS investigator as suspect. Therefore, even if you are a law-abiding taxpayer it pays to know the difference between tax evasion and tax fraud, the penalties, and what the IRS’ statute of limitations is when prosecuting tax crimes.

Tax Evasion vs. Tax Fraud

Although often used interchangeably, there are important differences between tax evasion and tax fraud. Tax evasion refers to the use of illegal means to avoid paying your taxes. This includes felonies, such as refusing to pay your taxes once they have been assessed, and misdemeanors; such as failing to file a return. Tax fraud, on the other hand, refers to lying on your tax return and falsifying tax documents- which is always a felony charge. This can extend to tax scammers will pose as a tax preparers and then rip off customers through refund fraud or identity theft. These phony accountants are committing Accountant Fraud and will tell you that they can get you a large tax refund and typically prey on low-income and non-English speaking taxpayers.

Take for example celebrity-convict Wesley Snipes, who was charged with three counts of failing to file a return. Snipes was convicted for three misdemeanor charges and received the maximum one-year sentence for each count. If he had been found guilty of a felony evasion charge or of tax fraud, he could have received up to five years for each count.

Statute of Limitations for Tax Evasion or Tax Fraud

The statute of limitations of a crime is the amount of time a prosecutor or a plaintiff has to file charges. In the case of taxes, it represents how long you should be looking over your shoulder after – willfully or otherwise – lying on your tax return.

The general rule of thumb is that the IRS has three years to audit your tax returns. If an investigation of your tax return reveals you concealed over 25% of your income, the IRS gets twice the time, six years, to file charges. However, this time period can be extended for a variety of reasons.

How can the Statute of Limitations be extended?

There are some stipulations that can make those ten years spread out to an even longer period of time. Here are some reasons you may have an extended tax statute of limitations:

  • If you agree to an extension, your statute is placed on hold until that extension time is up.
  • If you file bankruptcy, your statute is placed on hold until six months after the bankruptcy and court proceedings have been finished.
  • If you leave the country for at least six months, the statute is placed on hold until you decide to return.
  • If you are making payment installment arrangements or request innocent spouse relief, the statute is placed on hold until the final decisions are made.

For instance, if you are not in the United States or you become a fugitive, the statute of limitations may be “tolled” – or stop running – until you are found or return home. Another matter to consider is when the 6-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from your last act of tax evasion or fraud.

It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.

Tax Crime Statistics

Let’s end with the good news. Although the law grants extensive powers to the IRS, the chances of you being charged — never mind convicted — of tax fraud are minimal. According to IRS statistics, of the approximately 240.2 million tax returns filed, less than 2,000 people were investigated for fraud in 2020. Of those who were investigated, only half were actually charged with a criminal offense. However, once the IRS charges a taxpayer, the conviction rate is high: around 93%. Tax prosecutors have a high burden of proof to meet and their resources are limited; so they tend to focus their efforts on clear-cut cases.

Another positive tidbit is that the IRS rarely brings up an original return in audits or criminal prosecutions, if you came forward and tried to correct mistakes through an amended return. This means that if you avoid blatant abuses and correct filing errors when they come up in an audit, your chances of staying on the right side of a prison cell are excellent.

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Reducing Taxes on Your Holiday Bonus

As the spirit of generosity is in the air, companies and employees need to know that holiday bonuses are considered supplemental wages and subject to taxes. Holiday bonuses are viewed by the IRS as compensation, just like paychecks, so taxes need to be withheld from your holiday bonus.

How Much are Holiday Bonuses Taxed?

Some of the taxes you will need to pay on your holiday bonus include:

Social security tax:

You pay social security tax on all compensation up to $132,900 in 2019. If you haven’t passed this threshold, then you can expect your employer to deduct 6.20% from your bonus for social security.

Medicare tax:

You can expect another 1.45% to be deducted from your holiday bonus for Medicare tax.

Federal income tax:

The IRS requires a set percentage of your bonus to be withheld when you receive it. This is because your holiday bonus is considered a supplemental income. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%. This is lower than the federal income tax rate of 25%.

State income tax:

depending on which state you live in, state income tax will be withheld at the rate the state requires by law.

Retirement Plans (401k):

If you have requested that your employer contribute a portion of your wages to your retirement plan, then the rate at which you have set will be the same rate that will be taken out of your holiday bonus.

Ultimately, you should check with your employer about your holiday bonus and taxes. Your employer has the option to combine your regular paycheck and holiday bonus and withhold taxes on the whole amount. If your employer does this, it may result in a higher withholding than 22%.

If this is the case, don’t worry as you will eventually get some of the money back as part of your federal tax refund when you file your taxes.

How to Avoid Holiday Bonus Tax

Are there any ways to avoid paying tax on the bonus? No. And failing to report and pay taxes could lead to problems down the road. But there are ways to minimize or delay the impact. Here are three options:

Give a little more:

Employers can estimate the taxes an employee would have to pay on the bonus and add that to the total amount. That way, after taxes, the employee would get to keep the intended bonus amount. Obviously, this requires the employer to be more generous, which is not always possible.

Invest in the future:

Another option – that would avoid both payroll and income taxes – is to put the bonus into the employee’s 401K retirement plan. While employees would not actually receive a check during the holidays, they would also not have to pay taxes on that money until they withdraw it. In the meantime, that bonus could continue to grow.

Kick Off a Healthy New Year:

Employers can decide to award holiday bonuses in January and offer the option of placing the money in a Flexible Spending Account for healthcare. None of that money would be taxed, but the employee would have to use it on qualifying health or dependent care expenses.

If you’re an employee and your company will not offer any of the options above, then do your best to plan ahead and factor the taxes into your holiday budget. And if it makes you feel any better, giving is always better than receiving.

Looking for assistance with tax relief? Optima Tax Relief’s licensed professionals offer a range of tax services to help you. Reach out for a consultation today.

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How to Report Foreign Income to the IRS

You may live or work abroad, but if you’re an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the country, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the IRS. However, in some cases you may receive a foreign tax credit or tax exclusion for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

What is a Foreign Income Tax Credit?

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the foreign tax credit is to ensure that the total amount you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to do your taxes, they will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, it would be advisable to choose a different tax preparation program.

What is the Foreign Earned Income Exclusion?

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year. For 2013, the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The IRS has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

What to do as a U.S. Government Employees Living Overseas

Income earned by employees of the U.S. government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion – even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the foreign tax credit or the foreign income exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the U.S.

If you reside within the U.S. full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self-employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

How to Report Income with a W2 or 1099

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements, or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

Need to speak with a licensed tax professional? Optima Tax Relief offers a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.

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Deducting Your Gambling Income & Losses

 

We all know the thrill of winning from gambling whether you’re an avid gambler or the occasional one. But did you know that all winnings are fully taxable? No matter how small your gambling winnings, they must be reported on your tax return. Gambling income includes- but not limited to- winnings from lotteries, keno, slot machines, table games (i.e. poker, craps, roulette, blackjack, etc.), racing or sports betting, and bingo.

Are gambling losses deductible?

Yes, and here’s where the deductions on your gambling losses come in – you may be entitled to a deduction if you had any gambling losses come tax filing season, but only up to the extent of your winnings for the year. For example, if you won $3,000 from gambling for 2016, the most you can deduct on your 2016 tax return is $3,000, no matter how much you lost. Gambling losses must be reported on Schedule A as an Itemized Deduction, which are separate from winnings. Continue reading for important facts about claiming your gambling losses on your tax return.

Five important facts about deducting gambling income and losses:

  1. You must report the full amount or your winnings as income and claim your losses (up to the amount of your winnings) as an itemized deduction.
  2. You cannot reduce your gambling winnings by your gambling losses and then report the difference.
  3. Claim your gambling losses on Schedule A, Itemized Deductions, under ‘Other Miscellaneous Deductions’.
  4. The IRS recommends that you keep written documentation, like a notebook or a diary, for proof in case of an audit and to keep winnings and losses separate and organized. According to the IRS Publication 529 Miscellaneous Deductions, your notebook should contain at least the following:
    • The date and type of your specific wager or wagering activity.
    • The name and address or location of the gambling establishment.
    • The names of other persons present with you at the gambling establishment.
    • The amount(s) you won or lost.
  5. According to the IRS, you should also have other documentation for additional proof through the following:

Form W-2G (if given), certain winnings; Form 5754, statement by person(s) receiving gambling winnings; wagering tickets; canceled checks; substitute checks; credit records; bank withdrawals; and statements of actual winnings or payment slips provided to you by the gambling establishment. Learn more about how gambling impacts your taxes with Optima Tax Relief. To keep up to date with gambling winnings tax laws and your responsibilities as a taxpayer, please refer to the IRS Help & Resource page or consult your local CPA or tax attorney.

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What Does Voluntary Compliance Mean in Regard to Taxes?

The United States federal income tax system is operated under a system of voluntary compliance. This innocuous sounding term actually packs quite a potent punch –  there is little that is voluntary about the federal tax system, at least where paying taxes is concerned. Many celebrities and ordinary citizens alike have learned this lesson the hard way, almost always at great financial cost.

Voluntary Compliance and Audits

The “voluntary” nature of taxation relates to the method of submitting and paying income tax obligations. The Treasury department places the burden of figuring, reporting and paying income taxes in the hands of its citizens, rather than automatically collecting the revenue. In contrast, sales taxes and other use taxes are involuntary. Whenever you buy an item or service that carries sales tax, you not only pay the price of the merchandise or service, but the tax as well.

Although the IRS collects taxes under a voluntary compliance system, the assumption is that most of the population will fail to pay its full tax burden, either by mistake or by deliberate attempts at tax evasion. To remedy the resulting shortfall, the IRS has instituted a system of tax audits. A majority of audits are triggered by suspicious items included or omitted from tax returns. Other tax audits are generated because taxpayers who should file tax returns fail to do so or file so-called frivolous returns. An unfortunate minority of taxpayers are flagged for audits by random selection – just plain bad luck.

Celebrity Tax Evasion & Frivolous Tax Returns

Throughout history, famous and infamous figures have been caught in the net of failure to comply with the “voluntary” system. Notorious gangster Al Capone died in prison as a result of a conviction of income tax evasion. More recently, celebrities like Martha Stewart, Wesley Snipes and Marc Anthony have been snared by convictions for federal income tax evasion. One persistent but thoroughly discredited strain of tax protest arguments claim that federal income taxes are unconstitutional, or that taxpayers can eliminate their federal income obligations by filing “zero” tax returns. Snipes was one of the more famous figures taken in by this line of reasoning, and as a result was convicted of misdemeanor tax evasion in 2008 and sentenced to 3 years in prison. As of 2014, the movie star was back on the silver screen, headlining in the action feature Expendables 3. Presumably, Snipes will pay a rightful proportion of his earnings from the film, marketed as a summer blockbuster, to the IRS. The IRS exercises little patience with taxpayers filing what it concludes to be frivolous returns. It imposes an array of civil penalties, listed below:

  • Accuracy-related penalty under section 6662 (20 percent of the underpayment attributable to negligence or disregard of rules or regulations)
  • Civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud)
  • Erroneous claim for refund penalty under section 6676 (twenty percent of the excessive amount)
  • Fraudulent failure to timely file income tax return (triple the amount of the standard failure to file addition to tax under section 6651(a)(1))
  • Frivolous submissions other than tax returns under the Tax Relief Health Care Law of 2006 ($5,000 penalty)

Is Tax Evasion a Felony?

Criminal penalties for tax evasion based on frivolous tax returns can be severe. Both fines and jail time may be imposed upon conviction. Specific penalties are listed below.

  • Felony for attempting to evade or defeat tax under Section 7201 provides as a penalty a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 5 years with optional additional fine up to $250,000
  • Felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter under section 7206 is a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000
  • Felony for promoting frivolous arguments and assisting taxpayers in claiming tax benefits based on frivolous arguments under section 7206(2) may be fined up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000

How Do Corporations Avoid Paying Taxes?

Individual taxpayers are far from alone in their attempts to minimize their tax burdens. Complex accounting maneuvers with names like the Double Irish or Dutch Sandwich allow major corporations like Apple and Google to evade the 35 percent US corporate tax. But unlike tax evasion or frivolous tax returns, corporate tax dodges are largely perfectly legal – for now. Governments around the world have begun to put measures in place designed to curb offshore tax havens and other corporate tax evasion strategies.

Fair Tax System

The voluntary compliance system is far from the only viable system of income taxation. The so-called fair tax system is based on imposing use taxes – the more goods and services a person uses, the more taxes he or she pays. But fair use systems often impose a heavier burden on low-income taxpayers because they pay a higher proportion of their income use taxes. For this reason, fair use taxes are often labeled as regressive — and aggressively unfair.

Simple Tax System

Supporters of a so-called simple tax system include tax expert Austan Goolsbee and policy wonk Ezra Klein. Under a simple tax system the IRS would calculate taxes, credits and deductions and provide taxpayers with a copy of the completed return. Taxpayers who agree with the IRS’s calculations could simply accept the return, while taxpayers who disagree could file their own returns.

The simple tax system has obvious advantages. The IRS has a good idea of what many taxpayers earn and owe anyway, thanks to Form W-2 and various versions of Form 1099. The simple tax system would also ensure nearly 100 percent compliance, since the IRS would be supplying tax returns rather than individual citizens.

As one might expect, the tax preparation industry (including TurboTax) largely disfavors the simple tax return system. Approximately 60 percent of all Americans contract with outside tax preparers to file their federal and state income tax returns. Implementing something like the simple tax system would cut deeply into that percentage.

While the simple tax return system is indeed simple, there are potential pitfalls. First, many taxpayers may accept the IRS’s version of their returns whether it is accurate or not from inertia, laziness or fear of reprisal. Second, even if the IRS and its agents were totally diligent in calculating the maximum credits and deductions, human error must still be considered.

Death and Taxes

Given the present financial and political climate, it is unlikely that the voluntary compliance tax system will change in the foreseeable future. It’s also a safe bet that attempts to evade taxes will continue, including extreme cases such as Facebook co-founder Eduardo Savarin, who renounced his American citizenship in 2012 shortly before the social media giant launched its IPO. In the face of such tax evasion attempts, the IRS will also undoubtedly continue its enforcement strategies, including the dreaded audit.

Considering a tax consultation? Optima Tax Relief offers a range of services discussed in our free consultation. Our award winning staff of tax professionals provide comprehensive tax relief services to help you resolve any tax issue. Speak to us today.

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Would You Cheat on Your Taxes?

Would you cheat on your taxes? If you said “no,” count yourself in the majority of people who wouldn’t commit tax fraud.

According to the Taxpayer Attitude Survey, about 87% of American Taxpayers say that it is not acceptible to cheat on taxes, while more than 95% agree that it is every American’s civic duty to pay their fair share of taxes. In addition, 91% of those surveyed agreed that everyone who cheats on their taxes should be held accountable.

Think that if you look honest, you can get away with fudging your taxes? Think again.

However, actual revenues collected by the Internal Revenue Service tell a somewhat different story. The so-called “tax gap” is defined as the difference between the total income tax liability and the amount of income tax payments that are made voluntarily and on a timely basis. This tax gap totaled $450 billion in 2008 but shrank to $385 billion after late payments were posted.

Taxpayers across the country under-reported their income by an estimated $376 billion the same year, while underpayments amounted to $46 billion, and $28 billion was owed by non-filers – people who did not complete tax returns at all. All told, the compliance rate in 2008 on the estimated $2.66 trillion tax obligation was about 83 percent.

Under-reporting Income to the IRS

Most taxpayers are diligent about paying taxes on income reported on W-2 forms. After all, the IRS receives the same information, so skipping out on paying what is owed is fairly difficult. Self-employed workers who receive 1099 forms have somewhat more latitude about how much total income they report due to legitimate business-related expenses. Nonetheless, earnings listed on 1099 forms are also reported to the IRS; therefore, most self-employed workers at least acknowledge those earnings.

On the other hand, a significant amount of cash income is never reported to the IRS. If you were paid $100 to fix someone’s computer, you will probably get by with not reporting that income. However, if you collect a cool $5,000 on the side through your online storefront, you shouldn’t expect to fly under the IRS radar if you don’t acknowledge the sum on the following year’s tax return.

Questionable Tax Deductions

There is nothing wrong with claiming every penny to which you are entitled through legitimate tax credits and deductions. This is not regarded as cheating on your taxes. If you are self-employed and you have established an authentic home office, you should absolutely claim the home office deduction. If you are a wage earner whose boss expects you to call on out-of-town clients on your own dime, go ahead and claim the deduction for work-related travel. As long as you can document your claim, you won’t be accused of tax fraud – even if you are audited by the IRS.

On the other hand, taking a vacation in Hawaii and claiming a deduction because you attended a seminar during the trip likely won’t pass muster with the IRS. Likewise, the cost of your daily commute from your home to your cubicle is also unlikely to be deductible. If you have doubts about whether a deduction or credit is legitimate, it’s best to check with a tax attorney or with a certified public accountant to avoid being accused of cheating on your taxes.

Discredited Tax Protests

A persistent movement exists among a small group of individuals who claim that federal income taxes are unconstitutional because the Sixteenth Amendment to the Constitution (which was ratified in 1913) was improperly ratified. These tax protesters insist that they are exempt from paying income taxes as a result. The IRS has repeatedly dismissed such claims, frequently charging delinquent taxpayers with filing frivolous returns.

One of the more prominent figures snagged for adhering to discredited tax protester claims is actor Wesley Snipes. Snipes was released from federal prison in 2013 after serving nearly three years for misdemeanor charges related to willfully failing to file tax returns. Snipes claimed that he was misled into believing that his actions were legal by his co-defendants, tax-protesters Eddie Kahn and Douglas Rosile. Federal prosecutors had also pursued felony charges against the three for tax fraud and conspiracy, alleging that Snipes had shipped more than $15 million overseas in an illegal bid to avoid paying taxes. Kahn and Rosile were convicted of those charges, but Snipes was acquitted.

Straight-Up Tax Scams

While the actions described above can be described as questionable claims and gray-area tax-related behavior by otherwise honest citizens, straight up tax evasion scams are also prevalent. Such tactics as strictly paying employees in cash and setting up questionable business and family trusts are among the more common tax evasion schemes attempted by both individuals and companies attempting to skirt paying income taxes.

While a case can sometimes be made for leniency concerning unwitting tax evasion, the IRS frequently takes a dim view of defendants that in its view have deliberately attempted to commit fraud. Outright scams, once uncovered by the IRS, are likely to result in criminal tax evasion charges and long prison sentences upon conviction. This contrasts with civil tax evasion, which can carry hefty fines but no jail time.

What is the Penalty for Cheating on Your Taxes?

Even if you get away with underpaying your taxes (or failing to file returns at all) for a short period, the odds are good that you will be caught eventually. The statute of limitations for federal tax audits is doubled from three to six years if you fail to report at least 25 percent of your income, or if you have income on undisclosed foreign assets that totals $5,000 or more. There is no statute of limitations on IRS audits for filing fraudulent returns or unlawfully failing to file tax returns, which means that you could be looking over your shoulder for years – or even the rest of your life.

Optima Tax Relief offers a range of tax relief services to help you prepare your taxes. Schedule a tax consultation with one of our licensed professionals today to discover how we can help you.

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Tax Season Is Here…And So Are The Scammers

The start of each new year typically brings renewed resolve to get healthy, strengthened desires for personal improvement, and of course, tax season.

Tax season can mean different things to a lot of people. Some look forward to a large refund; for others, it’s one more thing to tack onto their to-do list. For the scammers out there, it means the annual opportunity to rake in fraudulent refunds has finally arrived. Tax scammers are ruthless. They’re unaffected by the thought of families and individuals dependent upon what is likely their biggest check of the year being denied this financial relief.

If there’s one thing we can be sure of, it’s that there will be scams this tax season. Fortunately, there are safeguards you can take to stay protected this tax season.

  • Schedule time with your tax preparer now so you can get your taxes done as early as possible. This will help decrease the chances that a fraudster will get your refund before you do.
  • Sign up for Scam Alerts from the FTC to stay abreast of all the dirty tricks scammers are currently using.
  • Talk to someone in your HR department to see if you can get your W-2 before it’s mailed out. This will help ensure that you actually receive it so you don’t have to risk it being lost or stolen in the mail.
  • Never send emails with personally identifiable information (PII) attached. It’s best to never send them through email at all, but if you must, you should encrypt your message by making a change in your email’s security settings.
  • Beware of computer scams. These can come via email or as popups on your computer asking for your personal information. The IRS saw an approximate 400% surge in phishing and malware incidents in the 2016 tax season.
  • Always use a professional, trustworthy tax preparer. Sometimes, even national tax preparation chains can scam you out of your money or use less-than-secure procedures when it comes to handling your personal information. Make sure you use someone you trust.
  • Never provide any personal information over the phone to someone who says they are from the IRS. The IRS will never contact you via phone, email or social media.

Tax season is stress enough as it is; worrying about tax fraud shouldn’t have to be a part of it. Maintain a peace of mind by filing taxes as early as possible and by enrolling in an Optima Protection Plan at optimatax.idprotectiononline.com.

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Gambling Taxes & Casino Win-Loss Statements

In the last thirty years, gambling has changed its image from a quasi-legal activity to a major player in the economy. The IRS has responded accordingly, now requiring gambling winnings to be reported as a source of income, with losses deductible only to the extent of winnings. A professional gambler, or someone who gambles often would especially need to be mindful of gambling taxes. (IRC section 165(d).) (If you win a prize in a drawing, that does not count as  “gambling.” It is reported on 1099-MISC, and other rules apply.)

Do you have to pay taxes on gambling winnings?

If you are fortunate enough to win $1200 in a jackpot at a slot machine, $1500 from keno, $5000 from a poker tournament, or $600 or more from “other” gambling winnings, then the casino will record your Social Security Number and the amount of the win, and write it off as an expense. Casinos offer a win-loss statement for their slot players that itemizes coin-in and coin-out, but vary in their player-tracking policies for other types of play. The casino will give you a copy of the gambling win, on Form W-2G and send a copy to the IRS. The IRS will use this gross figure as increased ordinary income unless you can indicate losses against this win. Senior citizens beware: the amount indicated on line 21 of Form W-2G will potentially make more of your Social Security benefits taxable!

Can you claim gambling losses on your taxes?

The traditional place to declare gambling losses is on Schedule A under miscellaneous deductions, but there are problems with doing it this way. First, you must “qualify” to itemize deductions on Schedule A.  For Schedule A to do you any good, your deductions must be greater than what you would receive as the standard deduction.

Let us say that you are single, so your standard deduction for 2014 is $6,200. If your allowable itemized deductions total less than this amount, then filing a Schedule A won’t benefit you. However, if you have sufficient mortgage interest, real estate taxes or charitable contributions to justify itemizing your deductions, then declaring a $1200 loss on Schedule A will help to offset the $1200 win.

If you don’t qualify for a Schedule A, or if you want to report less than what appears on line 21 of Form W-2G , then you have significantly more bookkeeping to do. All winnings, not just W-2G winnings, are reportable. Therefore, you must maintain a day-to-day diary that itemizes ALL of your winnings and losses per session, not just amounts of $1200 and over. The diary, similar to a tip diary, must be credible. It’s a good idea to back it up with bank records, ATM slips, and casino win-loss statements.

If you travel to gambling resorts once or twice a year, be prepared to keep a log of your winnings and losses per trip. As you arrive at your resort or hotel, make a dated note of your “buy in”, the amount of cash that you brought along to play with. When you check out of the hotel or resort, make a note of your “win” (or loss). This is considered the end of your gambling session.

If you live in a gambling city such as Reno or Las Vegas, then there is technically no way to delineate a gambling session, since slot machines are available in supermarkets and convenience stores 24 hours a day, as well as in bars and restaurants. If you are reporting less than the amount of winnings reported on Forms W-2G, be prepared for an IRS letter or an audit, and have all of the records required for a day-to-day record of wins and losses.  You should also be aware of various state laws that may vary from federal requirements. In such cases, it’s a smart strategy to have a tax professional assist you with the reportable figure. This option will require conforming to the situation in the court case Shollenberger v. Commissioner T.C. memo 2009-306, as referenced in The Tax Book, by Tax Materials , Inc.

Don’t expect casinos to proactively withhold any portion of your winnings for tax purposes unless state law requires it. Most state laws do not. Exceptions include foreign winners or other special circumstances.

There are two obvious reasons casinos won’t voluntarily place tax withholdings on your gambling winnings:

  1.      Withholding creates added administration paperwork
  2.      Withholding disrupts the flow of business (if the money is withheld, then you won’t lose it back)

You can request that gambling taxes be withheld from your winnings (perhaps based on your marginal tax rate or higher) at the time of the payoff. But you should not request withholding if your winnings come from the casino where you work. (Some states and casinos allow casino workers to gamble where they work; others do not.) However you go about doing so, having tax withholdings from gambling winnings can potentially save you hundreds or even thousands of dollars at tax time.

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