by Optima Financial Group | Sep 18, 2014 | IRS Collections
Statistically, your chances of being charged with criminal tax fraud or tax evasion by the IRS are minimal. The IRS initiates criminal investigations against fewer than 2% of all American taxpayers. Of that number, only about 20% face criminal tax charges or fines.
Related Article: The IRS Criminal Investigation Process
Unofficially, the minimum amount of unpaid taxes required to trigger an IRS criminal investigation is $70,000. And since the majority of Americans don’t even earn that much money, it’s easy to see why ordinary taxpayers need never worry about facing tax evasion or tax fraud charges.
While honest mistakes or even negligence generally won’t trigger a tax investigation, perpetrating fraud very well might. IRS agents are trained to recognize signs of criminal tax fraud and evasion. Exhibiting behaviors the IRS calls “affirmative acts” could eventually result in that fateful knock on the door from the IRS.
Negligence versus Tax Fraud
Back in the day, it seemed like the IRS was lying in wait, prepared to strike unsuspecting taxpayers at the slightest sign of tax error. These days the IRS is more tolerant of mistakes made by honest taxpayers.
When the circumstances are not clear cut, the IRS frequently errs on the side of giving the taxpayer the benefit of the doubt. Miscalculating the amount of your Earned Income Tax Credit is a mistake that could cost you a significant sum of money, but it isn’t usually considered to be tax fraud. Artificially concealing $800,000 of income by keeping two sets of books? Tax fraud. (Nolo)
Evidence of Tax Fraud
Four so-called elements of tax fraud are recognized by the IRS: deception, misrepresenting material facts, submitting false or deliberately altered documents and failing to submit critical documents, such as tax returns. Several elements of fraud must occur together to trigger IRS tax fraud charges. But a single element that occurs in an especially blatant fashion may generate IRS tax fraud charges.
For instance, failure to submit a tax return for a single year is not usually considered to be an element of tax fraud. On the other hand, unless your income is extremely low, failing to file any tax returns ever could very well cause the IRS to initiate a criminal investigation against you.
Badges of Tax Fraud
The list below, taken from the IRS.gov website, represents several “badges of fraud” the IRS looks for when determining whether to file criminal charges.
Badges of tax fraud fall into four general categories: improper reporting of income, unjustified deductions or tax credits, inadequate record keeping and outright illegal behavior. As with elements of fraud, IRS agents are inclined to give taxpayers the benefit of the doubt. They’ll impose penalties for taxpayers in arrears rather than bringing criminal charges against them.
- Understatement or omission of substantial sums of money
- Fictitious deductions
- Maintaining “shadow” sets of accounting records
- Deliberate destruction of records
- Evidence of consistent underreporting of income
- Obviously nonsensical explanations for behavior
- Refusing to cooperate with an auditor or examiner·
- Deliberately concealing assets, as in overseas tax shelters
- Illegal activities
- Dealing exclusively in cash
- Maintaining obviously inadequate records
- Indicators of Fraud
The IRS categorizes indicators of tax fraud into six broad categories: income, expenses and deductions, books and records, income allocation, methods of concealment and taxpayer conduct.
Just as with elements of tax fraud and badges of tax fraud, the difference between negligence and criminal conduct is often a matter of extent.
Indicators of fraud usually include an element of deliberate conduct as well. An extensive list of actions that constitute indicators of fraud are available on the IRS website, but the examples below should provide a general idea of how the IRS views indicators of fraud.
Example #1:
Forgetting to include income from a W-2 form is not considered an indicator of income fraud. Insisting on being paid cash wages for a job and refusing to list any income from that job on your federal income tax return would be considered to be an indicator of income fraud.
Example #2:
Miscalculating the percentage of business versus personal use for your computer is not considered an indicator of fraud for expenses and deductions. Attempting to deduct the entire cost of your vacation to the Bahamas because you answered a single work-related email from your hotel room WOULD be.
Don’t Be Evasive
In general, if you suspect that a particular type of conduct is disallowed by the IRS, you shouldn’t do it. If you go ahead and do it anyway, you run the risk of being cited for tax evasion or tax fraud. And if you do receive that dreaded knock on the door from the IRS, you should not be surprised.
Additional Tax Tips:What to do during an IRS Audit
How to survive an IRS tax audit
by Optima Financial Group | Aug 27, 2014 | IRS Collections
You may be under the impression that if you’re being audited, you’ll find out by a strong knock at your front door. Unless you’re in serious trouble, this won’t be the case.
How will you know if you’re being audited?
Short Answer: The IRS will let you know directly.
The only way you’ll know for certain if the IRS is auditing you is if the IRS tells you – either by phone or mail. If your initial contact is by email, it’s likely a scam and you should report it.
Who is most likely to be audited?
According to Bloomberg News, only 1% of all tax returns each year are audited. But there are factors that increase your chances of being targeted for an IRS audit.
- Being rich. 12.5% of all tax returns for those who make over a million dollars a year.
- Mistakes on your tax return. This could be anything from not reporting all of your income, your numbers not matching with your employer-provided W2s, or even math errors on your tax return. Don’t round your numbers.
- Self-employed. The IRS will look at your deductions to see if they are the typical amount for someone in your industry. Travel/entertainment and automobile deductions are watched especially closely. While a home office is no longer an immediate reason to suspect an audit, taking the deduction needs to be backed up with detailed records.
- Large charitable donations. If you only make $20,000 a year and yet donated a substantial amount of money, watch out.
- Your associates. If your business partner in a firm or a close relative is being audited, you could be too.
Types of IRS Audits
There are three types of IRS audits, depending on the complexity of your return, the number of questions the IRS has and the dollar amount involved.
- Correspondence Audit – An IRS tax audit conducted entirely by mail. The IRS likely has a short checklist of questions to ask you about your income, expenses, or itemized deductions.
- Field Audit – The IRS will send an agent to visit you in person in your home or business. They will want to inspect the records you’ve kept.
- Office Audit – You are requested to meet with an agent at their nearest office and bring your paperwork with you to the meeting.
If you are audited there are four things to remember:
- Respond to their letters within the deadline given on the notice. If you need more time, you’re far more likely to get an extension if you ask for it before the deadline’s passed.
- Gather all the documentation you need to answer their questions and provide copies to the IRS. (Never give them your original documents, they aren’t responsible if anything is lost.)
- Bring the right representation. Not your Uncle Bill but a CPA or tax attorney. This is not the time for amateur help or to go it alone.
- Be polite and respectful. But don’t volunteer anything. If the agent wants to expand the audit, you are entitled to more time to answer any new questions that may arise.
An IRS tax audit can be a painful experience but you will get through it with thorough preparation, and if needed, expert help from Optima Tax Relief.
Additional Tax Tips:
The IRS Criminal Investigation Process
What to do during an IRS Audit
What does the IRS look for in an audit?
IRS penalty and interest rates
by Optima Financial Group | Jun 17, 2014 | Tax and IRS News
The bonus depreciation tax break allows businesses to deduct up to 50% of the cost of capital purchases upfront, resulting in big tax savings for business owners. In May 2014, the Ways and Means Committee of the Republican-controlled House of Representatives voted 23-11 – along party lines – to renew and make permanent the tax break designed to encourage corporate business investment.
A Tax Break with a Deficit
But making the depreciation tax break permanent would add nearly $300 billion to the deficit over the next ten years, according to the Wall Street Journal. A measure to make corporate research credits permanent would increase the deficit by another $300 billion. Enacting all the corporate-friendly tax measures proposed or passed by the House would extract approximately $1 trillion from the economy. Despite these added costs to the budget, the sentiment in the House is that business owners need certainty about future tax regulations in order to feel confident about making capital investments.
Related Article: Should We Abolish Corporate Income Taxes?
A Fate Less Certain
The permanent extension of the corporate capital deductions bill is scheduled for a vote by the full House, where it is expected to pass, most likely along party lines as well. But the ultimate fate of the corporate depreciation tax credit is somewhat less certain. A version of the corporate depreciation tax credit bill under consideration in the Democratic-majority Senate limits the extension of the credit to two years. Scheduling a Senate vote for its version of the bill is also being weighed down by partisan battles concerning a number of related and unrelated issues.
The differences between the bills means that the two would have to be reconciled before they could be sent to President Obama’s desk for his signature or veto. It is not known whether President Obama would sign the measure if it passed Congress, although he did sign a similar measure in 2010 that allowed businesses to apply an accelerated rate to deductions for capital expenses on their 2010 federal income tax returns.
Renewing Expired Tax Breaks
In a typical year, Congress passes numerous pieces of legislation designed to renew or extend temporary tax measures that have expired recently. Even in the hyper-partisan atmosphere of the present Congress, many expired tax measures are expected to be renewed eventually. This includes the corporate depreciation deduction. But given that 2014 is an election year, some observers believe that no significant legislation will be passed until after November, when a lame-duck Congress will be at least temporarily freed from the pressures of campaigning.
Related article: 9 Tax Breaks That Could Expire in 2014
by Optima Financial Group | Jan 28, 2014 | Tax Planning
If you are eco-conscious, you probably sort your disposables for recycling, wash your clothes in cold water, carry reusable shopping bags to the grocery or perform other environmentally-friendly actions. But did you know that you may also be eligible to receive tax credits and deductions from Uncle Sam? While tax breaks for going green are not nearly as generous as they were in past years, it is still worth your while to investigate possible savings from the IRS for projects that you plan to carry out anyway.
Make Home Improvements
Did you recently replace one or more drafty windows or reinforce the insulation on your home? If so, you may qualify for tax credits through the Non-Business Energy Property Credit, which covers 10 percent of costs associated with purchasing and installing qualified energy-efficient insulation, doors, metal and asphalt roofs and windows.
The credit is also available for non-solar heating, ventilating and air conditioning (HVAC) systems, biomass stoves and non-solar water heaters. A maximum of $200 in credits can be claimed for window installation, with a $500 lifetime limit in total credits. The credit can only be applied to improvements made on your existing primary residence located within the United States. The Non-Business Energy Property Credit expired at end of December, 2013; new projects will not qualify unless Congress votes to renew the credit.
Update to Energy Efficient Appliances
Have you resorted to showering with cold water to save money on your utility bills? Perhaps you should consider installing an energy-efficient solar hot water heater.The Residential Energy Efficient Property Credit covers up to 30 percent of the cost of purchasing and installing a solar hot water heater, along with costs associated with solar electricity arrays, residential wind turbines and geothermal heat pumps.
There is no upper limit to the amount of tax credits you can claim, and the credit is applicable to new and existing residential construction. You can also claim up to 30 percent of the cost of installing residential fuel cells and microturbine systems up to a limit of $500 under the program. The Residential Energy Efficient Property Credit remains in effect through the end of December 2016, so you have plenty of time to make those improvements.
Optima Tax Relief has more about how you can get credit for making your home energy efficient in this post.
Green Up Your Ride
If you missed out on the recent Cash for Clunkers program, you may still have a chance to collect tax breaks for buying an energy-efficient car – as long as the car you buy is either a plug-in hybrid or an all-electric model. The Plug-In Electric Drive Vehicle Credit (IRC 30D) applies to four-wheeled passenger vehicles acquired by individuals and businesses after December 31, 2009. Some two-wheeled and three-wheeled vehicles acquired after December 31, 2011 and before January 1, 2014 also qualify for the program. Tax credits for non-plug-in hybrids, diesel-powered vehicles and alternative fuel vehicles (AFVs) expired at the end of 2010.
You may claim $2,500 for all eligible vehicles. In addition, for a vehicle that draws what the IRS calls “propulsion energy” from a battery with a capacity of at least 5 kilowatt hours, you may claim an additional $417. You may claim an additional $417 for each additional kilowatt hour capacity up to a maximum credit of $7,500.
The IRS will begin phasing out the credit over a one-year period beginning with the calendar quarter following a calendar quarter during which a specific manufacturer sells at least 200,000 qualifying vehicles in the United States. (The clock starts after December 31, 2009). During the first two quarters of the phase-out period, individuals who purchase qualifying vehicles may claim 50 percent of the applicable credit; during the second two quarters of the phase-out period, taxpayers may claim 25 percent of the applicable credit. No credit may be claimed after the end of the phase-out period.
As of January 2014, there is little danger of sales triggering the phase-out stage of the Plug-In Electric Drive Vehicle Credit program. The most popular plug-in electric car, the Chevrolet Volt, has sold approximately 56,000 units since it was introduced to the consumer market in December 2010. (Chevy representatives made an announcement at the 2014 Detroit Auto Show that mass production of the all-electric Volt has been suspended; instead, the car will be reclassified as a “niche” model targeted for specific audiences, much like the iconic Corvette.) The Ford Focus electric model had sold just under 21,000 cumulative units in the United States as of November 2013, according to the IRS website.
How to Claim Your Tax Breaks
To claim tax breaks for home improvements and energy-efficient appliances, file Form 5695, Residential Energy Credits.
To claim tax breaks under the Plug-In Electric Drive Vehicle Credit program, individual taxpayers submit Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit along with their federal income tax returns. Under the American Recovery and Reinvestment Act (the “stimulus”), individuals who purchase qualified vehicles during 2010 or later may apply the credit toward payment of the Alternative Minimum Tax (AMT), if they are subject to the tax. To claim the credit for vehicles purchased for business use, submit Form 3800, General Business Credit.
Going green doesn’t reap the same rewards it used to, but there’s still money on the table if you’ve made any of these changes. Don’t let these tax credits fall through the cracks!
Photos: Flickr, Al.com
by Optima Financial Group | Dec 6, 2013 | Tax Planning
Who wins after every lotto draw? The taxman does, of course! Optima Tax Relief wants to help you save by providing tips for lowering taxes on your lotto winnings.
How Much Are Lotto Winnings Taxed?
Not only is the lottery a tax on people who are bad at math –US lotteries generally only pay out 60% of the money players bet. The chances of winning a large lottery, such as the Powerball, is one in 175 million and the lucky winner actually has to give the IRS and state tax revenue agencies a big chunk of the prize, every time.
How big a chunk? The taxman’s share could be anything from 40% to 60%, depending on how the winner decides to cash in the prize and if they live in a state that taxes lotto winnings. The same applies even if you win a small prize, win on a game show, or participate in a community raffle.
What to do after winning the lottery
So how does paying taxes on lotto winnings work? And if you do happen to win the lottery, what is the smartest way to minimize your tax burden?
Lump Sum Vs. Annuity Payments
The first tax decision lottery winners have to make is whether to receive their prize as a lump sum or have it paid out in yearly installments, called an annuity. If you win a $10 million prize with the New York State Lottery, for instance, you get to choose between $10 million over 26 yearly payments of approximately $250,000 or a lump sum of a little less than $5 million. The full prize is only for those who choose the annual payments.
Those who choose the lump sum get the cash value in bonds that the lottery would have had to buy in order to pay $10 million over 25 years.
From a tax perspective, choosing annual payments will keep you in a much lower tax bracket, which will reduce the amount of tax you have to pay. As of 2013, taxpayers with an income between $183,251 and $398,350 pay 33 cents on the dollar to the IRS. Those with an income of more than $400,000 have to pay nearly 40 cents on the dollar, which doesn’t even include state taxes.
Similarly, business owners whose profits swing dramatically from one year to the next may benefit from spreading taxable income over multiple years.
However, there is a strong likelihood that taxes will continue to go up over time and negate the tax benefit of annuities. Also, if you choose the lump sum, you could invest the entire amount and put those lotto winnings to work, which — if your investments go well — could more than compensate for the higher initial lump sum tax rate.
“When deciding upon a lottery payment option it ultimately depends on the unique situation,” says Harry Langenberg, Managing Partner at Optima Tax Relief, who points out winners of big jackpots will be in the highest bracket either way. “If you’re a wise investor, it makes sense to take it all at once.”
Set Up a Trust
A smart move for lottery winners is to set up a trust. In states that permit it, creating a trust allows you to collect your winnings anonymously, which can avoid a lot of unsolicited attention from scammers and opportunistic long-lost friends and relatives. A well-designed trust can also allow for tax-free growth of assets, as well as reduce estate taxes for married couples.
Trusts are not just a good idea for lottery winners and the ultra-wealthy. Even families with a moderate income can reap the benefits from setting up a trust. For instance, trusts allow you to specify how and when your children inherit your estate, which can help them use their inheritance more wisely. You can also use trusts to provide funds for particular purposes, like for education and health care, or to allocate monies for a favorite charity.
Pay Taxes Like a Millionaire
Sadly, lottery winners often end in financial ruin due to bad investment choices, greedy relatives and friends, misjudging the cost of taxes or the costs of maintaining the stuff they buy. This trap can be avoided by investing all winnings in a low-risk mutual fund and living off the interest. For example, if you invest a $250 million dollar windfall in bonds and a diversified mutual fund, you could easily generate $4 million a year after taxes.
Even investing a more modest $1 million lottery prize could earn you $50,000 a year, assuming your portfolio yields a 5% interest. Earning a living from your investments, as opposed to owning a business or working for a salary is the reason ultra-wealthy people like Mitt Romney and Warren Buffet pay a lower tax rate than their secretaries. Capital gains, or the money you generate from investing in stocks and bonds, are taxed differently than regular income. This is particularly true if you avoid the trap of trying to time the stock market and hold on to your shares and bonds for the long haul. As of 2013, the long-term capital gain tax rate is 15% for taxpayers with incomes in the 25% to 33% tax brackets.
Lottery as Voluntary Taxation
The words of John Fielding, the 18th-century English satirist, hold true today.
A Lottery is a Taxation,
Upon all the Fools in Creation;
And Heav’n be prais’d,
It is easily rais’d,
Credulity’s always in Fashion;
For, Folly’s a Fund,
Will never lose Ground;
While Fools are so rife in the Nation
The quip that lotteries are a taxation on people who are bad at math is not a joke. According to The Tax Foundation, a non-partisan tax research group based in Washington, D.C., lotteries are not just a controversial way to fill state coffers, they are an actual tax. The use of lotteries to finance the government is nothing new. In 1892, A.R. Spofford, Librarian of Congress, described lotteries as the kind of voluntary tax the most reputable citizens would engage in — as part of their civic duty — to help with the financing of schools, hospitals, and courthouses.
Today, lotteries have lost most of their patriotic component, although some lotteries are centered around charities, but they still are a significant component of state revenue. As with property taxes, lottery tax can be avoided altogether by refraining from buying a ticket.
Photo: pirateyjoe
