Why Smart People Fall For IRS Phone Scams

The IRS is not calling you.

We reviewed all of the reasons why the IRS is not calling you in last month's post. So why is it that smart people fall for IRS phone scams?

Scammers are persistent.

The fake IRS is persistent, and taxpayers don’t really understand how the real IRS works. The fake IRS’ persistence combined with the taxpayer’s ignorance starts to eat away at your confidence.

The scammers may have a lot of your personal information.

The fake IRS frequently has a lot of personal information about you. They may know your full name, your address, and all or part of your Social Security Number (most commonly, the last four digits). 

It’s important to remember that none of that information is very private. Heck, every time I call the cable company, they ask for the last four digits of my SSN to confirm my identity. So does my credit card company. And my cell phone company. And let’s not forget about Experian and the IRS – both of whom have been hacked in recent years.

Maybe you really do owe taxes.

Sometimes the taxpayer might actually owe the IRS money. To them, it seems reasonable that the IRS is calling them to demand payment. As discussed previously though, calling you about your tax debt really isn’t part of their collections process.

You're honest.

And finally, most people a fundamentally good people who want to do the right thing and stay out of trouble. The fake IRS preys on this.

What to do if you still have doubts?

Hang up the phone and go Google the real IRS’ phone number. Call it. Wait an hour on hold. Talk to the real IRS.

OR – Hang up the phone and make a payment directly to the IRS. Go to their website or look in the instructions for your tax form, look up the address, and mail a payment to the IRS. Alternatively, you can pay them online via IRS Directpay.

Do not write down the phone number that the fake IRS gives you. Do not write down the address that the fake IRS gives you. Go look up that information.

And last but not least: CALL YOUR ACCOUNTANT!

Seriously, if you have an accountant, just let them handle it. Don’t call the IRS on your own. Call your accountant.

The IRS Is Not Calling You

If you’re like me, you’ve received calls from the fake IRS.

Your first instinct when “the IRS” calls you is probably that it’s a scam.

But if you’re like a lot of people, you’ve started to experience doubts due to the sheer persistence of these IRS calls. After all, you don’t want to ignore the real IRS, right?

The IRS is Not Calling You.

But how can I be so sure?

The call is often automated. It usually threatens a civil lawsuit or a criminal charge – usually both. The fake IRS will leave voicemail.

The real IRS has some fairly serious privacy restrictions. The real IRS can’t leave a voicemail or use an automated message to inform you about your tax situation, because they don’t know who might listen to that message. 

Let’s go beyond that and examine the threats.

The real IRS doesn’t sue you. It doesn’t need to sue you. If the IRS has determined you have tax debt, it has the power to file a lien, garnish your wages, seize assets, all without taking you to court. They have a long list of processes they need to follow before they can do all of that – but a civil lawsuit is not part of that process. Ever heard of Tax Court? You initiate that when you disagree with the IRS. You take the IRS to court when you disagree with it, not the other way around.

There is no criminal charge for unpaid tax debt. Criminal charges might stem from tax fraud. In that case, the IRS investigates the fraud and if they find enough evidence, they recommend that the Department of Justice files charges.

If you really think you might be under investigation for tax fraud, do not call the IRS. Call an attorney.

The fake IRS demands immediate payment over the telephone.

Real IRS agents can’t accept payment information over the telephone. They’re not allowed. You can’t do it. If you try, they’ll tell you to pay online through the IRS’ website or mail a check. That’s right – only the fake IRS demands phone payments.

The real IRS doesn’t call you.

Once in a while, when you initiate a phone call to the real IRS and the call is disconnected, a real IRS agent will call you back. But only the nice ones. And that’s when you’ve initiated a real conversation with them. The fake IRS calls you first 100% of the time, and they always return your call.

The real IRS has a process for initiating contact with you. First, they send you a letter.

So, what if you've moved recently and the letter is undeliverable? Wouldn’t the IRS call you then? 

No. 

They’re still not calling you.

When the IRS can’t contact you via letter, your account is placed in an uncollectible status. When they are able to figure out where you live – for example, when you next file a tax return, or get a W-2 – they’ll try again.

Stay tuned for installment #2 of The IRS is Not Calling You: Why do smart people fall for the fake IRS scam?

TAX REFORM 2018 – WHAT SHOULD YOU DO BEFORE DECEMBER 31, 2017.

Congress is fond of passing tax bills in the last week of the year, and this year was no exception!

The standard deduction is changing to $24,000 for married taxpayers, $18,000 for heads of household and $12,000 for individuals. As a result, if your total itemized deductions are below the new standard deduction number, you will no longer be itemizing.

Your itemized deductions include state and local taxes, property taxes, charitable deductions, mortgage interest, etc.

Starting in 2018, total state taxes – your state income taxes plus your property taxes – will be limited to a $10,000 deduction.

Mortgage interest will be limited to $750,000 of mortgage interest and home-equity line of credit interest will no longer be deductible.

Unreimbursed employee expenses and other 2% Miscellaneous deduction (safe deposit box, tax return preparation, investment fees) will no longer be deductible.

What can you do before year-end? 

• Prepay your State taxes for 2017 – don’t wait until 2018 to pay. You cannot prepay next year’s taxes and take a deduction, but you can make sure to pay 2017’s tax prior to year end and take the deduction on 2017’s tax return.

• Prepay your real-estate taxes prior to year-end, if possible. For example, if you recently received a property tax bill in the mail with the option to pay “1^st half” and “2^nd half” – you can pay both now. This can be tricky if you escrow your tax payments with your mortgage payment.

• Make your 2018 charitable contributions before 12/31/17. This includes that trip to Goodwill you’ve been putting off!

Changes to Self-Employment Taxation in the State of Kansas.

Tax Increase In Kansas

Since 2012, self-employment income in Kansas has been exempt from state income tax. This massive tax cut was commonly referred to as “the LLC Loophole” and led to budget problems due to lack of tax revenue. The label “LLC Loophole” was a misnomer – this tax cut was not a loophole, it was a big tax cut that worked exactly as intended, and it really didn’t have a heck of a lot to do with LLCs.

Let me explain: a broad range of businesses became exempt from taxation on ordinary business income that was non-wage income. These businesses included sole proprietors, partnerships, most LLCs, and many corporations, as well as farms and rental properties. Not only did they not need to be LLCs to qualify, they didn’t have to be any type of entity: plain old self-employed individuals and owners of property benefited from the tax cut.

So you may have heard that massive quantities of new LLCs were formed in Kansas because of this tax cut, but you’re wrong. Massive quantities of new LLCs were formed in Kansas because people had no real comprehension of this law and read only the headline.

What does this mean for self-employed individuals?  Start making Kansas estimated tax payments. The tax bill is retroactive to January 1, 2017, so you’ll be paying Kansas taxes on your next tax return. Technically, you're already behind and have missed the first and second quarter estimated tax deadlines. You'll have to catch up. The Kansas Department of Revenue says they won't charge penalties for estimated tax payments that are late solely because of this tax change.

2.      Assess your structure. Now that self-employment income is no longer exempt from tax, it’s time to re-assess whether it’s prudent to make a tax election to become an S-Corp or a C-Corp. If that’s what’s right for you, there are forms to file and formalities to observe. Depending on your situation, it might be possible to make your election retroactive to January 1, 2017.

      If you're a wage earner, your tax rate also went up. The tax increase on wage earners wasn't as large as for self-employed individuals, so it's going to be less noticeable. Withholding tables should have been adjusted automatically in most payroll software. You may have noticed in the last month or so that your Kansas withholding went up a bit. There's nothing more you need to do. If your HR or payroll department changed your withholding since June 30, they have implemented the change already.

Why Do Business Owners Love to Buy Trucks?

You may have noticed that some business owners like to buy a new truck or heavy SUV each year to save on their taxes. Have you found yourself wondering how spending money on a truck really saves money?

What are the elements that come into play?

Depreciation – All vehicles can be depreciated over 5 years.

Bonus Depreciation – New vehicles qualify to take extra depreciation in their first year.

Section 179 deduction – All vehicles can expense a portion of their cost outright. The limit for vehicles that weigh less than 6000 lbs is $3,160. The limit for vehicles that weight more than 6000 lbs is $25,000.

Business use – These deductions work to some degree for vehicles that are used 50% or more in your business. The examples used in this discussion are for vehicles used 100% for business.

All put together, the biggest tax deductions come from buying new vehicles that weigh more than 6000 lbs, due to the combination of bonus depreciation and the Section 179 deduction. But used vehicles that weigh more than 6000 lbs make a good showing on your tax return, too.

Due to limits on deductions for new and used vehicles that weigh less than 6,000 lbs, lighter vehicles make for a less attractive tax deduction.

What kinds of Vehicles qualify?

Dennis Bishop, a Commercial and Retail Sales Consultant at Laird Noller Automotive was kind of enough to curate a short list of his favorite heavy vehicles. If optioned correctly, all of these vehicles will weigh more than 6,000 lbs – but make sure to check the weight on the tag before buying:

Ford Explorer

Ford Expedition

Ford F-150

Ford F-250, F-350, F-450, F-550, F-650, F-750

Lincoln MKT

Lincoln Navigator

Dennis might be understandably biased toward brands that are for sale at Laird Noller, but if you're local to Lawrence, Kansas and you’d like for him to show you any of these models, please contact him at: dbishop@lairdnoller.com.

                           The Ford F-150 needs to be optioned correctly to weigh more than 6,000 lbs.

                           Photo courtesy of Ford Motor Company (2017 model).

Show me the Money!

Here are some examples of how much tax savings you could see. Each example shows a self-employed business owner who reports all income on Schedule C and has no children and no other deductions. The vehicle costs $35,000 in each example. Tax rates will be different for C-Corps and S-Corps, as well as for families with children. Each tax return is different – so treat these examples as illustrative estimates.

TAX SAVINGS FROM PURCHASING A $35,000 VEHICLE ON 12/31/16 THAT IS USED 100% IN BUSINESS
Income		New Ford F-250			Used Ford F-250			New car or light SUV
		Single	Married		Single	Married		Single	Married
$40,000.00*		$7,844.00	$5,932.00		$6,855.00	$5,261.00		$3,129.00	$2,612.00
$100,000.00		$11,300.00	$8,490.00		$9,528.00	$7,158.00		$4,164.00	$3,129.00
$250,000.00		$10,911.00	$9,167.00		$9,197.00	$7,727.00		$4,392.00	$3,381.00

* At the $40,000 income level, the taxpayer potentially qualifies for the Earned Income Tax Credit after taking this deduction - EITC is not factored in to this table as it varies considerably by family size.

From the table, we see that if a single self-employed person who makes $100,000 in profit purchases a new truck on the very last day of the year they will save $11,300 in taxes – or 32% of the vehicle cost! Those are some big tax savings!

The beauty of purchasing a truck for tax savings is that debt-financed vehicles qualify for this great tax deduction – in other words, the taxpayer qualifies for this deduction before they’ve even paid for the truck.

A Public Service Announcement From Your Accountant 

Depending on your situation, buying trucks every year is probably not the most efficient way to save on taxes or manage your business budget! Please talk to your CPA about tax planning strategies for your specific situation.

Are You Ready to File 1099-MISC?

There’s a new deadline for filing 1099-MISC for independent contractors: this year’s 1099-MISC's that report non-employee compensation will be due by January 31, 2017, bringing them in line with when W-2s are filed.

 What is 1099-MISC and why do I care about it?

When a business hires an independent contractor and pays them $600 or more, it is required by law to file a 1099-MISC reporting non-employee compensation. This form is how the IRS knows that person has income.

In general, businesses have been lackadaisical about filing 1099-MISC's, which creates an enforcement problem for the IRS. Without 1099-MISC, the IRS can’t easily tell if self-employed individuals are reporting their income accurately.

With that in mind, the penalties for filing 1099-MISC late or not filing at all are increasing.

 What's the problem with filing 1099-MISC by January 31?

Due to poor planning or a poor understanding of the law, businesses often neglect to have independent contractors fill out form W-9, which is the form that provides the business all of the details they need to file a 1099-MISC, such as the taxpayer identification number.

After contractors are paid, the business might lose touch them, or they may be unresponsive or uncooperative about filling out a W-9.

Often, businesses don’t know they’re going to pay an independent contractor more than $600 and don’t realize until the end of the year when they’re reviewing their books for tax return purposes.

With one short month to get the 1099-MISC's filed, meeting that deadline, businesses will need to be certain they are collecting W-9s in a timely fashion.

To issue a 1099-MISC or not to issue a 1099-MISC, that is the question.

You don’t need to file a 1099-MISC if you’re not a business.

Self-employed individuals, business entities, and landlords are all “businesses,” so contractors hired in the course of doing business need a 1099-MISC. However, no 1099-MISC is needed if you hire an independent contractor to perform a service to you as a private individual.

For example:

Sarah hires a contractor to make repairs on her personal residence and pays him more than $600. NO 1099-MISC.

Sarah hires a contractor to make repairs to the offices of Stonecreek Accounting, her business, and pays him more than $600. FILE 1099-MISC.

Sarah hires a contractor to make repairs in excess of $600 to a rental property that she owns. FILE 1099-MISC.

You do not need to file a 1099-MISC if you pay by credit card or PayPal.

When you use a third-party processor to make a payment, such as a credit card or PayPal, you do not need to collect a W-9 or issue a 1099-MISC to the contractor.

Third-party processors file a different form, called a 1099-K, to report payments to the recipient. Any payment that is eligible to be reported on a 1099-K is not eligible to be reported on a 1099-MISC.

If you did file a 1099-MISC in this situation, you run the risk of double reporting that person’s income, which may now appear on both a 1099-MISC and a 1099-K.

If you pay by cash, check, wire transfer, ACH, or direct deposit, then you file a 1099-MISC.

If you pay by credit card, debit card, PayPal, or via some other processor, then you don’t file a 1099-MISC, because those payments are reported on a 1099-K by the third party processor.

You do not need to file a 1099-MISC if the independent contractor is something other than a self-employed individual.

The hitch here is that single-owner LLCs often count as self-employed individuals, but you don’t know if the LLC needs a 1099-MISC without asking. An LLC could be a partnership, an S-Corp, or a C-Corp, none of which need a 1099-MISC.

Don’t assume. Ask for a W-9 from every individual contractor and every LLC. The independent contractor will check the appropriate boxes on the W-9 to help you ascertain whether or not you need to file a 1099-MISC.

Who counts as an independent contractor?

We won’t go into the finer points of differentiating independent contractors from employees, but an independent contractor is essentially any person that you pay for services who is not your employee.

Examples may include:

 An accountant or attorney

 Someone hired to work on a single, short-term project

 A consultant

 A worker with specialized skills needed temporarily

A repair person

Example:

A landscaper does not have an irrigation specialist on staff, so she hires an irrigation company that’s an LLC to install an irrigation system for a project she’s doing. She’s not sure if she’ll end up paying this irrigation company more than $600. She should ask the irrigation company to fill out a W-9, because she may need to issue a 1099-MISC.

Example:

A business normally pays its accountant $500 to complete its tax return, but this year asked the accountant to provide some additional consultation and paid her a total of $1,000 this year. The business should ask the accountant to fill out a W-9, because it may need to issue a 1099-MISC.

With the January 31 deadline in mind, now is the time to look back on your year and start trying to collect any W-9's that you've missed, and put a policy in place going forward to ensure you have all of the information you need to file your 1099's at the end of the year.

MISTAKE #7: Not Filing a Tax Return

MISTAKE #7: Not Filing a Tax Return

Top Tax Return Mistakes Made By Self Preparers

© Carroteater | Dreamstime.com

You know you’re supposed to file a tax return, but sometimes it drops to the bottom of the to-do list. It’s a big chore to collect all of the documents and then sit down and actually prepare your tax return. It can be an all-day event. You may need to hunt down some tax data. Ain’t nobody got time for that!

First of all, if you know you’re not going to file your tax return on time, then file an extension. If you file Form 4868 before the April 15 deadline, it’ll extend your deadline by six months, until October. It’s free and you can do it online, or you can mail it. It takes a few minutes and can save you from costly late-filing penalties. Form 4868 only extends your time to file – your taxes are still due April 15. But the penalties for late filing your return are quite a bit more costly than the penalties for not paying your taxes on time. So file Form 4868 even if you won’t be making a tax payment on time.

If the reason you aren’t filing is because you’re afraid of your tax bill, then you should understand that your tax bill won’t go away just because you don’t file – it’ll just get bigger. The advantage to filing, even if you can’t afford your taxes, is that you can fairly easily initiate a payment plan with the IRS, and you avoid additional penalties for not filing the tax return. Eventually those taxes are going to catch up to you – it’ll cost you less if you address them head-on in a timely manner.

A lot of people don’t file their tax returns because they become self-employed and get busy. The bookkeeping falls behind, so it’s hard to catch up. If you begin to feel like you’re falling behind on your accounting as a self-employed person, there is no shame in hiring an accountant to help. It gets harder and harder to pull together your income and expenses as more time passes.

Some self-employed people feel that they didn’t make enough money to justify filing, or they had a loss. It’s important for self-employed individuals to file, even if they didn’t make a lot of money for a couple of reasons. The first is that if your business lost money, you get to carry forward your loss until you make a profit, and then deduct it. So you’re costing yourself money by not filing. The second reason is that the filing threshold is a very low $400 for self-employed individuals. One unreported 1099 is all it takes to cause a problem.

Finally, not filing a tax return can be costly for other reasons: You may be eligible for tax credits, such as the Earned Income Tax Credit, or a healthcare subsidy that you didn't realize you could claim. It's very common for people to avoid filing their tax returns, only to discover later that they missed out on some big tax credits. 

Read about Mistake #6.

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