Tag: IRS

Advertiser Disclosure

News

Tax Tips for Hurricane Victims

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

tax tips for hurricane victims
iStock

The 2017 hurricane season wreaked havoc across the Southeast, but for those living in federally declared disaster areas, special disaster tax relief is available.

Three Category 4 hurricanes — Harvey, Irma and Maria — ravaged parts of the continental U.S., Puerto Rico and the U.S. Virgin Islands in 2017. Those storms alone caused about $265 billion in damages, according to estimates from the National Oceanic and Atmospheric Administration, and they weren’t the only ones. There were a total of 16 billion-dollar climate disasters in the U.S. in 2017, the NOAA reports.

States up the coast and as far inland as Tennessee felt the effects of the hurricanes. The U.S. Census Bureau says that Harvey affected nearly 22 million people, Irma affected more than 53 million and Maria affected about 3.7 million. Texas, Florida, Puerto Rico and the U.S. Virgin Islands bore the brunt of the damages, as that’s where the storms made landfall, but many residents also endured flooding and power outages in Alabama, Georgia, Louisiana, Mississippi and South Carolina.

Special tax provisions for both individuals and businesses can offset the impact of the three storms’ impact on millions of people under The Disaster Tax Relief and Airport and Airway Extension Act of 2017.

Under the act, deadlines for taxes like quarterly, payroll and excise were extended from Fall 2017 or early January deadlines to Jan. 31, 2018. In Florida, corporate returns and payments were extended to Feb. 15, 2018.

B. Trevor Wilson, partner in the tax and estates practice group at Jones Walker in Baton Rouge, La., says most returns qualify for relief, but filing documents like 1099s and W-2s, which are known as information returns, are not eligible for a deadline extension.

Here are key ways that residents in hurricane-stricken areas can take advantage of disaster tax relief.

You can claim personal casualty losses

Generally, you can’t claim personal casualty losses when doing your taxes, unless you meet certain qualifications, itemize your deduction and your loss exceeded 10 percent of your adjusted gross income (AGI), says Eric Smith, a spokesman for the IRS.

If you suffered damage from Harvey, Irma or Maria, and your uninsured, unreimbursed loss exceeds $500, you can claim it on your standard return without itemizing.

“Most people who suffered significant damage from these hurricanes were probably going to clear that threshold pretty easily,” said Smith.

Though it’s been updated, the aid is similar to tax relief provided after 2005’s Hurricane Katrina, says Smith.

There also are provisions for business owners. Though they vary slightly from individual relief, Wilson says one difference is there is no threshold for loss, so the first uninsured, unreimbursed dollar of loss can be claimed.

How to prove your losses

It may seem like a difficult task to determine your loss, but there are tools to help.

Even if you haven't had a recent appraisal on your home, Smith says IRS formulas can help you determine the amount of loss you can claim. Different tables help calculate damage to your roof, decking and the structure of your home; the cost of interior flooding; and if it was a near or total loss.

IRS revenue procedures provide eight safe harbor methods for taxpayers to use in determining their losses, three of which are specifically for assessing losses due to federally declared disasters and one specifically for Harvey, Irma and Maria victims. Six of the methods apply to personal residential property and two apply to personal belongings. Here’s an overview of the methods:

For losses of personal-use residential real property

Personal-use residential real property includes property that contains at least one personal residence and is owned by someone who suffered a casualty loss (like a hurricane). For these purposes, a personal residence includes single-family homes and individual units of attached properties (like a townhouse or duplex). Owners of condominiums, co-ops and some mobile homes are out of luck — people who don’t own the structural features of their property (like the walls, foundation or roof) don’t qualify. The property is also not considered personal-use residential property if any part of it is used as a rental property or home office for a for-profit business.

As you can tell from the complicated definition above, figuring out if you can claim these losses on your taxes can get tricky — there are lots of rules to follow and exceptions to be aware of. Work with a tax professional to make sure you’re doing it correctly.

Estimated Repair Cost Safe Harbor Method

This method is for losses of $20,000 or less. You have two independent contractors prepare itemized estimates of the costs required to restore your property to its pre-casualty condition. You use the lesser of the two estimates to determine your cost.

De Minimis Safe Harbor Method

This method is for losses of $5,000 or less. You can determine the loss on a good-faith basis, but must keep records of the methods used to determine loss.

Insurance Safe Harbor Method

This method allows an you to use the estimated loss as determined by your homeowners or flood insurance report.

Contractor Safe Harbor Method

This method allows you to determine the decrease in the fair market value of your property by using the contract prices for repairs by an independent contractor. It must be a binding contract signed by both you and the contractor, who is licensed and registered in accordance with state or local regulations.

Disaster Loan Appraisal Safe Harbor Method

Using this method, you can determine the decrease in your property’s fair market value using an appraisal that was prepared for the purpose of obtaining federal funds or federal government loan.

Cost Indexes Safe Harbor Method

This method provides cost indexes for properties based on square footage and geographical area. If you own two or more properties and use this method for one, you do not have to use the cost index method or any other safe harbor method for any other property.

For losses of personal belongings

For these purposes, personal belongings are items owned by people who suffered casualty losses, as long as those items are not used for business and do not maintain or increase in value over time (like antiques). Things like boats, aircrafts, mobile homes, trailers and vehicles are not considered personal belongings in this situation.

De Minimis Safe Harbor Method

This method is for losses of $5,000 or less. Similar to the same method used for property loss, you can determine your loss on a good-faith basis. You must keep records detailing the personal belongings affected and the methodology used to determine loss.

Wilson says one way to calculate the loss of personal items is to use third-party prices from resellers like Goodwill, which publishes its prices as reference.

“Something you’ve had for five years is not worth something you bought brand-new,” he added.

Replacement Cost Safe Harbor Method

Using this method, you can determine the decrease in fair market value of personal belongings by estimating the cost of replacing each item minus 10 percent for each year the item was owned. If owned for nine or more years, the pre-disaster value is 10 percent of the cost of replacement. If using this method, you must apply it to all personal belongings that are claimed as a loss for that disaster.

You can borrow from your qualified plan

Special provisions allow hurricane victims to take penalty-free hardship withdrawals from qualified plans like their 401(k). For example, if a person is less than 59 ½ years of age, there is typically a withdrawal fee of 10 percent. But under the new law, the fee is waived and the amount you’re allowed to borrow increases to either $100,000 or 100 percent of the account balance, whichever is lower. (The limit is usually $50,000.)

“Generally, you have limitations on what you can use loans for and your employer must allow for them,” said Wilson, “but this relief kind of overrides all that and gives you quicker access to your 401(k) plan for loans.”

Smith says using this option is an individual decision. Although it could be helpful, make sure that there isn’t another option that doesn’t deplete your retirement fund.

If it is something you feel comfortable doing, the typical five-year repayment period can be extended an extra year, as well.

You can file for this year or the previous year

“One of the things that’s unique about disaster area loss claims is that you can choose to report it for the year that it happened, or the prior year,” said Smith. “It sets up a different situation than what normally occurs in the tax world.”

The process can take a while, because you have to prepare an amended tax return on paper, he says.

If your income looks the same on your 2016 and 2017 returns, Smith recommends filing for 2017. However, if your income or tax bracket changed and amending 2016’s return would yield a bigger refund, that option is available.

Whether you choose to file an amended return for 2016 or claim your losses on your 2017 tax return, the IRS says to write your state and the hurricane(s) you are claiming casualties from at the top of your return, such as “Texas, Hurricane Harvey.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Kat Khoury
Kat Khoury |

Kat Khoury is a writer at MagnifyMoney. You can email Kat at kat+mandi@magnifymoney.com

TAGS: , , , , , ,

Advertiser Disclosure

News

Report: IRS Debt Collection Program Cost Taxpayers Millions

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

tax debt collection by the irs
iStock

In its first year in operation, a new IRS program that was meant to outsource federal tax debt collection efforts ultimately cost U.S. taxpayers three times more than it actually recovered.

The findings were published in a Jan. 10 report by the National Taxpayer Advocate (NTA), an independent consumer advocacy arm of the IRS.

In 2015, federal lawmakers enacted legislation that required the IRS to outsource its tax debt collection efforts to private collection agencies. The agency hired four agencies to do the job and spent a total of $20 million to cover program operations. The agencies were charged with collecting $920 million in unpaid debt but, ultimately, they managed to recoup a mere fraction of that amount — $6.7 million in recovered tax debts, according to the report.

Read more: Tax Reform 2018 Explained

After its first year, the current attempt has resulted in a net loss of $13.3 million with less than 1 percent of unpaid tax debt collected.

Consumer advocacy groups like the National Consumer Law Center (NCLC) were quick to cry foul, saying the report’s findings show that the program needlessly wasted money and abused taxpayer rights.

“The IRS private debt collector program is the epitome of waste and abuse in government programs,” said Chi Chi Wu, a staff attorney at the NCLC in a statement.

It’s not the first time the U.S. government has outsourced debt collection efforts to private firms. The NCLC notes that an effort in the mid-1990s lost $17 million and was cut after a year. Another attempt to outsource debt collection in 2006 lasted three years and lost $4.5 million.

Among the taxpayers who were most impacted by this latest private collection program are families hovering just above the poverty line, those beneath it, and retirees who are on Social Security or receive disability benefits.

The report found:

  • 4,905 taxpayers were assigned to private collection firms, and of those, 4,141 filed recent returns by Sept. 28, 2017.
  • 44 percent of those taxpayers had incomes below 250 percent of the federal poverty line ($24,600 for a family of four).
  • 28 percent had an annual income of less than $20,000
  • 19 percent had a median annual income of $6,386
  • 5 percent received Social Security or disability and had a median income of $14,365

report finds IRS private tax debt collection cost more than recouped
Source: Taxpayer Advocate Service

When you owe a tax debt to the IRS, the IRS typically calculates payment plans so that a family can keep up necessary living expenses like housing, transportation, utilities, food, and out-of-pocket health care after making their tax debt payment. However, NTA states that the data shows that these taxpayers were still pressured by the private collection firms hired by the IRS to enter into payment plans they couldn’t afford.

“Forcing the IRS to use private debt collectors to put the squeeze on vulnerable low-income families simply lines the pockets of these private collectors while jeopardizing the economic well-being of families,” said Wu.

Further insight into the problem is difficult to obtain, the NTA says, because the IRS refuses to let representatives of the organization listen to calls between private debt collectors and taxpayers.

Where do the recovered tax debts go?

Under this program, the IRS would send a 10-day notice to taxpayers letting them know a private debt collector will be assigned to them. Of the $6.7 million collected by PCA’s in 2017, $1.2 million, or 18 percent, was recovered as a result of those letters.

Private firms are not supposed to receive a commission off of collected debts. But the NTA study states that the private debt collectors are receiving commission for work done by the IRS and the agency “has no plans to change its procedures to attempt to identify payments that were clearly not attributable to PCA action.”

The IRS is authorized to keep 25 percent of the amount collected by the private agencies and the agencies themselves receive 20 percent in commission. Of the unpaid taxes collected by PCAs, $3 million is the minimum amount left that goes to the Treasury.

What do I do if debt collectors call?

If you’re called by a debt collector, there are several things to know. First, that you have rights, and second, that you need to know more.

The Consumer Financial Protection Bureau (CFPB) states certain laws related to debt collection are put in place to protect taxpayers’ privacy and security. For example, they can’t call before 8 a.m. or after 9 p.m. and they can’t harass or threaten you. In addition, if you have an attorney,  the debt collector will need to contact them instead of you.

You also should check with your state attorney general's office to see if it offers any additional protection or help for dealing with debt collectors.

Keeping track of your documents is also important. Any communication between you and the debt collector, including letters you may have sent, should be kept in a file that starts when the collector calls, the CFPB suggests.

Identifying the debt collector can save you from taking on a debt that isn't yours or entering into a less-than ideal payment plan. The CFPB suggests that you don’t give any information, personal or financial, until you’ve verified the collector’s name, address, phone number, and all information about the debt, such as whether it’s yours or not, any dates associated with it, and the total amount including any fees.

What happens if I owe a tax debt?

If you owe a tax debt, you should act sooner rather than later. Unpaid tax debts can not only result in extensive penalties and fees but it could result in:

Reduced Social Security benefits

  • Garnished wages
  • Seized property
  • Passport revocation

Interest is compounded daily on past due taxes (the rate fluctuates, but is 3% more than the federal short-term rate) and late payment penalties are charged separately and can go as high as 25% of the owed amount.

If you owe a tax debt, you still have to file your taxes on time.

If you can’t pay, the worst thing to do is ignore the bill. Contact the IRS and ask them to set up some kind of payment plan that you can afford.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Kat Khoury
Kat Khoury |

Kat Khoury is a writer at MagnifyMoney. You can email Kat at kat+mandi@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Life Events, Reviews

Easily Find Your Free File Options with the IRS Tool

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Tax return check

If your household grossed under $62,000 in 2015, you’re eligible to file your taxes using Free File from the IRS. Free File is a conglomeration of different online tax filing software providers that have partnered with the IRS to make their product available for no charge for low- and middle-income households.

When you look at all of your Free File options, you’ll see something like this:

IRS pic 1

Those aren’t even all of your options. As if filing your taxes weren’t enough of an exercise in tedium, now you have to go through each program, determine if you qualify, and decide which software will best suit your needs.

Except that you don’t. If you click on the “Help Me Find Free File Software” link in the furthest left hand column, the IRS will provide you with an online tool to help you weed out some of your options.

The tool, which can be found here, will ask you for a few pieces of information:

  • Your age
  • Your estimated Adjusted Gross Income (AGI) for 2015
  • Your state of residence
  • Your eligibility status for the Earned Income Tax Credit
  • If you or your spouse received military income in 2015
  • Your state, if you want to file a free state return

If you don’t know if you qualify for the Earned Income Tax Credit, clicking on the embedded link will bring up income limits. The real issue we see is inputting AGI if you have a variable income. When you have a steady income, you can reliably assume a number similar to your previous year’s return. Variable-income households may have to run some of their numbers first in order to see if they qualify, which partially defeats the purpose of using tax software.

We ran a couple of fictional profiles to see how the tools work. The first one is for a 30-year-old Pennsylvanian with an AGI of $61,000. They do not qualify for the Earned Income Tax Credit, and did not receive military pay in 2015.

IRS pic 2

These were their filing options, as brought up by the tool:

IRS 3

The only two options, if they want to file their state return for free, are H&R Block and OLT.com. This makes the decision a lot easier. We know from research that H&R Block’s tools are more in depth than OLT.com’s, so our filer will probably go with the former.

The next parameters we ran were for a 30-year old resident of New Hampshire who did not have any military income, but did qualify for the Earned Income Tax Credit with an income of $34,000, and one child. We were curious if free, state-filing options would be more limited, as New Hampshire’s unique tax laws often cause problems for online tax software providers.

Much to our surprise, we got more hits for our New Hampshire resident than the Pennsylvanian:

IRS 4

After some digging, we discovered that the two contributing factors were the lower income, and eligibility for the Earned Income Tax Credit. TaxACT’S Free File is only available to those with an income below $50,000, unless they meet a litany of alternative requirements, such as qualifying for the Earned Income Tax Credit. TaxACT, OLT.com, and H&R Block all offer free state returns, even for the difficult state of New Hampshire; it was the Pennsylvanian’s income that kept them out of the TaxACT bracket.

IRS Tools Saves You Valuable Time

The point is that the selection process is arduous if you try to go it on your own. As long as you can reliably predict your AGI, using this IRS tool will save you valuable time and headaches when choosing your Free File software provider.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Brynne Conroy
Brynne Conroy |

Brynne Conroy is a writer at MagnifyMoney. You can email Brynne at brynne@magnifymoney.com

TAGS: , ,

Advertiser Disclosure

Consumer Watchdog

Consumer Watchdog: The IRS Reveals Dirty Dozen Tax Scams

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

The IRS Reveals Dirty Dozen Tax Scams

Updated for 2016

Tax time is high season for scams and identity theft. In fact, tax-refund fraud is expected to hit $21 billion this year. We’ve alerted you to some of the tactics crooks use during tax season like pretending to call as an IRS agent demanding payment, email scams saying your tax payment got rejected or that you owe back taxes, or simply stealing your W2 then filing your tax return and routing your refund to another bank account. The IRS also has its own list of 12 scams used to part you with your hard-earned money (or that they think you might be tempted to do).

We want you to be aware of every way a thief might try to take advantage of you during the often frustrating and trying time of filing taxes.

Here are the Dirty Dozen tax scams from the IRS:

1. Phone Scams

This scam is the most prevalent way a crook will try to use tax time to get your money. A fraudster will call you impersonating an IRS officer claiming you owe more money (or back taxes) and need to pay it now or risk being arrested, deported, getting your driver’s license revoked or whatever clever scare tactic he can come up with. Stay calm, never give out personal information and immediately hang up and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484 and file a complaint using the FTC Complaint Assistant (choose “Other” and then “Impostor Scams”).

[Learn how to protect yourself from tax scams here.]

2. Phishing

If it smells fishy, it probably is! The IRS won’t send you an email out of the blue about a refund or back taxes. In fact, first contact from the IRS almost always still comes via snail mail and not email or phone. If you get an email claiming to be from the IRS, don’t click any links until you contact the IRS directly to confirm it’s valid. The crooks are looking to steal your personal information.

[Read more about how to protect against Phishing Scams here.]

3. Identity Theft

Getting your identity stolen at any point during the year is a major hassle and could be costly. But getting your identity stolen at tax time is probably because a crook is filing for a tax return using your name and getting your refund first (or a fake version of your refund). One of the best ways to defend against this is to file your taxes as early as possible. Also be sure to track all your W2 or 1099 forms and reach out to an employer immediately if you haven't received your forms by early February. Crooks are not above stealing your tax forms and using them to file.

[Learn how to prevent and deal with identity theft here.]

4. Return Preparer Fraud

Looking for a good deal is great, but don’t go to cheap tax preparer (accountant) if he or she isn’t credible. Do your due diligence before giving over all your personal information to an accountant. Unfortunately, some of them use tax season as a chance to steal people’s identities.

5. Offshore Tax Avoidance

This one is on you. Don’t hide your money offshore, because you’ll be paying big time when Uncle Sam tracks it down. You can voluntarily admit to having an offshore account (even if you had one by accident – perhaps while working internationally) through the Offshore Voluntary Disclosure Program.

6. Inflated Refund Claims

It’s fine if a tax prep software company promises the biggest return compared to competitors, but don’t trust anyone claiming to get you an inflated refund. Never sign a blank return and be wary of anyone promising a big return without even looking at your information. Also, don’t agree to pay fees based on a percentage of a refund. This scam is typically perpetuated via word of mouth, flyers in storefronts and targets community and church groups.

7. Fake Charities

Check out any charity before donating. This is good practice year-round, but fake charities become especially popular during tax season to prey on people receiving refunds. Use tools like GuideStar.org to see if a charity is legit.

8. Hiding Income with Fake Documents

Much like hiding money offshore – this tax scam is on you to avoid. Don’t attempt to fake taxable income by filing false Form 1099s or other documents to inflate your tax refund. You are legally responsible for what is on your returns, regardless of who prepares them.

9. Abusive Tax Shelters

The IRS is committed to cracking down on abusive tax structures/ tax avoidance schemes and persecuting people who create and sell them. Be wary of anyone pushing tax shelters that sound like a great deal.

10. Falsifying Income to Claim Credits

Just report what you’ve earned. It’s really basic. Falsifying your income in anyway will not end well for you, no matter what a con artist tells you.

11. Excessive Claims for Fuel Tax Credits

Some prepares may try to talk you into making a fuel tax credit claim on your return. Be wary! The fuel tax credit is generally limited to off-highway business use, typically for farming. If you aren’t a farmer, it’s doubtful this tax credit is for you.

12. Frivolous Tax Arguments

Yes, you have the right to contest your tax liabilities in court. But don’t let a scam artist sell you snake oil. Often times frivolous tax arguments not only fail to hold up in court but filing a frivolous tax return results in a penalty of $5,000.

Be sure to check out the Dirty Dozen tax scams directly on IRS.gov and contact the IRS and FTC directly if you believe you’ve been a victim of a tax scam.

Think You're a Victim of a Tax Scam?

Scams need to be reported immediately to the Federal Trade Commission (FTC). You can also hear an example of a scam IRS call here.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

TAGS: , ,

Advertiser Disclosure

Fine Print Alert

Fine Print Alert: Hackers Hit the IRS

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

fineprintalert-full

In our weekly Fine Print Alert we call out news from the financial community and shine a spotlight on any sneaky changes in the fine print. We also share our favorite reads from the week.

FINE PRINT ALERT

Hackers hit the IRS...

Keep an eye on your credit reports folks. The IRS announced that over 100,000 people's data was compromised in a recent breech by hackers. The thieves took taxpayers' past returns, which means access to Social Security numbers, addresses and birth dates. That's the information needed to steal someone's identity and cause quite a financial headache.

The IRS will be notifying people who may have been affected via mail. The IRS will also provide free credit monitoring services to those who had their data compromised. You can also be proactive by pulling your credit reports to look for any recent activity.

MAGNIFYMONEY IN THE NEWS

Nooga.com: New graduates, read this to avoid financial mistakes of predecessors 

FAVORITE READS FROM AROUND THE WEB

How This Woman Tracked Down Her Identity ThiefWhen Jessamyn Lovell’s wallet went missing at an art gallery in 2009, she took all the right precautions. She canceled all of her credit cards and put a fraud alert on her credit report to prevent anyone taking out new lines of credit under her name. Despite these efforts, a year and a half later, Lovell, 38, received a phone call from a police officer who had strange news: A woman in San Francisco had been arrested for using Lovell’s driver’s license to check into a swanky hotel. Mandi Woodruff shares the story on Yahoo! Finance.

Why You're Thinking About Your Budget All Wrong - In our conversation (which you can watch in full, above), Washington noted that living according to a budget can actually enhance our lives, because it gives us a sense of exactly what we have on hand to spend, and how we can plan for the future. Think of it as a guideline for getting what you want — and not a rigid set of rules that’s preventing you from buying coffee or spending a night on the town. Maggie McGrath covers how to budget on Forbes.

More Graduates are Repaying Their Parents for CollegeIt’s fairly often you hear about parents making their children pay their own way through school. Some parents don’t save for college, while others want their children to simply pay their own way. However, a trend has emerged with parents offering to pay for college, but with the caveat that the student has to repay the debt. Robert Farrington explains the rationale behind this new trend on Forbes. 

 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

TAGS: ,