IRS to Tighten Controls over Refundable Tax Credits

Millions of dollars in refundable tax credits that were determined to be erroneous after taxpayers received them may never be recovered by the Internal Revenue Service, but the IRS plans to clamp down on erroneous and fraudulent claims for tax breaks such as the Earned Income Tax Credit.

 

A new report released Monday by the Treasury Inspector General for Tax Administration on refundable tax credits found that they are highly vulnerable to fraud. Refundable tax credits such as the EITC, the Additional Child Tax Credit, the First-Time Homebuyer Credit, and the American Opportunity Tax Credit for education also provide valuable tax breaks for low-income taxpayers and the middle class.

TIGTA initiated its audit to determine the effectiveness of efforts by the IRS to recover refundable credits disallowed during post-refund examinations and to consider options the IRS could implement to decrease the issuance of erroneous refundable credits.

“Because of the susceptibility of these credits to fraud, and the low success rates in recovering erroneous credits once refunds have been issued, the IRS should take every reasonable step possible to identify potentially questionable credits and validate those credits before associated refunds are issued,” said TIGTA Inspector General J. Russell George in a statement.

To collect erroneous refundable credits issued to the taxpayer, the IRS frequently needs to rely on a process of refund offsets, which withhold future tax refunds to repay any amounts owed by the taxpayer. If the taxpayer does not repay the erroneous credit in a timely manner, the IRS must wait for the annual tax season to collect any money. In that case, the IRS would only be able to collect if the taxpayer is eligible for a refund.

TIGTA found that due to post-refund examinations of tax returns, taxpayers were required to repay more than approximately $2.3 billion in erroneous refundable tax credits during tax years 2006 through 2009. By the end of December 2011, the IRS had recovered an estimated $1.3 billion, of which more than 70 percent was collected through refund offsets.

TIGTA recommended that the IRS implement additional controls to identify and stop erroneous claims for refundable credits before refunds are issued, including implementing an account indicator to identify taxpayers who claim erroneous refundable credits to prevent them from erroneously receiving those claims for a specific period in the future. TIGTA also recommended that the IRS freeze and verify claims for the ACTC on all returns for which the EITC is frozen; and coordinate with the Treasury Department’s Office of Tax Policy to seek legislation to expand the EITC due diligence requirements to include the ACTC.

IRS management agreed with TIGTA’s findings and plans to take appropriate corrective actions. However, rather than implementing an account indicator to identify taxpayers who claim erroneous refundable credits, the IRS plans to develop pre-refund examination filters to ensure historical information is available and used as selection criteria. While this planned action is different than what TIGTA recommended, TIGTA said it believes that it is a viable alternative.

“As noted, we are in the process of refining the filter process to address many of the issues raised in the report,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Our experience with the EITC indicates that the filtering process applied during initial return processing results in a better selection of claims to be referred for pre-refund examination when compared with relying solely on the presence or absence of the EITC ban indicator.”

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10 Overlooked Tax Breaks

1. Charitable expenses: Sure, the donation is deductible, but so are expenses incurred while doing charitable work – including possibly cleaning your candy-striper’s outfit, or your mileage on your car for taking all those (insert life-saving materials here) to those (insert needy recipient here).

2. Moving expenses: Not only can you deduct many moving expenses when you relocate – you can even deduct your very first relocation – say, after college.

3. Job hunting costs :Costs associated with looking for a new job while in a current job are deductible, as long as the taxpayer itemizes – and the costs, along with other miscellaneous itemized expenses, exceed 2 percent of the taxpayer’s adjusted gross income

4. Military reservists’ travel credits :Reservists and members of the National Guard who travel more than 100 miles in a day and stay overnight for training can deduct related expenses

5. Child and other care credits :Child care costs for looking after the rugrats during the summer can be deductible, too – but only for day-camp, not sleep-away camp. Care expenses for adult dependents may also be deductible.

6. Mortgage refinancing points: If a taxpayer used the proceeds of a mortgage refinancing to improve their principal residence, they may be able to deduct the points paid on the load for the year of purchase.

7. Many medical costs:Various miscellaneous medical costs – like travel expenses to and from treatments – may help taxpayers reach the 7.5 percent of AGI threshold for claiming medical expenses.

8. Retirement savings: The Retirement Savings Contribution Credit aims to get moderate- and low-income taxpayers to save, and can be worth as much as $1,000 on contributions to an eligible retirement account.

9. Educational expenses:There’s tons here, including deductions for tuition and fees, the Lifetime Learning Credit, and the American Opportunity Tax Credit. If the taxpayer is getting any kind of education, they’re worth looking into.

10. Energy-efficient home improvements: While not quite as generous as before, there are still credits worth up to $500 for energy-efficient home improvements available for 2011 returns

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Don’t Fall for Phony IRS Websites

IRS Tax Tip 2012-13

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, ‘Suspicious website’.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.

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Tax Benefits Increase from Inflation Adjustments

The Internal Revenue Service said  that more than two dozen tax provisions will be adjusted for inflation for tax year 2013.

Among them, the annual exclusion for gifts rises to $14,000 for 2013, up from $13,000 for 2012. The amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax,” is $1,000, up from $950 for 2012. The foreign earned income exclusion rises to $97,600, up from $95,100 in 2012.

Details on these inflation adjustments and others such as the low-income housing credit, the dollar limits for high-deductible health plans and other amounts can be found in Revenue Procedure 2012-41.

In general, many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.  However, other limitations will remain unchanged because the increase in the index did not meet the statutory thresholds that trigger their adjustment. Highlights include:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500.

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $95,000 to $115,000, up from $92,000 to $112,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $178,000 and $188,000, up from $173,000 and $183,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012.  For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000.  For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

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IRS Releases Guidance on Additional Medicare Tax on High-Income Earners

On June 11, 2012, the Internal Revenue Service (IRS) released new guidance, in a 20 questions and answers (Q&A) format, on the 0.9% additional Medicare tax scheduled to go into effect in 2013. The Q&As are intended to assist employers and payroll service providers in adapting systems and processes that may be affected by the new tax.

Background:

As a result of the enactment of the Affordable Care Act (ACA), effective for wages paid on or after January 1, 2013, the Medicare tax rate increases from 1.45 percent to 2.35 percent on wages earned above $200,000 for single filers and $250,000 for joint filers . This increase only applies to the employee Medicare portion of the Federal Insurance Contributions Act (FICA) tax. Consequently, employers do not have to match the increased Medicare tax amount from employee’s wages. However, employers are still responsible for the withholding and reporting obligations with respect to the increased employee Medicare tax. If an employer fails to withhold and deposit the additional Medicare tax amount AND the employee pays it with his or her tax return, the employer will not be required to pay the missed amount, but the employer will be subject to penalties for the failure to withhold the tax.

NOTE: The employer is required to withhold the increased amount from all workers with wages exceeding $200,000 regardless of the marital status claimed on the employee’s Form W-4. Over and under withholding for the employee will be reconciled upon the filing of his/her tax return.

All wages that are currently subject to Medicare tax are also subject to the additional Medicare tax if they are paid in excess of the applicable threshold for an individual’s filing status (see above).

  • The additional Medicare tax also applies to employees who are nonresident aliens and U.S. citizens living abroad if their wages exceed the applicable thresholds.
  • An employer must begin withholding the additional Medicare tax once an employee’s wages are over the threshold, even if the employee may not ultimately be liable for this tax. For example, consider a situation where one spouse earns $210,000 and the other spouse earns $25,000, and the couple files a joint return. Although the employer would be required to withhold on the higher earner’s wages to the extent they exceed $200,000, the couple would not be liable for the additional Medicare tax because their combined income is less than the applicable $250,000 threshold. Any excess additional Medicare tax withheld will be credited against the total tax liability shown on the employee’s personal income tax return.
  • An employer is not required to notify an employee when it begins withholding the additional Medicare tax.
  • Although an employee can’t request additional withholding specifically for the additional Medicare tax, an employee who anticipates being liable for it may request that his employer withhold an additional amount of income tax withholding on Form W-4, which will be applied against all taxes (including any additional Medicare tax liability) shown on the employee’s income tax return.
  • An employer begins withholding the additional Medicare tax in the pay period in which it pays wages to the employee exceeding the $200,000 threshold and not earlier, even if the employee’s annual wages are expected to exceed the threshold.
  • If an employee receives wages from an employer in excess of $200,000 and the wages include noncash fringe benefits, the employer calculates wages for purposes of withholding the additional Medicare tax in the same way that it calculates wages for withholding the existing Medicare tax. The employer is required to withhold additional Medicare tax on total wages, including noncash fringe benefits, in excess of $200,000. The value of noncash fringe benefits must be included in wages and the employer must withhold the applicable additional Medicare tax and deposit the tax under the rules for employment tax withholding and deposits that apply to noncash fringe benefits.
  • To the extent that tips and wages exceed $200,000, an employer applies the same withholding rules for additional Medicare tax as it does currently for the existing Medicare tax. An employer withholds additional Medicare tax on the employee’s reported tips from wages it pays to the employee. If the employee does not receive enough wages for the employer to withhold all the taxes that the employee owes, including additional Medicare tax, the employee may give the employer money to pay the rest of the taxes or the employee may need to make estimated tax payments to cover any shortage.
  • If an employee receives third-party sick pay, wages paid by the employer and by the third party need to be aggregated to determine whether the $200,000 withholding threshold has been met.
  • If an employee has amounts deferred under a nonqualified deferred compensation (NQDC) plan, the employer calculates wages for purposes of withholding additional Medicare tax on the NQDC in the same way that it calculates wages for withholding the existing Medicare tax.

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Social Security Benefits to Increase 1.7% Next Year

Monthly benefits for nearly 62 million recipients of Social Security and Supplemental Security Income will increase 1.7 percent in 2013, the Social Security Administration said Tuesday.

The 1.7 percent cost-of-living adjustment will begin with benefits that more than 56 million Social Security beneficiaries receive in January 2013. That is only about half of the 3.6 percent COLA increase in 2012, but better than the lack of an increase in 2010 and 2011. Increased COLA payments for more than 8 million SSI beneficiaries will begin on Dec. 31, 2012.

Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $113,700 from $110,100.

Of the estimated 163 million workers who will pay Social Security taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum.

Information about Medicare changes for 2013, when announced, will be available at www.Medicare.gov.

For some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums.

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IRS May Report Tax Debts to Credit Bureaus

Congress is considering allowing the Internal Revenue Service to report on taxpayers’ tax debts to consumer credit bureaus.

The Government Accountability Office provided a report Wednesday to Senate Finance Committee chairman Max Baucus, D-Mont., and Senate Judiciary Committee ranking member Charles Grassley, R-Iowa., on the factors for considering a congressional proposal to report tax debts to credit bureaus. The report noted that millions of individual and business taxpayers owe billions of dollars in unpaid federal tax debts—$373 billion as of the end of fiscal year 2011, including $258 billion in individual debt and $115 billion in business debt—and the IRS expends substantial resources trying to collect these debts.

Unlike many other debts owed to the federal government, tax debts are not directly reported to the credit bureaus that collect and sell information about the credit history of individuals and businesses. The IRS is not allowed to directly report tax debt information to credit bureaus because long-standing federal law protects the privacy of any personally identifiable information reported to or developed by the IRS. The IRS is, however, allowed to file tax liens on some tax debts. Tax liens become part of the public record, which can be picked up by credit bureaus and included in the credit history information they compile

Among the potential reasons for directly reporting tax debt information to credit bureaus are the possibility that it could increase revenue by encouraging tax debtors to pay off their debts and the possibility that it could give the users of credit bureau information a more complete picture of the indebtedness of tax debtors. A proposal could conceivably encompass all tax debts or specify types of tax debts for such reporting. “However, the tradeoffs that directly reporting tax debts to credits bureaus would entail are not well understood, and you asked us to provide information about such tradeoffs by applying our recently published guide for assessing proposals to authorize disclosures of tax information,” said the GAO.

How much of this debt would be suitable to report to credit bureaus could depend on the purpose of the reporting proposal, such as to collect more debts or simply to inform other potential creditors of the existence of tax debts, the GAO noted. Most debts are relatively small in size. Well over half of individuals and businesses with tax debts owed less than $5,000.

However, much of the aggregate debt is concentrated among those owing relatively large amounts. Debts over $25,000 add up to a total of $310 billion. Some debts were in the collection process, where the IRS notifies the taxpayer of the debt, and were subject to dispute by the taxpayer, while other debts were covered by installment agreements. Approximately $60 billion of the debts owed were in these two categories. About $110 billion of the total debt was classified by IRS as uncollectable. IRS files tax liens on some tax debts and these liens are public records that credit bureaus routinely pick up and add to their data. Over half of the total amount owed was subject to liens, cutting across the above categories.

Subject matter experts consulted by the GAO commented that issues surrounding data accuracy, alternatives, and the expected benefits would be among the important factors that Congress might wish to consider in regards to any possible future proposal to report tax debts to credit bureaus.

“One key factor discussed was the need to ensure that any reported tax debt data is accurate and current as this would be important to both credit bureaus and the affected taxpayers, who could be denied credit, employment, or housing based on inaccurate negative information in their credit histories,” said the GAO.

Several subject matter specialists who the GAO spoke to said that it would be important to consider the IRS’s current use of tax liens, which are already known to credit bureaus, as an alternative to reporting debts directly. Another important consideration would be the expected benefits of direct tax debt reporting. These experts suggested that such reporting could yield benefits such as increased revenue collected or reduced tax debt inventory.

However, the National Taxpayer Advocate cautioned that such reporting could cause some taxpayers to choose not to file or file inaccurately if they know they owe money to the IRS.

 

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IRS Changes Tax Withholding Program for Foreign Entertainers and Athletes

The Internal Revenue Service is changing the procedures for the tax withholding program used by foreign entertainers and athletes who want to work in the U.S.

A Central Withholding Agreement is a tool that can help nonresident entertainers and athletes who plan to work in the U.S. A CWA provides for a reduced amount of tax withholding that is more in line with the nonresident’s annual projected tax liability by allowing withholding based upon net income at graduated rates.

The IRS will consider entering into a CWA provided that all CWA program requirements are met. Accurately completing and timely submitting a CWA application will fulfill the requirements for consideration.

The IRS said in an email to tax professionals Friday that effective Oct. 1, all CWA applications must be faxed to (630) 493-5906 or mailed to the following address:.

Central Withholding Agreement Program
Mail Stop: 1441
2001 Butterfield Rd.
Downers Grove, IL 60515-1050

Effective Jan. 1, 2013, requests for a CWA must be received by the IRS at least 45 days prior to the first event to be covered by the CWA. Requests received less than 45 days prior will not be processed and such events will be subject to withholding at 30 percent of gross income as required under IRC 1441.

To help clarify the process for nonresident aliens, the IRS said it has confirmed with the Social Security Administration that nonresident aliens may apply for a Social Security Number immediately upon entering the USA and do not need to wait 10 days. In addition, it has been confirmed that the mailing address for the nonresident alien may be a U.S. post office box or the address of a designated power of attorney.

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IRS Issues Latest Per Diem Rates

The Internal Revenue Service has updated the per diem rates for taxpayers to use in 2012-2013 when substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home.

 

The latest per diem rates, outlined in Notice 2012-63, specifically apply to (1) the special transportation industry meal and incidental expenses rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The special M&IE rates for taxpayers in the transportation industry are $59 for any locality of travel in the continental United States and $65 for any locality of travel outside the continental United States.

The rate for any locality of travel for the incidental expenses only deduction is $5 per day.
For purposes of the high-low substantiation method, the per diem rates are $242 for travel to any high-cost locality and $163 for travel to any other locality within the continental U.S. The amount of the $242 high rate and $163 low rate that is treated as paid for meals for is $65 for travel to any high-cost locality and $52 for travel to any other locality within the continental U.S.

The per diem rates in lieu of the rates described in Section 4.02 of Rev. Proc. 2011-47 (the meal and incidental expenses only substantiation method) are $65 for travel to any high-cost locality and $52 for travel to any other locality within the continental U.S. A number of localities also have a federal per diem rate of $202 or more, and are high-cost localities for all of the calendar year or a portion of the calendar year.

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