A lot of people are talking about taxes this time of year, myself included. This talk comes in many different forms from many different directions. Maybe sometimes, though, we are missing some of the basic things.
This struck me recently when reading an article on the TaxProf Blog. This touts itself as a member of the Law Professor Blogs Network, so it often discusses some high-level things, which can be of interest to some, but are not things I generally like to talk about in this space. This recent work, though, had some of those basic points in it that I thought were worth remembering during filing season.
The first big point is the dividing line between personal and business taxes. Almost everyone understands that both individuals and businesses pay taxes and file tax returns, but the fact that items and expenses can only be in one or the other category might be lost. If you spent something while carrying on an activity geared toward profit, that is a business expense. If not, it is personal.
Now let me go into a spiel on the importance of having separate bank accounts for your personal and business expenses. If you are legitimately putting effort into a business, there are going to be expenses. No one likes to sit down with a bank statement and a highlighter and go through which of the expenses were actually for your business, though. There is computer software that can make this more manageable, but it is even easier when you have already made the dividing line with separate accounts. This comes with minimal cost and can fend off a large amount of aggravation.
The article talks about how there can be some difficulty distinguishing the business from the personal and this division helps with that. Even with separate accounts, though, just what is a deduction can become an issue. Another great point from this article is that the expenditures will either be deductible or non-deductible. This is not area where there is some gray area between the two. Something either falls into the rules or it does not. If you hear people talking about how certain machinations could turn something into a deduction, chances are that is not on the up and up. A good tax preparer can make you aware of deductions you did not know existed, but they cannot conjure up new ones.
The article then goes deeper into the weeds about the intricacies of when things turn from personal to business, and that is on the deeper level I don’t feel is appropriate for this space. I do, however, see more and more people pursuing small businesses of their own, or taking part in the gig economy, so I thought some of these basic facts were worth highlighting.
If the difference between the personal and the business is something you are struggling with as you prepare your 2018 tax information, let us help. Time is starting to run short on the filing season, but some appointments are still available. But then let’s talk again after the season to continue taking steps to make that dividing line between the two ever easier to navigate.
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I know I wrote about scams and the IRS’s annual Dirty Dozen list of them last week, but the agency has continued to write about them, so I will as well. This is because there’s one more I wanted to mention this week – using frivolous tax arguments.
This one feels different than most of the scams one hears about because it’s not predatory. Those scams feel dangerous, while frivolous tax arguments feel more, well, frivolous if not downright silly.
I mean, just look at the three arguments that the IRS listed in its look at the scam:
If you’re reading this at all, you probably are knowledgeable enough to recognize these as the false claims they are. They apparently do exist, though. I would, however, say that the more dangerous frivolous claims are the ones that do not look as obviously egregious.
Instead, have you ever heard a friend talk about deducting something on your taxes that you never knew one could? Have you heard someone claim a windfall because they’re getting some money they don’t pay taxes on?
Frivolous arguments are not only the ones that tell you that you have to pay no taxes, they can be the ones that tell you that you can pay less taxes. These can be dangerous because those using them are largely not trying to defraud anyone. They think they have legitimate information, but they did not look into it, and now are attempting something they do not know is illegal. This can be avoided with some diligence, though.
Even if we have worked with you and done your tax return for years, don’t be afraid to speak up if you think your tax return is not being maximized to your benefit. It could be that there is information you didn’t know was relevant, thus was never shared, so we didn’t know we could use it. It could be that it would benefit some taxpayers, but it is not something you qualify for. Or it could be that it’s simply bad information.
No matter the answer, though, addressing it with a professional means that you will then have comfort and knowledge and avoid any misdeeds.
Another reason to speak up is because you can get you some money from past years’ tax returns, as well. You only generally get three years to do this, though, so the window for the 2015 tax year is closing.
It’s wild to think about as a whole number, but the IRS estimates that there is $1.4 billion in potential refunds from that year waiting to be claimed. A lot of this comes from people who never filed a tax return. The IRS isn’t exactly tracking them down, though, for if those returns remain unfiled the money becomes property of the government.
So if you or someone you know could be owed some of that money, feel free to reach out.
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Every year around this time the IRS releases its ‘Dirty Dozen’ scams list. The timing is not a mistake, as the tax filing season provides more opportunities for people to try to take advantage of others. So in that spirit, here is a renewed warning for things to look out for.
The largest of these are phishing schemes. This does not only happen around tax time, so make it a general rule to not follow web links from suspicious emails and not to enter personal information onto websites before confirming they are legitimate. In addition, this is starting to occur more often over social media. So know that links encountered there could also be dangerous. Installing security software on your computer can help alert you and steer you away from malicious sites and block malware attempts. Many internet service providers offer this as part of your plan, but even if they don’t it is relatively inexpensive, especially considering the potential costs.
At this time of year, these scams will increasingly use the name of the IRS to frighten people and direct them to places they shouldn’t go and to do things they shouldn’t do. So let this be a reminder that if you aren’t aware of any issue you have with the IRS, the first time you hear from them is not going to be over the computer.
The initial contact from the agency almost always comes via regular postal mail. So let that also make you wary of phone scams from those who say they’re from the IRS. The awareness of these scams is pretty strong, as it seems most everyone has received one of these fake calls, but that has not stopped them from occurring. The fright that they can cause may feel a little larger this time of year, but remain vigilant. Even if you think a call is legitimate, it is okay to take the time to check its credentials before sharing personal information or making payments.
The IRS is also concerned about those trying out scams on their actual tax filing, too. Some of these are easy to understand, like people not reporting income or claiming expenses and deductions for which they do not quality. There are also scams out there where people try to inflate income. Without getting into the mathematical minutiae of this, having a bit more income could help someone’s tax picture by maximizing some tax credits.
Overall, if someone is promising a bigger refund, but there are machinations involve that feel shady, they probably are shady. As always, I think that the best way to handle a tax return is with honesty. Sure, the final numbers may not always be what you would like, but there is value in peace of mind, too. Even if you owe more money than you think you can afford, handling that and figuring out how and when you can pay it (even if it turns out to not be immediate) is better than doing something that could come with greater consequences later.
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It has been a growing trend, and one that does not promise to end anytime soon, that more people are earning money that does not come through a traditional W2 job. This can often be a side hustle for someone who does not consider themselves self-employed, or it can be someone who completely lives off that type of work and embraces the gig economy. Either way, this type of income is subject to self-employment tax. This is how the government gets you to pay into social security and Medicare when those monies aren’t being taken out of a paycheck.
And just so you know, enforcement of this could be about to go up.
The Treasury Inspector General for Tax Administration (TIGTA) released a report last month saying that the Tax Gap (difference between the taxes owed to the government and what is paid on time) for the self-employment portion was $69 billion (yes, really, with a B). TIGTA is an office that provides independent oversight of the IRS to promote fair administration of the tax system. And yes, it is fair that the IRS actually gets to collect the money that is owed to it. This seems to indicate that those who have been getting away without paying all their tax from side gigs could be subject to increased inspection as the IRS is urged to put more of its energies there.
If you are unsure about where you stand in this situation, that’s not a good sign. Just start from the standard rule that if you earn money, the IRS wants to know about it, and very likely wants to tax it. So if you are earning money, it most likely should be on your tax return.
I think a lot of this money that goes unreported does not do so through willful negligence. If someone is unfamiliar with the tax system, those various 1099 forms that come in the mail at the beginning of the year could be meaningless to them and left in a pile on the desk or thrown in the trash. This could be a young person making a little extra money, not feeling like they actually have a job, and then not understanding they have income to report and taxes to pay. This could be someone who has been in the workforce for years, knows how to handle their taxes off their one W2, and don’t realize that there is more to their tax picture.
Something else that this group does not understand, though, is that if they receive a 1099 form, a copy of it has also made its way to the IRS. Many of these can be of a small amount that slip through the cracks. Those small numbers obviously add up to a big one for the IRS, (really, with a B) and if they are going to put more effort into finding taxpayers who ignore them, it can be worth not ignoring them. After all, if it is a small number, it will only take a small number to handle the tax liabilities caused by it.
Let this be a warning then to be sure that you are reporting all that you should on your tax return. Yes, it is great to get some tax-free money, but it will not be tax free (and will come with penalties and interest) if the government finds you should have paid them some of it. And as always if you need help navigating through this part of your tax picture, we remain here to help.
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