Yes, here comes more talk of the Employee Retention Credit, and if you are a business owner, you may very well be sick of hearing about it.

I have written previously about the proliferation of fly-by-night companies that have popped up promising businesses high returns on IRS credits that they could have for just a small fee. I won’t go into the issues with these offers again here, but you know what they say about things that sound too good to be true …

But now there is another reason to shy away from these offers as IRS Commissioner Danny Werfel spoke last week about how the agency is going to turn increased attention toward looking into these claims.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," he said. "Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area."

Of course, this doesn’t mean that businesses who qualify for the credit should not pursue getting it, but it does mean that they should be very confident that they qualify for the credit before submitting any paperwork for it.

This has become so big that it may even be worth reading a news release from the IRS that discusses the matter. This covers many things from how unsavory individuals aggressively market applying for the credit, how they lure victims, what one can do to protect yourself from it, and how one actually qualifies for the credit.

I am not of the mind that someone can go to this link and suddenly have clarity on the situation and know exactly where they stand. The fact that these rules aren’t easily and instantly understandable is something that scammers are able to take advantage of, after all. But one can fall back on what the IRS puts atop its list of how businesses can protect themselves – work with a trusted professional.

When someone contacts you out of nowhere, it is a good rule of thumb to always approach that with a healthy dose of skepticism. They often speak with just enough truth to tempt and there is nothing wrong with a little temptation. Allow yourself the time to find the full answers, though, and you will protect yourself from the IRS and its promised increased efforts to track down those abusing these credits.

​Warmly,

Josh Bousquet
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Often when writing these articles, I come back to the conclusion that the best way to not worry about your tax return is to submit a legitimate tax return. Usually this comes about with ideas of trying to hide income or claiming deductions that are not true deductions. And with these, it usually comes down to that if you think you are bending the rules, you have probably broken the rules.

But of course, not everyone does this on purpose. People who go about filing their tax returns by themselves could legitimately think something counts as a deduction that does not. They also may not realize that some money they received should have been reported. This is where the assistance of a tax professional can help to avoid genuine mistakes.

With the proliferation of social media in recent years, though, there is more false information out there that can lead people to believe that they are finding actual loopholes to pay less tax. And beyond that, there are also claims that one does not have to pay any taxes at all. This comes from many theories, such as federal withholding tax is unconstitutional, paying income tax is voluntary, or that you can choose to not pay on religious, ethical, or moral grounds.

For more information on this, you can read this recent article from CPA Practice Advisor about how these claims will be labeled as “frivolous” by the IRS. Not paying taxes due to frivolous claims can result in consequences that run right up to criminal penalties. But even if someone’s actions don’t reach that level, there are some general IRS penalties one should keep in mind when it comes to not filing a tax return or not filing a proper return:

• Failure-to-file penalty of 5% of unpaid taxes per month

• Failure-to-pay penalty of 0.5% of unpaid taxes per month

• Accuracy-related penalties of 20% of underpaid tax

• Civil fraud penalties of 75% of unpaid taxes

• Erroneous refund claim penalty of 20% of the excess amount

• Fraudulent failure-to-file penalty of 15% per month

Just how much these can add up to depends on the level of what’s unpaid but it does make clear that even a relatively small unpaid amount can start to grow quickly when multiple penalties from this list are tacked on.

And of course, some people are still going to believe what they believe and awareness of this is not going to change their minds. But I did want to mention it here because it does backup that original idea of how valuable a legitimate tax return can be and how it is worth consulting those with knowledge instead of pulling it in from wherever one happens to see it.

Warmly,

Josh Bousquet
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Remember back at the end of tax season when we were happy with the IRS’s performance? Yeah, that was a good time.

And now it feels like a long time ago.

A recent gaffe by the agency resulted in mailing out collection notices to taxpayers in disaster areas demanding that they need to pay a bill when they were supposed to have been given extra time to do so. And these people do have that extra time and do not yet have to pay. In fact, National Taxpayer Advocate Erin Collins addressed the issue by pointing out that the fourth page of the notice essentially tells taxpayers that they can ignore the first three pages.  But when you first read three pages saying you owe the IRS some money …

This mistake happened as some areas of the country are enduring record heat waves and widespread flooding flows through others. States from California to Florida have qualified disaster areas, so this isn’t something that is localized. Those times are trying enough for people, and I think everyone agrees that receiving a note to pay something to the IRS never arrives with complete comfort and just piles on the worries.

But even through this, there are a couple of lessons that can be learned.

No matter how big, scary, and in charge it seems, the IRS is not infallible. In fact, it is so not infallible that this is by far not the first time it has made a mistake. And you are not going to receive anything from the agency through the mail that requires you to respond to it in super rapid fashion. You have the time to investigate it if you feel it is mistaken.  And in this situation, confirming the status of a disaster area would have established you are correct (and maybe even then given you the impetus to comfortably read through your notice and get to that mystical fourth page that contained the real information.)

Of course, the fact that the IRS gives some leeway to a disaster area is a piece of news that could easily pass someone by as, you know, they deal with actual disaster. Or maybe you heard about it at the time, then received such a notice, and thought that the extra time could have been rolled back, the deadline has actually come and you misremembered the date, or whatever other reason that makes you think a professional agency is doing its job correctly. At that time, it can also be worth taking the effort to consult a professional who can help you get to the correct answer.

Warmly,

Josh Bousquet
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There has been a lot of political push and pull recently concerning increased funding for the IRS and its ability to carry out audits. Some of this was recently pulled back by Republicans as part of the debt ceiling agreement. Critics of this move claimed that it was for the benefit of the wealthy, and now there seems to be some backup to that.

A recent study based on 710,000 audits from 2010-2014 found that an additional $1 spent on audits of top earners (those above the 90th income percentile) brought in over $12 of revenue. Audits of below-median income taxpayers only yielded $5.

The study states that, “While audit costs rise with taxpayer income, the same is true for audit revenue. In fact, the additional costs stemming from the complexity associated with auditing high-income taxpayers are more than offset by additional revenues."

This definitely seems to legitimize the idea that adding increased funding to the IRS’s audit power more than pays for itself. After all, if you could be guaranteed a 12 times return on investment, you would immediately start moving a lot of money.

And why would you want to take money away from that investment then?

I don’t want to push this any further and get too political, for I can certainly appreciate arguments saying many of these people who would be affected are being unfairly taxed. After all, we are talking about a complicated system that is difficult to make fair to everyone. But I do believe that people should have to fulfill their obligations under the rules in place.

For those still with me, the report’s conclusions state:

“On average, the direct revenues collected by audits surpass the cost by more than 2 to 1, but that ratio varies widely by income. Audits of taxpayers in the bottom 50% of the income distribution do not break even, producing 96 cents for each $1 in cost. Audits in the 70th to 80th percentiles return $1.58 for each dollar in auditing costs; in the 90th to 99th percentiles, audits return $2.18 for every $1, and for audits in the top 0.1%, the return is $6.29.

“The researchers get to the figure of $12 in revenue from the highest-income taxpayers by including the effects of deterrence: Following an audit, people pay more taxes for a minimum of 10 years and a maximum of 14 years. The revenue generated is three times greater than what is collected during the initial audit.”

So even if the idea of an audit is frightening no matter who you are, letting them achieve the desired outcome would seem to be something we could all agree on – especially if they can be so effective. And as always, the best way to avoid a stressful audit is to submit a legitimate tax return.

Warmly,

Josh Bousquet
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During the summer, many people are taking time off and enjoying working a little less, but there are others who are using their increased free time to do some extra work and bank some extra cash. More and more, this is happening by joining into the gig economy. I figured then that this may be a good time for some reminders about how this affects one’s tax picture.

And of course, as always when it comes to any money you make, the big thing is that the IRS is going to want to know about it. Also, the IRS is very likely going to know about it if you make over $600 doing any type of service or selling any type of goods, for you will be receiving a 1099 that reports this income and a copy of that also goes to the IRS.

Where things really turn with the gig economy and taxes comes with the fact that you are not considered an employee when working within it. When you receive a regular paycheck and a W2 reporting this income at the end of the year, most of your tax obligations are probably being taken care of (especially if we are only talking about some part-time summer work) with what is withheld from your pay. When you receive payment as a contractor, though, none of these obligations are taken care of before you get that money.

And this does not just include federal and state withholding taxes. It is still possible that someone will only make a small amount of money over a year and not be liable for anything in that area. No matter how little is made, however, gig workers will still be responsible for all Social Security and Medicare taxes on their income.

So, if someone has a job as an employee outside of the gig work, one may want to think about submitting a new W-4 form to their employer and have more taxes withheld from their paycheck to help take care of those outstanding obligations. If one does not have that option, it’s possible to make quarterly tax payments throughout the year to help offset these taxes – and in fact, if enough money is being made, the IRS may even require these payments to happen.

None of this means that making money in this type of way is a bad idea, there are certainly advantages to it for people in many situations. There are just tax ramifications that should be considered and thought about before they become a surprise come tax time next year.

Warmly,

Josh Bousquet
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