Author Archives: Joe Orabona

New Tax Season, New Tax Scams

As long as humans still use money there will always be people trying to take it from others.  No, I’m not talking about taxes. Every year I hear about IRS scams.  For the past few years it’s been phone calls to people telling them they’re behind on their taxes and are about to be arrested.  They use fear and intimidation to get people to give out their information and their money.

This year they’re using a more modern tactic.  The IRS has reported a huge surge in phishing and malware incidents this year.  Rather than calling, scammers are emailing and using fake websites that are designed to look like the IRS’ website.  The IRS in general rarely contacts people via email.  Their preferred method of contact is good old fashioned snail mail.  If you get an email that appears to be from the IRS report it by sending it to phishing@irs.gov.

The full text of the notice from the IRS is below and contains additional details on what they’ve been seeing this year.  If you receive a call, letter, or email from someone claiming to be an IRS representative that you’re suspicious of, feel free to contact our office to discuss it further.

IR-2016-28, Feb. 18, 2016

WASHINGTON — The Internal Revenue Service renewed a consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season.

The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

Variations of these scams can be seen via text messages, and the communications are being reported in every section of the country.

“This dramatic jump in these scams comes at the busiest time of tax season,” said IRS Commissioner John Koskinen. “Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

This tax season the IRS has observed fraudsters more frequently asking for personal tax information, which could be used to help file false tax returns.

When people click on these email links, they are taken to sites designed to imitate an official-looking website, such as IRS.gov. The sites ask for Social Security numbers and other personal information. The sites also may carry malware, which can infect people’s computers and allow criminals to access your files or track your keystrokes to gain information.

The IRS has seen an increase in reported phishing and malware schemes, including:

  • There were 1,026 incidents reported in January, up from 254 from a year earlier.
  • The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
  • This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

(Numbers provided are for phishing and malware incidents combined.)

“While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. “We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns.”

As the email scams increase, the IRS is working on this issue through the Security Summit initiative with state revenue departments and the tax industry. Many software companies, tax professionals and state revenue departments have seen variations in the schemes.

For example, tax professionals are also reporting phishing scams that are seeking their online credentials to IRS services, for example the IRS Tax Professional PTIN System. Tax professionals are also reporting that many of their clients are seeing the e-mail schemes.

As part of the effort to protect taxpayers, the IRS has teamed up with state revenue departments and the tax industry to make sure taxpayers understand the dangers to their personal and financial data as part of the “Taxes. Security. Together” campaign.

If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov.  Learn more by going to the Report Phishing and Online Scams page.

It is important to keep in mind the IRS generally 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. The IRS has information online that can help protect taxpayers from email scams.

Phishing and malware schemes again made the IRS “Dirty Dozen” tax scam list this year. Check out the last IRS Phishing Scam news release for more info.

What to look for in these scams

Taxpayers receive an official-looking email from what appears to be an official source, whether the IRS or someone in the tax industry.

The underlying messages frequently ask taxpayers to update important information by clicking on a web link. The links may be masked to appear to go to official pages, but they can go to a scam page designed to look like the official page. The IRS urges people not to click on these links but instead send the email to phishing@irs.gov.

Recent email examples the IRS has seen include subject lines and underlying text referencing:

  • Numerous variations about people’s tax refund.
  • Update your filing details, which can include references to W-2.
  • Confirm your personal information.
  • Get my IP Pin.
  • Get my E-file Pin.
  • Order a transcript.
  • Complete your tax return information.

“All they do is put my information into their software”

taxes and calc

This is something I hear frequently. Usually it’s a comment on an internet discussion about using software or going into a tax office. To an extent, it’s true. When a client gives me their tax documents I’ll enter it into my tax software, but that’s where the similarities end. And it’s definitely not “all” I do.
Here are some of the main differences between working with a tax professional instead of software:

No guessing. When someone decides to use software that they purchase themselves what you’re basically doing is entering you’re information into a calculator and hoping for the best. Unless you’re familiar with each deduction and credit you have no way of knowing if your return is actually correct or not. Before I enter in the first number I already know what your completed return will look like and can review it to make sure that you get every deduction and credit that you’re eligible for.

Support: If you’re doing your own taxes then your software is not going to be there to help you if you get a letter from the IRS. We’re open year round and can help you understand what that IRS letter is asking for and explain your options. I also stand behind every return that I prepare. If there are any problems, I’m here to help. Your software will just tell you that the error was your fault and wish you good luck.

Tax Planning: Wondering how the Obamacare penalty is going to affect you as you change jobs? Need to know how your taxes are going to change after you retire? Is your current withholding still going to be enough now that you got that rise? There are countless things that can affect your taxes each year. Its always best to come up with a plan as early as possible. All of my clients are eligible for a free tax planning session each year so that we can be proactive about the changes in your life.

Call or email today to schedule your appointment at our office in Windsor Locks
860-580-5183
Info@VectorTax.com
www.Info@VectorTax.com

Image courtesy of everydayimages at FreeDigitalPhotos.net

“But I’m just an Independent Contractor”

IRS Self employment tax form.  Schedule SE

It’s a phrase I hear several times a year once I mention Self Employment Tax.   Unfortunately there are only one of two categories that you can fall in to for earned income on your taxes.  Either you’re an employee or you are a business owner.  Though there are actually lots of people who get a 1099 that are improperly classified as independent contractors when they should be employees, but that’s a much longer discussion.

If you work and you get a 1099 at the end of the year, you are considered a business owner and subject to Self Employment tax.  Unfortunately there’s no way around this.  Self Employment tax is misunderstood by a lot of people though.  I’ve worked with people who’ve assumed it was punitive.  It’s not, but if you’re not prepared for it, it can definitely feel like it is.  A lot of small business owners, and independent contractors, actually wind up paying more in Self Employment tax each year than their actual income tax.  It winds up being approximately 15.3% of the profit from your business.  If that’s something you’re not prepared for it can be a big hit, but what is it?

As an employee of a company you pay 6.2% of your income to Social Security and another 1.45% to Medicare.  You may see these combined and listed as FICA.  In addition to that your employer also has to match.  So, if you combine the two you get 15.3%.  Self Employment tax is not an extra tax you have to pay for being self-employed, it’s you paying in to Social Security and Medicare. Now as an employee you only had to pay half of that amount.  Unfortunately being an INDEPENDENT Contractor means there’s no one else to pay the other half for you.  Seeing as how the good people at the IRS are so generous they do at least let you take a deduction for half of what your SE tax is.

If you need help planning for your upcoming tax bill call or email us today to schedule a free tax planning session.
Vector Tax & Accounting
73 Old County Rd
Windsor Locks, CT 06096
860-580-5183
Info@VectorTax.com

The 7 Month Disappearing Act

emptyoffice

This time of year everyone is very aware of the impact that taxes have on their lives.  It’s hard to turn on a TV or radio or drive past a billboard without seeing an ad for a tax service.  Each year hundreds of thousands of seasonal tax preparers report to their office, many for their first year.  From January through April they’ll meet with the approximately eighty million tax payers who work with paid preparers.

But then what happens?  After April 15th most of these places close up shop.  The army of preparers go back to being college kids, retirees, stay at home moms, etc.  While you may only think about your taxes once per year, the IRS is open all year round.  So where do you turn when it’s the middle of the summer and you have questions or you get a letter from the IRS?

A local tax or accounting practice, that’s active in your community year round, is always going to be your best choice.  Unlike seasonal offices, year round offices are generally run by a CPA or EA.  People with either of these designations are professionals who are committed to their field.  They’ve taken a series of certification exams and have yearly continuing education requirements.  While a CPA’s test and education requirements can cover any number of a broad range of accounting related topics, all of requirements for EAs are strictly tax related.

During tax season our office is open 7 days a week.  After tax season is over we scale back to regular office hours 5 days a week.  Night and weekend times are still available by appointment.  Free tax planning sessions are available for individuals over the summer.  We’re more than happy to meet with you, answer any questions you may have, and explain your tax situation to you in terms that someone who isn’t an accountant can understand.

Vector Tax & Accounting
73 Old County Rd
Windsor Locks CT 06096
www.VectorTax.com

IRS: Common Sense Need Not Apply

confusion
I had a woman in my office for a tax prep consultation a few weeks ago. She had a fairly interesting situation, well interesting if you’re an accountant anyway. I explained the situation to her and how it should be handled. She left and discussed things with a family member. He told her that I was wrong. His reasoning was very straight forward and based entirely on common sense. Unfortunately, when your dealing with the Internal Revenue Code, common sense doesn’t always play a role.

There are lots of very valid reasons why you may want to file your taxes separately from your spouse. I’ve probably heard most of them at this point. Some of the most common are married couples that simply want to keep their finances separate. One spouse may have a delinquent debt and the IRS now takes their refund. Another common reason is that one just started a business and they don’t want their taxes to effect their spouse’s refund.  These are all very valid reasons as to why you would want to file separately from your spouse. Unfortunately, in all of these situations you’re still usually better off filing jointly.

Married Filing Separate (MFS) is the worst filing status you can use. the IRS basically punishes you for using it. There is a long list of deductions and credits that you’re no longer eligible for if you choose to do MFS. I ran through the numbers for a client of mine last month. Had they filed separately they would have gotten over $1,700 less in their refund. Its bad to the point where I’ve seen, soon to be divorced, couples that generally can’t stand to be in the same room together still come together to file their taxes.

Now you may be thinking, does it matter if my portion of the refund is higher if the IRS is just going to grab it all because of my spouse? Good question! There are two ways of looking at this. First ,there is the fact that this debt isn’t going to go away until the IRS  gets all their money. The larger the refund they take the faster it gets paid off and things go back to normal. While that’s all well and good, maybe you still want to get a refund. There are ways to still file jointly and get your portion of the refund. Depending on the circumstances you maybe eligible to file under injured or innocent spouse relief. If you qualify then you still get your portion of the refund but, without the penalties of filing separately.

If you have any questions about what the right status for you is, or anything else, feel free to comment below or email at Joe@VectorTax.com.

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Your time is valuable, but the IRS doesn’t care.

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I’ve always said that if you want to really get to know someone, do their taxes. Most people don’t view it as that big of a deal, but others view it as a very personal experience. After I’ve worked with someone I know who they are, where they live, where they work. I’ll know if they have kids, are in school, are they saving for retirement, and may other factors that tell me what their life is like and what kind of person they are. One other thing that comes up commonly is, do they donate to any charities.

Donating to a good cause is a great thing that lots of people do every year. Many people are able to take advantage of the tax benefits of donations, but not everyone can.  In an earlier posts I talked about some common misconceptions about the tax benefits of donations.  Just because you donate something doesn’t automatically mean that you get a tax break for it.  To be honest, if you’re making a donation just for the tax deduction, you’re doing it for the wrong reason.

I work with a lot of new business owners.  One common thing that gets brought up is donating a free consultation, evaluation, portrait session, etc.  Some people just legitimately want to help the organization out by donating this service, others want to help out but also view it as a form of advertising.  Either one is a perfectly fine reason for making a donation.  The problem comes when they think they can deduct the full market value of the donated service.  When it comes to donating your time, your hourly “billing” rate is $0.  While you’ve done a wonderful thing, your time has 0 in the way of deductible value.  That’s not to say that you can’t take any deduction for your donated service.  You can deduct your actual costs.  So any supplies that you needed to purchase for this, as well as your mileage, are all deductible, but that’s it…Sorry.

For artists, the majority of the time, it’s going to be exactly the same as I described above.  However, there are some rules regarding the donation of intellectual property and finished works of art that may apply.  Though that’s too involved of a discussion for a format like this.

CPA? I don’t think that means what you think it means.

inconceivable

The going assumption is that if you want to start a business or if you need help with accounting or taxes, then you need a CPA. While there are CPAs that do focus in these areas, the vast majority do not. That’s kind of like meeting a doctor and assuming he has a family practice or meeting a lawyer and assuming he does personal injury cases. Those are the most visible practice areas, but there are lots of other areas to specialize in. There are essentially 2 things that you would specifically want a CPA for, they can certify audit reports and financial statements. That’s something that upwards of 90% of businesses will never need.

Easily the most frequent question I get asked is, “Are you a CPA?”, or they’ll make some sort of statement that makes it clear that they assume that I’m a CPA. I am not. It’s understandable since I’m performing all of the tasks that they think they need a CPA for. I’m eligible to take the CPA exams, and I might do that one day, but it’d be just for the sake of brand recognition. The CPA designation isn’t necessary for what I do, it isn’t really even relevant.

My main focus is on taxation. Not just preparation but looking at the whole big picture and how it effects your personal life and/or business. That allows me to better serve my clients for their bookkeeping, payroll, and other accounting needs. The certification that is the most appropriate for that is Enrolled Agent. One thing I learned after I decided that this was what I wanted to do, was that unless you’re an accountant, you’ve probably never heard of an EA.

The Enrolled Agent designation is the highest certification you can get from the IRS, and it’s the only one that is purely taxcentric. The CPA exams cover a broad range of topics, only one of which is taxation. Exam 1 is all about tax. Exam 2 is all about taxes. Exam 3 is about representation. You need to do a minimum of 16 hours of continuing education each year, 2 hours of ethics, all the rest is about taxes.

This time of year everyone is very aware of the impact that taxes have on their lives. For individuals it’s really a year round thing, but most people only really think about it once. For most small businesses they don’t need to care about annual reports or GAAP accounting or anything like that, for them everything really just boils down to their taxes. This is why I, and many EAs, do bookkeeping work as well. With everyone that I work with I make sure that all of their records can survive an audit and I advise them on strategies focused on long term tax savings rather than just lower their taxes in the current year.

Taxes are a factor in every level of business and are often the most complex part of it. Sales tax for example is far more complicated than it should be. It should break down to if you sell a product then you collect sales tax. But, like all the other areas, it’s a system that’s controlled by politicians, lawyers, lobbyists. I have one client that is run a vet clinic. If she were to charge someone from trimming their pet’s nails, she doesn’t have to charge tax on that. I have another client that’s a dog walker. If she charges for trimming nails then she has to collect tax. A couple of weeks ago I was working with someone who has a commercial flooring business. There are all sorts of different rules as to when he would or wouldn’t have to collect tax. They have to factor in things like the type of building, what the building is being used for, what phase of construction it’s in, etc.

So generally when people think that they need a CPA, what they’re really saying is that they need a tax expert. Their are some great CPAs out there who specalize in taxation and small business account. EAs, however, are the only ones who are tested solely on taxes and have tax related continuing education requirements.

Tax Prep without leaving home

DIY-SNOW-Pillows-Two-Purple-Couches

Snow has started coming down…again.  I don’t know about you, but if I didn’t have to be at the office, I wouldn’t want to leave my home.  So why should you?  Here’s one less reason to, instead of coming into the tax office, we can work remotely.  We work with clients from all over the country.  Just because you live near by doesn’t mean that you can’t take advantage of the convenience of getting your taxes done remotely.  Just call or email to find about how to take advantage of this at no additional charge.

860-580-5183
Info@VectorTax.com
www.VectorTax.com

Is your donation actually deductible?

I met with someone in October. He had filed a 6 month extension for his taxes in April and now in mid October the deadline was again looming and it was time to finally get his taxes in order. There was a long list of things that were discussed. One thing we talked about was some clothes that he had donated. Everyone “knows” that if you donate items to a good cause you can then take a deduction for it. Like everything else in the tax code, it’s not actually that simple. In order to be able to deduct a donation it has to be given to a qualified charitable organization. So when you walk past a homeless person and give them a dollar, while you’re doing a nice thing, the IRS doesn’t care.

In this case he had donated a bag of clothes to a fundraiser for a young girl who was ill. I’ve been to a few events like this. All of the ones that I have been to have been run by the family itself. In that case what you’re doing is considered giving them a gift, not making a charitable donation. Fortunately, this was one of the rare exceptions. This family had actually partnered with a local charity so all donations were actually considered to be given to that charity and not just the girl’s family. So, we were able to get him the deduction and everyone lived happily ever after.

Another key factor to consider is, are you even eligible to deduct donations at all? Charitable donations are accounted for on Schedule A of your 1040. On this schedule is a whole list of items that you can take deductions for, but you need to several thousand dollars worth of deductions here to make it worth it. This is something that’s generally only done by people who own a house. So if you’re not eligible to itemize your deductions, which most people aren’t, then your deduction is good karma, but it wont help you on your taxes.

Like everything else in the tax code, charitable donations are more complicated than they should be. There are rules about how much you can donate to what type or organization and what documentation you’ll need. If you have any questions about a donation you’d like to make, it’s always better to ask a knowledgeable tax professional before you make the donation and not on April 15th.