IRS warns millions about health insurance penalty

By Ricardo Alonso-Zaldivar

WASHINGTON, D.C. — The IRS is sending personalized letters to millions of taxpayers who might be uninsured, reminding them that they could be on the hook for hundreds of dollars in fines under the federal health care law if they don’t sign up soon through HealthCare.gov. It’s an unusual role for a revenue-collection agency.

Fines are one of the most unpopular parts of the 2010 health overhaul, and there’s a high likelihood they’ll get repealed by Republicans, even if other parts of “Obamacare” survive. The administration is counting on IRS reminders to help sign up as many people as possible before open enrollment ends Jan. 31. That’s soon after officials hand off President Barack Obama’s signature program to a Trump administration committed to “repeal and replace.”

In this Oct. 24, 2016, file photo, the HealthCare.gov 2017 web site home page as seen in Washington. President-elect Donald Trump says he wants to preserve health insurance coverage even as he pursues repeal of the Obama-era overhaul that provided it to millions of uninsured people. How his administration handles a pending lawsuit over billions of dollars in insurance subsidies will reveal whether Trump wants an orderly transition to a Republican-designed system or if he’d push “Obamacare” over a cliff. Stripping away the subsidies at issue in the case would put the program into a free-fall. (Pablo Martinez Monsivais, File/AP)

In this Oct. 24, 2016, file photo, the HealthCare.gov 2017 web site home page as seen in Washington. President-elect Donald Trump says he wants to preserve health insurance coverage even as he pursues repeal of the Obama-era overhaul that provided it to millions of uninsured people. (Pablo Martinez Monsivais, File/AP)

Letters bearing the IRS logo will be sent to an estimated 7.5 million people who either claimed an exemption from the law’s requirement that most Americans carry health insurance, or who paid a penalty for being uninsured during the 2015 tax year. The coverage requirement was included in the law as a way to get healthy people into the insurance pool, helping to keep premiums in check.

The penalty for this year could be $2,085 or more, depending on family size and income, says one draft version of the IRS letter. Another draft takes a somewhat different approach, leaving a blank space for the IRS to provide an individualized estimate of what the particular uninsured taxpayer might owe.

The drafts were obtained by The Associated Press. Although the administration has made no secret of the IRS role in open enrollment this year, officials have not responded to requests for copies of the actual letters.

See also: Health Secretary to lobby Washington to prevent collapse of Obamacare

Republicans say the whole thing is a waste of money. The campaign will cost about $4 million, say congressional aides.

“People receiving these letters have already made up their minds about Obamacare when they applied for an exemption or paid a penalty,” said House Ways and Means Chairman Kevin Brady, R-Texas. “They don’t want stock letters. They want better health care choices and lower costs.”

Supporters of the health care law say research has shown that many people who remain uninsured are still unaware that they can go to HealthCare.gov and qualify for government subsidies to help pay their premiums. Those subsidies were designed as tax credits, bringing the IRS into the picture. The IRS letters make the pitch:

“Most people who enroll in a plan through HealthCare.gov can find plans for $75 a month or less after financial help,” the letters say. “At HealthCare.gov, you can compare plans to find one that meets your needs and budget.”

While such low-cost plans are available, many people actually pay more, and the $75 figure doesn’t take into account deductibles and copayments. The average monthly premium last year for HealthCare.gov customers was $106, after financial help, according to the government. The administration has not released a comparable premium estimate for this year. Insurers raised their sticker prices significantly, but the law’s subsidies should cushion the impact for most HealthCare.gov customers.

About 800,000 letters went out after Thanksgiving, and an additional 6.7 million are going out now, according to congressional aides.

See also: Congress to Complete First Step to Repealing Health Law

Last year about 6.5 million people paid fines for being uninsured, averaging $470, according to recent IRS data. The amount is generally deducted from a taxpayer’s anticipated refund. The fines started small in 2014, but are now fully phased in, starting at about $700.

The administration has a goal of signing up 13.8 million people for coverage this year and is looking for a strong finish to open enrollment season. Although the Affordable Care Act has reduced the nation’s uninsured rate to a historic low, it remains politically divisive.




IRS to delay tax refunds for millions of low-income families

By Stephen Ohlemacher

WASHINGTON, D.C. — The IRS is delaying tax refunds for more than 40 million low-income families this year as the agency steps up efforts to fight identity theft and fraud.

The delays will affect families claiming the earned income tax credit and the additional child tax credit. These tax breaks are geared to benefit the working poor, and many families claim both.

“For most of these people it’s the biggest check they are going to get all year,” IRS Commissioner John Koskinen said in an interview with The Associated Press. “We are sensitive to that.”

The tax filing season starts Jan. 23. But a new law requires the IRS to delay tax refunds for people claiming these credits until Feb. 15. Processing times will delay most of the refunds until the end of February, Koskinen said.

A 1040 tax form appears on display, Tuesday, Jan. 10, 2017, in New York. The IRS is delaying tax refunds for millions of low-income families as the agency steps up efforts to combat identity theft and fraud. Starting in 2017, a federal law requires the tax agency to delay refunds until Feb. 15 for people who claim the earned income tax credit and the additional child tax credit. The IRS says processing times will delay most of the refunds until the end of February. (Mark Lennihan/AP)

A 1040 tax form appears on display, Tuesday, Jan. 10, 2017, in New York. (Mark Lennihan/AP)

The delay is designed to give the agency more time to screen the returns for fraud. The IRS estimates that it issued $3.1 billion in fraudulent tax refunds to identity thieves in 2014. The year before, the agency says, it paid out $5.8 billion in fraudulent refunds. Over those two years, the IRS says it blocked nearly $47 billion in fraudulent refunds.

The earned income tax credit is one of the federal government’s largest anti-poverty programs. It has also been plagued by billions in improper payments each year, including overpayments, underpayments and fraud.

In 2014, about 29 million families received more than $72 billion in earned income credits.

“The EITC is a pro-work success,” said Chuck Marr, director of federal tax policy at the liberal Center on Budget and Policy Priorities. “It encourages work, it rewards work, and it has long enjoyed bipartisan support for those reasons.”

Eager to get refunds, about half of H&R Block’s customers who claim the EITC file their returns by early February, said Bill Cobb, president and CEO of the tax giant.

The tax preparer is offering interest-free loans to taxpayers affected by the delay, Cobb said.

The additional child tax credit also targets low-income families.

Most families with children are eligible for the standard $1,000-a-child tax credit. The additional child tax credit is for low-income families who don’t owe enough in federal income tax to claim the full credit.

For example, if you only owe $500 in federal income tax, you can use the $1,000 child tax credit to reduce your tax liability to zero. But you don’t get the other $500.

See also: Fed expected to raise rates for first time in a year

The additional child tax credit enables eligible families to claim the rest of the credit in the form of a tax refund.

In 2014, more than 20 million families claimed $27 billion in these credits.

This year, the IRS expects to process more than 153 million tax returns. More than 70 percent of taxpayers are expected to get refunds. In most cases, the IRS says it can issue refunds within three weeks of receiving a return.

The delayed refunds are part of a broader effort by the IRS to fight identity theft and fraud on refunds, which has mushroomed into a multibillion industry.

Two years ago, the IRS started partnering with the major tax-preparation services and with state tax agencies to combat identity theft.

“All of the players in the industry are sharing information against the common enemy, which is organized crime,” Cobb said.

Koskinen said the agency is making progress.

Last year, the number of people reporting to the IRS that their identities were stolen dropped by 50 percent, to 275,000 taxpayers, Kosinen said.

However, a new report by an agency watchdog says stepped up screening by the IRS is also delaying legitimate refunds, forcing taxpayers to spend weeks or months proving their identity to the tax agency.

See also: For some Low-Income Workers, Retirement Is Only a Dream

Last year, about 1.2 million legitimate refunds — worth $9 billion — were delayed an average of more than 30 days, according to a report released Tuesday by Nina E. Olson, the National Taxpayer Advocate. Olson runs an independent office within the IRS.

Koskinen said the IRS has had to get more aggressive in screening tax returns because the crooks have become increasingly sophisticated.

“We’re talking about international organized crime syndicates,” Koskinen said.




Why It Matters: IRS

FILE - In this photo March 22, 2013 file photo, the exterior of the Internal Revenue Service (IRS) building in Washington. Politicians love trying to use the tax code to highlight their goals to voters. This year, it’s a battlefield between Hillary Clinton, who wants to boost levies on the rich to pay for expanding social programs and Donald Trump, who says cutting taxes would gird the economy. The clash has consequences for the rich, poor and those in the middle. (AP Photo/Susan Walsh, File)

In this photo March 22, 2013 file photo, the exterior of the Internal Revenue Service (IRS) building in Washington. Politicians love trying to use the tax code to highlight their goals to voters. (AP Photo/Susan Walsh, File)

WASHINGTON – THE ISSUE: The Internal Revenue Service touches everyone, not just taxpayers but anyone who receives a government check, drives on roads made possible by tax revenue or sends a child to a school helped by Washington. It’s a touch that can come with a heavy hand, in the eyes of critics who believe the agency’s far-reaching powers are abused and the agency needs to be cut down to size.

___

WHERE THEY STAND

Republican Donald Trump’s most explicit views about the agency have been on the personal level – he says he’s been under a continuing multi-year IRS audit and that’s why he won’t release his tax returns, as other presidential candidates do. He’s also boasted that his use of business losses to zero out his tax liability shows he’s smart. Trump’s tax plan reduces the number of tax brackets but does not envisage dismantling the IRS as its fiercest critics want.

Democrat Hillary Clinton has said little about the powers of the IRS except to suggest Trump would use them to go after his opponents. She’s sure to fight attempts by congressional Republicans to cut the agency’s budget.

___

WHY IT MATTERS

No one loves the IRS.

Many Republicans, though, unlike most Democrats, talk of abolishing it. That idea never materializes. Even a smaller government could not function without an agency responsible for collecting revenue and going after tax cheats.

IRS Commissioner John Koskinen says it’s one thing to simplify the tax code – a good idea, he offers – but another to think the country can get by without tax collectors. “You could call them something other than the IRS if that made you feel better,” he’s said to the critics.

With some 90,000 employees, a massive stockpile of information on citizens and powers to dig deep into the lives of those it decides to investigate, the IRS is in the face of Americans like no other agency. That’s become even more so since it was handed the job of enforcing the mandate that people carry health insurance.

The potential for abusing power is obvious, and it has happened – most vividly at the hands of President Richard Nixon but also in the administrations of John Kennedy, Franklin Roosevelt and more, historians say.

During the Obama administration, the IRS has acknowledged mistreatment of tea party groups by subjecting them to excessive scrutiny in their bid for tax-exempt status. But investigations by the Justice Department and the IRS’ independent inspector general found no evidence that actions against the conservative groups were politically motivated.

Koskinen took over after the IRS actions in question but has not been clear of the controversy. Conservative lawmakers pressed unsuccessfully to impeach him, accusing him of lying to Congress, not answering subpoenas and overseeing an agency that destroyed documents in the tea party case. He denied the accusations and told lawmakers that when he testified in June 2014 that no documents had been destroyed since congressional investigations began, he didn’t know that IRS workers had mistakenly destroyed backup tapes bearing thousands of emails.

As for getting rid of the IRS altogether, even libertarian-leaning analysts say that’s a stretch. Chris Edwards of the Cato Institute, a former senior economist with Congress’ Joint Economic Committee, says even the most simplified tax code would require 10,000 to 20,000 tax collectors. “If you’re going to have federal taxes, you need an agency to collect them,” he said.

The Libertarian Party presidential candidate, Gary Johnson, says he’d like to eliminate the IRS and any other federal agency that Congress might vote to dismantle. But that, he has said, would take “a magic wand.”




Obama Administration Proposes Rules Aimed at Tax Evasion

President Barack Obama pauses while speaking in the White House briefing room in Washington, Friday, May 6, 2016, about the economy and new steps to strengthen financial transparency and combat money laundering, corruption, and tax evasion. (AP Photo/Carolyn Kaster)

President Barack Obama pauses while speaking in the White House briefing room in Washington, Friday, May 6, 2016. (AP Photo/Carolyn Kaster)

WASHINGTON – New financial regulations would force companies to disclose more information about their owners, as part of a crackdown on tax evaders and money launderers, the Obama administration announced on Friday.

President Barack Obama touted the proposals on Friday, as he urged Congress to pass legislation that he said would further enhance transparency in the U.S. banking system and help law enforcement track down secret owners. The president linked the push to the disclosures in the “Panama Papers,” the leaked documents that revealed how many wealthy individuals and government officials from around the globe use shell companies to hide assets and avoid paying taxes.

“We’ve seen just how big a problem corruption and tax evasion have become around the globe,” Obama said Friday at the White House, as he promised to continue an effort “to make sure that the rules aren’t rigged and our economy works for everybody.”

The president spoke a day after the Treasury Department announced two new measures aimed at forcing companies to better track and disclose ownership to the IRS.

One, the so-called customer due diligence rule, was finalized Thursday after four years’ consideration. The rule dictates how banks keep records on who owns the companies that use their services.

A second proposed rule would close a loophole that allows a narrow class of foreign-owned companies to avoid reporting to the IRS.

As Treasury announced the regulations, Secretary Jacob Lew wrote to Congress urging lawmakers to go further. Lew said congressional action was needed to give law enforcement tools to “to combat bad actors who seek to hide their financial dealings and evade their tax responsibilities.”

Treasury sent new draft legislation to Congress that would require companies to know and disclose their owners to the IRS and to allow law enforcement to access that information. And he called on Congress to pass legislation that would require U.S. banks and other financial institutions to collect and disclose more detailed information about foreign account holders – information it requires foreign banks to collect about Americans.

The high profile push is unlikely to get much traction in a divided Congress that has shown no appetite for tackling contentious tax battles or taking on financial service industry in an election year.

Several anti-corruption experts said the new rule for banks’ record-keeping leaves loopholes of its own and the proposed legislation is watered down. “It appears the rule is quite weak,” Mark Hays, senior policy adviser at Global Witness, said in a conference call with reporters Friday.

For example, special accounts set up by lawyers to hold company funds could be excluded from requirements for banks to determine a company’s true owners, Hays said.

Heather Lowe, director of governmental affairs at Global Financial Integrity, called the administration bill “a very watered down version.”

The American Bankers Association said many of its concerns about the rule as it was being drafted were taken into account by the Treasury regulators in the final version. “We were pleased,” the lobbying group’s president, Rob Nichols, said in a statement.

A two-year transition period for the rule to take effect, “along with manageable expectations for customer and … ownership identification, alleviates some of the potential burden,” he said.

The administration also made a push on another front. Obama and Lew both urged lawmakers to ratify eight tax treaties that have languished in the Senate. Obama said the treaties would improve law enforcement’s ability to pursue tax dodgers hiding assets abroad by enabling cooperation with foreign governments. He pointed to Sen. Rand Paul, R-Ky., as holding up the treaties, adding Paul was “a little quirky” on the issues.

Paul has said he opposes the agreements for privacy reasons, saying they would let governments collect and share citizens’ financial information.

The Associated Press




IRS Seeks Volunteers for Taxpayer Advocacy Panel

SAN JUAN – The Internal Revenue Service stated Tuesday it is seeking volunteers to serve on the Taxpayer Advocacy Panel (TAP), a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns and makes recommendations for improving IRS service and customer satisfaction.

The TAP reports annually to the Secretary of the Treasury, the Commissioner of Internal Revenue, and National Taxpayer Advocate. The Office of the Taxpayer Advocate is an independent organization within the IRS that provides support for and oversight over TAP.

“In trying to comply with an increasingly complex tax system, taxpayers may find they need different services than the IRS is currently providing,” National Taxpayer Advocate Nina E. Olson said in the published announcement. “The TAP is vital because it provides the IRS with the taxpayers’ perspective as well as recommendations for improvement. This helps the IRS deliver the best possible service to assist taxpayers in meeting their tax obligations.”

TAP taxpayer advocy IRSThe TAP includes members from all 50 states, the District of Columbia, and Puerto Rico, and one member from abroad who represents U.S. taxpayers living overseas. Each member is appointed to represent the interests of taxpayers in his or her geographic location, as well as taxpayers as a whole.

To be a member of the TAP, a person must be a U.S. citizen, not be a current employee of any bureau of the Treasury Department or have worked for any bureau of the Treasury Department within the three years preceding Dec. 1 of the current year, be current with his/her federal tax filing and payment obligations, be able to commit 200 to 300 volunteer hours during the year, and pass a Federal Bureau of Investigation criminal background check. Individuals who practice before the IRS must be in good standing with the IRS. New TAP members will serve a three-year term starting in December. Applicants chosen as alternate members will be considered to fill any vacancies that open in their areas during the next three years.

Applications for TAP will be accepted through May 16. Applicants must apply online at http://www.usajobs.gov.

For additional information about TAP or the application process, visit http://www.improveirs.org or call 888-912-1227 (a toll-free call) and select option number 5. The TAP staff may also be reached via email at taxpayeradvocacypanel@irs.gov for assistance.




Rubio, Cruz Release Tax Summaries in Challenge to Trump

WASHINGTON – Republican presidential candidates Marco Rubio and Ted Cruz released summary pages of their recent tax filings on Saturday, seeking to capitalize on GOP front-runner Donald Trump’s refusal to release similar information.

Despite making promises to release his tax records, Trump has balked at doing so, saying he won’t disclose the filings until the IRS finishes auditing his returns.

“We’re putting these out today to put pressure on Trump and the other candidates to release theirs,” said Rubio campaign spokesman Alex Conant.

Cruz, meanwhile, speculated that there could be “a number of bombshells” in Trump’s tax returns, from exaggerations about the celebrity businessman’s earnings to “significant contributions to Planned Parenthood.”

The two candidates now pressing Trump have not released their complete tax returns, as Mitt Romney did in 2012 and Hillary Clinton did last year. Both Rubio and Cruz produced the first two pages of their filings to the Internal Revenue Service, which don’t include key details about subjects such as their tax deductions.

Both Cruz and Rubio have left the door open to releasing more information, with Cruz essentially daring his opponents to go first.

“If Marco wants to release the complete thing for the recent years, I’m happy to do so as well,” Cruz said. But he reserved his sharpest comments for Trump, calling the front-runner’s delay “unprecedented in presidential politics.”

Every major party candidate since 1976 has released his full tax returns at some point during the campaign, according to Joseph Thorndike, a tax historian and contributing editor to Tax Notes, an accounting trade publication.

But while Thorndike faulted Trump for backing away from releasing his tax returns, he called partial releases such as those by Rubio and Cruz “fake transparency.”

“If you’re going to release your tax return, you need to release your tax return,” he said, calling such disclosure a rite of passage for candidates.

The tax returns released by the two lawmakers, combined with their previously released personal financial disclosures, offer an overview of their financial lives since arriving in the Senate.

Rubio released portions of his 2010 through 2014 returns on Saturday, adding to 10 years of tax documents he had previously made public.

Since winning election to office in Washington, they show Rubio’s income has ranged from $276,059 to $938,963, and he has paid between $46,500 and $254,894 in federal income tax. Most of the income came from a business that collected royalties on two books: Rubio’s memoir, “An American Son,” and a pre-campaign tract, “American Dreams.”

CORRCTS STATE TO GA INSTEAD OF SC - Republican presidential candidate, Sen. Marco Rubio, R-Fla., speaks to the media before he speaks to a crowd at Mount Paran Christian School, Saturday, Feb. 27, 2016, in Kennesaw, Ga. (AP Photo/Mike Stewart)

Marco Rubio (AP Photo/Mike Stewart)

In 2012, Rubio’s most lucrative year, his effective tax rate topped out at a little more than 31 percent. But by 2014, the family’s income dropped to $335,963, an amount on which the Rubio and his wife Jeanette paid a 24 percent tax rate. Rubio’s earnings that year were padded by cashing out $68,241 from his retirement savings.

Cruz released portions of his 2011 through 2014 returns. They show he and his wife Heidi brought in an annual average of $1,131,792, with large portions of their income coming from Cruz’s work in 2011 and 2012 at the law firm Morgan, Lewis and Bockius, and his wife’s work at Goldman Sachs. Cruz also reported $190,000 in income coming from a book advance from Harper Collins in 2014.

The returns show that Cruz and his wife reported more than $5.2 million in income in those years and paid an average effective tax rate of 37.6 percent.

The summary returns yield few details on either candidate’s charitable giving, but they indicate that the Texas senator, who has banked on the support of evangelicals and appealed to voters on matters of faith, hasn’t tithed a full 10 percent of his income.

“All of us are on a faith journey, and I will readily admit that I have not been as faithful in this aspect of my walk as I should have been,” Cruz told the Christian Broadcasting Network in January.




Trump Says He Won’t Release Tax Returns Because of Audits

WASHINGTON — Republican presidential front-runner Donald Trump is sticking to his new explanation for why he can’t yet release copies of his recent tax returns: The IRS is auditing him, as Trump says it has for the last 12 years.

“Until my audit is finished, you’re not going to see anything,” Trump said Friday, adding that he believes the government has unfairly targeted his returns. “I’m not going to complicate things.”

Republican presidential candidate Donald Trump gestures as he speaks at Regent University in Virginia Beach, Va., Wednesday, Feb. 24, 2016.  (AP Photo/Steve Helber)

Republican presidential candidate Donald Trump (AP Photo/Steve Helber)

Tax experts say that explanation has them scratching their heads — emboldening Trump critics who argue that the celebrity businessman-turned-candidate’s personal finances remain unexamined.

During Thursday’s debate, Trump predicted what anyone reviewing his tax returns would find: “nothing, nothing.” But the odds of being randomly audited every year for a decade is vanishingly small — and Trump’s statement that “four or five” years of his tax returns are actively being audited raised even more questions. The IRS’s normal statute of limitations for an audit is three years — though that time frame is extended in instances of substantial underreporting and there is no time limit on reviews in the event of fraud.

The Trump campaign did not respond to questions from the AP about why the IRS would be auditing his tax returns past the normal three year period. At the Christie endorsement event, Trump ignored questions from a reporter on why he would keep private earlier returns not at risk of audit.

With both Ted Cruz and Rubio having pledged to release their own returns — an invariably unpleasant rite of passage for every major party nominee since 1976 — Trump will soon stand alone among the major Republican candidates in having not yet produced them. And, despite Trump’s claims to the contrary, the last Republican nominee — Mitt Romney — had long since released two years of tax returns by this time in the 2012 cycle.

Romney has speculated that a “bombshell” is lurking in Trump’s returns — perhaps indications of trouble in his business empire. And Cruz —who normally boasts of his plans to dismantle the IRS — declared that “the voters need to know” if the government is homing in on possible wrongdoing.

Given the complex matrix of partnerships and business structures disclosed on Trump’s filings with the Federal Election Commission, the scope of information available through Trump’s personal tax returns is difficult to predict. But the nature of Trump’s charitable endeavors, his effective tax rate and the underlying profitability of his business operations would all likely loom large. Similar questions dogged Romney until late in the general election — suggesting that the focus on Trump’s taxes may not quickly abate.

“If you are not prepared for this level of scrutiny of your financial affairs, you should rethink your vocational choice,” said Joseph Thorndike, a tax historian and contributing editor to Tax Analysts, an accounting trade publication. “This one doesn’t go away.”

If Donald Trump has been audited for a dozen years straight, Trump would be certainly right to think that the process isn’t random. According to statistics published by the IRS, between 2005 and 2013, audit rates for earners bringing in more than $1 million faced ranged between 5 percent and 12 percent a year.

“Why am I audited every single year?” Donald Trump asked at a press conference Friday, insinuating unfair scrutiny of his taxes began under the Bush administration.

But regular audits wouldn’t necessarily be a sign of anything more than the complexity of Trump’s tax returns, Thorndike said: “No one claims it’s a lottery.”

There is no way to independently verify if Trump is in fact the subject to numerous active audits. But Thorndike said tax attorneys he’s spoken with are generally sympathetic to the desire not to make tax returns public while they’re being audited.

“If the returns are out there, then no one can hide — the taxpayer can’t hide, and the authorities can’t hide,” Thorndike said.




4 Things Every Small-Business Owner Should Know About Taxes

NEW YORK – Blood pressures are rising at many small businesses now that tax season is underway.

Although many owners hire accountants and attorneys to complete their income tax returns, taxes are a hassle. In a survey released last year by the advocacy group National Small Business Association, nearly 60 percent of the owners surveyed said the administrative burdens were the biggest problems posed by federal taxes. And 85 percent of the more than 675 owners said they relied on a professional to prepare their returns.

Owners can make the process easier by being organized and watching out for tax pitfalls, accountants say. Here are four tax issues small business owners should be thinking about now and year-round:

RECORD-KEEPING MATTERS

Haphazard or incomplete records are one of the biggest problems accountants see at small businesses. Rather than using accounting software year-round, owners stuff receipts and bank statements into file folders and then have to sort them as the tax deadline approaches.

Using accounting software to organize records will ease the process and help guard against costly errors, says Scott Berger, an accountant with the firm Kaufman Rossin in Boca Raton, Florida. He noted that checking accounts can be linked to the software, cutting down on data entry. Financial records can also be linked with tax preparation software, shortening the time it takes to compile a return. It may be too late to get your records into an accounting program for 2015, but owners should get started for 2016 before more time passes, Berger says.

Another reason for keeping good records: Owners need to provide financial numbers for potential lenders or investors.

“It’s in their best interest if they want to take their business to the next level,” Berger says.

TAX TIME, A TEACHABLE MOMENT

Many owners don’t bother to ask for a copy of their tax returns, says Emilio Escandon, an accountant with Morrison, Brown, Argiz & Farra in New York. That’s a bad idea – a tax return is like a report card, providing a snapshot of how a business is doing, he says.

“You should go through that report card and see where you can improve,” Escandon says.

Reviewing the return and discussing it with an accountant can also help an owner plan for the future. For example, if a business suffers a loss, it may not be a one-year event; the loss can also be carried forward, Escandon says.

“You should always have a forward-looking approach,” he says. Owners should also know that their prior-year returns can be amended to take advantage of a loss.

EMPLOYEES AND FREELANCERS

Small businesses that hire freelancers need to be sure these workers are truly independent and shouldn’t be classified as employees. Many companies use freelancers because they don’t want obligations like Social Security and Medicare taxes or providing health insurance. But under the law, freelancers can’t be treated like employees in terms of what they do and how much control a boss has over them. The IRS and state tax officials are paying closer attention to how workers are classified, looking to catch businesses violating the law, says Michael Greenwald, an accountant with Friedman LLP in New York.

Companies must give W-2 forms to employees and 1099s to freelancers detailing their 2015 compensation by Feb. 1. Freelancers, many of whom are small business owners themselves, should be sure they get 1099s from everyone they worked for the previous year. The IRS will match the 1099 copies it gets against the income you’ve reported, and if you failed to include any income, you’ll hear from the agency.

YOUR HOME OFFICE AND CAR

The deduction for using part of your home as an office has long been a point of contention between owners and the IRS. If an owner uses half the family room to run the business, the government won’t allow a home office deduction. A home office must be a separate space used solely for business purposes.

“You could theoretically go to the extent of putting up a partition to wall it off,” Greenwald says.

But the reality is the IRS won’t know whether you have a separate office unless your return is audited and an IRS agent visits your home.

On the other hand, the government recognizes that owners use cars for personal and business use. But owners must keep a diary of how many miles they drive for business each day, and calculate their deduction based on that amount. Many owners as they juggle work and family probably don’t keep those records, Berger says. The answer, as in keeping a company’s books, may lie in technology; there are smartphone apps like TripLog to help owners track business mileage.

By The Associated Press




IRS Watchdog Warns of Scaled-back Service in Agency Plans

WASHINGTON – The IRS is planning to push you to fire up the computer rather than calling for tax help, but the agency’s in-house watchdog says that could freeze out millions of taxpayers or force them to pay for advice.

As part of a plan that would focus more on online accounts for the 150 million individual taxpayers and 11 million businesses seeking help and information, the IRS may soon dramatically scale back telephone and face-to-face service, National Taxpayer Advocate Nina Olson said in her annual report to Congress.

Olson said the IRS should be more open about its plans and that service cutbacks may cause an increasing number of people to turn to tax preparers and software such as TurboTax to file their returns.

That would increase tax compliance costs for millions of filers.

“Implicit in the plan – and explicit in internal discussion – is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers,” Olson’s report said. “The key unanswered question is by how much. … It is incumbent upon the IRS to be much more specific about how much personal taxpayer assistance it expects to provide.”

The IRS said Olson’s report did not paint an accurate picture. It said taxpayers want new options to interact with the agency and that moving more communications online would free up resources for traditional services.

“The IRS remains fully committed to personal service to taxpayers, and the IRS believes increasing the availability of self-service interaction frees up in-person resources for taxpayers who truly need them, including those who are not comfortable online or don’t have personal access to a computer,” the statement said.

Taxpayers currently make more than 100 million calls a year to the IRS and more than 5 million visits to the agency’s walk-in assistance centers.

Olson said millions of taxpayers do not go on the Internet and that millions more are reluctant to share sensitive information online, as envisioned by an IRS plan for future operations. That plan has been under development for a year-and-a-half.

The agency has scaled back taxpayer services while putting in place budget cuts imposed by Republicans in Congress. As a result, many calls to IRS information centers go unanswered and those who do get through get answers to only the simplest questions. The agency also no longer helps low-income taxpayers file their returns and it conducts fewer audits.

Congress has cut the agency’s budget by about 19 percent since 2010, after adjusting for inflation. Last month, Congress finally gave the agency a budget boost, including $290 million in additional money for taxpayer assistance.

Olson said the evolving IRS plan has “many positive components,” such as new online taxpayer accounts that would speed information to taxpayers. That is likely to reduce demand for overburdened telephone and face-to-face interactions with the agency.

Still, Olson said, many people seeking help from the IRS don’t have “cookie cutter” problems that can be handled online. For instance, last year more than 9 million filers experienced refund delays or received IRS notices after submitting their returns proposing to adjust tax payments.

“They will agree to assessments and adjustments they never should and they will forfeit significant due process protections,” the report said. “All because they can’t talk with an IRS employee about their situation or because they can’t afford to pay someone to help them.”

Olson’s warnings stem from limited public pronouncements about the agency’s planning and internal IRS discussions. She said the IRS should make its plans public.

Online: Olsen’s report

By The Associated Press