November 18, 2013 § Leave a comment
I think we all appreciate the many technical advances we have seen over the last several years. We can do our shopping from home, pay our bills electronically, deposit checks remotely and even prepare and file an income tax return from a smart phone. The downside of all of this convenience is that more and more of our personal information is floating around in cyber space and is available for unsavory individuals to find as well. Criminals are actively looking for creative ways to access this information and are using the IRS as a vehicle to obtain information and facilitate fraud. I’d like to share a few things I’ve recently read as it relates to identity theft, tax fraud and the IRS.
The IRS recently issued a warning on a sophisticated phone scam that has been hitting individuals across the country over the last few weeks. Victims are called and told they owe the IRS money and are asking for credit card numbers or asking for payment via a pre-loaded debit card or wire transfer. The scammers are often providing fake IRS badge numbers and other personal information about the victim to make it all sound legitimate.
Criminals continue to use email as part of phishing scams by sending out official looking IRS emails that often direct individuals to fake websites that appear to be official, where victims are asked to submit personal and financial information. They are also sending emails indicating a shortfall in the amount of tax paid and asking for payment to be made to fraudulent accounts.
The IRS is currently dealing with a significant increase in the filing of fraudulent income tax returns using a false identity. Individuals are obtaining names and social security numbers and using that information to generate false tax returns, generating millions of dollars in fraudulent refunds. When the victim goes to file their tax return, it will be rejected as the IRS has already processed a return under their identification number. According to a recent report, it is taking the IRS an average of 312 days to resolve identity theft tax filings.
Even criminals behind bars are finding ways to get involved. I recently read an article about tax preparers in New Jersey who solicited prison inmates as clients and prepared and filed thousands of fraudulent income tax returns on their behalf – to the tune of $1.7 million. It appears they will likely be joining their clients in jail.
Unfortunately the problem is likely only to get worse. A recent report from the Treasury Inspector General for Tax Administration indicated that in 2011 1.1 million returns were filed that were suspected to be identity theft tax returns and that the IRS potentially issued approximately $3.6 billion in fraudulent refunds. Midway through 2013 the IRS had encountered 1.6 million potential identity theft returns.
Some words of warning out of this: Be extremely suspicious of any correspondence from the IRS via email or phone call and be extremely careful when providing personal and financial information online or to unknown parties.
November 4, 2013 § Leave a comment
We all know that Health Care is changing. The new rules of the Affordable Care Act (referred to as ObamaCare) are probably going to be imposed on us whether we like it or not.
One benefit that isn’t changing very much is Cafeteria Plans. Almost all larger employers offer these plans, and more and more small employers have also adopted them. In simplest terms, the Plans allow employees to pay for certain benefits with pre-tax dollars. The most common feature within these plans is the ability to pay for the employee’s portion of health insurance with pre-tax deductions.
Many Plans offer additional benefits that are often ignored by employees. Those additional benefits can be very valuable – specifically a Flexible Spending Account for medical expenses (FSA) and Dependent Care Reimbursement Account (DCR).
Cafeteria Plans with these features represent one of the few opportunities that we W-2 employees have to get some of our expenses paid with pre-tax dollars. It is a legitimate “tax loophole” still available to many. Contributions to these accounts escape federal and state income taxes as well as Social Security and Medicare taxes. For a large number of employees, that represents a combined 40% tax savings.
Unfortunately, many employees avoid using these accounts because of the “use it or lose it” rules imposed by the regulations. Keep in mind that because of the tax savings, most employees could forfeit up to 40% of their elected amount and still be dollars ahead by using the Plan. The risk of loss isn’t really as great as it might seem.
Dependent care contributions are limited to $5,000 annually. As anyone with small children in daycare knows – that amount doesn’t go far. Most employees with kids in daycare should be taking full advantage of the DCR accounts. A few lower income employees might be better off with the federal Child Care Tax credit, but most will not.
Flexible Spending Accounts for medical expenses are limited to $2,500 annually. I regularly hear people say “I don’t have much out of pocket medical expense – why should I bother?” The fact is most people have more qualifying expenses than they realize. Even if your health insurance covers doctor visits, what about dental costs, eye exams, glasses, contacts and contact solution? Did you know that Band-Aids and sunscreen are qualifying costs? While most over-the-counter medicines no longer qualify, many supply items do qualify. You can even submit mileage to purchase these items at the medical rate of $.24 per mile.
November and December is benefit election time for many employees. If you work for an employer that offers a Cafeteria Plan, I encourage you to take a fresh look at your options. Don’t let the potential tax savings your employer is serving up be thrown in the cafeteria trash can!
John Schmidt, CPA