1st Grade Tax Tips

Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

IRS Provides Guidance on Tax Treatment of Bitcoin

Its status has been up in the air for some time now, but today the IRS provided guidance on the tax treatment of online currency such as Bitcoin.  The official position is that virtual currency is not to be treated as legal-tender currency, but should be treated as property instead.  Bitcoins, therefore, should be reported and taxed as ordinary income, or as assets subject to capital gains, as the case may be.

[V]irtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.

Therefore, in real world applications, employees who are paid in virtual currency must pay taxes on that income just as they would pay taxes on dollars.  And an employer would have to withhold taxes, report these wages on a W-2, and comply with payroll tax laws.  And, of course, a 1099 is required for the self-employed who are paid in Bitcoin.

Perhaps of greater concern to some Bitcoin users around the world is the impact this IRS notice will have on “miners” (computer geeks who compete to unlock new Bitcoin by cracking codes).  If they want to be 100% legit, they will have to go back and determine how much Bitcoin they mined throughout the year, its fair market value on the date it was mined, and include it in their income.

First-time Penalty Abatement in California

Franchise Tax Board Penalty Waiver

What kills people when they have an IRS tax debt is the interest and penalties.  If you don’t file and pay your taxes when they become due, you can eventually find yourself owing much more than the original tax assessment.  It is possible to negotiate an abatement of penalties, but it isn’t always easy, especially for “repeat offenders.” Keep reading for FTB reasonable cause examples.

By “repeat offender” I mean those who have a history of non-compliance, (i.e., failure to file on time and/or failure to pay on time).  The IRS treats repeat offenders differently.  If you have no missing returns and no prior penalties for the preceding three (3) years, then you may qualify for “first-time abatement penalty relief.”  First-time abatement may be granted without consideration of individual circumstances and excuses.  However, if you do not meet the criteria for first-time abatement, then your only recourse would “reasonable cause penalty relief,” which can be very difficult to prove.  Chances are, what you consider a reasonable excuse for not filing on time or not paying on time will not be considered reasonable by the IRS.

The California Legislature is currently considering adoption of a bill that would provide a first-time abatement option for California taxpayers.  Under AB 1777, the Franchise Tax Board would give preference to non-repeat offenders like the IRS.  The requirements would be as follows:

  1. No prior timeliness penalties imposed for the current year and four (4) prior years;
  2. The taxpayer has paid all current tax due, or is in a valid installment agreement;
  3. The taxpayer is otherwise compliant with FTB filing requirements

As you can see, the first-time California late-filing penalty abatement, as proposed, would be more restrictive than the Federal version, as it requires a slightly longer history of compliance.  It seems like California looks to the IRS for guidance in administration of its tax laws, and then tries to figure out how it can make things just a little bit tougher for California taxpayer.

IRS Employee Breaks Protocol and it's Still Considered News

Today the IRS released a statement addressing a situation involving improper use of confidential information by an IRS employee.  One rogue employee took home an unencrypted flash drive containing “employee-related information” that dates back to 2007.  Typically this type of problem would be discovered by the Treasury Inspector General for Tax Administration (TIGTA) and released in one of their famous audit reports.  However, this particular incident was identified by the IRS which preemptively released its statement via their own “newsroom” today.

One news source cited the commissioner as saying that the incident did not involve any taxpayer information.  This would have been a humorous gaff, had he actually said this.  Humorous because even if the information that was put at risk belonged to former or present IRS employees, wouldn’t it also be taxpayer information?  The last time I checked, IRS employees have to pay taxes too.  But I think this was a bad job of paraphrasing.  Put back into context, the statement reads a little differently.  According to the prepared statement, the information “included IRS employee-related information and not general taxpayer information or records.”  Even though the difference in wording is very slight, it makes quite a difference in meaning.

According to the statement, this was an “isolated instance,” and inappropriate use of this information “could not occur in today’s environment.”  Mmm-Hmmm…

One month left until tax day; who should prepare your tax return?

There’s about one month left to file your 2013 taxes. You may notice that there are lots of places soliciting to prepare your taxes these days. Every time you pass a strip-mall you likely see some type of gimmick, from air dancers, flags, and a person dancing on the corner with a sign. These gimmicks were formally found at a used car lot to attract your attention, but competition can be tough these days. Just like buying a car, you want to make sure you don’t get a lemon when it comes to choosing a tax preparer.

These strip mall tax centers are virtually everywhere. Just because they are everywhere, does not necessarily make them better. The quality and expertise of these types of tax preparers rests entirely on who specifically within the pop-up shop prepares your tax return. There really is a spectrum in the quality and experience you may encounter at one of these shops because these companies are often so big and/or individually owned and franchised.

On the one hand, you may be trusting your taxes with a seasoned tax preparer who’s a licensed accountant, really knows what they are doing, and will work closely with you to ensure your returns are accurate. On the other hand, you may be risking doom with someone using the franchise’s own do it yourself software, who’s simply answering the Turbo Tax type questions for you. So the key when trusting your returns with these types of tax preparation shops is to consider the complexity of your tax returns and to ask about the experience and qualifications of the specific person who is actually going to prepare your tax return.

TAP Now Accepting Volunteer Applications

Do you live in Alaska and have a spare 200 to 300 hours per year to donate to a good cause?  You may want to think about volunteering as a member of the Taxpayer Advocacy Panel (TAP).

TAP is “a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns, and makes recommendations for improving IRS services.”  As a TAS committee member, one of your primary responsibilities will be to put together an annual report (containing said recommendations) for the Taxpayer Advocate Service (TAS), the Treasury Department Secretary, and the IRS Commissioner.

The IRS is actually seeking TAP committee members in several states (19 to be exact), not just Alaska.  They want alternates in a handful of states as well.  And they need one member to represent international taxpayers.  If you’re interested in the international position, don’t worry too much about travel; it looks like the IRS is not requiring any in-person meetings from the international member.

The great thing about this service opportunity is you don’t have to be a tax preparer, accountant, tax attorney, or any kind of tax professional to join the panel.  You have to be accepted to the panel, but you don’t need to have any special connection to the IRS or the tax community at all.  Federal advisory committees in general are required to seek out people from a variety of backgrounds and viewpoints.  The “underrepresented groups” sought by TAP include U.S. taxpayers living abroad and Native Americans.

April 11th is the deadline to apply to become a member of the panel.

The Unlikely IRS Phone Scam Victim

Have you heard about those IRS phone scams?  No, it’s not what you’re thinking; not scams sponsored by the IRS.  They are scams perpetrated by individuals posing as IRS personnel, and they have been more prevalent than ever in the past couple years.  If you haven’t heard of them then maybe the IRS isn’t being aggressive enough with its public announcements and warnings.  If you do know about these schemes then maybe you have pondered the questions “Who are these people that pay thousands of dollars to phony IRS agents?  Can’t they tell it’s a scam?  How can someone be so gullible?”

I have definitely had these kinds of thoughts, that is until reading the story of Halah Touryalai, staff writer for Forbes.  She was recently contacted by one of these scam artists and almost fell for it.  This is an expert on finance and investing; somebody who should probably know better.  And even though she stopped short of doling out the $5,000 that they were demanding of her, they definitely had her going.  This is somebody who has always paid her taxes and never had a reason to doubt herself.  It only goes to show that if these scam artists call with enough urgency and authority in their voices, they can successfully dupe just about anybody.

Touryalai was told a whole host of lies on the phone that day:

  • The IRS had launched an investigation against her
  • She had attempted to defraud the government by not reporting all her income
  • The IRS was going to get a warrant for her arrest
  • The IRS was going to seize her property
  • The IRS had already issued a bank levy to collect the tax debt
  • The IRS had suspended her driver’s license and passport
  • Her social security number had been “blacklisted”
  • Somebody was waiting at her office to arrest her when she arrived
  • She could avoid further action if she paid $4,900 within the next hour

Be careful out there!  As long as you know how the real IRS operates, you’ll be fine.  The IRS will never demand that you make payments over the phone.  They will rarely contact taxpayers by phone without first sending notices by mail (and certainly not for a measly $4,900!).

When the IRS Goes Above and Beyond

Sometimes when I call the IRS with questions about a specific tax account, I want them to scour the entire file, read all the notes, research all the issues, and give me all the pertinent details.  Other times I contact the IRS with only one or two very specific questions; I want to get in and get out, and I don’t particularly want them lingering on my client’s account longer than necessary.  The truth is, sometimes (if not most of the time) it is a huge disadvantage trying to deal with the overzealous IRS representative.  They tend to make issues where there are none.  It is as if they don’t have enough work to do so they have to create work for themselves.  Maybe you know what I’m talking about.

Christine O’Donnell knows what I’m talking about.  Back on March 9, 2010 she announced that she was running for the United States Senate.  Later that same day one of these overzealous IRS types named David Smith pulled up O’Donnell’s tax record “just out of curiosity” and leaked her private tax records to reporters.  Or if he didn’t leak it personally, then he put it in the hands of somebody else who did.  And it pretty much ruined her chances of getting elected.  See, the information Smith decided to make public was a Federal Tax Lien (filed when a tax debt goes unpaid).  But it turned out that this information was inaccurate; O’Donnell didn’t owe the IRS.

This story is probably fairly mind-blowing to most people who do not regularly deal with the IRS.  I’m not that surprised by it though, especially the part about the erroneous lien.  The IRS makes mistakes like this all the time.  And as far as I know, David Smith still works at the IRS.