The IRS has this advice for anyone who receives an email claiming to be from the IRS or directing you to an IRS site:

Do not reply to the message;

Do not open any attachments. Attachments may contain malicious code that will infect your computer; and

Do not click on any links in a suspicious email or phishing website and do not enter confidential information. Visit the IRS website and click on ‘Identity Theft’ at the bottom of the page for more information.

Here are five other key points the IRS wants you to know about phishing scams.

1. The IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information;
2. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts;
3. The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on their site and report it to the IRS;
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. Forward a suspicious email to phishing@irs.gov;
5. You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website to get details on how to report scams and helpful resources if you are the victim of a scam. Click on “Reporting Phishing” at the bottom of the page.

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A qualified disaster relief payment is an amount paid:

• To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster.
• To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster.

Qualified disaster relief payments exclude any income replacement payments, such as payments of lost wages, lost business income or unemployment benefits and would be taxable. In addition, although an employee is not required to substantiate that the qualified disaster relief payments are related to a qualified disaster, the employer may exclude such payments from income only to the extent that insurance does not otherwise compensate the employee for the loss.

To be deductible in 2012 these payments must be made by December 31, 2012.

The IRS and the states are very serious about Trust Funds. If you are stuck in this situation give Matis a call at  646-580-1099 for help and strategies to mitigate the effects of the TFRP.

It is a very good idea to purchase an inexpensive program such as Quickbooks to help categorize your income and expenses. You can email the “Accountants copy” to your accountant while you continue to work in Quickbooks. Any changes your accountant makes can be imported back to Quickbooks. Call Matis at 646-580-1099 or email matis@1099bookkeepers.com for help in setting up your Quickbooks program.

1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It’s a good idea to have a designated place for tax documents and receipts.

2. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return
• You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

3. If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

Recent prosecutions of individuals and companies who – acting under the guise of a payroll service provider – have stolen funds intended for payment of employment taxes makes it important that employers who outsource payroll are aware of the following tips:

1. Employer Responsibility The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward the tax payments to the third party to make the tax deposits, you – the employer – are the responsible party.

   If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.

2. Correspondence If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.
3. EFTPS Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments.
4. For help with your payroll and other bookkeeping needs call Matis at 646-580-1099 or email matis@1099bookkeepers.com.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8. It’s important that you keep copies of any correspondence with your records.

By Karen Hube,  

The Internal Revenue Service has added a couple of notches to its enforcement belt. First came the disclosure that international financial services giant Credit Suisse is under federal investigation for helping U.S. citizens avoid taxes using foreign accounts. Then came multi-platinum rapper Ja Rule’s conviction for failing to pay taxes on $3 million in earnings. He was sentenced to 28 months in prison.

Gulp.

These high-profile examples of stepped-up IRS enforcement can’t help but fuel worry even among the most honest taxpayers: Will the IRS raise a question on my return? Was there a faulty calculation? Did I claim a deduction that will raise a red flag?

Depending on your occupation, income and the kinds of claims you’ve made, there may be reason for concern. With government revenue in short supply, the IRS has begun bearing down on specific groups of wealthier taxpayers and is showing far less sympathy than in years past, accountants say.

“Our firm has 21 offices up and down the West Coast, and in every office there’s been an increase in examinations,” says Gary Stirbis, who handles the IRS controversy practice at Moss Adams. “The IRS has been less flexible, and agents seem to be under internal pressure to collect more aggressively.”

A directive from Congress in 1998 to shift IRS resources reduced enforcement activity, but it has recently climbed again. Before Congress stepped in, there were 25,215 key IRS enforcement staff positions. That number fell below 20,000 by 2003. It’s now 22,710 — not a big increase, but enough to turn up the heat a little.

And new programs have been launched to help spot problem returns, according to Steven Miller, deputy IRS commissioner for services and enforcement. Last year, the IRS created the Global High Wealth Industry Unit, in which agents work in teams to evaluate wealthy taxpayers’ profiles. “When you look at the 1040 [form], it doesn’t tell the whole story,” Miller says.

This year, in an effort to crack down on underreporting of income, agents will begin reviewing credit card statements and cross-checking data against tax returns, Miller says. Big spenders who claim little income, beware.

Don’t think you’re under the radar just because your income is a tiny fraction of Ja Rule’s millions.

The IRS likes small, inexpensive audits because they can influence other taxpayers to comply, says Bill Smith, managing director of CBIZ MHM in Bethesda. People who see a co-worker or friend get audited are likely to be more careful, he says.

“One audit may only bring in $500, but if you can increase compliance in that group of taxpayers by 20 percent because people hear about the audits, then for the IRS it’s worth it,” Smith says.

Still, for the general population the chance of coming under IRS scrutiny is slim. The audit rate last year was 1.11 percent of all taxpayers, up from 1 percent a year earlier.

Among certain groups the rate is significantly higher. Those who operate their own businesses and are required to file Schedule C forms (estimated by the IRS to be underreporting income by about $68 billion a year) have an audit rate of just over 4 percent. The wealthy get far more attention. The audit rate was 3.1 percent for taxpayers with income of more than $200,000 last year, and 8.1 percent for those earning more than $1 million.

Other broad areas of interest by IRS enforcement agents align with the biggest areas of suspected fraud, such as returns claiming refundable tax credits, over-reporting deductions and offshore accounts.

Some of the IRS’s latest areas of focus, according to the agency and tax lawyers:

Interest deductions for home loans

Taxpayers who claim big interest deductions on mortgages and equity loans have come under scrutiny “because a lot of people have been borrowing on their homes for college tuition or just to live,” says Ira Rubenstein, a principal in charge of the New York region for MBAF-ERE CPAs.

Homeowners are allowed to claim an interest deduction for up to $1 million of mortgage debt, and up to $100,000 of home equity debt. “We worked with one auditor who looked at the amount of the deduction and said, ‘That’s too high for the interest rate,’ ” says Phil London, a CPA and tax partner at Wiss & Co.

Adoption credit

After the adoption tax credit was raised to a maximum of $13,170 last year and it became refundable — meaning you can claim it and get a refund even if you owed no taxes — “the IRS is flagging anyone who took the adoption tax credit last year and asking for proof,” says Diane Michelsen, an adoption lawyer in Lafayette, Calif.

Gifts of property

The IRS has been scouring state property transfer records and comparing them with tax records to find taxpayers who haven’t disclosed real estate gifts, says Beth Shapiro Kaufman, a partner at Kaplin & Drysdale in Washington. With property values depressed, gifting real estate has become more popular, particularly among wealthy folks.

Under current law, you must file a tax return for gift values in excess of $13,000. Anyone whose undisclosed gift exceeds the $1 million unified credit (the maximum you can give away in a lifetime without paying the gift tax) will be subject to hefty penalties and interest, Kaufman says.

Large donations relative to income

The IRS is sizing up charitable deductions against income, looking for discrepancies. “Some innocent retired people with low income have the wherewithal to make contributions, and get targeted,” says Greg Margarit, a tax partner at Boulay, Heutmaker, Zibell & Co.

Ultra-rich

The audit rate for taxpayers with more than $10 million in income rose to 18 percent from 10 percent last year. And with the IRS’s new global wealth squad, these folks should expect a colonoscopy-style checkup rather than the old-style knee-knock exam.

Looking ahead, it’s unclear how long the IRS can keep flexing its muscles at its current level. The agency has requested that its $12.1 billion budget be ramped up to $13.3 billion next year, but cuts appear likely. This may force the IRS to trim enforcement — or it could mean taxpayer service will be scaled back first, making audits potentially more painful.

A note on my last column, which explained that taxpayers on vacation may be able to claim business deductions when a big chunk of time is spent working:

Chip Watkins, a reader and longtime tax attorney, raised questions about the ability of a taxpayer to ever deduct a portion of meals and lodging on a trip that is primarily personal. He cited this part of the tax law: “If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. However, expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible even though the traveling expenses to and from the destination are not deductible.”

Other tax advisers say the there is room for interpretation, especially for executives and managers who don’t punch a clock. “These rules are detailed, but there are still circumstances not addressed,” such as spending hours a day working on a supposed vacation day, says Stephen Kirkland, a tax adviser at Kirkland, Watson & Dyches. “That’s when you have to make a judgment call.”

Hube is a columnist for The Fiscal Times, an independent news organization that provides original reporting and analysis on fiscal and economic matters.

© The Washington Post Company

Shifting or the Assignment of Income / Substance versus Form

Closely held or one-man personal services corporations, including business consultants, have assigned or shifted income earned by themselves, as individuals, or their closely held corporations, to another entity in order to reduce their income and or self-employment taxes. The taxpayer may shift income earned by one entity to a related entity in order to offset net operating losses of a related entity or in some cases to circumvent the Roth Individual Retirement Account limitations. Subsequent to this shifting of income, the taxpayer may take a relatively small salary from the entity (that received the assigned income) in relationship to the amount of income shifted.

Audit Techniques

To whom is the client/customer contracting the services?

• Is the Taxpayer an S corporation or a partnership and yet the contract requires the services of a particular employee/owner?
• Is the contract voided upon the death of a particular employee of the Taxpayer?
• Do the terms of the agreement call for services that only one employee/owner is capable of performing?
• The examiner should trace the consulting fees per the contract to the Taxpayer’s books and records.
• Request copies of all tax returns that are considered related returns of the taxpayer because the taxpayer has control. As outlined in IRM 4.10.4.3.4.3, the examiner should evaluate copies of tax returns of significant shareholders or partners (greater than 20% direct or indirect ownership) for:
  a. examination potential (including issues unrelated to the corporate or partnership return),
  b. the proper treatment of related transactions with the corporation or partnership, including losses from related parties, and
  c. The likelihood of diverted funds.

Some of these penalties related to tax returns failure to pay or failure to file are as follows:

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and explore other payment options in the meantime. The IRS will work with you but not too much.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
If you timely filed a request for an extension of time to file and you paid at least 90 percent of your actual tax liability by the original due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.