Instances of tax-identity theft multiplied nearly twenty times between 2008 and 2011, rising to 1.1 million identified cases, amounting to billions of dollars in defrauded money. These cases can come in the form of identity theft, refund fraud or return-preparer fraud.
In addition, this form of fraud is not limited solely to federal taxes – Georgia reports that roughly four percent of their state taxes filed annually are fraudulent.
The common usage of e-filing has made it easier to commit, and more difficult to identify tax fraud.
In this article, we will explore the commonly-employed methods of tax identity theft and tax fraud, and a few things you can do to offer yourself some level of protection.
How Do They Do It?
Over the last 15 years, the IRS has actively encouraged taxpayers to switch to a digital method of filing tax returns. This method offers quicker processing of your return, a direct deposit into your bank account and an electronic postmark confirmation.
However, this method is not without its downside.
Criminals can easily file a fraudulent digital return using a person’s name and social security number in combination with a fake W-2 or Schedule C. They can then have the fraudulent refund deposited directly to the account of a prepaid Visa card.
In other cases, a third-party return preparer might simply change the routing information for the deposit of the refund to have the money deposited directly into his account. The preparer might also increase the total deductions and have only this increase routed to his account. In the latter case, the victim will not even know anything has happened unless the IRS chooses to perform an audit.
What Should I Do?
You might consider a request for an electronic filing PIN. This will help provide an additional boundary between yourself and a prospective identity thief.
You may also file Form 14039, known as the “Identity Theft Affidavit,” which will instruct the IRS to apply more stringent screening procedures while processing your return.
It has been recommended by the Nation Taxpayer Advocate that the IRS allow taxpayers to formally opt only to file a paper return and give you the option to instruct the IRS never to accept a digital return filed under your name; however, this is currently not an option. Unfortunately, there is no fool-proof method for preventing tax identity fraud.
If you become a victim of this form of identity fraud, it is recommended that you seek out a referral to the IRS Identity Protection Specialized Unit or the Taxpayer Advocate Service as quickly as possible using form 911.
Even if you do act quickly, keep in mind that it could take as long as a year to fully resolve the case, as the IRS has an extensive backlog of alleged fraud (over 650,000 cases at this point).
By the nature of the process, the digital filing of tax returns opens up the possibility for fraud. With digital filing now the most widely used method (roughly 80% of people choose to file digitally), it is unlikely that the digital option will disappear.
While you may not be able to prevent fraud, by taking the above measures you can help lessen your chances of being victimized. If you do still become the victim of tax identity theft and fraud, quick action will be your best bet to help control the damage.
Guest author Jason Brown works for eConsumerServices. He helps protect consumer rights by unearthing various forms of fraud, scams and identity theft. He advises consumers on topics like how to report an internet scam, how to protect their identity, and how to prevent fraud.
It seems to be a common misunderstanding that having a mortgage is a great way to pay less taxes. While this is half true – having a mortgage is a means of paying less in taxes – it is by no means a way that should be pursued for this purpose.
By understanding how the mortgage interest tax deduction works, and then seeing how one can get the same deduction without paying a bank, it becomes apparent that a mortgage is not a vehicle that should be kept in order to save on paying taxes.
How Tax Deductions Work
People get tax deductions when they spend money on things that are deductible. This includes the interest on a mortgage. The reason the interest is deducted from taxable income is because nothing is actually acquired in the payment.
For a person who pays a monthly payment of $1,075, $1,000 of that amount may go toward interest while only $75 is getting knocked off the principle. For a married person who earns $50,000 per year, this means that $12,000 will be deducted from his or her taxable income.
So, instead of looking at a tax bill of $12,500 (25% of $50,000), the damage will be lessened to $9,500 (25% of $38,000). In effect, this home owner spent $12,000 in interest to a bank and saved $3,000 in taxes to the government.
Spending A Dollar To Save A Quarter
By doing this, people are spending a dollar to save a quarter, but to a bank.
If a person paid off his or her mortgage, they could keep an additional $9,000 per year in the example above, or they could have the exact same result by giving away $12,000 to a favorite charity, such as the Carol M. Baldwin Foundation or Portfolios With Purpose, or by putting $12,000 into a 401(k) that will remain tax deferred until the shares of stock are sold at a later date.
Is A Mortgage A Bad Thing?
After reading about why a mortgage is a terrible way to get a tax deduction, some may conclude that mortgages are bad. This is not the case. A mortgage is a great way to help people purchase a home over time that may not have been able to otherwise. After all, there are many times when rent rates are comparable to a mortgage, so many people are going to find it extremely hard to save additional cash to buy a home outright while doing so.
By understanding how tax deductions work, one can see that they can get them as a result of having a mortgage, but that a mortgage does not help people get deductions so much as it prevents them from getting those same deductions in ways that are much more satisfying, such as by saving for retirement or giving it to a good cause.
This post is provided by Don Anfuso, a Morris County mortgage broker. When he is not helping people with their mortgages dilemmas, he enjoys blogging about mortgage news and advice.
Many people financially depend on their tax return and look forward to the money that they’ll receive each year. Although most people have an idea of the amount that they’ll get back, it is still common to receive less than expected. With a few common tips, it’s possible to receive a high return in the future.
1. Claim All Deductions
To prevent spending more on taxes than you really owe, it’s important to claim as many as expenses as possible. Keep a record of all of your charitable donations, as well as receipts. Traveling can also be included, between rental cars to fuel, including food purchased while working if you own your own business. Services from ADP.com can also be deducted, as well as office supplies needed to maintain a business.
2. Medical and Dental Expenses
For those who have hefty medical and dental expenses that exceed their income by 7.5 percent, they’re able to deduct it on their tax return. This even includes the cost of travel expenses or lodging to obtain the medical care or supplies. The expenses do not include basic health items like vitamins or supplements.
3. Job-Hunting Expenses
For those who are currently unemployed, every dollar counts, especially when getting a tax return. Few realize that they are actually able to write-off the cost of job hunting between spending money on fuel to overnight travel. This can even include job counselors or resume-editing services.
Job-hunting expenses can only be written off for those who are not looking for their first job.
Those who move for a job are also able to write off their moving expenses as long as they are working full-time and have moved at least 50 miles away from their former residence. They also must work at least 36 weeks in the first year of moving to qualify.
4. Report Child Care Expenses
With one-quarter of children under the age of five in some form of daycare, many people do not realize that they’re able to write off this expense when paying taxes each year. A child care credit can be received for 20 to 35 percent of the overall cost that you’re paying.
With a little research, hundreds to thousands of dollars could be saved annually just by knowing what expenses can be written off with taxes, between airfare to services from ADP.com. It can be the extra money needed for an emergency or can be used to grow a small business for a savings that is important to take advantage of.
Small business owners know the stress that comes from dealing with finances on a regular basis. For those that are just starting out in an industry, learning the balance of how much money will be dedicated to taxes, and figuring out how to subsequently budget your income can be challenging. Learn all you need to know about your small business’s taxes, and the amount required.
When it comes to small business taxes, income tax is first to come to mind. No matter the size of your business, you must file an annual income tax return. There are a few different forms to choose from, depending on how your business is organized. The main types of business structures include:
- Limited Liability Companies
- Sole Proprietorships
Before setting out to file your income taxes, determine what kind of business you have, and fill out your income taxes accordingly. Federal income tax is required to be paid throughout the year. By the end of the year, you may still have to pay an additional amount that was not accounted for in the beginning. This additional tax is estimated tax.
When you are running your business without the help of any employees, you don’t need to worry about this tax. As your business expands and employees are added, be prepared to pay an employment tax when necessary.
The employment taxes are due at the beginning of the year, and can be completed around the same time as personal taxes are due. The main components of employment taxes include:
- Social security and Medicare – these costs come directly from your employee’s wages. The W-4 of the employee is used to determine how much should be taken out.
- Federal Income – this is a standard amount taken, based on a number of different factors. To determine how much should be taken out, refer once again to the W-4 for the employee.
- Federal Unemployment – although this tax falls under the employment tax section, the employees don’t pay this tax; it comes directly from the employer.
- Self-Employment – if you are self-employed, you will need to pay this tax dealing with social security and Medicare.
The size of your business and the income of each of your employees will determine how much each of these taxes will cost. Be sure to set them up correctly from the beginning, to avoid the need to pay more once tax season rolls around.
This tax is determined by what your business entails. There are several different forms that must be filled out, depending on:
- If environmental issues are addressed
- Your business accepts wagers or deals with a lottery
- Certain equipment is used
Determine beforehand if the products you make, the type of business you run, or the equipment you use mandates that you will need to pay an excise tax.
Think through and organize the taxes for your small business today. It is essential to get them done right the first time, to prevent problems in the future. Use resources that have been produced to do your own research and find out what your business needs. Be aware of any changes to your company, and how that will affect all your business taxes.
For many users, the internet is a sort of virtual Wild West, an abstract “place” where you can find plentiful resources for just about anything you could imagine (and plenty of things you couldn’t). But even the internet isn’t entirely immune from the rules and regulations that govern three-dimensional life. Sales tax, for example, is becoming one of those realities. You expect it when you approach the cash register of a physical store – but what about online?
Quill Corp v. North Dakota
In 1992, in the case of Quill Corp. v. North Dakota, the United States Supreme Court ruled that mail-order merchants (for our purposes, internet merchants) were not required to collect a sales tax on their wares, provided that the merchant did not have a physical, brick-and-mortar presence in that state. Likewise, if a remote merchant did have a physical presence in a given state, they would be required to collect sales tax, in laws colloquially referred to as “Amazon Laws.” There is an exemption in place for retailers who turn a profit of less than one million dollars annually.
Since 1992, the decision of the Supreme Court has remained comfortably in place. However, the internet tax landscape is beginning to shift. While the verdict of Quill Corp. v. North Dakota has yet to be overturned, many states are beginning to become restless – and it’s easy to see why. Sales tax is responsible for billions of dollars in revenue each year – billions of dollars lost, in the eyes of states both north and south, big and small, in large part due to the decision in 1992.
The Future Of Internet Taxation
In 2002, 40 states banded together to create the Streamlined Sales and Use Tax Project (SSUTA). The difference between sales tax and use tax essentially boils down to whether the state is collecting taxes from buyers, or sellers. With sales tax, a consumer buys an item, and the retailer then pays the sales tax to the state. With use tax, on the other hand, consumers are (at least theoretically) required to pay the tax directly to the state.
Small purchases have so far proven to be simply too trivial and too numerous to vigorously track, and use tax applies more to large, conspicuous purchases like boats and cars. The Marketplace Fairness Act, a piece of legislation making the rounds in Congress, seeks to remedy this trend by shifting more of the use tax responsibility from consumers to retailers, who have higher rates of compliance. A hurdle to the Marketplace Fairness Act has been some states’ tax codes, which are, across the United States, notoriously dense and tangled. Simplification of tax codes seems like it would be a prerequisite for this Act to have success. Internet shopping can breathe a sigh of relief, however, because as of the publication of this article, The Marketplace Fairness Act is still pending in the United States Congress.
About the Author
Shannon McNulty is a Pennsylvania tax and estate attorney. She is the Managing Partner of the Law Offices of Shannon McNulty, with offices in Philadelphia and Scranton, PA. She is a frequent author on a variety of tax issues.