IRS
collects 93% of US Governments revenue, and it is working overtime to improve
the tax preparation, filing and collection process. This is a win-win situation who those who want
to file accurate returns and pay taxes in time.
On the flip side this makes it more costly and difficult for others who
want to avoid taxes by underreporting income and over reporting expenses. Continue
reading for highlights pertaining to most of us.
Refundable Credits
There
are three refundable credits possible on a tax return (taxpayer gets them even
after the tax liability is reduced to zero). These apply as per tax situation:
1. Child Tax Credit: Max $1000
per child below age 17
2. American Opportunity Credit:
Undergrad child supported by parents (max $2500; refundable: $1000)
3. Earned Income Tax Credit:
For low income groups (Max ~$6000)
There
are two things you as a taxpayer need to know about this: Firstly, these three
credits will be reported on same form 8867, and secondly, elaborate documentation
needs to be kept for these credits. IRS aims at using automation procedures to
audit these returns.
Documentation
IRS has about 200 filters to detect fraud on electronically
filed returns, and it aims at increasing these as automation helps. Automatic Under
Reporting (AUR) has been in place for some time, and effort is on to bring
1099K (credit card payments) under this gambit. Major Credit Card companies
will send 1099K for credit card payments received by businesses, and IRS will
compare these numbers with entries on the tax return.
Apart from this, IRS is tightening the process to audit
donations over $250 and expenses on business returns. So here’s an important
action for you to take that is in your interest: maintain records for business
expenses or unreimbursed employee expenses (Form 2106) and insist on receipts
for donations. Best is to scan the receipts and keep them handy. In case of
audit it is easier to respond promptly. Be prepared as if the tax return WILL
be audited.
See how a CPA fell short of documentation standards and was
refused deductions on documentation not done properly:
Identity Theft
Every two seconds, an identity is stolen in the USA. Most of
this is through credit cards. It is important that you keep all information
safe. We are usually casual giving away our tax return or social security
number to institutions while taking loans, or dealing with financial matters.
Be careful, and verify that the documents will be safe. Take some measures as
under:
1
Never send attachments of tax documents or
financial documents by email attachments. Ask the bank for upload portal or
send by pass wording the file.
2
Do not click on spurious links in email. It is
better to type the URL on the browser.
3
Share minimal information on Social Media such
as Facebook. Things like DOB and address are easily taken off these sites, and
this leads to spurious calls.
4
IRS never calls on phone to threaten for money.
You must have received spurious calls. Be careful, never pay off under a
threat. Talk to your tax advisor if there is a doubt. These scammers are after
elderly, immigrants (especially illegal), and resident aliens.
ITIN
In case you had got an ITIN for your parents or family
visiting, it is advisable to keep using it. If you do not use it on the tax
return for 3 consecutive years, it will expire and you will have to apply
again. You must have seen the strictness that the IRS is observing with ITIN
issue. Prior to the PATH Act, an individual applied for and received an ITIN
only once, this remained in effect until the taxpayer became eligible for and
obtained an SSN; not anymore. You will need to use this continually to keep it
active.
Foreign Assets Reporting
IRS KNOWS MORE ABOUT YOU THAN YOU THINK. You must be
reading about FATCA, even from your foreign banks and institutions (like
Investment firms). Because of international agreements, foreign banks and
financial institutions need to report to the IRS about accounts help by US
citizens. It would be wise to report to the IRS before they come to know about
this. Once a taxpayer has got an examination notice on FATCA, the case will
need to be resolved through an attorney, and penalties are very heavy, much
heavier than you could imagine.
Reporting of Share in Foreign Companies. If you own
10% or more in any foreign company, make sure you are filing form 5471. It
needs to go with the return, and non-filing attracts a minimum penalty of
$50,000 per year.
Mutual Funds Abroad (PFIC). Mutual funds held abroad
are a pain to report on the return. A form 8621 needs to be filed for each
mutual fund, which is very complicated (and expensive) to file. Keep off Mutual
funds abroad. Taxpayers do not have mutual funds abroad due to complex tax
reporting in USA.
It is better to report foreign financial assets before the
IRS catches-up on this, when it is going to be very late. Please note that
there is no tax liability for this reporting.
Not reporting however is considered to be a financial crime and thus
penalties for not reporting are significant.
You also need to report of any inheritances or bequests received.
As always, I am available to answer any other questions on
tax related matters you may have. So
please never hesitate to reach out.
Thank you.
Your de-taxing partner,
Arun Lal
Tax Guru USA
P: 703-470-6811
Tax Guru USA
P: 703-470-6811
E:
Arun@TaxGuruUSA.com
No comments:
Post a Comment