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:
- Child Tax Credit: Max $1000 per child below age 17
- American Opportunity Credit: Undergrad child supported by parents (max $2500; refundable: $1000)
- 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:
- 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.
- Do not click on spurious links in email. It is better to type the URL on the browser.
- 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.
- 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
E: Arun@TaxGuruUSA.com
