Report: IRS Debt Collection Program Cost Taxpayers Millions

tax debt collection by the irs
iStock

In its first year in operation, a new IRS program that was meant to outsource federal tax debt collection efforts ultimately cost U.S. taxpayers three times more than it actually recovered.

The findings were published in a Jan. 10 report by the National Taxpayer Advocate (NTA), an independent consumer advocacy arm of the IRS.

In 2015, federal lawmakers enacted legislation that required the IRS to outsource its tax debt collection efforts to private collection agencies. The agency hired four agencies to do the job and spent a total of $20 million to cover program operations. The agencies were charged with collecting $920 million in unpaid debt but, ultimately, they managed to recoup a mere fraction of that amount — $6.7 million in recovered tax debts, according to the report.

Read more: Tax Reform 2018 Explained

After its first year, the current attempt has resulted in a net loss of $13.3 million with less than 1 percent of unpaid tax debt collected.

Consumer advocacy groups like the National Consumer Law Center (NCLC) were quick to cry foul, saying the report’s findings show that the program needlessly wasted money and abused taxpayer rights.

“The IRS private debt collector program is the epitome of waste and abuse in government programs,” said Chi Chi Wu, a staff attorney at the NCLC in a statement.

It’s not the first time the U.S. government has outsourced debt collection efforts to private firms. The NCLC notes that an effort in the mid-1990s lost $17 million and was cut after a year. Another attempt to outsource debt collection in 2006 lasted three years and lost $4.5 million.

Among the taxpayers who were most impacted by this latest private collection program are families hovering just above the poverty line, those beneath it, and retirees who are on Social Security or receive disability benefits.

The report found:

  • 4,905 taxpayers were assigned to private collection firms, and of those, 4,141 filed recent returns by Sept. 28, 2017.
  • 44 percent of those taxpayers had incomes below 250 percent of the federal poverty line ($24,600 for a family of four).
  • 28 percent had an annual income of less than $20,000
  • 19 percent had a median annual income of $6,386
  • 5 percent received Social Security or disability and had a median income of $14,365
report finds IRS private tax debt collection cost more than recouped
Source: Taxpayer Advocate Service

When you owe a tax debt to the IRS, the IRS typically calculates payment plans so that a family can keep up necessary living expenses like housing, transportation, utilities, food, and out-of-pocket health care after making their tax debt payment. However, NTA states that the data shows that these taxpayers were still pressured by the private collection firms hired by the IRS to enter into payment plans they couldn’t afford.

“Forcing the IRS to use private debt collectors to put the squeeze on vulnerable low-income families simply lines the pockets of these private collectors while jeopardizing the economic well-being of families,” said Wu.

Further insight into the problem is difficult to obtain, the NTA says, because the IRS refuses to let representatives of the organization listen to calls between private debt collectors and taxpayers.

Where do the recovered tax debts go?

Under this program, the IRS would send a 10-day notice to taxpayers letting them know a private debt collector will be assigned to them. Of the $6.7 million collected by PCA’s in 2017, $1.2 million, or 18 percent, was recovered as a result of those letters.

Private firms are not supposed to receive a commission off of collected debts. But the NTA study states that the private debt collectors are receiving commission for work done by the IRS and the agency “has no plans to change its procedures to attempt to identify payments that were clearly not attributable to PCA action.”

The IRS is authorized to keep 25 percent of the amount collected by the private agencies and the agencies themselves receive 20 percent in commission. Of the unpaid taxes collected by PCAs, $3 million is the minimum amount left that goes to the Treasury.

What do I do if debt collectors call?

If you’re called by a debt collector, there are several things to know. First, that you have rights, and second, that you need to know more.

The Consumer Financial Protection Bureau (CFPB) states certain laws related to debt collection are put in place to protect taxpayers’ privacy and security. For example, they can’t call before 8 a.m. or after 9 p.m. and they can’t harass or threaten you. In addition, if you have an attorney,  the debt collector will need to contact them instead of you.

You also should check with your state attorney general’s office to see if it offers any additional protection or help for dealing with debt collectors.

Keeping track of your documents is also important. Any communication between you and the debt collector, including letters you may have sent, should be kept in a file that starts when the collector calls, the CFPB suggests.

Identifying the debt collector can save you from taking on a debt that isn’t yours or entering into a less-than ideal payment plan. The CFPB suggests that you don’t give any information, personal or financial, until you’ve verified the collector’s name, address, phone number, and all information about the debt, such as whether it’s yours or not, any dates associated with it, and the total amount including any fees.

What happens if I owe a tax debt?

If you owe a tax debt, you should act sooner rather than later. Unpaid tax debts can not only result in extensive penalties and fees but it could result in:

Reduced Social Security benefits

  • Garnished wages
  • Seized property
  • Passport revocation

Interest is compounded daily on past due taxes (the rate fluctuates, but is 3% more than the federal short-term rate) and late payment penalties are charged separately and can go as high as 25% of the owed amount.

If you owe a tax debt, you still have to file your taxes on time.

If you can’t pay, the worst thing to do is ignore the bill. Contact the IRS and ask them to set up some kind of payment plan that you can afford.

The post Report: IRS Debt Collection Program Cost Taxpayers Millions appeared first on MagnifyMoney.

10 Tips for Doing Your Taxes Yourself

W-4 Tax Form

If you’re planning to file your own tax returns this year, you’re in good company. Approximately 33 percent of Americans file their own taxes each year.

As you’re gathering all of your 2017 tax documents and preparing to file your taxes there are some important things to keep in mind. Following these tips will help you avoid common pitfalls and mistakes and ensure you keep as much of your own money in your pocket as possible. After all, the less money you have to give to Uncle Sam, the more you can put towards reaching your financial goals, paying off debt, or otherwise positively impacting your credit score.

Know the filing deadline

We all have April 15 burned in our brains as the last day to file taxes. But if that date falls on a weekend or a holiday the due date can be different by a couple of days. Of course, this is always to the taxpayer’s advantage, as no calendar occurrence move the due date prior to April 15 in any year. If the date is different it will always be later than April 15. For example, the filing deadline this year is April 16, 2018.

Make sure you need to file

If you’re not sure whether or not you need to file, you can find out using the IRS’s online Interactive Tax Assistant. By answering some basic questions about your filing status, gross income and whether you had federal income tax withheld, you will be able to determine whether or not you need to file for a particular tax year.

Review last year’s tax returns

Reviewing the information from the previous year’s federal and state tax returns will make the current year’s filing much simpler. Much of the information will be the same, including employer federal ID numbers, children’s social security numbers, etc.

Gather all necessary income documentation

Make sure to gather all forms that include income information, specifically those from employers and financial institution. These includes:

  • Form W-2 (wages)
  • W-2G (gambling winnings)
  • 1099-INT (interest)
  • 1099-DIV (dividends)
  • 1099-B (investment sales)
  • Combined 1099 (brokerage combined tax statement)
  • 1099-MISC (independent contractor work, royalties)
  • 1099-R (retirement distributions)
  • K-1 (MLP, Partnership or S-Corp share of income)
  • SSA-1099 (Social Security benefits)
  • 1099-G (unemployment benefits and state tax returns)
  • 1099-C (forgiven debt).
  • Income Adjustment Documents, including Form 1098-E (student loan interest); 5498 (IRA contributions); 5498-SA (HSA/MSA contributions); and 1098-T (tuition).

Determine whether or not you should itemize deductions

Itemizing deductions is only beneficial of those deductions will exceed the standard deduction. If you’re using a tax software program it will guide you as to what you should do. If you do opt to itemize your deductions, you will need forms including 1098 (mortgage interest) as well as receipts for expenses such as charitable contributions, unreimbursed employer business expenses, and medical expenses.

Don’t forget your state taxes

Most states require a separate state tax return to be filed. There are seven states that don’t collect state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Check and double-check your return

Before you drop that tax return in the mail or hit submit when e-filing, make sure that you’ve checked the figures you’ve entered when filing your return. A mistake can mean a filing error that could give you an overinflated refund you’ll have to pay back later.

File on time

Even if you owe an amount you cannot pay in full by tax day, it’s important to file on time and to pay as much as you can. Doing so will allow you to avoid a late filing penalty and to minimize interest charges on any unpaid balance. If you cannot pay your taxes in full, you can request an installment agreement from the IRS.

Tax advantage of free filing

The IRS offers Free File to file your federal taxes without paying any fees. The amount of your adjusted gross income determines the version you will need to use. If it’s $66,000 or less, you can use the free filing software. If your adjusted gross income is higher, you will use Free File fillable forms that are the electronic version of its paper forms.

File electronically

You can still file paper returns and many filers do so because they’re uneasy sending their personal and tax information over the Internet. However, e-filing via the IRS website is very safe and it will expedite your refund if you’re getting one.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

The post 10 Tips for Doing Your Taxes Yourself appeared first on Credit.com.

Identity Theft and the New Tax Bill

Will Congress Overhaul Credit Reporting Laws?

The 2017 filing season could be the worst yet for tax-related crime. With widespread confusion about the new tax law, IRS budget cuts, and a record-breaking year for data compromises, there’s an opening for fraud that should be serious cause for alarm, but doesn’t seem to be.

The bottom line: you should be concerned.

Last tax year, the IRS stopped 787,000 confirmed identity theft returns, totaling more than $4 billion. For the same nine-month period in 2015, the IRS stopped 1.2 million confirmed identity theft returns, totaling about $7.2 billion. There were many other widely reported wins. But what did not get reported was how much money scammers stole. Given the IRS’s estimate that 2016 would see a loss of $21 billion via fraud, one wonders.

That was then. The compromise of 143 million people in the Equifax breach changed all that. It included Social Security numbers—compromised SSNs being the most common “pre-existing condition” of crimes committed against the U.S. Treasury, and as such that breach poses a significantly increased threat difference over previous years.

We’re looking at a far more significant threat of tax-related fraud in the 2017 filing season than ever before. Compounding this situation, the IRS is less able to fend off the threat of identity-related tax fraud than it was last year.

Overworked

I know it’s risky to publicly sympathize with the nation’s most hated federal agency, but I can’t imagine it’s been much fun to work at the Internal Revenue Service since Congress passed its new tax bill (note that I’m not suggesting there was ever a time I could imagine it might be fun to work at the IRS).

With the new tax year just begun, the agency is racing to find real-world applications for the numerous changes to the tax code conceived in the hothouse of Congress, where ideas do not always (or perhaps even very often) jibe with real life, and the daily concerns of actual Americans has more the feel of an annoyance than a matter of, say, central importance.

There are significant logistical challenges posed by the new tax bill. First order of business is getting the changes in place that need to be implemented now, for instance the coding to adjust withholding, which the IRS hopes will make its first appearance on pay stubs as early as February. There are other provisions that affect the here-and-now, like the new trigger for healthcare deductions, as well as a decent-sized punch list of smaller changes—all of which needing the immediate attention of a greatly diminished staff in the coming months.

Underpaid

Remember those cuts back in 2010? The agency was denuded of $900 million, which led to the loss of 21,000 jobs. That’s a major problem right now.

The last time there was tax overhaul like the current one, “Walk Like an Egyptian” was on the radio and cable TV was just finding its way into the suburbs. Today, Twitter feeds are reloaded continually, and late-show hosts joke about the size of the presidential button.

In 1986, the IRS got a budget increase to accomplish the increased workload, but this time around, “the House and Senate appropriations bills for 2018 would cut the IRS budget by an additional $155 million and $124 million, respectively,” according to the National Treasury Employees Union.

What You Can Do

Wait times were more than an hour last year. The helpline matters because people don’t read tax bills, or even news stories about them. The questions will be many—far more than usual. They will be on a host of topics. People will call in reaction to good, bad and neutral information.

Is there nothing to worry about till this time next year? Do I need to fill out a new W4? Is my tax bracket the same?

The only question that matters is this one: What’s the best way to avoid becoming a victim of tax-related fraud. The answer: file your tax return as soon as you have all the necessary documents to get the job done.

While it’s important to sort out what’s what with regard to the coming changes in our nation’s tax code, it’s crucial to take a look at the simple fact that people are confused, and that creates a beneficial state for fraud to flourish.

For time being, the only “solution” is beating scammers to the punch.

With everything that the IRS needs to do to function well, budgetary issues necessarily come to the fore. We should all be voicing concern about the agency’s ability to safeguard taxpayers from refund fraud given the current situation. And we should all be doing everything we can to protect ourselves in a hostile environment.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated each month.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

 

Image iStock

The post Identity Theft and the New Tax Bill appeared first on Credit.com.

Why It’s Not Smart to Get a Big Tax Refund Each Year

Why let the government hold your money throughout the year when you can put that money to work today?

If you’re expecting a big tax refund this year, you’ve probably already decided what you’re going to do with that money. Whether it’s a vacation, a new jet ski or a nice boost to your retirement savings, you’re probably pretty excited about the extra cash. But here’s the deal: Getting a big tax refund each year isn’t necessarily a good thing. It means you haven’t been putting that money to work for you all year long.

“If you are receiving a refund this year, it means that you overpaid your taxes during the course of the year. Instead of giving the government your hard-earned money, think about all of the great things you could have done with that money,” says Ron Weber, a senior marketing manager with Quicken Inc. “You could have paid off credit accounts, invested it in your future, and/or spent it as you earned it. Money is always better in your pocket than in someone else’s — even if that someone else is the government.”

Here’s how you can make sure you boost your bottom line this year by not overpaying your taxes and also not getting a refund.

Review Your Withholdings

Sit down and review your paycheck withholdings and see if you can break even when it comes to the taxes you pay. You’re looking for your Goldilocks zone. Not too little, not too much, but just right.

“If you are unsure what to do, experiment until you get it right,” Weber advises. “Most people are unaware that you can change your number of payroll exemptions as many times as you wish.”

You can also try using a tool to help you find your Goldilocks zone. The Internal Revenue Service has a withholdings calculator that can help you see how much difference a change in your withholdings will make. Certainly, you don’t want to owe taxes next year if you can avoid it, but getting your tax refund as close to zero as possible means you can invest or spend the additional income on a regular basis instead of letting the Treasury Department store it for you.

As you review your withholdings, you’ll want to be sure you …

Don’t Forget Your House …

If you own your own home, you probably know you can claim mortgage interest and property tax deductions, so take into account how much that will reduce your tax burden.

… Or Your Investments

If you own investment property, you’ll also want to consider any expenses you can deduct that might affect your taxes for next year.

… Or Big Life Events

“There are certain life events that you want to keep in mind when changing your exemptions such as marriage, having children or any situation where you decrease the number of dependents, such as divorce,” Weber says. “Also, keep in mind that while you are able to change the number of withholdings as often as you wish, your employer doesn’t have to apply it until the first payroll ending 30 days after you submit the change, effectively limiting the number of times you actually can change. Other than these considerations, the ultimate goal each year is to get your refund close to zero. Make it a game and see how close you can come.”

But You’re Terrible at Saving Money, You Say?

Of course, if saving isn’t your forte and you’re going to just end up spending whatever additional income you get throughout the year, letting Uncle Sam hold it for you might not be such a bad idea if you plan to put your refund directly into a retirement account like an IRA. The IRS will even help you keep your promise to invest the money by direct depositing all or part of your refund into savings, an IRA or even toward buying savings bonds.

If that’s your situation, you can read our guide on how to maximize your tax refund. But investing that money into a 401K throughout the year could be a better alternative, especially if your employer provides matching funds.

Those savings can pile up, especially if you start young. If you’re planning to turn your refund into the start of a lifetime of saving, check out our list of 50 things young people can do to make sure they’re set when it’s time to retire.

Also remember that keeping your credit in good standing helps you save money throughout the year, on everything from loan and credit card interest rates to mortgages. A good way to check on how your credit is faring is by getting credit your two free credit scores, updated every 14 days, on Credit.com.

Image: RapidEye

 

The post Why It’s Not Smart to Get a Big Tax Refund Each Year appeared first on Credit.com.

10 Bizarre Claims People Make to Avoid Paying Taxes

how to avoid paying taxes

Resistance to taxes is baked into Americans’ DNA. After all, it was cries of “taxation without representation” that spurred the American Revolution. Tax protests have continued on and off ever since, from the Whiskey Rebellion to Vietnam War-era tax resisters to the “sovereign citizen” movement.

People object to paying taxes for all kinds of reasons, from opposition to certain policies to not recognizing the government’s authority to collect taxes in the first place, but the IRS isn’t having it. No matter what you read on the internet or your weird Uncle Bob says, you can’t get out of paying taxes without suffering consequences.

“The IRS and the courts hear many outlandish arguments from people trying to avoid their legal filing and tax obligations,” IRS Commissioner John Koskinen said in a statement. “Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law.”

Now, that doesn’t mean there aren’t things you can do to legally avoid taxes. Taking all your deductions or moving money into tax-sheltered accounts like a 401K are perfectly acceptable ways to lower your tax bill. It’s when you get into weirder tax avoidance strategies that you run into problems. (Note: Not paying your taxes can have serious implications for your credit. Check out our quick guide for keeping your taxes from messing with your credit. While you’re at it, you can also get your two free credit scores, updated every 14 days.)

Trying to claim that filing a tax return is optional, that you aren’t really a citizen of the U.S., or that only certain types of income are taxable will backfire. When you submit a frivolous return or slam the IRS with other off-the-wall requests the result may be a fine of $5,000 to $25,000. Plus, you could also be prosecuted for tax evasion, a felony punishable by prison time and penalties of up to $250,000.

The IRS spends a lot of time and energy debunking various convoluted anti-tax arguments, and it’s collected dozens of them in a document titled “The Truth About Frivolous Tax Arguments.”

Below, we’ve highlighted 10 of the more bizarre reasons why people say they shouldn’t have to pay taxes.

1. Filing a Return & Paying Taxes Is Voluntary

The first and perhaps most direct argument against the U.S. tax system is the idea that filing a return and paying taxes is voluntary. Primary points include court cases like Flora v. United States, in which the term “voluntary” is used to describe how the tax system is based on “voluntary assessment and payment, not upon distraint.”

But when the IRS says filing a return or paying taxes is “voluntary” what it really means is that a taxpayer has the right to determine his or her tax liability by completing the appropriate forms, as opposed to having the government complete the forms and determine the bill. It doesn’t mean you have the option to opt out of the system entirely.

2. The Money They Earned Isn’t Really Income

According to this anti-tax argument, the money you receive for working isn’t technically income. Rather, you’re engaged in an equal exchange of your labor for fair market wages, and thus there’s no “gain” to be taxed. In this view, the government only has the right to tax gains or profit, not wages.

In reality, the IRS is allowed to tax virtually all your income, whether it’s dividend income from stocks or wages you receive from your employer. Exceptions include gifts and inheritances (though large estates may have to pay an estate tax), child support, life insurance benefits, and welfare payments.

3. Taxes Are Against Their Religion

You may not believe in paying taxes, but the IRS isn’t buying it. Though churches and other religious institutions are exempt from taxes, the same does not apply to individual taxpayers.

Allowing people to opt out of taxes on religious grounds would cripple the tax system. In the United States v. Lee, the U.S. Supreme Court ruled that “[t]he tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious belief.”

4. Paying Taxes Violates the Fifth Amendment

Some argue that including financial information on a return may bring unlawful or illegal activity to light, thereby forcing a taxpayer to forego their Fifth Amendment protections.

The IRS calls this a “blanket assertion” of constitutional privilege. The agency asserts that there are no constitutional grounds for the refusal to file a tax return based on the Fifth Amendment. In cases like the United States v. Sullivan and the United States v. Neff, the courts back the IRS’s position.

5. Paying Taxes Is a Form of Slavery

The U.S. has prohibited involuntary servitude (except as punishment for a crime) since 1865, when the 13th Amendment was ratified. Since then, some anti-tax protestors have tried to equate paying taxes to slavery, arguing that having to send some of their money to the IRS is a constitutional violation. Even prominent politicians have evoked this absurd anti-tax argument. “If we tax you at 50% you are half slave, half free,” Rand Paul said in 2015. But the IRS and the courts have declared the “taxes equals slavery” claim bogus.

On the flip side, arguments that African-Americans and Native Americans can claim a tax credit as reparations for slavery and other forms of oppression are invalid. While there have been serious arguments that the U.S. should pay reparations to the descendants of former slaves, the government has not taken any such action.

6. The 16th Amendment Doesn’t Count

The 16th Amendment to the Constitution is short and to the point: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Yet some tax protestors argue the 16th Amendment is invalid because it was not properly ratified or that Ohio was not properly a state at the time it voted for the amendment. (Ohio has been a state since 1803; the amendment was ratified in 1913.) “Proponents mistakenly believe that courts have refused to address this issue,” the IRS noted. “There were enough states ratifying the Sixteenth Amendment even without Ohio to complete the number needed for ratification. Furthermore, after the Sixteenth Amendment was ratified, the Supreme Court upheld the constitutionality of the income tax laws.”

7. Their State Isn’t Part of the United States

Among the goofier anti-tax arguments is the assertion that only people who live in the District of Columbia, in federal territories, or on Indian reservations or military bases have to pay federal income tax. Everyone else is supposedly a citizen of a “sovereign” state, not the U.S., which means they’re exempt from federal income tax. Not so, says the IRS.

“The Internal Revenue Code imposes a federal income tax upon all United States citizens and residents, not just those who reside in the District of Columbia, federal territories, and federal enclaves,” the IRS explained.

8. The IRS Is Secretly a Private Corporation

Some conspiracy theorists are convinced the IRS isn’t actually part of the federal government at all. Supposedly, it’s a private corporation masquerading as a government agency, and it actually has no authority to enforce the tax code. In the 2002 case Edwards v. Commissioner, the court dismissed the claim as “tax protestor gibberish.”

9. They’ve Rejected Their Citizenship

You can’t reject your U.S. citizenship or claim to be a “free born citizen” of a particular state in order to get out of paying taxes. “Claims that individuals are not citizens of the United States but are solely citizens of a sovereign state and not subject to federal taxation have been uniformly rejected by the courts,” according to the IRS.

Even if you were to formally renounce your U.S. citizenship (which involves appearing in person at a U.S. embassy or consulate in another country), you still may not be able to escape your tax bill. “Persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations,” the State Department explained.

10. They Aren’t Technically a Person

In various court cases, this argument has been declared “meritless” and “frivolous and requir[ing] no discussion.” Here’s a tip: If the government is willing to consider a corporation a person, they’re definitely going to consider a person a person.

Erika Rawes contributed to this article.

This article originally appeared on The Cheat Sheet.

Image: AndreyPopov

The post 10 Bizarre Claims People Make to Avoid Paying Taxes appeared first on Credit.com.

How Unemployment Can Really Drive Up Your Tax Bill

Avoid these mistakes when receiving unemployment benefits.

Back in September of 2015, I lost my job and decided to take unemployment benefits for the first time in my life while I looked for a new one. Even the significantly reduced income that the unemployment benefits provided was a needed cushion since we’d closed on a new home the same week I lost my job. I’d crunched the numbers, and taking the benefits was going to be a better alternative than using money from our emergency fund (which was tied to the markets and had fallen significantly just the month before).

What I didn’t account for was taxes, so when I received that 1099-G form from the unemployment commission last spring, I was confused. I owed income tax on the benefits I’d received, which were already just 25% of what my income had been? Seriously? It felt unfair that my employers had been paying into unemployment insurance all these years so I’d have the benefit if I ever needed it, and now the government was going to take a good-sized chunk of that money I needed to keep our family afloat.

After a couple of hours of grumping, I bucked up, talked to our accountant and moved on. Of course it was my fault that I didn’t ask the right questions and do the necessary research to see what the tax consequences of receiving unemployment benefits would be. I was more mad at myself than anything, but the reality was that, instead of getting a refund, I was going to be paying Uncle Sam a couple thousand dollars.

Here’s how you can avoid having to do the same:

1. Get Those Taxes Withheld

If you’re currently unemployed, are receiving benefits and aren’t having taxes withheld, request that they do so now. Yes, your benefit amount will decrease, but it’s easier to cut back a little each week now than it is to come up with a larger lump sum when your taxes come due.

2. Review Your Filing Options

If you received unemployment benefits in 2016 and didn’t have taxes withheld, you’re going to have to pay them. Fortunately, there are some ways to mitigate just how much.

“You do have to claim your unemployment income, but remember your new lower income may make you eligible for tax benefits you couldn’t qualify for before,” said Lisa Greene-Lewis, a CPA and tax expert with TurboTax. “You also may be eligible for tax deductions and credits which can lower your tax liability.”

For example, you could qualify for the Earned Income Tax Credit, which is worth up to $6,269 for a family with three or more children. There’s also the Child Tax Credit of $1,000 for each dependent under 17 years old, and Education Tax Credits like the Lifetime Learning Credit, which can be up to $2,000. (You can find a quick guide to common tax exemptions and deductions here.)

“Credits are great because they lower your tax liability dollar for dollar,” Greene-Lewis said. “Also don’t forget what the IRS calls above-the-line deductions like deductible expenses for educator expenses paid up to $250, student loan interest up to $2,500, moving expenses for a job, and deductible IRA contributions, which can lower your taxable income.

“If you make below the IRS income filing threshold of $10,350 single ($20,700 married filing jointly), you also may not be required to file your taxes, however, you should if you had federal taxes deducted in your paycheck,” she said.

It could be worth your time and effort to get some guidance from a tax professional if you’re feeling uncertain about how all these credits work. If you can’t afford to pay a professional and you made less than $54,000 last year, there are free tax preparation services provided by the IRS. You may have to stand in line for a bit, but it could end up saving you significantly on your taxes.

3. Don’t Avoid Filing or Paying Your Taxes

Getting into trouble with the IRS is the last thing you want to deal with coming off of a stint of unemployment, so if you’ve reviewed all of the above options and find you’re still going to have a hefty tax bill due that you simply can’t afford, don’t panic, and definitely don’t put off dealing with the situation.

First, if you’re once again employed and can qualify for a credit card with a 0% introductory offer for purchases, you could pay your tax bill using that card and pay it off over time without any interest or penalties. It’s a good idea to check your credit scores before applying to ensure you qualify. You can get your two free credit scores, updated every 14 days, here on Credit.com.

If that’s not an option for you, you could consider using a credit card you already have, especially if it has a low APR, but you’ll end up paying significant interest, which will end up just costing you more money and probably isn’t a great idea. Instead, your best bet is likely talking to the IRS and asking for an installment agreement. That, Greene-Lewis said, allows you to pay your tax liability over a six-year period if necessary.

Think you’re going to owe Uncle Sam this year? You can find 7 ways to potentially cut your tax bill here.

Image: PK-Photos

 

The post How Unemployment Can Really Drive Up Your Tax Bill appeared first on Credit.com.

Donald Trump’s Latest Tax Problem Is More Common Than You Think

donald-trumps-latest-tax-problem

Donald Trump’s taxes have been a centerpiece of the election cycle — but the particular tax issues he’s faced have likely been beyond the pale for average Americans. Questions about releasing his returns, how much he’s donated to charity and whether his nine-figure losses should have offset his federal income tax responsibilities are not the kind of things most of us have to deal with as the April 15 tax deadline looms.

That changed a bit earlier this week, however, with a story in the New York Times that looked at how Trump was able to avoid reporting hundreds of millions of dollars in taxable income in the 1990s. It turns out the issues he may have been dealing with aren’t necessarily so different than those faced by millions of Americans — albeit on a much larger scale.

How Canceled Debt Affects Your Taxes

The issue revolves around canceled debt. When someone owes a bank some money, and they are no longer able to pay that money back, they may negotiate with the bank for a cancellation of all or a portion of that debt. This can happen in foreclosures, short sales and even when people owe money on their credit cards that they can’t afford to pay.

Let’s say, for example, you owe $25,000 on a credit card, but you simply can’t afford to pay it all back, and the interest and fees make it unlikely that you’ll ever be able to pay it back. You call up the bank and explain the situation and they agree to do a deal wherein you pay them $10,000 and they forgive the remaining $15,000. In addition to the credit consequences (that $15,000 in canceled debt will likely be documented on your credit report) there are tax consequences too. The IRS treats canceled debt like this as income, which means you’ll have to pay taxes on it, just as you would for your salary. People in this situation will often get a form called a 1099-C in the mail which documents this tax liability. Sometimes these forms come many years after the debt is forgiven. We’ve written about 1099-C problems extensively in the past and many people have no idea about potential tax liabilities when they are negotiating debt forgiveness with a financial institution. In fact, nearly 6 million Americans get 1099-Cs in the mail every year.

Trump’s Canceled Debts

So what does any of this have to do with Trump? A New York Times story by David Barstow, Mike McIntire, Patricia Cohen, Susanne Craig, and Russ Buettner published earlier this week looked at how the mogul allegedly dealt with his canceled debts in connection to overall losses in his casino business.

“As that empire floundered in the early 1990s, Mr. Trump pressured his financial backers to forgive hundreds of millions of dollars in debt he could not repay. While the cancellation of so much debt gave new life to Mr. Trump’s casinos, it created a potentially crippling problem with the Internal Revenue Service. In the eyes of the I.R.S., a dollar of canceled debt is the same as a dollar of taxable income. This meant Mr. Trump faced the painful prospect of having to report the hundreds of millions of dollars of canceled debt as if it were hundreds of millions of dollars of taxable income.”

So what did Trump do? According to the Times, he may have been able to offset those tax liabilities by using a stock-for-debt swap provision that existed in the tax code at the time. Here’s how the Times describes it:

“The strategy, known among tax practitioners as a “stock-for-debt swap,” relies on mathematical sleight of hand. Say a company can repay only $60 million of a $100 million bank loan. If the bank forgives the remaining $40 million, the company faces a large tax bill because it will have to report that canceled $40 million debt as taxable income.

Clever tax lawyers found a way around this inconvenience. The company would simply swap stock for the $40 million in debt it could not repay. This way, it would look as if the entire $100 million loan had been repaid, and presto: There would be no tax bill due for $40 million in canceled debt.

Best of all, it did not matter if the actual market value of the stock was considerably less than the $40 million in canceled debt. (Stock in an effectively insolvent company could easily be next to worthless.) Even in the opaque, rarefied world of gaming impenetrable tax regulations, this particular maneuver was about as close as a company could get to waving a magic wand and making taxes disappear.”

According to the Times, Trump allegedly stretched this strategy one step forward by swapping debt with partnership equity in his then-flailing casinos.  

Trump, who is no fan of the New York Times, declined to comment for the article. (His campaign also did not respond immediately to Credit.com’s request for comment.) Trump’s spokesperson, Holly Hicks, did send the Times this statement in an email: “Your email suggests either a fundamental misunderstanding or an intentional misreading of the law… Your thesis is a criticism, not just of Mr. Trump, but of all taxpayers who take the time and spend the money to try to comply with the dizzyingly complex and ambiguous tax laws without paying more tax than they owe. Mr. Trump does not think that taxpayers should file returns that resolve all doubt in favor of the I.R.S. And any tax experts that you have consulted are engaged in pure speculation. There is no news here.”

Socks-for-Debt-Swaps?

So how does all of this this relate to the average American who may have gotten a 1099-C in the mail and is facing a steep tax bill because of canceled debt? Well, given Congress banned stock-for-debt swaps in 1993 and equity-for-debt partnerships back in 2004 in order to eliminate the potential for abuse, no one will be able to replicate the strategy The Times alleged Trump to have used. Nevertheless, imagine if this option were available to everyday Americans. What might it look like?

Let’s go back to our earlier example: the $25,000 credit card debt. Let’s say the bank has agreed to forgive the whole thing, but you don’t want to get stuck paying income taxes on that $25,000. Since you’re an average American who doesn’t have stock to trade away and can’t do a “stock-for-debt swap,” let’s call this a “sock-for-debt swap.” You send the bank a cardboard box full of your old socks and tell them that they are worth $25,000. They bank doesn’t really care, because they’ve already forgiven the debt and written it off their books, but you get to tell the IRS that the bank hasn’t really “forgiven” anything. You traded that credit card debt for $25,000 worth of fabulous, beautiful, old socks. So you’re in the clear.

What to Do if You Get a 1099-C

The reality is most Americans can’t make much of an argument when they get a 1099-C in the mail. Still, there are a few steps you can take if you are really in dire straits and can’t afford to pay.  

Consumers might be able to avoid paying taxes on canceled debts by claiming the insolvency exclusion. Per the IRS, a taxpayer is insolvent when their total liabilities exceed his or her total assets. You may also be able to avoid paying if the debt was discharged in bankruptcy. You can go here to learn more about what to do if you get a 1099-C.

It also helps in these situations to pull a copy of your credit report. They can help you understand and confirm the dates and amounts listed on the form. You can pull your credit reports for free each year at AnnualCreditReport.com and view your free credit report summary, updated every 14 days, for free on Credit.com.

Image: scarletsails

The post Donald Trump’s Latest Tax Problem Is More Common Than You Think appeared first on Credit.com.

The IRS Is Hiring Debt Collectors. Here’s What You Need to Know

irs-tax-debt-collection

The Internal Revenue Service will soon begin using private collection firms for some overdue federal tax debts, the department announced Monday.

The new program, authorized under a federal law enacted by Congress last December, is slated to begin next spring. Four private, debt-collection contractors — CBE Group, Conserve, Performant and Pioneer — have been designated to collect outstanding tax debts, the IRS said in a prepared announcement.

“As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act,” the announcement said.

Several factors contribute to the IRS assigning these accounts to private collection agencies, the announcement said, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.

Look For Written Notice From the IRS

It was unclear from the announcement if these companies will be allowed to call taxpayers about their debts, something the IRS has never done and has previously been a surefire way of spotting a scammer. Calls to the IRS Taxpayer Advocate office were not immediately returned, but the announcement did provide some details regarding the private companies’ IRS debt collection practices that could prove helpful in determining whether any correspondence is legitimate. For instance, the IRS will provide affected taxpayers and their representatives with written notice that an account is being transferred to one of the agencies.

“The agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer,” the announcement said. “Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.”

The announcement acknowledged potential confusion with phone tax scams, which involve people posing as IRS agents in order to scare someone into turning over their payment or personal information.

“The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities,” the agency wrote. “The IRS will continue to keep taxpayers informed about scams and provide tips for protecting themselves. The IRS encourages taxpayers to visit IRS.gov for information including the ‘Tax Scams and Consumer Alerts’ page.”

Protect Yourself

Remember, if you are ever concerned about the legitimacy of debt collectors, particularly those trying to collect a tax debt, it is best to err on the side of caution. If you receive an email, for example, do not open any links. Rather than answer, forward the email to phishing@irs.gov.

If you’re worried you may have already compromised your identity by falling for a tax scam, you may want to monitor your credit to make sure your information hasn’t been used to commit new account fraud. You can pull your credit reports (here’s how to get your free annual credit reports) and you can also check your credit snapshot, updated every 14 days, for free on Credit.com for any unexpected changes, which could be a sign of identity theft.

Image: kali9

The post The IRS Is Hiring Debt Collectors. Here’s What You Need to Know appeared first on Credit.com.

Why the IRS Needs to Stop Letting Taxpayers Use Stolen Social Security Numbers

While you’d never know it if you listen to politicians on the right and left argue, there are some truths out there, things that don’t yield to debate. I’m talking basics, like it’s easier to walk through an open door, and the Internal Revenue Service shouldn’t be in the business of providing open doors to pervasive forms of fraud.

Are you rolling your eyes? Well, it’s happening once again at everyone’s favorite punching bag, the Internal Revenue Service. Granted, past fails haven’t been intentional—whether we’re talking about the “Get Transcript” hack that affected 700,000 taxpayers or this year’s E-File PIN attack that involved more than 464,000 unique Social Security numbers. There was incompetence and a lack of farsightedness in those instances, for sure, but the latest wrinkle at the IRS has the agency turning a blind eye to crime. It has been happening in broad daylight without the slightest twinge of worry that maybe someone should, you know, maybe do something about it — that is, until this month.

Undocumented Workers Using Stolen Social Security Numbers

Forget about Obama’s “path to citizenship.” Forget about “amnesty.” This goes beyond partisan bickering over a label.

I first became aware of the issue through the lens of right-wing media and almost dismissed it due to my own political assumptions. To be fair, it was so poorly reported and exclusively discussed on conservative websites like Breitbart, All That’s News and the Tea Party Patriots.

The story, featuring undocumented workers stealing Social Security numbers to apply for jobs and fill out W-2s under the watchful eye of the IRS, was first made public during a Senate Finance Committee meeting, when Sen. Dan Coats of Indiana asked IRS Commissioner John Koskinen to explain why the IRS doesn’t inform certain victims of employment-related identity theft — specifically people whose Social Security numbers have been used by undocumented immigrants to get work or fill out W-2 forms.

I rationalized these reports as little more than “echo chamber” attacks on Big Government. But a week later I read about it in The Hill. There it was: Koskinen confirming that when the IRS discovers undocumented immigrants have used a stolen SSN to apply for jobs or fill out W-2s but files their taxes using an Individual Tax Identification Number (ITIN) — a number often provided to undocumented immigrants to pay taxes — they get a pass from the agency.

According to the report, this will no longer be the agency’s standard operating procedure by January 2017, when the IRS will begin informing victims of employment-related identity fraud.

While that’s great news, it boggles the mind that such a situation could have been allowed to persist. Koskinen’s argument for not implementing a solution sooner was basically that people who want to pay taxes should be able to do so because collecting the revenue is in everyone’s best interest and that the agency could not find an effective way to notify compromised individuals while protecting sensitive taxpayer information on both sides.

Because Crime

While the IRS may be collecting revenue from the undocumented workers who are filing returns, Republicans on the Senate Finance Committee raised concerns of these filers actually receiving refunds from the IRS fraudulently. In theory, if an illegal worker gets a Social Security number, he can file three years of back taxes and claim the Earned Income Tax Credit, providing he can remember all the details of his off-the-books earnings during that time period.

Sen. Chuck Grassley (R-Iowa) asked Koskinen about this theory and Commissioner Koskinen confirmed:

To clarify my earlier comments on EITC, not only can an individual amend a prior year return to claim EITC, but an individual who did not file a prior year return may file a return and claim EITC (subject to refund limitations under section 6511 of the Internal Revenue Code). I would note that filing new returns for prior years would likely be difficult, since filers would have to reconstruct earnings and other records for years when they were not able to work on the books. Section 32 of the Internal Revenue Code requires an SSN on the return, but a taxpayer claiming the EITC is not required to have an SSN before the close of the year for which the EITC is claimed.

When it comes to identity-related tax fraud, nothing is too complex if there’s a payoff. While I can’t say if the situation with unreported employment-related identity fraud as described here has ever been used to make unlawful grabs at Earned Income Tax Credits, this is just one question regarding what is doubtless countless possible crimes that can be committed because the IRS decided employment-related identity fraud should get a pass for the sake of revenue.

The bottom line is that if it can be imagined, it can be achieved. The fact that the IRS has essentially looked the other way when it comes to the unlawful use of personally identifiable information in the face of our identity crime Armageddon is inexcusable.

At the end of the day, this has to stop being viewed as a political issue. Republicans will blame the situation on President Obama’s “amnesty” policies geared toward getting undocumented immigrants integrated as taxpayers (maybe), Democratic voters (probably) and welfare recipients (for sure). In other words, the whole enchilada. Democrats eschew the amnesty label, preferring to talk about “a path to citizenship,” with the very serious goal of creating a safer, opportunity-filled world for immigrants who will (most likely) vote Democratic.

The problem: Neither party sees it as an epic fail.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Identity Theft:

Image: stevanvicigor

The post Why the IRS Needs to Stop Letting Taxpayers Use Stolen Social Security Numbers appeared first on Credit.com.

Easily Find Your Free File Options with the IRS Tool

Tax return check

If your household grossed under $62,000 in 2015, you’re eligible to file your taxes using Free File from the IRS. Free File is a conglomeration of different online tax filing software providers that have partnered with the IRS to make their product available for no charge for low- and middle-income households.

When you look at all of your Free File options, you’ll see something like this:

IRS pic 1

Those aren’t even all of your options. As if filing your taxes weren’t enough of an exercise in tedium, now you have to go through each program, determine if you qualify, and decide which software will best suit your needs.

Except that you don’t. If you click on the “Help Me Find Free File Software” link in the furthest left hand column, the IRS will provide you with an online tool to help you weed out some of your options.

The tool, which can be found here, will ask you for a few pieces of information:

  • Your age
  • Your estimated Adjusted Gross Income (AGI) for 2015
  • Your state of residence
  • Your eligibility status for the Earned Income Tax Credit
  • If you or your spouse received military income in 2015
  • Your state, if you want to file a free state return

If you don’t know if you qualify for the Earned Income Tax Credit, clicking on the embedded link will bring up income limits. The real issue we see is inputting AGI if you have a variable income. When you have a steady income, you can reliably assume a number similar to your previous year’s return. Variable-income households may have to run some of their numbers first in order to see if they qualify, which partially defeats the purpose of using tax software.

We ran a couple of fictional profiles to see how the tools work. The first one is for a 30-year-old Pennsylvanian with an AGI of $61,000. They do not qualify for the Earned Income Tax Credit, and did not receive military pay in 2015.

IRS pic 2

These were their filing options, as brought up by the tool:

IRS 3

The only two options, if they want to file their state return for free, are H&R Block and OLT.com. This makes the decision a lot easier. We know from research that H&R Block’s tools are more in depth than OLT.com’s, so our filer will probably go with the former.

The next parameters we ran were for a 30-year old resident of New Hampshire who did not have any military income, but did qualify for the Earned Income Tax Credit with an income of $34,000, and one child. We were curious if free, state-filing options would be more limited, as New Hampshire’s unique tax laws often cause problems for online tax software providers.

Much to our surprise, we got more hits for our New Hampshire resident than the Pennsylvanian:

IRS 4

After some digging, we discovered that the two contributing factors were the lower income, and eligibility for the Earned Income Tax Credit. TaxACT’S Free File is only available to those with an income below $50,000, unless they meet a litany of alternative requirements, such as qualifying for the Earned Income Tax Credit. TaxACT, OLT.com, and H&R Block all offer free state returns, even for the difficult state of New Hampshire; it was the Pennsylvanian’s income that kept them out of the TaxACT bracket.

IRS Tools Saves You Valuable Time

The point is that the selection process is arduous if you try to go it on your own. As long as you can reliably predict your AGI, using this IRS tool will save you valuable time and headaches when choosing your Free File software provider.

The post Easily Find Your Free File Options with the IRS Tool appeared first on MagnifyMoney.