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.

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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.

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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.

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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.

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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.

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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:

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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.

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

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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.

Consumer Watchdog: The IRS Reveals Dirty Dozen Tax Scams

Tax return check

Updated for 2016

Tax time is high season for scams and identity theft. In fact, tax-refund fraud is expected to hit $21 billion this year. We’ve alerted you to some of the tactics crooks use during tax season like pretending to call as an IRS agent demanding payment, email scams saying your tax payment got rejected or that you owe back taxes, or simply stealing your W2 then filing your tax return and routing your refund to another bank account. The IRS also has its own list of 12 scams used to part you with your hard-earned money (or that they think you might be tempted to do).

We want you to be aware of every way a thief might try to take advantage of you during the often frustrating and trying time of filing taxes.

Here are the Dirty Dozen tax scams from the IRS:

1. Phone Scams

This scam is the most prevalent way a crook will try to use tax time to get your money. A fraudster will call you impersonating an IRS officer claiming you owe more money (or back taxes) and need to pay it now or risk being arrested, deported, getting your driver’s license revoked or whatever clever scare tactic he can come up with. Stay calm, never give out personal information and immediately hang up and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484 and file a complaint using the FTC Complaint Assistant (choose “Other” and then “Impostor Scams”).

[Learn how to protect yourself from tax scams here.]

2. Phishing

If it smells fishy, it probably is! The IRS won’t send you an email out of the blue about a refund or back taxes. In fact, first contact from the IRS almost always still comes via snail mail and not email or phone. If you get an email claiming to be from the IRS, don’t click any links until you contact the IRS directly to confirm it’s valid. The crooks are looking to steal your personal information.

[Read more about how to protect against Phishing Scams here.]

3. Identity Theft

Getting your identity stolen at any point during the year is a major hassle and could be costly. But getting your identity stolen at tax time is probably because a crook is filing for a tax return using your name and getting your refund first (or a fake version of your refund). One of the best ways to defend against this is to file your taxes as early as possible. Also be sure to track all your W2 or 1099 forms and reach out to an employer immediately if you haven’t received your forms by early February. Crooks are not above stealing your tax forms and using them to file.

[Learn how to prevent and deal with identity theft here.]

4. Return Preparer Fraud

Looking for a good deal is great, but don’t go to cheap tax preparer (accountant) if he or she isn’t credible. Do your due diligence before giving over all your personal information to an accountant. Unfortunately, some of them use tax season as a chance to steal people’s identities.

5. Offshore Tax Avoidance

This one is on you. Don’t hide your money offshore, because you’ll be paying big time when Uncle Sam tracks it down. You can voluntarily admit to having an offshore account (even if you had one by accident – perhaps while working internationally) through the Offshore Voluntary Disclosure Program.

6. Inflated Refund Claims

It’s fine if a tax prep software company promises the biggest return compared to competitors, but don’t trust anyone claiming to get you an inflated refund. Never sign a blank return and be wary of anyone promising a big return without even looking at your information. Also, don’t agree to pay fees based on a percentage of a refund. This scam is typically perpetuated via word of mouth, flyers in storefronts and targets community and church groups.

7. Fake Charities

Check out any charity before donating. This is good practice year-round, but fake charities become especially popular during tax season to prey on people receiving refunds. Use tools like GuideStar.org to see if a charity is legit.

8. Hiding Income with Fake Documents

Much like hiding money offshore – this tax scam is on you to avoid. Don’t attempt to fake taxable income by filing false Form 1099s or other documents to inflate your tax refund. You are legally responsible for what is on your returns, regardless of who prepares them.

9. Abusive Tax Shelters

The IRS is committed to cracking down on abusive tax structures/ tax avoidance schemes and persecuting people who create and sell them. Be wary of anyone pushing tax shelters that sound like a great deal.

10. Falsifying Income to Claim Credits

Just report what you’ve earned. It’s really basic. Falsifying your income in anyway will not end well for you, no matter what a con artist tells you.

11. Excessive Claims for Fuel Tax Credits

Some prepares may try to talk you into making a fuel tax credit claim on your return. Be wary! The fuel tax credit is generally limited to off-highway business use, typically for farming. If you aren’t a farmer, it’s doubtful this tax credit is for you.

12. Frivolous Tax Arguments

Yes, you have the right to contest your tax liabilities in court. But don’t let a scam artist sell you snake oil. Often times frivolous tax arguments not only fail to hold up in court but filing a frivolous tax return results in a penalty of $5,000.

Be sure to check out the Dirty Dozen tax scams directly on IRS.gov and contact the IRS and FTC directly if you believe you’ve been a victim of a tax scam.

Think You’re a Victim of a Tax Scam?

Scams need to be reported immediately to the Federal Trade Commission (FTC). You can also hear an example of a scam IRS call here.

The post Consumer Watchdog: The IRS Reveals Dirty Dozen Tax Scams appeared first on MagnifyMoney.