The Fiscal Cliff Deal, Winners and Losers & What It Means To Your Personal Finances

The showdown in Washington over Federal taxes and spending ended with an agreement signed into law this week. Here are the losers and winners that we can see at this point. Further analysis is forthcoming of H.R.8 – American Taxpayer Relief Act of 2012, and will be reported to you later this month.


  1. Overall Taxes: Joint filers with incomes below $450,00, individuals with incomes below $400,000 and heads-of-households with incomes below $425,000 WILL CONTINUE to enjoy tax reductions put in place by George W. Bush.
  2. Alternative Minimum Tax: Tax payers with incomes below $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, WILL NOT be faced with the Alternative Minimum Tax (AMT). It was set to go to $33,750 (individuals) and $45,000 (married couples filing jointly). This will be indexed for inflation.
  3. Unemployment Benefit Recipients WILL have benefits EXTENDED this year.
  4. Entitlement Recipients of things like Social Security, Medicare and Medicaid WILL NOT face reductions, however expect battles over this one in the coming year, and changes affected by Obama Care, as the economy continues to struggle and deficits increase.
  5. Investors owning stocks that pay dividends, or the long-term sales of stock WILL NOT face increased tax on dividends and capital gains if their income is below the above amount.
  6. Itemizers: Tax filers with incomes below $250,000, heads of households below $275,000 or married joint filers below $300,000, WILL CONTINUE to enjoy the same itemized tax deductions for things like home mortgage interest and contributions to charities.
  7. Politicians benefit by not having to reduce spending for entitlements or cut back on special deals made to specific industries, thus enabling them to continue to receive political support from those groups and entities – in the short run.
  8. Pork Recipients: About $70 billion worth of special tax breaks were written into the bill.


  • Employees: Anyone paying federal payroll taxes will see an INCREASE in the amount withheld from their paychecks from 4.2%  to 6.2%. If you make $50,000 expect your pay to decrease by 2% or approximately $1,000 for the year, or about $83 per month. This restoration of a tax holiday was inevitable to pay for current and future Social Security and Medicare benefits.
  • Self-employed people will see an INCREASE in their payroll tax from 8.4% to 12.4%, or an increase of about $2,000 if making $50,000.
  • High Incomes Earners with incomes above $450,000 will see an INCREASE in their top tax rate to 39.60% from 35% (individuals with incomes above $400,000 and heads-of-households with incomes above $425,000).
  • High Income Investors owning stocks that pay dividends, or those that sell stock (held long-term), will face INCREASED tax on dividends and capital gains to 20% from 15%, if their incomes exceed the levels described above.
  • Large Estates: Individuals dying with estates in excess of $5 million will see the tax on their estates INCREASE from 35% to 40%.
  • Alternative Minimum Tax (AMT) Payers: Tax payers with incomes above $50,600 (individuals) and $78,750 (married couples filing jointly) respectively, will CONTINUE to be faced with the Alternative Minimum Tax (AMT). Many have hoped to see the AMT go away completely, or income minimums increased substantially.
  • High Income Itemizers: Provisions of the Bill will REDUCE itemized deductions such as mortgage interest and charitable contributions to those with incomes $250,000 and above, $275,000 for heads-of-households or married joint filers above $300,000.
  • Those served by charities: Anyone who benefits from not-for profit enterprises that rely on charitable contributions, may see less benefits being provided to them, or increased costs.  This is due to some limits now being placed on tax deductions given for contributions made to these institutions, from higher income people. Charities and non-profits may be faced with shrinking budgets due to lower contributions.
  • Charities MAY LOSE income due to the reduction of itemized tax deductions for high income donors.
  • Politicians on the right may LOSE political clout, since they relinquished some of their goals for reduced spending. Politicians on the left may LOSE political clout in the long-term, if the the economy fails to recover or we go through another recession. Most US citizens overall opinion of all political leaders continues to decline amidst poor leadership.
  • All US Citizens and succeeding generations will suffer from poor federal leadership when it comes to current economic policy of run-away spending and lack of balanced budgets.

This battle took so long to remedy, due to major philosophical differences, that I wrote about earlier this week, “Do you want to know what the fiscal fight is really about.” Expect the battle to rage on in the coming year. This information should not be relied upon for your individual tax situation: consult your tax, legal and financial advisers.

Do you want to know what the fiscal fight is really about?

This is a non-partisan article about what the fiscal cliff fight is really about. It is a philosophical battle, but if you read the newspapers, and watch TV news, you will not get this story. Believe you me, I have watched and read many commentaries and opinions about this, but no one has yet to boil it down to one article- so I will take a shot at it. In addition, since this is a financial blog, I will try to render a non-political opinion about what this means to your personal finances. Since readers from both sides of the political spectrum’s read this, I will try not to take sides.

First of all, we have an economic crisis in the United States of America.  Real unemployment is about 15%, not the less than 10% that you read about. Secondly, government spending both today and into the future exceeds income or revenue (mainly taxes). The budget deficit exceeds $1 trillion per year, and the total federal deficit is almost $16.5 trillion.  Manufacturing is down, growth of our gross domestic product is lack-luster, and we are headed to long term double and who knows, maybe triple dip recession. Yes housing is gaining strength, the some industries are doing quite well, and there are other reasons to be optimistic, but a strong argument can be made that we are headed to economic disaster because our federal balance sheet is a disaster.

Coming through a recession, we have a lot of people with their hands out wanting financial help. With high unemployment we have people on unemployment benefits. With an aging population we have a large increasing number of people on Social Security, Medicare, and Medicaid. With low incomes coming out of the recession we have a large percentage of people not paying Federal income tax. We have have a large number of people without health insurance, or under-insured (who should be provided for). We have a large percentage of people on food assistance, income assistance either in the form of weekly benefit or an annual bonus check called the Earned Income Tax Credit.  These are a lot of open hands, some very well justified that need help- I agree, but none-the-less, at the end of the day a lot of open hands- but no long term plan to pay for it.

Even if we aren’t paying Federal income tax, we pay a lot of our income out to sales tax, payroll tax (Social Security, Unemployment Insurance, Medicare and Medicaid), gas tax, real estate tax, toll roads, corporate tax that we pay in increased cost of goods- to mention a few. So the poor and low income do pay tax, the point here is the government- federal, state, city and local have high revenues.

The Left’s Viewpoint: To meet the financial needs of our country, such as entitlement programs the tax plan that President Obama wants congress to pass, wants to increase income or revenue through increase in taxes on the rich, and modest cutbacks in spending but not on entitlement programs, and in some instances a desire to increase them, for example extending unemployment benefits.  Class warfare seems to be used as a motivator: “The rich and big business caused the economic crisis, therefore we want to take from them, to help everyone out and fix our economy.” A few of them definitely did contribute to the recession, but really can we tax our way of this mess?

The Right’s Viewpoint:  To meet the financial needs of the country, reduce spending (including entitlements) and move towards a balanced budget. Keep taxes low for everyone, and leave more wealth in the hands of wealthy and business, who create jobs and expand the economy. Really, can we not increase taxes some with spending so high. Okay they say, but reduce spending first.

The 113th Congress of 201 Democrats and 234 Republicans in the House of Representatives, don’t want to budge on these issues, because it comes down to these philosophical differences. If the House can pass something agreeable, then the Senate’s 54 Democrats and  45 Republicans will approve it, and sent it to Obama for his signature.

The philosophy on the left says, we want to be more like a European style social democracy, of high taxes, and a high level of social programs. It puts faith in the government to care for the people in a fair and just way. Society welds power from 3 entities: government, people, and business. Therefore this style of government, seeks a shift to have more power, than people and business. The hope here seems to be government will maintain the freedom and welfare of the majority of people. Government is self seeking, so those in power don’t always care for people well though. I am not saying if you are on the left you totally believe all of this, but this is what seems to be they are saying.

The philosophy on the right says, we want to maintain more freedom for business and people, and the answer to economic problems is better financial management and business growth (which will in turn generate more taxes). The hope is that business and capitalism, hard work and self determinism, good personal financial management (spending saving and investing) will, in the long run, pay for entitlement needs, not taxes and government programs- it doesn’t always do that well, but that’s its hope. The right believes in entitlement programs, but seeks a balance. The people on the right are not heartless, since well researched analysis validates that conservatives give much more money to non-profit entities benefiting the poor than those on the left.  I am not saying if you are on the right you totally believe all of this, but this is what seems to be they are saying.


1. Compromise: Neither side exclusively has the only answer, both can actually be right and wrong -in part. Compromise doesn’t mean giving up one’s philosophy but, agreeing to work together on a balanced approach- some give and take. A balanced approach takes care of needy, preserves freedom by not shifting too much power to government and business, has modest taxes, AND something that neither party seems to be mentioning much- encourages new business start-ups and growth. A rising economy alleviates many of the financial problems struggling economies face.

2. A good president, majority and minority leaders are ones that supports compromise, works together, and brings both sides together: This battle is frustrating, but actually makes good political theater. Will one philosophy win out here, or will will end up with a good compromise and the best part of both parts will help everyone, not just those on the right and left?

3. The longer we take to answer questions of budgets, taxes and deficits, the longer our economy will languish. The more it languishes the greater the toll to average people’s personal finances. A government that manages money well, taxes fairly, takes care of the poor, secures freedom and encourages business growth – by working together, will be one that lead us to prosperity.

2013 IRA and Retirement Plan Contribution Limits

The Internal Revenue Service (IRS) recently published the new rules for contributions into retirement plans and IRAs for 2013. Some of these numbers have increased, and are good for you to know if you participate in IRAs (individual retirement accounts) or retirement plans like 401(k)s, sponsored by employers.

The most an individual can contribute to any kind of IRA, whether it be deductible, non-deductible or a Roth IRA is $5,500 or $6,500 if you are age 50 or older. The amount that you can deduct, or contribute to Roth depends upon if you are eligible to participate in a retirement plan through your employer, and your income. For the current income tables, for IRAs go to and for Roths go to This does not cover contributions to spousal IRAs.

Retirement plans

  • 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan, employees contribution increased from $17,000 to $17,500. The catch-up contribution limit for employees aged 50 remains unchanged at $5,500
  • Defined benefit plans commonly referred to as pension plans, maximum benefit increased from $200,000 to $205,000
  • SEP IRA annual contributions the employer makes to an employee’s account can’t exceed the lesser of 25% of compensation, or $51,000 for 2013, up $1,000 from 2012
  • Simple 401k limit is 12,000, up from $11,500 in 2012
  • Total contributions (employer and employee) for 401k and Profit Sharing plans, can’t exceed lessor of participants income or $51,000 (or $56,500 including catch-up contributions), up from $50,000 in 2012
  • There are many other types of retirement plans, the ones listed here are probably the most common types but the information provided doesn’t compare exactly to those other plans, go to the document for other plan limits

Some of these limitations are subject to IRS updates, changes and interpretation and actual plan type and design. Refer to and your plan description for complete information.


Tax Planning: In Uncertain “Fiscal Cliff” Times & Year End Tax Planning

Kevin Koval, CPA, ABV, CFP and Roger C. Nagel, CPA, CMA of Nagel, CPAs*

With the completion of the presidential elections there has been much discussion focused on the so-called “fiscal cliff”. Many economic forecasts have stated that President Obama and Congress need to reach some agreement to avoid the fiscal cliff if the nation is to avoid another recession.  As you probably know, the Bush tax cuts are set to expire at the end of 2012 and there are many other tax changes set to take place in 2013, such as the implementation of the taxes from the Obamacare healthcare plan. Given the disagreements between the President and Congress, it is difficult to predict what will happen to all of the tax cuts that are set to expire at year-end and what the outcome will be.  Year-end tax planning is always a challenge, but many long-time tax practitioners have noted that this could be the most challenging environment that they have faced.

Whatever the outcome of the any agreements between Congress and the President, it is likely that at least some taxes will be increasing and it is almost certain that dividend and capital gains tax rates will not be going down in 2013.  Maximum long-term capital gains rates are set to increase, generally, from the current rate of 15% to 20%. Dividends will be taxed at ordinary income rates instead of the current capital gains rate of 15% in most cases.  The top marginal rate will increase from 35% to the “pre Bush rate” of 39.6% and the rates for other income brackets would increase as well. Regardless of the outcome of any agreements reached between the President and Congress regarding the expiring Bush tax rates, taxes on investment income will rise next year by at least 3.8 percent on taxpayers with higher investment income due to the funding provisions in the President’s healthcare plan. Beginning in 2013, an additional Medicare hospital insurance tax will apply to wages or self-employment of married individuals with earnings exceeding $250,000 or single individuals with earnings greater than $200.000.  There will also be a new 3.8% net investment income tax for individuals exceeding these same income thresholds.  If Congress and the President do not make changes, the combined effect could result in an average tax hike of around $3,500 per household for up to 90% of Americans, and much higher rate for upper-income taxpayers.

It is reasonably likely that rates will be going up for investors, small business owners, and high income individuals, traditional tax planning strategies to defer revenue and taxes may not be applicable this year.  Taxpayers should consider an approach that involves addressing many of the possible changes directly while also making use of all options for deductions and credits, or other tax-advantaged opportunities to lower their taxable income. Planning for these changes should begin now, since it may involve significant modifications in your tax strategy.

Since most advisors are confident that capital gains rates and rates on investment income will be higher next year, taxpayers may want to consider some of the following strategies concerning the potential for higher rates in 2013:

If your portfolio includes significant long-term capital gains, taxpayers should take advantage of the lower rates in 2012.  For upper-income taxpayers who will be facing rates of 20% (barring any changes) on capital gains and the additional 3.8% healthcare tax on investment income their top rate will rise to 23.8% versus the current capital gains rate of 15%.  It may pay to take advantage of the lower rates in 2012 by selling investments with potentially big profits.

While advisors often recommend that taxpayers offset their capital gains by selling investments with capital losses, it may be beneficial to hold off incurring losses to offset against potential gains in the following year that will be taxed at higher rates.

Consider various strategies to accelerate ordinary income into 2012. If you have flexibility on when you can receive payments of income before year end, consider that the income may be subject to lower taxes this year than in 2013. Again, this is counter to tax strategies that are often employed to defer taxable income. Similarly, taxpayers would normally look to increase deductions before year end; it could be beneficial to defer expenses such as charitable deductions until the following year when tax rates will likely be higher.

Another option may be to convert a traditional IRA to a Roth IRA this year, if a conversion otherwise makes sense.

You may want to move dividend paying equity investments into tax deferred or federally non-taxable investments like municipal bonds.

Many taxpayers are accelerating gifts under the current $5 million ceiling on lifetime giving. Not only is there a good chance that estate tax rates will rise (the scheduled Sunset provision is for rates to revert to 55%) but the exclusion amount for estates and gifts will revert to $1 million.

Some other acceleration strategies include exercising stock options, taking bonuses, foregoing 1031 elections, and electing out of installment sales.

The alternative minimum tax (AMT) will apply to 2012 income for many more Americans if not indexed for inflation. At the end of 2011, the AMT exemption was $74,450 for married taxpayers and $48,450 for singles. In 2012, the AMT exemption is $45,000 for joint filers and $33,750 for single filers. In making their estimated payments, taxpayers will need to consider that for 2012 they could be exposed to a higher AMT tax if Congress does not revise the exemption amount.  Additional care will need to be taken to help avoid potential AMT taxes.

Business owners will want to look at accelerating taxable income, but they will also need to evaluate the fact that the Section 179 deduction can be significantly reduced in 2013.  Under Section 179 of the tax code, small businesses can deduct the total cost of some qualifying property in the year it is placed in service, within certain limits, rather than depreciating it over time. The limit on the cost of property (including real property) that can be expensed is now $139,000 which will drop to $25,000 if no changes are made. The total value of the equipment purchased cannot be higher than $560,000. In 2010 and 2011, businesses were allowed to expense as much as $500,000 in equipment and property on one year’s tax return. Additionally, bonus depreciation which was 100% in 2010 and 50% in 2012 is set to expire in 2013.

Business owners need to evaluate the potential for immediate write-offs and 50% bonus depreciation for capital purchases made in 2012 versus being stuck with the longer term depreciation MACRS depreciation schedules for purchases made in 2013. It may pay to make planned purchases of equipment in the current year. On the other hand, faced with higher tax rates business may not want to elect Section 179 or bonus depreciation treatment to preserve more deductions for future years when the rates are scheduled to be higher at least for individual owners operating as Schedule C or as pass through entities.

Like so much in life, we can only plan ahead, confidently, based on what we know to be fact.  Today, we know that tax laws will change back to “pre-Bush tax cuts” on January 1, 2013.  Of course, Congress and the President can intervene, before year end, or even afterwards (and make new rules retroactive.)  This unprecedented level of uncertainty makes good decision making difficult. Consequently, seek tax advice about your specific circumstances.  If you have large, pending transactions, the timing of which you can control easily, then this is a good year to engage your advisors soon to harvest sizeable benefits.

*Kevin Koval, CPA, ABV, CFP and Roger C. Nagel, CPA, CMA of Nagel, CPAs. They can be reached at 505-898-2558 or email They are located at 2240 Grande Blvd SE Suite 103, Rio Rancho, NM 87124.

Rules for Tax Deductions, Reporting and Privacy of contributions to Charities and Political Groups

There are many regulations regarding the reporting requirements, privacy and income tax deductibility of cash donations to organizations. Here is a brief list of some of the rules for cash gifts:

  • Non-Profit charities 501(c)3 institutions include schools, churches, universities, hospitals and politically titled groups with a main emphasis of education. Deductions for contributions are limited to 50% of the donors adjusted gross income (AGI). There are usually no limits on donations for individuals.
  • Donations of cash gifts to Private Foundations organized as 501(c)3 for religious, charitable, scientific, literary, or educational purposes, are deductible up to 30% of AGI.
  • Social welfare non-profits 501(c)4 contributions are not deductible, but if $5,000 or larger they must be reported. These groups primarily promote social welfare, can lobby and participate in campaigns, but can’t contribute to candidates.
  • Donations to Super PACs are not deductible, and there are no limits or reporting requirements to the IRS. Information about the donors are not private, but the information might not indicate the actual person who made the donation, since it can be routed through a private company.
  • Individual’s donations to political parties, campaigns and some super PACs are limited to $2,500 per election or campaign, $5,000 to a PAC, and up to $30,800 to a national political party committee. Donations of $200 or more must be reported to the Federal Election Commission (not the IRS) by individuals, are not deductible and the information is made public.
  • Membership dues to 501(c)6 organizations are deductible, except for the portion used for political causes.

In addition, there are many other rules, sometimes complex, for donations of cash and non-cash gifts such as property, partial interests in property, property that earns income, life insurance, annuities, artwork, IRAs and qualified assets, securities, and assets in charitable trusts. This is just a brief review, individuals should seek the advice of professional tax advisers.

Obama Versus Romney Tax Rates

The presidential race tax debate faces Romney’s lowering them 20% for all, versus Obama’s increasing them for those in middle to higher incomes. For quite a while the tax burden has continued to shift to higher income people, and those on the opposite end pay less and less taxes, per the Wall Street Journal. If you want taxes lowered for all bracket, it seems as if your candidate is Romney lowering them and if lowered just for the upper income earners, then you may favor Obama, per Bank Rate.

According to the Wall Street Journal, the following chart outlines the tax policy for Obama and Romney.


Future of the Federal Estate Tax

The Federal Estate Tax is the tax paid on assets that transfer at death.

The current top rate is 35%, but it could increase to 55%, reverting to the 2001 tax rules if Congress doesn’t continue the lowering of tax of the Bush Administration. The current tax only applies to estates of $5,000,000 or larger, but the prior law applied to estates of $1,000,000 and larger.

Analysts believe the future of estate taxes will probably go one of three ways: 1) let the Bush tax cuts expire to help balance the budget, thereby reverting to system that had a top rate of 55% and began taxing estates of $1,000,000 or more 2) compromise, perhaps with a top rate of 45% and an exemption amount of $3.5 million. 3) continue the tax cuts and leave the exemption and rates where they are today.

What should they do depends upon your political and economic beliefs. Those who lean more to the right favor low or no tax, stating that estate tax is arbitrary and confiscatory redistribution of wealth, and have negative ramifications to business growth. Those on the left feel that funds are needed to help balance budgets, and redistribution helps prevent large amounts of wealth (and power) gradually ending up in fewer hands, recalling a few hundred years ago of America’s monopolies. Perhaps there is room for compromise here, I favor a law that penalizes fewer small businesses and farms, yet considers some of the thoughts contained in the “Gospel of Wealth” by Andrew Carnegie. Carnegie argues the tension created by having an estate tax, has social philanthropic benefits and satisfies the concerns of those in both ends of the spectrum.

Tax Prep Assistance

People have many option these days for tax preparation, all have their strengths and weaknesses:

  • Doing it yourself:
    Tax preparation software like Turbo Tax, Tax-Cut, or just doing it in paper and pencil can be learning self educating experiences for those willing to invest their time. The software is easier to use and is getting better all the time. This is a good option for those with simple taxes, very comfortable with computers, identifying financial records and is very careful to input information correctly. The software is sometimes free (depending upon income or very low-cost. Some ‘free’ services may charge for electronic filing. The advantages of this option are the learning you get, low-cost, the quick turn around time to complete the return and get a refund. The disadvantage is a good tax professional can sometimes do better and help file a more accurate return, get you a higher refund or pay less in taxes, and plan better for the future.
  • Getting Free Help
    Free tax preparation assistance may be provided through one of the  Benefit Bank sites in your state. In Columbus Ohio there are several sites of the Ohio Benefit Bank including the Vineyard Community Center, leave a message: 259-5352. Many county agencies provide this for low to moderate income people for no cost. Just doing a search in your browser can help you find one in your area, be sure the url contains a .gov to insure you are not being snagged to a commercial site. The service is really good, but not extensive, so many people will benefit from working with a professional.
  • Professional Assistance
    Tax Preparation Professionals (accountants, CPAs, and tax attorneys) can often save you money, even if your situation is simple. Be very careful, however, to help ensure that you are not over-charged. Get competent advice, referrals, and meet a few before choosing one. Remember, during tax season –February to April 15th these Professionals are extremely busy. Also, professionals can also be helpful by providing pointers for next year’s taxes, so that you can plan or keep good records now. This is especially applicable for self-employed people. If you owe taxes for other than last year, consider having your tax advisor review your old returns.

Tax Refund Loans
Some tax preparation services will loan you an amount equivalent to your tax refund. There is usually a fee and interest charged; only consider this if an emergency and after reading the fine print.

What to do with your Tax Refund

When we find out we are going to receive what might be thousands of dollars in tax refunds from the Federal or State Governments, we have two competing impulses:  wants versus needs. Those that are struggling may want to give this issue serious consideration, because any windfall like tax refunds or bonuses can really help us get out of financial crisis, or at the least set us on the path to doing so. Those doing okay, can really use these funds to plan smarter. Research indicates that most people who get windfalls and raises seldom see any change to their day-to-day cash flow management, since life just seems to happen and soak up any extra money that flows our way. These demanding recessionary and inflationary (i.e., health care, gasoline and food) times require diligence.

Needs: Basic items that are necessary to sustain basic living. In Dave Ramsey’s Financial Peace University class he advises that people should cover these things first, because sometimes people will pay for wants or debt and then not have money for important things like food and rent. Good for some to be reminded when they have money forthcoming.

  • Housing: rent or mortgage, utilities (basic phone only), real estate taxes and insurance
  • Groceries: food and personal care items
  • Transportation: car payment, gasoline and car insurance
  • Health: prescriptions and doctor provided care
  • Clothing
  • Childcare if working fulltime

Tier 2 Needs: Items that are not always necessary for day-to-day living, but help people with things such as health and not fall into pay-check to pay-check lifestyle. Again good for some to be reminded when they have money forthcoming.

  • Emergency savings for things like car repairs and health insurance deductibles
  • Health insurance and fitness
  • Pet expenses for those that already own one
  • Internet

Tier 3 Needs: Things people must do to get debt free, since when debt is eliminated extra money will be there for building up larger savings and investments. With no debt and savings, people will usually be a very good financial situation. If someone gets a tax refund or a bonus, these are the items to use it for:

  • Debt repayment, using the snowball method until all non-mortgage debt is repaid
  • Emergency savings fund for health insurance deductibles, car repairs and the like

Wants:  These are the things that people may be considering with their tax refund, but should refrain considering until they are out of debt and have funded 3 – 6 months of income in savings. Extra courage is needed, especially when we have done without for a long time:

  • New TV, car, furniture and appliances
  • Robust cable TV
  • Vacation
  • Smart phone or fully equipped phone with data and all the bells and whistles
  • Down payment on a new loan for anything

IRS Issues its Annual Dirty Dozen Tax Schemes 2012

The Internal Revenue Service recently issued its annual “Dirty Dozen” ranking of tax scams to remind taxpayers to use caution during tax season

  1. Identity Theft. The IRS is seeing more identity thieves using legitimate taxpayer’s identity and personal information to file a tax return to claim a fraudulent refund. If you receive an IRS notice that more than one return was filed it may be a tip-off. If you believe that has happened immediately contact the IRS Identity Protection Specialized Unit, see the special identity theft page at
  2. Phishing. Phishing is done through unsolicited email or a fake website that pretends to be a legitimate site to lure people to provide valuable personal and financial information. If you receive an unsolicited email that looks like it is from the IRS, government website, forward it to
  3. Return Preparer Fraud. Some fraudulent ‘professional’ tax return preparers sometimes skim off their clients’ refunds and or charge too high fees. Starting in 2012 paid tax preparers must have a Preparer Tax Identification Number (PTIN) that they enter when the return is filed. You may be dealing with a bad preparer if they: Don’t sign the return or place a Preparer Tax Identification Number on it. Don’t give you don’t get a copy of the return. Over promises a large tax refund. Get a percentage of the refund, or splits it as their fee. Ask you to use false information on your return, such as false income, expenses and/or credits.
  4. Hiding Income Offshore. Evading U.S. taxes using offshore financial accounts to hide income. Sometimes foreign trusts, employee-leasing schemes, private annuities or insurance plans are utilized for these schemes.
  5. “Free Money” from the IRS &  Tax Scams Involving Social Security. Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches. Low income and elderly people are often victims of fees using the false hope of money.
  6. False/Inflated Income and Expenses. In order to maximize refunds some people include income that was never earned, or expenses not paid
  7. False Form 1099 Refund Claims. “In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts forU.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.”
  8. Frivolous Arguments. Promoters of this scheme encourage people to make outrageous and frivolous claims to avoid paying the taxes they owe. The IRS has of some frivolous tax arguments to avoid. These arguments are false and have been thrown out of court, and some have served prison time.
  9. Falsely Claiming Zero Wages. “Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.”
  10. Abuse of Charitable Organizations and Deductions. Tax-exempt 501(c)(3) organizations are sometime used to avoid paying tax by shielding income or assets from taxation. Some donators maintain control or receive income from donated assets, or donating overvalued assets.
  11. Disguised Corporate Ownership. Improper use of corporations to obscure the true owners to under report income and claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and other financial crimes.
  12. Misuse of Trusts. Trust promoters (not true estate planners) use ‘special’ trusts to own assets to provide income and estate tax savings. There are hundreds and maybe thousands of legitimate uses of trusts in tax and estate planning, that have protection and tax advantages, however some trust promoters use them to illegally avoid taxes and hide assets.


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