End of Year Donations and Write Offs

Here at year end many people are preparing to make charitable donations. As long as the checks are in the mail by December 31st, 2016, you will be able to write off the donation on your 2016 tax return. If you are making your donation using a bank-issued credit card, you can claim the write-off in the year you charged the expense, even if you pay the bill in the next year. Retailer-issued credit cards must claim the write-off in the year the bill is paid.

IRS Scams - Part 2!

Each year, the Internal Revenue Service releases a list of the worst tax scams. These scams peak at tax season, but they happen all year round. Here’s a roundup of some of the fraudsters’ favorites.

Identity theft, phone scams and “phishing” are listed as the top three forms of scams. Identity theft, of course, is when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund. Phone scams are those scary, send us money right now or go to jail calls. Phishing is usually done by email. The sender is seeking personal and financial information.

Fake charities also abound. They often use names similar to trusted organizations; some even go as far as setting up fake websites. They are out to take your hard earned cash and prey upon your generosity. To check if a charity is legitimate, you can check https://www.irs.gov/charities-non-profits/search-for-charities.

Taxpayers can be guilty of tax scamming as well. They have been known to falsely claim deductions, under report income, use multilayer companies to try and conceal who owns income. The earned income tax credit has been abused, as taxpayers actually claim higher income and/or dependents they are not entitled to claim, to get a larger refund.

The IRS is on the lookout for fraud constantly. Beware, be smart, and if you have any questions, give us a call at (702) 893-9500.

Trust Fund Criminal Penalties

When it comes to employee tax withholdings, business owners can be sentenced to jail if they aren’t careful. In July, Richard Whatley of Salt Lake City was sentenced to a maximum 51 months on federal prison for willful failure to account for payroll taxes. On top of that, he must pay $540,000.00 in restitution. This is a reduction from the original $2.3 million in employee tax withholdings that he failed to forward to the IRS.

Mr. Whatley is the former owner of three employee leasing companies. He signed the payroll checks for all of the leased employees, and over the course of five years (2001-2006), he failed to properly forward taxes that were held on the employees’ behalf to the IRS. He reached a plea agreement with prosecutors in January, pleading guilty in exchange for a sentence of 41 to 51 months in prison and reduced restitution. Judge David Nuffer sentenced him to the maximum 51 months from that agreement.

The IRS requires that business owners, officers, and directors be held responsible for unpaid taxes that were withheld (or supposed to be withheld) for the IRS, but not forwarded to them. These are trust fund taxes. The officers and directors are held responsible if they have the ability to control which debts are paid. These trust fund taxes include payroll taxes, sales tax, and certain employment taxes. On the civil side, the IRS can transfer any trust fund tax liability to any person that they feel is responsible for the unpaid debt.

Owners and officers aren’t just vulnerable to civil (monetary) liability. Like Mr. Whatley, they can be put in jail. To pursue criminal imprisonment, the IRS needs to show a willful failure to pay. In some cases, it has determined that “willful” only requires custody or responsibility of the funds. Charges of tax evasion or willful failure to account for the trust funds are felonies.

The lesson here is clear. Businesses can struggle and fail. They can even find shelter and a fresh start through bankruptcy, except for trust fund taxes. A business, its owners, and any employee with significant responsibilities cannot avoid liability for trust fund taxes. It may become a personal liability, and even a criminal one. Tax evasion and other criminal charges are a real danger any time trust fund taxes are not paid.

The IRS and Social Media

The IRS indicated as early as December of last year that it would begin in January to examine connections between social networking accounts for actionable tax violations. As this strategy gains wider recognition, new and challenging issues have begun to arise. It has said that it will only monitor accounts if a tax form raises a red flag, but it is unclear to what extent that monitoring will be. It remains untested how thoroughly it can examine social media accounts.

The technique follows the pattern set my social media marketing, through data mining and conducting widespread searches for certain keywords, often potentially taking advantage of “loopholes” in Facebook privacy settings. Because that is more the exception in the rule, the IRS is generally limited to publicly divulged information.

The precedent has been set for using social media to secure indictments in recent East Harlem gang activity, and until now, most concerns regarding the government’s surveillance of social media have been limited to the Department of Homeland Security and the FBI. However, the IRS has quietly followed their wake into the social media investigations.

For example, the IRS can use the geographical tagging that is connected to Facebook and Twitter posts and photos as evidence of an individual’s travels and examine their content to ascertain the primary purpose of those travels, thus determining the deductibility of those related expenses.

Also, it has indicated that that there is a higher likelihood that an individual with an overseas bank account is connected on social media to another individual with a foreign bank account. If an individual with an unreported account is discovered through the recently expanded disclosures by formerly private banks, then the IRS will likely examine those social media connections for others likely to have undisclosed foreign accounts.

Private government contractors have been working diligently towards the development of software to identify individuals that meet certain criteria (such as security threats, in the case of the Department of Homeland Security), which technology is closer to being appropriated by the IRS to perform similar tasks in pursuit of the more efficient collection of revenue.

These government agencies have said that they are in the process of developing guidelines for how to gather information from social media while still protecting privacy, but make no mistake that such monitoring is now fair game.

Tax Planning and IRS Issues

Tax planning is a very important part of running a successful business. We have many clients who come to us owing the Internal Revenue Service thousands of dollars. The simplest way to avoid any problems with the IRS is to file your taxes in a timely fashion and pay all the taxes owed. However, in this economy, it is not always that easy. If you do receive a notice from the IRS, there are a number of things that can be done if you do in fact owe the taxes. You can (a) file bankruptcy if you qualify; (b) file an Offer in Compromise; (c) set up a payment plan; or (d) settle.