Annual Accountancy Awards Banquet

On June 7^th Flagel, Huber, Flagel & Co. was proud to award two scholarships at the Annual Accountancy Awards Banquet held at the Holiday Inn across from Wright State University.  The well-deserved recipients were Kristin Harrington and Jacob Tehan.  We look forward to hearing about their success in the future.

Pictured from left to right is FHF Partner Randy Kramer, and Kristin Harrington.

(Jacob Tehan was unable to attend)

Tax Identity Theft Is a Growing Problem

Identity theft is a growing problem throughout the country and it is affecting the filing of tax returns in a major way. The Federal Trade Commission reports that it continues to be the number one consumer complaint reported to the agency year after year.

Identity theft can be a risk every time you swipe your credit card at a store or provide your Social Security number online. On the tax front, clever con artists masquerading as IRS representatives or agents may try to steal your vital information and use it for illegal means. Or an identity thief could file a fake tax return for you in order to obtain a refund.  

Criminals Mine Data from Social Media Sites to Prey on Grandparents
Have you heard of this recent scam? Criminals scour publicly available data on Facebook, Twitter and other social media sites. Then, they locate a vulnerable relative -- generally a grandparent -- and call them pretending to be a grandchild traveling abroad.

Here's a typical "grandparent scam" phone call using information gleaned from the Internet: "Hi Grandma, it's Tom. I'm in Mexico on break from (the name of the university he attends). I got into a car accident and need some money to pay for the damage (or emergency medical treatment). Can you wire me $2,000 right away? Please don't tell my parents because they'll just get upset."

In some cases, the scammers pretend the grandchild was arrested and is in jail. If money is wired, the grandparents may be contacted again, and told additional money is needed.

Meanwhile, the victims' grandchildren are actually safe at home or school.

To pull off these scams, criminals go through social media accounts, searching for information. On many accounts, scammers easily gather names, locations, schools attended, photos and other details that allow them to overcome skepticism when they call the grandparents.

According to the FBI, criminals often call "late at night or early in the morning when most people aren't thinking that clearly."

There are variations on the scam, the FBI reports, including:
1. Instead of the "grandchild" making the phone call, the criminal pretends to be an arresting police officer, a lawyer, a doctor at a hospital, or some other person. Sometimes, the phony grandchild talks first and then hands the phone over to an accomplice...to further spin the fake tale.

2. After perusing a soldier's social networking page, a con artist will contact the individual's grandparents, claiming that a problem came up during military leave that requires money to address.

If you receive such a call, here are some steps to take:
• Don't be pressured to act quickly.
• Ask questions that would be difficult to answer unless you were actually in the family.
• Ask to contact the individual directly. Call the parents or friends to see if the grandchild is really traveling.
• Don't send money unless you're certain it is your family member.
• If you've been scammed, contact law enforcement immediately.

Incidences of tax identity theft have increased significantly in the past couple years. The IRS's Incident Tracking Statistics Report shows that 641,052 taxpayers were affected by identity theft in 2011 compared with 270,518 in 2010.

Here are some typical tax identity theft scams:

• You receive an IRS notice or letter stating that more than one tax return for you was filed. A criminal may have used your identity to fraudulently file a tax return and claim a refund. Generally, identity thieves use a stolen Social Security number and try to file early in the tax season to collect a refund before the legitimate taxpayers file.

• You are informed by the IRS that you have a balance due, a refund offset or a collection action was taken against you for a year in which you did not file a tax return.

• IRS records indicate you received wages from an employer unknown to you.
To make matters worse, when two tax returns are filed with the same name and Social Security number, the real taxpayer's refund can be delayed for months while the IRS determines who is legitimate.
"The growth in these cases has overwhelmed IRS resources and burdened taxpayers," according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA).

Problems TIGTA found include:

• The IRS does not work to resolve identity theft cases quickly. It can take more than a year to resolve them.

• Communications between the IRS and ID theft victims are limited and confusing. Victims are asked multiple times to substantiate their identity.

• When a taxpayer calls the IRS to report that his or her electronic tax return was rejected because it appears another individual already filed a tax return using the same identity, the IRS instructs the individual to mail in a paper tax return with the Form 14039, Identity Theft Affidavit, and attach supporting identity documents. However, the IRS has been processing these mailed-in tax returns using standard processing procedures and does not prioritize them.

• Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections. The guidelines are inconsistent and conflicting.

• The IRS makes little use of the data from the identity theft cases to identify any trends that could be used to detect or prevent future refund fraud.

Despite the criticism from TIGTA, the IRS is aware of the tax identity theft trend. In the latest version of its "Dirty Dozen Tax Scams" for citizens to watch out for -- a list that the IRS has been producing for years -- identity theft is the number one item for 2012. Online "phishing" for personal information is number two.
In response to growing ID theft concerns, the IRS recently embarked on a comprehensive strategy for preventing, detecting and resolving identity theft cases as soon as possible. The tax agency has also stepped up its internal reviews to spot false tax returns before tax refunds are issued and vowed to continue to help victims of identity theft refund schemes.

Anyone who believes that his or her personal tax information has been stolen and is being used for illegal purposes has been advised to immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the IRS website at www.irs.gov/identitytheft. 

As part of its identity theft strategy, the IRS recently announced that it is initiating a new law enforcement assistance program. The undertaking is designed to aid local investigations and prosecutions of specific identity theft cases. Under a pilot program, the IRS will be working with law enforcement units to coordinate anti-theft efforts throughout Florida, the State with the highest per capita rate of reported identity theft complaints (followed by Georgia and California).

State and local law enforcement officials who have evidence of identity theft involving fraudulently filed federal tax returns will ask identity theft victims to complete a special IRS disclosure form. The form was created by the IRS solely for this purpose. The victims must give their permission for the IRS to provide law enforcement with tax returns using their Social Security numbers. The law enforcement officials will then contact those individuals to request and secure consent for disclosure of the records. In some cases, the IRS will provide assistance with locating taxpayers and soliciting their consent.

Law enforcement officials will forward the form to the Criminal Investigation Division of the IRS, along with a copy of the police report and the IRS Identity Theft Affidavit, if available. Identity theft victims should still submit the original copy of the affidavit in accordance with the instructions on the back of the form.

While the pilot program is in operation, the IRS will process the disclosure forms and send the information to the requesting law enforcement officer. These documents will not be sent directly to taxpayers. However, in a press release, the IRS stated it will continue to work directly with taxpayers to resolve their tax issues.

At the conclusion of the program, the IRS will assess the results before deciding on how to proceed. This is one of several IRS initiatives designed to thwart identity theft. It is also implementing new procedures for handling tax returns, new filters to detect fraud, new partnering agreements with stakeholders and a renewed commitment to investigate the criminals who perpetrate these crimes. If you want to read more details about IRS activities on this issue, consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on its website.

If you have concerns about your situation, contact your tax adviser.

Work out a Plan for Retirement Payouts

When you leave the workforce to retire, or if you switch jobs, you have to determine how to take distributions from your company retirement plan. The decision can have major tax implications.

Here are four basic options, as well as the exceptions that allow a taxpayer to take money from a qualified retirement plan before age 59 1/2 without having to pay the 10 percent early withdrawal penalty.

It takes a lot of years and hard work to arrive at retirement. Hopefully, you've been able to set aside enough funds in a company retirement plan to enable you to spend your golden years in relative comfort and security.

Let's say you have a 401(k) plan at work and you have deferred a portion of your salary each year to the account. Even better, your deferrals might have been "matched" by company contributions up to a stated percentage of compensation. Plus, you are entitled to receive all the earnings you've accumulated over the years.  

You still have some work ahead of you. Specifically, you must make some tough decisions concerning distributions of funds from the retirement plan. This is also true if you are switching jobs.

Let's take a brief look at the four main options:

1)  Know when to hold 'em.  When the retirement plan permits, you can simply leave the money where it is. In other words, although you're no longer an employee for the company, you continue to maintain the same account. Of course, you can't contribute to your account anymore, but the funds will continue to grow tax-deferred. This might be the route to take if you don't want to change your investments.    

On the downside, you may have some concerns about administering your account when you're no longer an employee at the company. In many cases, retirees and departing employees choose to pull out the funds.

2) Know when to fold 'em.  If you need the cash immediately, you can choose to receive a lump-sum distribution from the plan. But be aware that the tax price is steep: The entire distribution is taxed at ordinary income tax rates, which can be as 35 percent. And, if you're under age 59½, you generally are required to pay a 10 percent early withdrawal tax penalty on top of the regular income tax you owe. (There are several exceptions to the 10 percent penalty as described in the right-hand box.)
Years ago, lump-sum distributions were eligible for special "income averaging" provisions, but now relief is limited to certain individuals born before 1936. (These optional methods can be elected only once after 1986 for any eligible plan participant.)

3) Play "roll over" with the funds. The tax law permits you to roll over funds to a traditional IRA or another qualified plan on a tax-free basis as long as the rollover is completed within 60 days. (The IRS may waive the 60 day requirement in certain situations, such as a casualty, disaster, or other event beyond your reasonable control.)

Once you roll over the funds, they can continue to accumulate without current tax until withdrawals are required (generally, after reaching age 70 1/2). If you roll over to a Roth IRA, you'll have to pay the tax due for a conversion.

To avoid income tax withholding on the rollover, arrange a trustee-to-trustee transfer of the funds. This way, you never actually touch the money yourself.

4) Spread out the wealth.  If you don't need all the cash right away, but you want to begin withdrawals to pay for living expenses, you can arrange to receive periodic payments from your account. The distributions are taxed at ordinary income rates, but the tax liability is spread over the years that payments are received. Since you'll probably be in a lower tax bracket in retirement, your overall tax bill is likely to be reduced.

The distributions are generally based on your life expectancies or the joint life expectancies of you and a beneficiary.

What route should you take? It depends on your personal circumstances. The above rules are general in nature. There are many exceptions that may apply. Contact your trusted financial adviser and discuss the options.

No matter which route you take, federal law sets a mandatory date by which you must start receiving your retirement benefits, even if you want to wait longer. This mandatory start date generally is set to begin on April 1 following the calendar year in which you turn 70 1/2 or, if later, when you retire. However, your company plan may require you to begin receiving distributions even if you have not retired by age 70 1/2.

Exceptions to the Early Withdrawal Penalty   

The tax law imposes an additional 10 percent tax on certain distributions from retirement plans to discourage participants from using the money before retirement.

Early distributions are those received from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. The term "qualified retirement plan" includes a 401(k) or 403(b) plan, traditional IRA, and other plans.

 Note: If you take an early distribution from a SIMPLE IRA plan within the first 2 years of participation, the additional tax is 25 percent.

There are exceptions to this penalty. The following exceptions apply to distributions from any qualified retirement plan:
1)  Made to your beneficiary or estate after your death.

2)  Made because you are permanently disabled.

3)  Made as part of a series of substantially equal periodic payments over the life expectancy of the owner 

(or life expectancies of the owner and the beneficiary). If these are from a qualified plan other than an  IRA, you must separate from service with the employer before the payments begin.

4) That are equal to, or less than, your deductible medical expenses. In other words, the amount of your medical expenses that is more than 7.5 percent of your adjusted gross income.

5)  Made due to an IRS levy.

6)  Made to qualified reservists who were generally called to active duty after September 11, 2001 and before December 31, 2007.
   
The following exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1)  Made to you after separating from service with your employer, if the separation occurred in or after the year you reached age 55 (After August 17, 2006, does not apply to distributions from qualified governmental plans if you were a public safety employee who separated from service after you reached age 50),

2)  Made in a divorce under a qualified domestic relations order.

3)  Comprised of dividends from employee stock ownership plans.

   

The following exceptions apply only to distributions from IRAs:

1)  Equal to or less than your qualified higher education expenses.

2)  Made to pay for a first-time home purchase.

3)  Made to pay health insurance premiums if you're unemployed.



Answers to Questions about Dealing with the IRS

Navigating the IRS bureaucracy can be challenging for many taxpayers. The agency processes more than 141 million individual income tax returns annually and deals with a constantly changing Internal Revenue Code. There were approximately 4,430 changes to the tax code from 2001 through 2010 -- an average of more than one a day, including an estimated 579 changes in 2010 alone.

Here are 16 Q&As that explain some of the workings of the IRS:

1)  I am waiting for my refund. How long does it typically take? It depends on whether you filed electronically or mailed a paper tax return. Refunds from e-filing can be received in 10 to 21 days. If you filed a paper return, it can take longer.

You can check on the status of your refund by going to the "Where's My Refund" page on the IRS website. You'll need to provide your Social Security number, filing status and exact refund amount.

2)  What happens if a tax return is filed late? If you owe tax and don't file on time, the total late filing penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $135 or 100 percent of the tax owed. Even if you don't have the money to pay your tax bill, you should still file so you aren't hit with the late filing penalty.

3)  How can a taxpayer prove a return, IRS form or other document was filed on time? It depends on whether you file electronically or through snail mail. With a paper return, timely mailing is generally timely filing. That means the return, petition, or other document must generally be postmarked no later than the due date. Postmarked is the operative word here. In one case, a taxpayer used a private meter to put the postage on the envelope. The taxpayer sent the item by certified mail, but the envelope, the certified mail sticker, and the receipt held by the sender did not have a valid U.S. Postal Service postmark. It was not accepted as mailed on time.

(One exception to the postmark rule comes into play when filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, which must arrive at the IRS by the due date, rather than be postmarked on the date.)

Filing electronically? You might want to avoid going down to the wire since transmission problems and delays have occurred. The IRS or state tax agency will provide confirmation that the return has been accepted, usually with a confirmation number, date and time. Make sure you save that just in case there's a question in the future.

Keep in mind that there are still a number of forms, responses to IRS requests, and other documents that can't (or usually aren't) filed electronically. To prove timely filing, go to the post office, get a receipt and save it with your tax files.

4)  What happens if a tax return is filed with a balance due but payment is not made? In that case, the taxpayer would owe the late payment penalty (but not the late filing penalty). The late payment penalty is one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25 percent maximum penalty is reached. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. For individuals who file by the return due date, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement with the IRS is in effect.

5)  Aren't there ways to get out of paying the late filing and late payment penalties? The penalties for filing and paying late may be abated if you have reasonable cause and the failure was not due to willful neglect. If you're billed for penalty charges and feel you have reasonable cause, your explanation should be sent along with the bill to your IRS service center. Generally, interest charges are not abated. They continue to accrue until all assessed tax, penalties, and interest are paid in full.

There are possible exceptions to the general deadlines for filing a return and paying tax. One possible exception is if you are a member of the armed forces and are serving in a combat zone. Another is if you are a citizen or resident alien working abroad.

6)  What constitutes reasonable cause for filing a tax return late? It's not easy to convince the IRS or a court that you've got a reasonable cause for filing your tax return late. Your idea of a reasonable cause may not be accepted. For example, in one court case, a taxpayer argued that he was late filing for two years because his mother and daughter were ill and he often took them to the doctors. The court noted that during that period, he was active in his business as an architect and that he should have been able to file the returns on time.

7)  How long after I file a tax return can the IRS audit it? Generally, the IRS can include returns filed within the last three years in an audit. This is the statute of limitations, which limits the time allowed to assess additional tax and make refunds. The statute of limitations is generally three years after a return is due or was filed, whichever is later.

Additional years can be added if a substantial error or fraud is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six years.

When a return is "officially" filed can be an important question. For one thing, it starts the statute of limitations running. If a return isn't filed, there's no time limit on how long the IRS can wait to audit the return. If you fail to sign the return, it's not officially filed.

If the audit is not resolved and the statute of limitations date is nearing, you may be asked to extend the statute of limitations date. You do not have to agree. Consult with a tax adviser so you understand all the implications.

8)  What are some of the reasons the IRS audits tax returns? There are many "red flags" that might cause a tax return to be audited. For example, the IRS is on the lookout for taxpayers claiming large travel and entertainment deductions or home office deductions. The tax agency also searches for taxpayers who deduct losses while operating a business that auditors consider a hobby.

If you are self employed or report a large income, you are more likely to be audited. If the information on a tax return doesn't "match" with what employers, banks, brokers, etc. report, the IRS will generate a notice about the discrepancy.

Selecting a return for audit does not always suggest that an error has been made. Some returns are randomly selected or chosen based solely on a statistical formula. For example, IRS computers compare income and deductions on a return with what other taxpayers report. If an individual deducts a charitable contribution that is significantly higher than what others with similar incomes report are, the IRS may want to know why.
Returns can also be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were previously selected for audit.

9)  If I'm audited by the IRS, do I need a tax professional to assist me or can I handle it alone? There's no requirement that you must have a tax pro but getting expert tax and legal advice up front could result in significant savings. If the audit involves a business, the auditor will probably ask a number of questions before looking at your records. The purpose is to secure answers that can be used against you later. For example, let's say the auditor asks whether the business takes in any cash. You answer no. If the auditor later finds to the contrary, you could be in trouble. The IRS also knows that most taxpayers are off guard at the beginning of the audit. To protect yourself, have your CPA or attorney present to assist.

10)  I lost all my tax records in a fire. What if I'm audited? All may not be lost. You may be able to deduct certain unsubstantiated expenses if you can show that you did incur the expenses, that the expenses would be deductible if substantiated, and that there was a basis for estimating them. It's called the Cohan rule, after George M. Cohan.

For example, let's say you lose some of your rent bills for the year. You've got the bills for the first and last couple of months. The courts might allow the expenses for the missing months even without the bills since it's clear you had the rent expense and the amount can be estimated. But consider this a last resort. And you can't use it for travel and entertainment, auto and certain other expenses.

11)  I got a summons from the IRS for records in my possession. What should I do? If the IRS issues a summons for documents in your possession, you generally have little recourse but to turn over the requested items. That's true even if the confidentiality of customers or clients is involved.

In one case, the court rejected a taxpayer's arguments that its clients' privacy would be invaded if the requested information were turned over. The court noted that the Supreme Court has held that when the IRS is legitimately investigating a taxpayer, any incidental effect on the privacy rights of unnamed taxpayers is justified by the IRS's interest in enforcing the tax laws. The court also noted that when a person communicates information to a third party -- even on the understanding that the communication is confidential -- he or she cannot object if the third party conveys that information to law enforcement authorities.

12)  If there is a question on a tax form and I just ignore it, would I be protected from getting into trouble over the issue? When preparing a personal return or a business (corporation, partnership, etc.) return, there are a number of boxes that may have to be checked -- or left blank. Ignoring them could be costly. In some cases, checking a box may allow you to make an election that could save you taxes. In other cases, you're making a statement.

For example, if you use a vehicle in your business or use a personal vehicle for business, you have to check some boxes to make statements about the usage and whether or not records were kept. Sometimes, checking a box that you shouldn't have can subject you to negligence or even perjury penalties. For instance, this is true if you check the NO box on Schedule B in response to the " . . . did you have an interest in or signature or other authority over a financial account in a foreign country?" if you did have an interest in such an account.

13)  If a person doesn't pay taxes, what property can the IRS seize? The IRS has two powerful tools: liens and levies. A levy is a legal seizure of property to satisfy a tax debt. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If a taxpayer does not pay his or her taxes (or make arrangements to settle the debt):
• The IRS could seize and sell his or her property (such as a car, boat, or house), or
• The IRS could levy property that belongs to the taxpayer but is held by someone else (such as wages, retirement accounts, dividends, bank accounts, rental income, accounts receivables, the cash value of life insurance, or commissions).
The IRS generally levies only when the following three conditions have occurred:
• The IRS assessed the tax and sent the individual a "Notice and Demand for Payment."
• The individual neglected or refused to pay the tax.
• The IRS sent the individual a "Final Notice of Intent to Levy and Notice of Your Right to A Hearing" at least 30 days before the levy. This notice is usually sent to the last known address.

14)  My business received an IRS notice about garnishing an employee's wages. Can the employee take legal action against my company? It's not unusual for an employer to receive an order from the IRS requiring it to garnish an employee's wages and remit the amounts to the IRS. The employee might try to take action against the employer, often threatening to sue.

Fortunately, an IRS levy on wages is enforceable. Section 6332 of the Internal Revenue Code clearly insulates an employer (or other private defendant) from suit for complying with an IRS tax levy.

15)  What if a person claims he or she didn't receive an IRS notice about taxes due? All the IRS has to show is proof of mailing and that the correspondence was mailed to the individual's last known address. The IRS can show proof of mailing by producing its certified mail log or official record of mailing. In the absence of contrary evidence, the Court will accept the IRS logs.

16)  Suppose an individual doesn't have the money to pay the bill. He or she files anyway and makes an effort to work with the IRS. Can the person be sent to jail? The unequivocal answer is no.

What if the same person fails to file a tax return or ignores demands for taxes due? Can the federal government send the individual to prison? In these cases, the answer is yes, but it's still not likely.
Nevertheless, it has long been the practice of the IRS to make examples of high-profile figures who owe the federal government money, ignore the law, and are unrepentant. The nation's tax collectors hope that these public displays improve compliance for ordinary taxpayers. One example is actor Wesley Snipes, who was sent to jail in 2010. Throughout the proceedings with the IRS, Snipes used "tax protestor" arguments to defend his position, at one point claiming he was a "non-resident alien of the U.S."

If a taxpayer can't come up with the cash right now, he or she can request to use an installment agreement. The IRS will generally approve such an agreement if a person owes less than $50,000 and agrees to pay off the debt within six years. But he or she still must pay interest and runs the risk of late payment penalties if the tax obligations are not met in a timely fashion.

Alternatively, some delinquent taxpayers might convince the IRS to accept an "Offer in Compromise," where the tax agency agrees to settle a debt for less than the full amount owed. (Either way, a professional tax adviser can help with the paperwork.)

On its website, the IRS states that a "long-standing practice" is "not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation."

The tax agency adds: "The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated."

As you can see, dealing with the IRS can involve a labyrinth of rules, procedures, and complicated tax laws. The above Q&As only deal with some of the issues taxpayers face every day. For more information in your situation, consult with your tax adviser or attorney.