The IRS has changed dramatically over the last few years. The system (I like to call it the terminator) that was set up years ago, extrapolates information and spits out a bill if the information that was sent to the terminator does not match your return.
At least half the time, the bill is wrong, but it’s up to you, the taxpayer, to prove your innocence. If you are filing your own taxes, here are a few things you need to know.
The IRS dished out $5 billion dollars of fraudulent refunds last year alone. With the information age that we are living in, it’s just too easy for someone to get their hands on your W2 information and file a joint return with you as the spouse.
Once this has happened, you have to show and prove who you are, and in many cases, wait up to one full year to get your refund that was given to someone else. The IRS is changing some of the filing requirements for businesses related to W2’s which might mitigate this problem.
For many years, there has been a huge problem of divorced taxpayers claiming kids that they don’t qualify to claim based on the divorce decree. This has become such a problem that the IRS is penalizing taxpayers, because a lot of time and resources have to go into properly getting the refund to the main custodial parent and take it back from the other non custodial parent.
If it’s not in your divorce decree, then just don’t do it.
1099’s and credit cards.
The IRS knows a lot more than they used to. For starters, there are a lot more requirements of businesses to send 1099 information to the IRS.
Paypal, all credit cards and other processers of payments, are now required to send those totals to the IRS. To be more clear, if you are doing business with XYZ Customer, and they paid you with a credit card, then those payments will show up on a 1099K that you get from Visa (or whatever card they paid you with).
The concern here is that in the past XYZ customer would have 1099’d you, but now they do not have to. If your customer is not familiar with the law and sends 1099 info to the IRS, then the IRS will think you made that dollar amount twice, and the result would be a bill from them for money that you did not claim.
1099’s for Individuals with Corporations.
Another example of this that I see a lot, is that people that are incorporated, particularly small businesses that recently incorporated or set up an LLC, get 1099’s from their customers made out to them personally with their social security number. The taxpayer filed the income properly through their corporation, but the IRS thinks they made money personally in addition to that, so they send you a bill for the full amount of income, because they think that you did not include it.
Remember, it’s a computer, not a person analyzing the data. They can’t see the correlation between what you filed on your corporate return and what is showing up under your social security number.
They computer simply spits out a bill. If you have a small corporation, make sure that all your customers know your Federal ID number and that they do not send 1099’s to you personally.
Line items on the tax return.
Even if you have all the numbers to put on your tax return, if you do not put them on the correct line item, the terminator will not recognize it and you will get a bill. This commonly happens when you are filing an IRA. IRA and pensions do not go on the same line.
Another example is when you have K-1’s from a passive investment. The line item for a passive investment is not only different than an active one, but it “pulls” to a whole slew of other forms that combine certain activities on your tax return.
If you have real estate or K-1’s from gas and oil or another type of passive investment, then I highly recommend using a qualified CPA.
Remember, Obamacare has kicked in. If you do not have insurance, then you will pay a separate tax of 1% of your income. Those in a higher bracket could pay thousands of dollars in taxes.
This is in addition to the 3.8% Obamacare tax that kicked in last year for those making over $250,000. For a list of exemptions, I recommend http://www.healthinsurance.org/obamacare/obamacare-penalty-calculator/.
Please like and share this information if it helped you, and subscribe to my websiteTheMoneyTherapist.com for more solutions on saving money, building your business, and eliminating stress.