What to Know about Identity Theft and Your Tax Return

Identity theft and tax refunds are big business for fraudsters. To give you an idea of the scope of this problem, in 2015, from January through November, the  IRS rejected or suspended the processing of 4.8 million suspicious returns – the refunds claimed on those returns totaled around $2.9 billion! And that is just for 11 months of 2015. Add to that the fish that get through the net – the IRS cannot catch every fraudulent return and so the numbers are likely much higher. If you are one of victim of a fraudulent return scam, do you know what to do? How do you avoid becoming a target of such a scheme? This post attempts to answer those questions.

First, be proactive and educate yourself. You can read some of the helpful resources produced by the IRS and the Federal Trade Commission (FTC). Some of what the agencies put out is common sense, such as keeping current on anti-virus software, but there are still useful information to be found. You can find these resources here (for the IRS) and here (for the FDIC). Here is a list of some of the tips put out by both agencies:

  • Only share personal information through encrypted websites, those which have a https address.
  • Shred information which bears personal identification information, such as those with social security numbers and dates of birth.
  • Keep tax returns is a secure place.
  • Use a strong password and do not use it for all of your logins.
  • Be careful of attachments in emails.

Even if you do everything right that doesn’t mean you won’t find yourself a victim of identity theft – data breaches and unscrupulous employees may provide thieves with your information in spite of your best efforts. So be aware of the warning signs:

  • Your electronically filed return is rejected as being a duplicate return filed under your social security number.
  • The IRS sends you a letter asking you to verify your tax return information.
  • You receive wage or income information from an unknown employer or third-party.
  • You receive an unexpected refund from the IRS; the IRS notifies you that you owe money for a tax year which you have not filed or which you show no tax due; or you receive a debit card from a third-party which you did not request (fraudsters often convert their ill-gotten gains into debit cards).
  • Your credit report shows unexplained or unexpected debts.

If you do find yourself a victim of identity theft or suspect you are a victim, you should take these steps to mitigate or stop further damage:

  1. File a complaint with the FTC at identitytheft.gov.
  2. Place a fraud alert with one (or more) of the three major credit reporting agencies: www.Equifax.com (1-888-766-0008); www.Experian.com (1-888-397-3742; and www.TransUnion.com (1-800-680-7289).
  3. If the IRS sent you a notice regarding potential identity theft, respond to the number provided immediately.
  4. If a duplicate return has been filed then you should prepare and file the IRS Identity Theft Affidavit Form 14039.
  5. Contact the Social Security Administration (SSA) if you find discrepancies on your SSA account.
  6. File a report with your local police department and state Attorney General’s office.

Be aware that even if you are a victim of identity theft through the filing of a fraudulent return, you are required to still file your returns and pay your taxes even if that means you need to file a paper return. If you cannot get help and you’ve previously contacted the IRS, call 1-800-908-4490, the IRS has set up a hotline for taxpayers who are victims of identity theft.

I hope this post provides some helpful guidance on identity theft and the IRS, good luck and here’s to a happy identity theft free end to tax season!

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What to Know if the IRS Levies Your Assets.

If you owe money to the IRS, you face possible seizure of your assets such as wage garnishment or a bank levy. In some rare cases, the IRS can even foreclose on your home. This post is intended to give you some basic knowledge of what an IRS levy is and what you can do if your are the target of an IRS levy. To keep things simple, I will confine my discussion to wage garnishments and bank levies. Just be aware that the IRS can levy on almost every asset imaginable.

What is a levy?

A levy is simply a seizure of a taxpayer’s assets to pay a tax debt. It should not be confused with a tax lien, which is a claim placed on real estate or personal property. Liens are passive collection measures; the IRS will place the lien on your property and then wait for you to sell it, at which point the IRS will be paid. Levies, on the other hand, are an active collection measure; the IRS can take action immediately to seize property to satisfy your tax debt. Often levies are intended to be a wake-up call to delinquent taxpayers, the idea is to encourage the taxpayer to take immediate steps to address their tax liability. I can tell you from personal experience that a levy does indeed get a client’s attention.

Under what circumstances can the IRS levy my assets?

As I said earlier, the IRS uses tax levies to either get assets to pay any taxes due or to force the taxpayer to enter into some payment arrangement to address the delinquency. So in deciding whether or not to levy a taxpayer’s assets the IRS will consider the following circumstances:

  • The taxpayer’s financial condition, including whether the levy will create an economic hardship for the taxpayer
  • The taxpayer’s responsiveness to attempts at contact and collection
  • The taxpayer’s filing and paying compliance history
  • The taxpayer’s effort to pay the tax
  • Whether current taxes are being paid

As you can see, you are more likely to face a levy if you have not been reactive to prior attempts to settle your tax debt. Even more so if you are in the habit of not being compliant with filing your tax returns and paying any taxes due.

Once the IRS has identified a taxpayer who is fit for a levy, the IRS will take certain steps to encourage the taxpayer to get compliant and avoid the levy. First, the IRS will ensure that were sent CP 501, a Notice and Demand for Payment regarding you tax liability. Second, the IRS will confirm that you either failed or refused to pay the tax due. Finally, the IRS sent you CP 90, a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy.

TIP – Often taxpayer will tell me that they had no idea the IRS intended to levy their assets. It is a very rare circumstance that the IRS levies on a taxpayer without prior notice. So don’t ignore any IRS notices! Attempt to resolve your tax debts and make sure to do your taxes on time and pay any amounts due. This will significantly reduce the likelihood of a levy. You can see a sample notice here.

What happens after the IRS determines my assets should be levied?

After the IRS determines a levy is appropriate and it confirms that it has followed all the required steps, the IRS will send paperwork to your employer or bank informing them that there is a levy in place.

Where the IRS garnishes your wages, the IRS will take a portion of your wages each pay period until you make arrangements with the IRS, the taxes are paid in full or the levy is otherwise released. Your employer will receive information on how much should be withheld from your paycheck and forwarded to the IRS.

To properly determine the amount to withhold, your employer is required to provide you with a Statement of Exemptions and Filing Status to complete and return within three days. Failure to return the statement within the required time frame means the employer is required to withhold the maximum amount possible. You also need to be aware that if you are to receive a bonus then 100% of the bonus may be payable to the IRS! This depends on whether or not you were paid in the same pay period as the bonus payment.

In the case of a bank levy, your bank will receive a levy notice from the IRS, requiring it to hold the balance of your account for 21 days. The reason for the hold is to allow you, the taxpayer, time to make payment arrangements or contest the levy. After the 21 days have passed the bank will pay the funds seized, as of the date of the levy, to the IRS. Funds subsequently deposited into your account, after the date of the levy, are not seized and so you can use the funds as you did before the levy. For example, if you have $1,000 in your account on the date of the levy, with another $1,000 deposited the following day, then the bank will hold the first $1,000 for 20 days; the remaining $1,000 is free to use by you.

What can I do to have the levy released?

The IRS will release the levy under the following circumstances:

  • You pay what you owe
  • The time period for collection ends
  • You enter into a payment arrangement with the IRS
  • The levy creates an economic hardship
  • The value of the seized asset is sufficient to cover any tax due and releasing the levy will not hinder the collection of the tax due

Economic hardship requires some explanation. It does not mean you are inconvenienced by the levy or that you can’t pay all your bills. Instead, economic hardship means the IRS has determined the levy prevents you from meeting basic, reasonable living expenses. Emphasis on the IRS determination. You will need to provide proof that you qualify for economic hardship before the levy will be released.

The best way to have a levy released is to not allow the levy in the first instance. The notice of intent to levy provides appeal rights, which means you have an opportunity to work something out with the IRS or challenge the IRS’ determination to levy your assets. The key is to be proactive before the levy is filed.

Is there anything else I can do?

Yes, call a tax professional immediately. If you owe taxes and the IRS has filed a levy against your wages or bank account you are at risk of future levies. Quick action is demanded to obtain the return of your money or to stop any wage garnishments. You should not take a levy action lightly!

New Parent? Here are Five Tax Benefits Children Bring to Your Life…Besides Diapers and Sleepless Nights.


Children are a blessing and a curse (and not the least bit cheap!). It is nice to know that the Internal Revenue Code at least acknowledges your pain and provides some tax benefits to make raising a child more affordable. Now if only the IRS could make it easier to raise a child…

Here are five tax benefits that are available to newly minted parents:

  1. Exemptions. You are now + 1 on your tax return (maybe more?!) and so you are allowed an additional exemption on your tax return. For 2016, the exemption amount for a dependent is $4,050 per child. You qualify for the full amount no matter when the child is born during the year, even if it is 11:59 on the 31st of December.
  2. Child Tax Credit. As a parent you now qualify for a $1,000 refundable credit, so long as your child is under 17 by the year-end. If your income tax liability is less than the credit than you may be able to receive the excess of the credit over the as a refund – meaning additional money in your check.
  3. Child and Dependent Care Credit. If you have to leave your child at daycare or pay someone to watch your child to enable you to work (or look for work) than you may qualify for this credit. The key requirement is that your job (or search for a job) requires you to leave your child at daycare; if your spouse doesn’t work or you are placing your child in daycare merely for convenience than you will not qualify. For 2016, the credit may be up to $1,050 for one child or $2,100 for two or more children depending on your income. The credit is not refundable and if you cannot use it in the current year than it is lost.
  4. Adoption Credit. First, let me say that adopting a child is a wonderful thing but painfully expensive. To help parents who want to adopt, the Internal Revenue Code provides a credit for adoption related expenses, up to $13,460 for 2016. This credit is not refundable but if you cannot use the credit in the current year then you can carry it forward up to five years. The rules for this credit can be complicated so if you are considering adopting a child than you should seriously consider speaking with a tax professional to see if you qualify.
  5. Earned Income Tax Credit. For low-income parents the Earned Income Tax Credit or EITC provides additional money to families in need through the use of a refundable credit. Like the child tax credit, if the EITC exceeds your tax liability then you will receive the excess in the form of a refund. The credit amount depends on how many qualifying children you have. The IRS provides a EITC Assistant to help you determine your eligibility, you can click here to open the link. I have listed the refund limits for 2016 here: $6,269 with three or more qualifying children; $5,572 with two qualifying children; $3,373 with one qualifying child; and $506 with no qualifying children.

Children may be taxing but at least you have the consolation of knowing that the little bundles of joy can save you some taxes. This list is not exhaustive of all the various tax benefits out there for children so if you have any questions about how your child impacts your tax situation, please give my office a call. Best of luck to you and yours and happy parenting!

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Tax Tips for Year-End Charitable Giving

Give and you shall receive, as the saying goes. If you are considering a year-end gift of money or property to a worthy charity, here are some tips on maximizing your charitable tax deduction:

  1. Keep good records! Regardless of the amount of money given, meaning from dollar $1 up, the taxpayer must maintain a record of the donation made at or near the time of the donation. You can meet this requirement with a bank statement, a cancelled check, a credit card statement or a statement from the charity. Regardless of the form of the record, such record needs to show the name of the charity, the date of the donation, and the amount of the donation.
  2. If you make a single donation, of money or property, and it is worth more than $250 then you must get a written acknowledgement from the charity to deduct this donation. The written acknowledgement needs to contain the name of organization; the amount of cash contribution, if applicable; a description of any non-cash contributions, if applicable; a statement that no quid pro quo goods or services were provided in return for the contribution or, if goods or services were provided, a description and good faith estimate of the value of goods or services provided to the donor.
  3. If you make a gift using a credit card before midnight on the 31st than it is deductible in 2016 even if you do not pay your credit card until 2017. Similarly, if you properly mail a check on the 31st than it will also count as deductible in 2016 even if the check clears in 2017.
  4. If you are 70 ½ or older and you hold an IRA account, you may be required to take what are called required minimum distributions from a traditional IRA account. You can make a donation, up to $100,000, directly from your IRA to an eligible charity tax free. While you will not get a tax deduction for the contribution, the distribution is not taxable to you and qualifies as a required minimum distribution.
  5. If you are going to make a gift of household goods or clothing than such items must be in good used or better condition to be deductible. Damaged or stained goods and clothing will not be acceptable and hence deductible. Household goods includes such things as furniture, furnishings, electronics, appliances and linens. Items worth over $500 do not have to meet this “good used or better condition” if a qualified appraisal is done.
  6. If you are making a gift of property with substantial worth than you may need to have an appraisal to provide a proper value to use for your charitable donation. There are some complicated rules in this area so I won’t go into detail but if you intend to donate artwork, antiques or collectibles than you may need to meet other requirements to get full advantage of your deduction.

I hope you and yours have a wonderful New Year’s Eve and best of wishes in 2017!

Gifts Can Be Taxing: Tax Consequences of Making a Gift

Gifts are a part of everyday life. Birthdays, holidays and special occasions. Who doesn’t love getting gifts! This includes Uncle Sam. You may not be aware of this but when you make a gift you are engaging in a taxable transaction. This gift tax is an excise tax assessed on individuals who make a gift and it is based on the fair market value of the property transferred. Now just because you make a gift and it is taxable does not mean you will owe anything to Uncle Sam. I intend to give you the broad strokes of how the gift tax works so you know before you make a gift the potential tax consequences of your actions.

First things first. What is a gift? A gift is a transfer of property or an interest in property for less than fair market value. Simple enough. The gift tax applies to lifetime gifts, whereas the estate tax only applies to gifts made after death. While I am only discussing the gift tax today, it is important to point out that both types of gifts share what is called an applicable exclusion amount. The idea is that even though a gift may be subject to tax, the tax should only be paid if the total gifts, during life and post-mortem, exceed the exclusion amount, currently $5.45 million in 2016. If the total gifts exceed the applicable exclusion amount then it will be subject to tax. Right now the tax rates range from 18% to 40%, with the 40% bracket starting when taxable gifts made during life equal to or exceed $1 million dollars.

Before you start worrying that every gift you make is a hidden tax trap, not all gifts are treated as taxable gifts. For example, gifts to political organizations, gifts made directly to an education institution for tuition, gifts made to medical institutions on behalf of another and gifts that qualify for the annual exclusion are excluded from the IRS definition of gift and there is no requirement to report such gifts. Similarly, gifts to charity and gifts to spouses are allowed a deduction equal to the fair market value of the transfer (though there are some small exceptions) so while they are treated as taxable, in essence these gifts will not reduce the applicable exclusion amount.

Let me focus in a bit on the annual exclusion (this is different than the applicable exclusion) because it comes up quite frequently. When an individual makes a gift of a present interest, the gift will be treated as non-taxable up to the annual exclusion amount, currently $14,000 per recipient. Theoretically, this means an individual can gift an unlimited number of people $14,000 and he or she would never use a penny of their applicable exclusion. Now the rub here is that the gift must be of a present interest, which means the recipient has the right to use, possess and enjoy the property or income generated by the property without restriction (think gifts of cash or tangible property like a car or home).

Closely related to the annual exclusion is gift splitting. Married individuals can double up the annual exclusion by agreeing to treat a gift as being made by both individuals. So let’s use an example. Joan and her husband Earl are well off but Earl wasn’t as thrifty as Joan and as such most of the wealth is owned by her personally. Their son David has just graduated from school and they would like to give him a gift of some stocks Joan has bought over the years (worth $20,000). Now if the gift-splitting rules did not apply, if Joan makes a gift of the stock, her gift would be treated as part taxable and part non-taxable. The first $14,000 of the gift would be covered by the annual exclusion, leaving $6,000 to be treated as a taxable gift. Now if Earl consents to gift-splitting, the gift can be treated as if made equally by both parents (even though Joan owns 100% of the stock) which means that none of the gift will be taxable because the combined annual exclusion amount of $28,000 exceeds the fair market value of the stock. Used wisely, gift-splitting can be a very powerful tool in estate planning. Imagine if Joan and Earl want to move assets to their son over time; over the course of five years, the couple can gift David $140,000 worth of assets without incurring any gift tax consequences.

One of the big caveats of making a gift is that individuals need to consider the potential future income tax consequences of making a gift. The recipient receives the same basis in the gift as it had in the hands of the gift giver. So returning to our earlier example, if Janet gives her son, David, stock worth $20,000, which she purchased 15 years ago for $5,000, then if David later sells the stock his gain will be calculated using a basis of $5,000. Now if Janet had died, David’s basis would be $20,000 rather than $5,000 because assets received from an estate get a step up in basis. So with highly appreciated assets there may be a good reason to keep the asset in the estate rather than gifting it during life but that really depends on an individual’s circumstances.

So in summary, a gift tax is assessed on the fair market value of taxable gifts made during a person’s life. No tax will be due unless the taxable gifts, in total, exceed the applicable exclusion amount, currently $5.45 million. Not all gifts are taxable and so you need to check if certain exclusions apply, such as gifts that qualify for the annual exclusion. You also need to see if the gift qualifies for a deduction such as gifts to charity or to a spouse. Finally, remember that the applicable exclusion amount is shared with the estate tax and so taxable gifts will reduce the applicable exclusion amount available to the individual’s estate when he or she passes.

Whether or not planned gifting can benefit your estate depends on your particular circumstances, so if you have questions you should speak with an estate planning attorney or tax planner.

Portability in Estate Planning

Portability is a rather new concept in the world of estate planning, specifically regarding the Federal estate transfer tax. Before explaining what portability is and how it fits into your estate plan, let me explain a few things about the Federal estate and gift transfer tax system. A tax may be assessed on the transfer of property either by gift or by testamentary transfer. The tax is calculated on the value of the transfer, either on the date a gift is made or on the date of death. A tax is due and payable only when the combined value of the gifts and testamentary transfers exceed what is called the applicable exclusion amount. In 2016, the applicable exclusion amount for an individual is $5.45 million. The only wrinkle with the applicable exclusion is that it is personal to the individual taxpayer. Before 2012, this could present a problem where you have a married couple where one spouse holds most if not all of the assets – if the poorer spouse died first the richer spouse lost the ability to use the deceased spouse’s unused applicable exclusion when he or she passed. Enter portability.

Portability allows a surviving spouse to preserve any unused portion of a deceased spouse’s applicable exclusion for estate and gift transfer tax purposes (called the deceased spousal unused exclusion or DSUE by the Code). Individually, a taxpayer’s taxable estate must exceed the applicable exclusion amount of $5.45 million to be taxable. With portability, a married couple can shield a combined taxable estate exceeding $10.9 million for the estate or gift transfer tax purposes. For most people, their estate will not get within a mile of exceeding $5.45 million but even so portability still has legs. Consider the following example.

Let’s say a couple has an estate valued at less than the exclusion amount – we will use $4 million – with most of the assets held by the husband. The wife unfortunately passes away before the husband, leaving him holding a $4 million dollar estate. If he lives long enough, his estate might substantially increase in value, he may win the lottery or secure a large court judgment potentially pushing his estate over the $5.45 million threshold. Without portability, he would only have his individual $5.45 million with which to shield his estate from tax. With portability, however, he can combine his applicable exclusion amount with his wife’s unused exclusion amount to potentially shield up to $10.9 million from the estate transfer tax. Portability is only one of many tools to reduce an individual’s potential estate transfer tax liability but but it is comforting to know that portability is available to provide wiggle room.

Portability is not automatic, however. The deceased’s personal representative must timely file a complete and accurate Form 706, which is due 9 months after the date of death (though an extension to file may be requested), and make an irrevocable election regarding portability. Once that’s done, whenever the surviving spouse makes a gift or testamentary transfer, the deceased spouse’s unused exclusion will be used up first before dipping into the surviving spouse’s applicable exclusion amount.
Care must be taken in situations where the surviving spouse remarries. The unused exclusion amount that can be tapped into is for the last deceased spouse, per the IRS regulations. This means that if the surviving spouse remarries and the second spouse dies then any remaining unused applicable exclusion amount from the first spouse is lost. Thereafter, the surviving spouse can only tap into any unused applicable exclusion amount from the second to die spouse, if any (assuming a proper election is made by the personal representative).

This is a simple explanation regarding portability and there is a lot more that can be said on the subject. If you think portability may apply to your situation, please speak with your tax adviser to ensure you qualify.

When is a Tax Return not a Tax Return?

In Re Giacchi, on appeal to the District Court E.D. of Pennsylvania

Good question. The answer can mean a great deal to a debtor trying to discharge a stale tax debt. Mr. Giacchi, hailing from Pennsylvania, sought out bankruptcy protection to try and discharge several years of unpaid tax returns, specifically 2000, 2001 and 2002. For reasons not explained, Giacchi did not file tax returns for those three years. It was only after the IRS examined those years and assessed taxes that Giacchi filed tax returns to report what he argued was the correct amount due. These returns were often filed several years after the original due date of the return; for example, Giacchi’s 2000 tax return was not filed until November 29, 2004 – more than three years after the original due date of April 15, 2001. Even though the returns were not filed on time, in each case, the IRS accepted Giacchi’s returns and adjusted the amount of taxes due to match the tax returns. In spite of this, Giacchi was still unable or unwilling to pay the amount due and in 2010, and again in 2012, he filed for bankruptcy protection.

While in bankruptcy, Giacchi attempted to get out from under his tax liabilities. He argued that while he did not file his return on time, each time he was notified that the IRS assessed a tax against him, he immediately filed a tax return; in fact, the IRS did not contest the returns as filed and adjusted his tax liability to match the returns. The problem for Giacchi, however, was that while he had prepared the correct tax form, with the necessary information to calculate his tax liability, mailed to the correct address and signed under penalty of perjury, what he filed was not, legally speaking, a tax return for bankruptcy purposes.

As a threshold matter, for a tax liability to be dischargeable, the debtor must file a tax return. Seems simple enough. Under the Bankruptcy Code, to meet the definition of a “tax return” a document must:

  • purport to be a tax return;
  • be signed by the taxpayer under penalty of perjury;
  • contain sufficient information to allow the IRS to determine if the proper amount of tax was calculated; and
  • represent an “honest and reasonable” attempt to satisfy the requirements of the tax code.

It is this last requirement that caused Giacchi’s ship to founder. A late filed return, filed post-assessment, is treated as being untimely by the courts; by not filing a return in a timely manner, Giacchi did not show that he was making an “honest and reasonable” attempt to satisfy the tax code, which meant that his tax debts were nondischargeable. The court did leave open the possibility that a debtor who has a good reason to file a late return, filed after an IRS assessment, might still receive a discharge of those taxes. Giacchi, however, failed to provide any excuse for the late filing, beyond stating that by filing his tax returns he reduced his tax liability, which the court rejected as not being a legitimate tax purpose. If, the court noted, the debtor only had to show that the IRS did not correctly calculate his or her tax liability then ” ‘the availability of a discharge would turn on the IRS’s accuracy in assessing taxes, rather than on [the debtor’s] sincerity and diligence in complying with the tax code.’ ”

So the question of whether a tax return is indeed a tax return can make a big difference for a debtor seeking to discharge an old tax debt. While the court did not address whether or not a merely filing a return late, without an IRS assessment, is dischargeable or not, it is clear that waiting to file a return until after the IRS comes a knockin’ can be detrimental to your financial health.