Reuters Money

Friday is D-Day to voluntarily tell the IRS about your offshore assets

If your financial life spans multiple countries and you’ve not been paying close attention to your tax issues, be forewarned: This Friday is the deadline for the Internal Revenue Service’s latest offshore tax reporting voluntary disclosure program.

It’s one of those deadlines that most people pay little attention to, despite how much it’s been publicized. It’s the second in a series of IRS efforts — some 15,000 came forward for the previous initiative in 2009 — to bring offshore assets and income into the tax system through a voluntary disclosure program that let taxpayers avoid an array of civil and even criminal penalties (including potential jail time) for foreign income and account violations. Taxpayers who choose the program still face penalties, which may be hefty, but they are far less severe than those the IRS can impose if it uncovers your tax transgressions.

While you may think that this effort affects mainly uber-wealthy taxpayers with numbered accounts in Switzerland, the rules apply to a far broader, and more eclectic, group of people. Among those who could be affected are dual residents who haven’t filed returns, U.S. citizens (including retirees) who have been living abroad for decades, and immigrants in this country (whether citizens or not) who have maintained financial lives back home. “Some folks might not even realize they have a filing requirement,” says Jim Medeiros, a tax partner in PricewaterhouseCoopers private company services practice. “There are a lot of unintentional violators.”

Some taxpayers will find that complying with the program and paying the penalties aren’t too onerous given the risk it removes. But others may end up with huge unintended tax bills simply because they didn’t know the rules. The voluntary program’s penalty for failing to report foreign accounts on the FBAR, or foreign bank account reporting form is generally 25 percent of the highest aggregate balance in the account between 2003 and 2010. That’s a number that could be well over one-quarter of the current account’s value if its holdings were stocks valued at the peak, and it’s possible that the penalties due could exceed the amount of money now in the account. The FBAR filing is required for any U.S. person with at least $10,000 in a foreign financial account.

As immigrant communities learned of the rules, some were up in arms. A coalition of Indian American groups, for example, sent a letter of protest over the summer to Administration officials, arguing that the 25 percent penalty on law-abiding citizens was “immoral and unfair.”

The risks of not taking advantage of the program, however, are quite high. Should the IRS catch your non-disclosure, the penalties are severe, and could include criminal prosecution — and you don’t want to be the one the IRS makes an example of for not reporting. “You cannot claim ignorance,” Medeiros says.

The deadline for the program, officially called the 2011 Offshore Voluntary Disclosure Initiative, and begun in February, was extended because of Hurricane Irene, until today, Friday, September 9th. For those who are out of time, but still want to take advantage of voluntary disclosure, it is possible to apply for a 90-day extension.

IRS sees staggering jump in identity theft cases

Identity theft fraud caught by the IRS has skyrocketed since 2008, the Government Accountability Office said in a report released this week.

n 2010, the GAO said the IRS found 245,000 cases of identity fraud — cases in which Social Security numbers of others were used to either falsely try to collect a refund or to get work and avoid taxes. That is up from fewer than 52,000 cases in 2008.

A particularly scary part of the crime is that the victims have no way to protect themselves.

“The incidence of tax-related identity fraud is indeed staggering,” said Paul Stephens, director of policy and advocacy for Privacy Rights Clearinghouse. “The number of reported cases significantly undercounts the actual numbers because there tends to be a significant delay in detecting most cases of tax-related identity fraud.”

He said the government is somewhat hamstrung from doing more to protect the victims.

“Unfortunately, various laws constrain the IRS from taking more aggressive action to curtail this abuse,” Stephens said. “For consumers, tax-related identity theft can be extremely difficult to resolve, despite the fact that IRS has set up a special unit to assist taxpayers with this problem. Other than trying to protect their Social Security numbers from unnecessary disclosure, there is little that consumers can do to protect themselves from this type of identity theft. ”

According to the GAO, privacy laws sharply limit information that is shared with victims and even with criminal investigators.

Do higher taxes encourage tax avoidance?

Nothing riles Americans quite like taxes: who pays what, whether the government needs to raise them or might slash them, and how much they’re eating away at our paychecks.

And when it comes to tax avoidance — the legal means of minimizing one’s tax burden, not to be confused with its illegal cousin, tax evasion — a growing chorus of critics say high tax rates are to blame, and an overly complex tax code isn’t helping. The emerging point of view: The higher tax rates get, the more people will try to figure out ways to stop paying them.

As evidence of that, analysts point to the relatively steady chunk of gross domestic product that can be attributed to tax revenues, even as nominal rates rise and fall. From 1950 until 2010, all federal taxes hovered between 15 percent and 20 percent of GDP, though top income tax rates varied wildly (from 28 percent to 91 percent) during that period. And that suggests a greater reliance on loopholes when rates are higher, experts say.

“When tax rates are that high, nobody is going to pay,” says Alan Dlugash, an accountant at Marks Paneth & Shron LLP in New York. “You’re going to find a way to get out of it,” he says. In fact, he says his high-end clients in New York are holding onto stocks and avoiding selling their business for fear of being bulldozed by a giant capital gains tax bill.

Big business appears to be following suit. The New York Times reported in May that loopholes in the tax code have meant U.S. multinationals are paying far less than the corporate tax rate (one of the highest in the world), leading one expert to conclude that U.S. businesses were “world leaders in tax avoidance.”

The Internal Revenue Service doesn’t have specific figures on the revenue lost each year to tax avoidance, but nearly a decade ago it reported a tax-gap of $345 billion, the vast majority of which was lost to under-reporting. That figure hasn’t been updated since 2001, though the IRS says plans are underway to release more current stats.

Tax critics, meanwhile, are busily trying to prove the harmful effects of high tax rates. For example, raising $1 trillion in tax revenue costs the economy and taxpayers an additional $110 to $150 billion, according to a 2009 report by Robert Carroll, a fellow at the conservative-leaning Tax Foundation. And a 2008 IMF paper argues that lowering the tax rate would effectively increase tax compliance and raise revenues.

Dear IRS: Where is my tax refund?

Whoo hoo! A refund. Speaking personally, this is the first time in about 10 years that I’ve qualified for a refund. I think it’s because I took this full-time job at Reuters and signed up to have big bucks deducted from my paycheck. And it’s because 2010 tax breaks passed retroactively actually lowered my total tax bill (and those of many others).

This year, the average tax refund is pushing $3,000, according to the Internal Revenue Service. Many financial advisers believe that it is a big mistake to get a big refund. Getting a big refund means you’ve loaned the IRS money all year long without earning a penny in interest. “My gripe with large tax refunds… is two-fold,” Eleanor Blayney, the consumer advocate for the CFP Board of Standards, said in a recent press statement. “First, they make mincemeat of any attempt to manage your cash flow. Second, they often go unplanned.”  She advocates budgeting your taxes as closely as you possibly can to the amount you’ll actually owe when the year ends, and integrating the extra cash you’re not sending the IRS into a reasonable spending and saving budget.

That makes sense, but realistically, with interest rates at their current low levels, it doesn’t matter that much. For example, the average bank money market account is paying 0.63 percent interest a year, according to Bankrate.com. So, even you had the whole $3,000 at the beginning of the year (which you don’t, you’re having it withheld week by week from your paycheck), you would earn only $18.90 a year in interest. If sending extra to the IRS helps you to acquire a solid chunk of change in a way that’s relatively painless, go for it.

The bigger challenge is putting that $3,000 to good use now. If you blow it all on spring shoes and sidewalk cafes, you’ll be sorry. Here are some tips.

* First, find it. The IRS allows you to track your refund online, so you’ll know exactly when it is coming. Of course, if you authorized the IRS to dump it directly into your checking account, and you filed electronically, you should get it in a jiffy. Last year, TurboTax customers who fit that profile saw their money in between eight and 15 days, the company said. Paper filers who insisted on a check had to wait as long as six weeks.

* Attack those credit cards. Roughly one in five Americans expect to spend their refund paying down credit card debt, says Experian, a credit reporting company. That’s good. Because at the average credit card interest rate of 14.43 percent (also from Bankrate.com), that $3,000 will save you $432 in interest in a year. That’s a significant amount of money. If you still owe money on your credit cards and you’re getting a big refund, consider cutting the amount of money you have withheld for taxes, and using the difference for an automatic payment on your credit cards. You won’t notice the difference in your take-home pay, and you’ll be saving 14.4 percent interest on every dollar you pay off. That is better than a refund later.

* Buy more tax savings with it. If you have no credit card debt, you have more options. You can use that refund to invest in an individual retirement account or 529 college savings plan. Either will produce tax savings in the future. Use it to pay for continuing education, and it may well be deductible. Give some of it to charity and there’s another deduction. Of course, deductions are only worth a fraction of the actual cash spent, but the higher your tax rate, the bigger that fraction is. And you get the benefit and the satisfaction of learning something or helping someone.

Taxes: How to file an extension

If you are one of those chronic procrastinators who has yet to close out the 2011 tax season, don’t waste time reading all of this. Just file an extension asap. If you think you’ll owe money, send a check along with it.

And what if you’re reading this after the April 18 deadline has passed? Go directly to your post office and mail an extension form right now. It couldn’t hurt.

That’s because (1) filing the extension on time will protect you from the burdensome “failure to file” penalties the Internal Revenue Service heaps on scofflaws. And (2), the IRS uses machines to open all of the mailed forms, and I’m just guessing that those machines don’t actually read the postmarks on the forms. So while an IRS spokeswoman would not confirm or deny my assumption, only emphasizing that you are required to file by April 18 at midnight, I think there’s a good chance that if your form arrived in the middle of this week’s giant pile of envelopes, nobody would notice that you slipped it into the mail slot on Tuesday instead of Monday.

Filing that extension gives you time and saves you money. You’ll have until October 17 to file your return. Perhaps more importantly, there are severe penalties for not filing your taxes on time. Late filing penalties run five percent of unpaid taxes for each month or partial month that your return (or extension form) is late. If your forms are more than 60 days late, your penalty is the lesser of $135 or 100 percent of your unpaid tax. (And that penalty doesn’t satisfy your tax bill, it’s on top of it.)

That’s far worse than the penalties you’ll face for simply not paying your taxes on time. If you don’t pay all that you owe by this year’s deadline — regardless of whether you’ve filed a tax form or an extension request — you’ll owe a failure-to-pay penalty of one-half of one percent on unpaid taxes for each month or part of a month after the due date that the taxes are not paid tax.

So get those forms in. And if, even after reading this, you still can’t do it, try to find a good reason. The IRS is going out of its way to work with taxpayers this year. It put out a statement on April 14 saying, “You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.”

Tax problems? The art of negotiating with the IRS

Whether it’s the NFL player who forgot to mail in his tax return or the person who exercised his stock options and triggered a huge tax bill, negotiator Jim Camp has seen a lot of people get into sticky situations with the Internal Revenue Service.

With 25 years of experience, Camp sat down with Prism Money to offer advice on how to successfully negotiate with the taxman.

Is it well-known that the IRS is willing to negotiate with people?

The IRS is more than willing to negotiate. I don’t think a lot of people realize that or understand that. The IRS can stop penalties and interest. They’ll reduce the bill. A lot of tax cases get settled for a lot less than what the IRS demands. You can have a successful conclusion.

(Reuters spoke to IRS spokesman Anthony Burke, who says the IRS offers several programs for those struggling to pay the tax bill: They can apply for an Offer in Compromise (OIC) to settle upon a reduced bill, or apply for a payment plan to pay the tax bill in installments.)

What should one do before negotiating with the IRS?

My first tip is that the worst person to negotiate for yourself is yourself. Negotiation is a terribly emotional arena. There are tax attorneys who do it (negotiate on your behalf) and tax services who can do it. I recommend they go to a tax specialist. I would recommend everyone pursue those services and find out what the cost is before they wade into negotiations with the IRS. It’s always better to have someone represent you.

Six ways to cut your tax bill now

Tax deadline day, April 18, is quickly approaching.

Before you file, make sure you’re grabbing all of the deductions due to you. Robert Spielman, a certified public accountant and partner in the tax and business services practice at Marcum LLP, sat down with Prism Money and shared several ways to navigate the muddy waters of tax season. Here is his advice.

What are the best ways to reduce taxable income?

Use all the credits you can. This one is a no-brainer. There are a million credits for individuals and not everyone knows about them.  There’s the new home buyer credit and the energy credit for installing new windows, energy efficient appliances, solar energy or anything like that. There’s one set of college credits.

What advice do you have for Roth conversions?

In 2010, you convert your otherwise taxable IRA account into a Roth IRA account and pay all the tax equally in 2011 and 2012. If  you want to change your mind, you have to do that before October 17, 2011. If, for whatever reason, you don’t want to take money from the Roth and you don’t want to pay the tax, you could convert the account back into a regular IRA account. That’s not to diminish the great idea of doing a Roth conversion, but one of the reasons that you might convert back is the account went down in value and you want to do it again in 2012.

10 mistakes to avoid at tax time

It’s the simplest things that can trip you up at tax time, like not getting money into your account or forgetting to sign your return. But this year, with so many tax changes, there are even more minefields.

If you were thinking you’d do your tax return the old-fashioned way, by hand, just stop now. Get an accountant or a tax-software program. Without software — which, yes, even accountants use — you’ll be unlikely to get through your return without errors.

Think it can’t happen? Trust me, it can. And, at some point, it likely will.

Here’s our list of 10 funny — and not-so-funny — errors to avoid on your return:

You forget to sign and date your return. Yes, it happens every year, but hopefully not to you. As the Internal Revenue Service warns: “An unsigned tax return is like an unsigned check — it is invalid.” If you’re filing jointly, both you and your spouse must sign.

There’s a typo in your Social Security number. The IRS matches your return with all the W-2s, 1099s and other bits of paper filed by others based on the Social Security numbers entered on them. If you entered yours — or one of your kids’ — incorrectly, expect to go straight to tax hell. “That is one of the biggest mistakes that people make,” says Bob Meighan, a CPA and TurboTax vice president.

You fail basic math. If you weren’t convinced about getting software, check your math again. The longer and more complicated your return gets (passive activity loss rules, anyone?), the more chance there is for a math error.

IRS commissioner: My taxes are done. Where are yours?

A threatened government shutdown won’t stop Internal Revenue Service commissioner Douglas Shulman from filing his own taxes on time; they’re already done. “I make sure it gets done on time,” he told Reuters. “I just have to look it over.” He said that taxpayers should follow that example and not expect to get any extra filing time if there is a temporary federal work stoppage.

“The IRS will be accepting tax returns,” he told the National Press Club in a luncheon speech on April 6. “The American people should file their taxes and they are required to file by April 18.”

Taxpayers who file electronically won’t face any delay in getting their refunds if a budget stalemate does force a government shutdown, because they are processed automatically, he said. But anyone who files a paper return may find their refund delayed if the government does stop all but essential services. Reuters had previously reported that the agency would continue to deposit tax checks from filers.

Shulman has already received his return back from the certified public accountant, identified only as “Gary”, who he has used for years. “I look it over, but all that I ever say is ‘Let’s be more conservative,’” he said.

“I figure that as commissioner of the IRS it’s a good idea for me to obey the law,” he said, noting that he wouldn’t want to embarrass President Obama or the Secretary of the Treasury, Timothy Geithner, who had his own problems with his tax return before he took that office.

Shulman outlined his vision for the tax filing season in the future, when the IRS would be able to pre-populate taxpayers’ forms with data from their 1099 and W-2  before anyone filed their returns. But he said that vision was still years off and not in the specific planning stages now.

5 ways to avoid a tax audit

Don’t stay up at night worrying about having your taxes audited, or imagining horrible interrogation scenarios with tax agents and windowless rooms. Fewer than one percent of returns are ever examined, and the vast majority of those are done through the mail and not in person. More reassuringly, more than one in 10 of those audits result in “no change” in the amount the taxpayer owes.

That data and more is included in the Internal Revenue Service’s most recent data book. In 2009, the IRS received 187 million returns, and it audited 1.7 million returns in fiscal year 2010, producing a 0.9 percent audit rate. So breathe.

But then dig a little bit deeper, and realize that there are some financial behaviors that can increase your chances of having your return questioned. One is claiming the earned income tax credit, a complicated tax break aimed at the lowest income levels. Roughly one-third of the audits focused on that provision. The rest of the audit-bait behaviors tend to concentrate on higher income levels.

That doesn’t mean that you should deny yourself legitimate deductions just because you’re afraid of the tax man. But it does mean that if you have the kind of return the IRS will think is funny, you should be prepared. Here are some red flag behaviors and how to protect yourself from the troubling audit.

Earning a lot. The IRS audited 8.4 percent of returns claiming more than $1 million in income last year. Perhaps that’s because high-end returns are complex and offer more opportunities for hiding income or padding deductions. If you had a great year in 2010, just make sure you document your legitimate deductions, and claim all of the income you received. Hiding income can be considered fraud, while claiming a bad deduction can simply be interpreted as an error.

Being self employed. If you run your own business, you already know that there are myriad expenses you can legitimately deduct. Others – not so much. The IRS knows it’s likely to find questionable deductions on those forms, so it focuses on them. Folks who earn less than $200,000 but don’t have businesses stand a 0.5 percent chance of being audited. Add a business and those chances go up considerably. If you had a business and between $100,000 and $200,000 in income, you stood a 4.7 percent chance of being audited last year. If you’re self employed, make sure you can justify miscellaneous categories like restaurant meals, client gifts, publications and the like.

Failing to match. Let’s face it, the IRS already knows how much you make, because it gets 1099 forms and W-2 forms from the people who pay you. So if you’ve received notices that $100,000 in income was reported to the IRS for you, but you’re only claiming $60,000, be prepared to explain where that other $40,000 went. If someone sent you a 1099 or W-2 that you think is wrong, ask that they correct it and send a corrected form to the tax agency.