Each year, the IRS publishes its list of the “dirty dozen” tax scams. This list is a variety of common scams that taxpayers may encounter anytime. Don’t fall prey!
Urgent appeals for aid – whether in person, over the phone, by mail, via e-mail, on a website, or through a social networking site – may not be on the up-and-up. Fraudsters pop up after natural disasters such as earthquakes and floods to try to coax people into making donations that will go into the fraudsters’ pockets – not to help victims of the disaster.
Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid the swindlers who are trying to take advantage of your generosity. Here are tips to help make sure that your charitable contributions actually go to the cause that you support:
- Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
- Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don’t get clear answers – or if you don’t like the answers you get – consider donating to a different organization.
- Don’t give out personal or financial information — such as your credit card or bank account number – unless you know for sure that the charity is reputable.
- Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
- Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: Once you send it, you can’t get it back.
- If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
- Check out the charity’s reputation using the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Navigator, or Charity Watch.
Remember that, to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary, or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state, or local government, qualifying veterans’ or fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs, and homeowner’s associations, as well as gifts to individuals, cannot be deducted.
To claim a cash contribution, you must be able to document that contribution with a bank record, receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization, the date of the contribution, and the amount of the contribution. Valid types of bank records include canceled checks, bank or credit union statements, and credit card statements. In addition, to deduct a contribution of $250 or more, you must have certain payroll deduction records or an acknowledgment of your contribution from the qualified organization.
Be aware that, to claim a charitable contribution, you must also itemize your deductions. It may also be beneficial for you to group your deductions in a single year and then to skip deductions in the next year. Please contact Dagley & Co. if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.
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Tax fraud is currently a huge issue which has cost the government billions of tax dollars. New laws are taking effect that clamp down on individuals who have fraudulently claimed the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC). Details on these credits are as follows:
- The AOTC is the college tuition credit for low-income families that provides a credit for each eligible student equal to 100% of the first $2,000 and 25% of the next $2,000 spent on college tuition and related expenses; the maximum credit is $2,500, of which 40% is refundable. The credit is phased out depending on income.
- The CTC is a tax credit of $1,000 for each of the taxpayer’s qualifying dependent children. A portion of the credit that is not used to offset the taxpayer’s tax liability can be refundable; the refund is based in part on the number children in the family and in part on the taxpayer’s earned income. This credit may also be phased out for higher-income taxpayers.
- The EITC is a refundable credit awarded to low-income taxpayers who work. The credit is based on the amount of the taxpayer’s income that comes from working as well as on total income and on number of children. In 2016, this credit can be worth as much as $6,269.
We have your rundown of some of the new provisions that the government has put in place to defend against fraud:
Retroactive Claims – Individuals are now prevented from retroactively claiming the AOTC, CTC or EITC if the individual, dependent child or student for whom the credit is claimed does not have a taxpayer identification number (TIN). In other words, the TIN must be issued prior to the due date for filing the original return in the tax year for which the credit is claimed; the IRS will deny the credit if the TIN is not issued on time. In most cases, the TIN is a Social Security number.
Disallowance Periods – When a taxpayer improperly claims the AOTC, CTC or EITC (either fraudulently or recklessly), he or she will be barred from claiming that credit for a period of time. The disallowance periods are 10 years for fraud and 2 years for reckless or intentional disregard of rules and regulations.
Preparer Due Diligence Requirements – In the past, paid tax preparers have always abided by a set of due-diligence guidelines for EITC qualification before including that credit on any return that they prepared. These due-diligence requirements have been expanded to include the CTC and the AOTC. This adds additional work for paid preparers and increases their liability for errors, as each disallowed credit could be subject to a $510 preparer penalty.
1098-T Required to Claim Education Credits – Education credits can no longer be claimed unless the taxpayer includes the employer identification number of the educational institution to which the tuition was paid. This number, as well as the other information needed to determine the credit, can be found on the Form 1098-T (Tuition Statement) issued by the educational institution. The new rules require that the taxpayer (or the dependent who is a student) receive a 1098-T form to claim the credit, although some exceptions are provided.
Refunds that Include the EITC or CTC Will Be Purposely Delayed – Refunds from returns that include an EITC or a refundable CTC will not be issued prior to February 15th, which gives the IRS additional time to verify the validity of the credit claims and to match them against the taxpayers’ income amounts and the informational returns that are filed with the IRS to verify tuition.
If you have questions related to any of the foregoing safeguards, the delayed refunds or the credits themselves, please give Dagley & Co. a call.
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Dagley & Co. is here to give you up-to-date tax and tax requirement details and due dates. Please read the following regarding a delay in a tax return due date:
The IRS, in an effort to combat rampant tax filing fraud, has introduced what they hope will be two new fraud-prevention measures for the upcoming filing season. The first will purposely delay until February 15 the issuance of refunds for tax returns where there is an earned income tax credit (EITC) and/or a refundable child tax credit (CTC), giving the IRS more time to match the income reported on these returns to the income reported by employers. These two tax credits have been the favorite target of scammers who have been filing fraudulent returns with stolen IDs and fabricated income before the IRS is able to verify the income and withholding claimed on the returns.
The second preventive measure is to require earlier filing of W-2 and 1099-MISC forms, which will enable the IRS to ferret out returns that report phony income and withholding. This measure will have a significant impact on employers by moving up the filing due date of the government’s copy of 2016 W-2s and 1099-MISCs to January 31, 2017 (the previous due date was February 28, or March 31 if filed electronically). January 31 has been and continues to be the date the forms are required to be provided to the employees (W-2s) or independent contractors (1099-MISCs).
The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases where the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances.
With regard to the government’s copy of 1099-MISC forms, the earlier filing due date only applies to those 1099-MISC forms reporting non-employee compensation.
If you have questions related to W-2 or 1099-MISC requirements, please give Dagley & Co. a call at (202) 417-6640.
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