Tax Season - Time for Scams

As tax season draws irresistibly closer, the scam artists are polishing their latest techniques. This article should help you keep an eye out for these nasty individuals.

Tax Season – Time for Scams

In a particularly cheeky move, scam artists have started posing in on form or another as the IRS in an effort to get you to turn over social security numbers and such. Logically, this actually makes sense. Everyone is terrified by the IRS and dread be contacted by the  Agency. Most of us would do anything to resolve any issue raised by an IRS Agent including sending them copies of credit card statements and providing crucial financial information over the phone. Put another way, this is the perfect scenario for a scam artists.

The goal of scam artists, of course, is to get private information they can use to open credit card accounts and so on. This is loosely known as phishing for the purpose of identity theft. 

Phishing and identify theft can occur through practically any communication method. Here are some recent scams that were successful:

1. One group of scam artists started sending spam emails notifying taxpayers they were eligible for tax refunds. The scam worked because the emails were sent from IRS types of email accounts including the irs letters in the address. Taxpayers were then told to go to click through to a site where they could fill out a form and get their refund. Of course, the email address and web site were fakes. Nobody got a refund, but the scam artists received a bevy of social security numbers, credit card information and so on.  In total, this scam occurred through 12 different web sites in 11 countries.

2. This one is a classic. Scam artists send bogus IRS letters and Form W-8BEN asking non-residents to provide personal information including bank account numbers, PINs, passport numbers and so on. Form W-8BEN is used by banks, not the IRS, to obtain information from non-residents who are opening bank accounts! Unfortunately, many non-residents fell for this scam and had their identities stolen. 

There are a couple of guidelines you can use when dealing with IRS communications. First, the IRS never, ever sends email to taxpayers. NEVER! If you get an email communication, it is absolutely a scam. Delete it or send it to the IRS so they can take action.

If you receive mail communications from the IRS, call the agency to verify a letter was really sent to you. With phone call communications, get the persons name and call them back at the IRS. Both methods will stop scam artists in their tracks. Be skeptical of communications you receive from sources you are not expecting.

Finally, the IRS never asks a taxpayer for passwords or PIN numbers. If the agency desires to seize your bank account, they can just do it. They don’t need to take out $300 a  day until your tax debt is collected! 

Scam artists are highly creative people. If you have doubts about an communication of the IRS, pick up the phone and call the agency.

Use Child Tax Credit for Tax Savings

Now, here’s a real tax savings to the individual taxpayer with dependents.  The child tax credit is a direct federal income tax credit based on the number of dependent children in your family. This federal tax credit is available to provide credit to taxpayers with income below certain established levels.   Started in 2003 and going to 2010, the maximum credit per child is $1000 and is first applied to reduce or eliminate the taxpayer’s federal tax liability.  In 2011, the Sunset Provision will decrease the tax credit unless the credit is extended or made permanent. 

How does this federal tax credit work and who qualifies for this credit?  Well, let’s start with the last question first.  Every family with children qualifies, however the federal tax credit phases out when income is above $110,000 for married filing jointly, $75,000 for single, head of household, or widow, and $55,000 for married filing separately.  In addition, the child tax credit might be limited by the amount of income tax you owe as well as any alternative minimum tax you might owe. But like everything else in this world, there are exceptions.  If the amount of your child tax credit is greater than the amount of federal income tax you owe, you may be able to claim a portion or all of the difference as an "additional" Child Tax Credit.  

First exception:  if your earned income exceeds $10,750, you may be able to claim up to 15 percent of that amount.  Second exception:  if you have three or more qualifying dependent children in your family, you may claim up to the amount of Social Security taxes you paid during the year, minus any Earned Income Tax Credit you received. If you qualify under both these exceptions, you receive the greater of the two amounts, up to the difference between your federal tax liability and your regular Child Tax Credit.  You may want to seek a tax professional for help with this credit.

Now, to answer the “how does it work” aspect; the best approach might be to simply break down the requirements, and explain each fully.  The child tax credit is the responsibility of the Internal Revenue Service (IRS), and the credit issuance is determined through the federal tax returns the individual taxpayer completes each year.  Taxpayers must complete either the 1040 or the 1040A and the IRS form 8812.  The IRS will then determine eligibility, and process accordingly; the requirements and limits change each year, so the individual’s eligibility may change each year.

In order to qualify, a family must have earned at least $10,500 in income, and that figure will rise each year, according to inflation.  There must also be at least one qualifying child.  In order to be classified as a “qualifying child”, the child must meet the following requirements: under age 17 of the tax year, claimed on your tax return as a dependent, must pass the relationship test (son, daughter, stepchild, grandchild, brother, sister, foster child, adopted child, etc.), be a US citizen or a resident alien, and have a social security number.

During its original year of inception, many families with qualifying children were mailed an advance federal income tax credit of either $300 or $400 dollars; but they were also told this would reduce their end-of-year tax credit, dollar for dollar. 
The method used for determining the tax credit is fairly simple, and is not difficult to calculate; however, any individual taxpayer with uncertainty should seek the advice and assistance of a tax professional when preparing their federal tax return. 

The credits, as stated earlier are claimed when you complete a 1040 or 1040A and file your returns with the Internal Revenue Service.  Although many individual taxpayers pay for a professional to complete their federal tax returns each year, there are qualified preparers that are available free of charge each year, through the IRS; either way, make sure that you communicate your qualifications for the child tax credit, and check your tax return to see that the credit was applied.  You do not want to let this tax credit slip by.

The child tax credit, along with the Hope and Lifetime Learning credits are a direct means to affect the individual taxpayer’s tax liability and offer some level of tax relief.  This is meant to help parents with the costs associated in raising children, and educating them.  Most often, the child tax credit is a way to alleviate the existing federal tax liability for middle-income taxpayers.  For the extremely low income families, there is often no income tax due, so there is no allowable tax credit.  Although it does not help the poverty level families as a form of federal income tax refund or tax-free income, it does help to alleviate any federal tax liability.  The Earned Income Credit is used by many poverty level or low-income families as a supplement to their earned income.

Deciding when to File a Tax Return?

April 15th – “The Day of Reckoning”!  Every year, millions of Americans get ready to pay taxes to Uncle Sam, or get ready to collect a tax refund from Uncle Sam; when did this become the great day that it is for taxpayers, and when are we actually required to file a income tax return?  Let’s take a look at the beginnings of the income tax date of April 15 and why it was chosen? 

The first known income tax that Americans were legally required to pay was enacted during the early 1860s, and the Presidency of Abraham Lincoln.  The Civil War was proving very costly to finance, and the President and Congress created the Commissioner of Internal Revenue and enacted a law requiring citizens to pay federal income tax.  This could be considered the start of our modern day income tax.  This income tax was based on principles of graduated or progressive taxation and of withholding income at the source.  The commissioner was given authority to assess, levy and collect federal income taxes.   The authority to enforce tax laws by seizure of property and income and by prosecution.
   
Originally, the deadline for completing and filing your individual income tax was not April 15th.  In the beginning, it was first set for March 1st.  Then, during 1918, Congress pushed the date out to March 15th.  Then, in the great overhaul of 1954, the date was once again moved forward to April 15th, and this is where it remains today. Why April 15th?  The main thought from most scholars say the reasoning is that the date gives the IRS more time to handle the work load and more time to hang on to your money before offering a tax refund.  This date has only been set this way for a little over 50 years.  That’s not very long, in historical terms, and it could possibly be changed again.
   
If you are an individual taxpayer, you are required to file either a return or an extension of time to file (Form 4868) by April 15th.  Corporate and other legal entities are required to file their federal income tax return by March 15th, and if not, they also must file an extension of time to file.  What this extension does not do, is to extend the amount of time you have to pay any taxes due the government.  So, if you are unable to ready your personal or business financial information in a timely manner, and have no reasonable estimate as to the amount of tax you may owe, you can expect to pay some form of penalty.
   
In the years following WWII, the burden of tax responsibility was shared fairly equally by the corporate world and the individual taxpayer.  Today, however, the shift has been toward more responsibility on the part of the individual, and less on the business backs.  To demonstrate how special interests have begun to overtake American politics, during 1867, public opinion was so strong, and the outcry of the general public so loud, that the President and Congress abolished the income tax law in 1872, and from 1872 until 1913 almost all of the revenue for government operation came from the sale of liquor, beer, wine, and tobacco.  Although the income tax did make a small come back in 1894,  it was found unconstitutional in 1895 by the U.S. Supreme Court because it was not apportioned among the states in conformity with the Constitution.

An interesting time during the formation and eventual taxation of America occurred during 1918.  Until that point in time, the vast majority of tax revenue for government funding came from alcoholic beverage sales and high tariffs.  In 1919, Congress passed an amendment to the Constitution that made it illegal to manufacture or sell alcohol; what would replace the revenue?  American federal income tax was the proposed solution, and we’ve been paying since.  Although during the great years known as Prohibition, many “revenue agents” spent their days tracking down “moon shiners” not tax evaders, the American citizen, the individual taxpayer took on the heavy burden of supporting government revenue, and it has become heavier with each passing year.  On a side note, although “moon shining” was illegal, the “moon shiners” still had to pay taxes on the moon shine so they were incarcerated for tax evasion and not “moon shining”.   Taxes seem to always come into play when looking for a way to prosecute someone.

Then, during 1942, the Revenue Act of 1942 was passed and the “New Deal” era was begun.  Since that point in time, government control, power, and expenditures has continued to increase at a phenomenal rate, and today the American taxpayer supports a trillion dollar giant known as the United States government.  This ravenous beast consumes more than 10% of our earned income each year, and if the Social Security Administration has their way, will continue to consume even more of our weekly earnings.  We can foresee no other relief in sight.
   
Currently, all the tax regulations for this country are the responsibility of the Internal Revenue Service, and there are four major divisions of this government office: the Wage and Investment, Small/Business Self-Employed, the Large and Midsize Business and the Tax Exempt and Government Entities.  Each division has responsibilities as they pertain to their individual specialty.

There continues to be talk on the hill to change the way taxes are calculated and collected.  The most common themes are the flat tax and the national sales tax.  Until Congress actually has the courage to step up to the plate and change it, taxes will remain as cumbersome as always.