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Some Unexpected ‘Gifts’ Come With a High Price

Unexpected IRS 'gift'“Never look a gift horse in the mouth” is one of those old adages that many of us grew up with. Sometimes, though, even the wisest among us might want to stop and think before accepting a gift with blind trust.

One such example is an unexpected check from a taxing authority. Before computers made it easier for the IRS and other tax agencies to keep track of your account, that scenario was unlikely; however, with the government on the lookout for needed revenue, what you don’t know might cost you.

A not-for-profit executive recently received numerous checks in the mail from a state tax department. The description on the checks indicated they were for overpaid taxes from past tax periods. The revenue clerk asked if he should deposit the checks and without hesitating, the executive said, “Yes.”

In this instance, the refunds were truly due to the organization, but the simple act of depositing the checks could have opened the nonprofit entity up to penalties and interest even though the tax agency itself had sent them the funds. It might seem unreasonable, but this is how the IRS and other taxing authorities view this kind of transaction.

For example, you filed your 2008 income tax return and paid the $10,000 balance due on April 15, 2009. The IRS sends you a refund check on Oct. 31, 2010, in the amount of $5,000 for the 2008 tax year. You have no idea why they sent the check, but you are happy to deposit it. Three months later, the IRS sends you a notice that claims you underpaid your 2008 tax bill by $5,000 and you now owe them $5,000 in taxes plus penalty and interest.

Do you owe the full amount of that bill? You do owe the $5,000, but will you owe the penalties and interest you’re being charged (starting from April 15, 2009) as well? The answer, according to the IRS, is yes. When you deposited the $5,000 check from them, it was as if you had never made the initial payment – even though you did. The IRS, or any other taxing agency, will assert you owe the full amount – and they can probably make that stick.

This scenario has played out with many clients over the years and, from a common sense standpoint, charging penalty and interest from the original due date of the payment doesn’t seem fair. But the IRS has been successful in collecting that amount. While a small sum for penalty and interest might be reasonable, charging for the entire period is not equitable – then again, nobody ever said taxes were fair.

The IRS has started notifying taxpayers that a refund is being sent and to contact them if the taxpayer believes the refund is in error. This notification, however, often gets less than your full attention.

What is the best course to follow if you receive an unexpected payment from the IRS? Well, first find out why you are receiving the refund. That could entail simply comparing the information the IRS sends against the data reported on your return. If you believe the IRS is correct, go ahead and deposit the check. If you believe the IRS is incorrect, do not deposit the check. Instead, call your tax preparer and explain your concerns. If you still believe you are not due the refund, send the check back to the IRS with a letter of explanation. Depending on the check amount, you might want to return it by certified mail. Make sure you keep copies of the check and all correspondence.

While keeping an unexpected gift sounds good, whoever came up with the “gift horse” saying probably never had a run-in with the IRS. If you receive an unexpected windfall from the government, make certain you understand and agree with the reason for the surprise payment. Otherwise, your only gift might be an unwanted headache. Let us know if we can help – we will be glad to assist you in minimizing any hassles with the IRS.

Technology: Protect Yourself From Cell Phone Hackers


CarbonNYC via Flickr

Cell phone hacking caused the downfall of The News of the World, Britain’s largest and most famous tabloid. This scandal has alerted cell phone users to the mayhem that hackers can create. An ever-increasing problem for the telecommunications industry, cell phone hacking no longer happens only to people in the public eye. More and more ordinary citizens are falling prey to fraudsters who regard mobile communications as a fruitful opportunity for scams. As many cell phone users have discovered, it is often a relatively simple matter to hack a cell phone.

How do hackers crack our cell phone passwords? Often we make it fairly easy for them by using the same password at other – less secure – sites. The hackers break into these easier targets and then try the passwords on bigger sites. Sometimes hackers launch a full frontal attack – programming computers to bombard sites with just about every word in the dictionary until they hit the right combination.

As many people discovered in the wake of The News of the World scandal, often it takes only a modicum of tech savvy for a crook to get access to the information stored in your phone. Here are a few tips to help safeguard your data.

  • Protect your phone and keypad with passwords that are strong. Make them long and difficult for thieves to guess. Use different passwords from those you use for your financial accounts, and never program passwords into your cell phone. If you use Gmail, make use of Google’s two-step verification procedure. This means you need to supply an access code (from your mobile phone) if you try to access your account from any place other than your own computer. The access code needed for your computer is a password that you change every 30 days. Though no solution is fail-safe, this two-step verification process can protect you from the thousands of remote attacks hackers launch every day.
  • Develop a practical way to manage the many passwords you need to access the various online sites. Use letter/number combinations that are meaningful to you, but not so obvious that a hacker can guess them correctly. Avoid words that might be guessed in a major attack – using a misspelled word or gibberish will give you a stronger password. Keeping a hard copy of your passwords in a desk drawer is a bad idea, and keeping them stored on your cell phone is even worse. Have different passwords for all the sites you use that hold important, confidential data. Make sure your voicemail password is strong, too. Perhaps you think crooks can’t cause much harm with access to your messages, but don’t be so sure. Fraudsters have gained access to bank accounts this way.
  • Some phones will lock out any entry after the phone has been idle for awhile. Check to see if your phone has this feature. If your phone is stolen, this lock out will stop a thief from accessing your data.
  • Don’t keep important data in your smart phone for indefinite periods of time. When hackers take over or compromise an email account, the data is lost to the user – often permanently. Sometimes resetting your password and logging back into your account doesn’t let you access the information you left there earlier. It’s gone. If you have important correspondence, attached files or photos on your smart phone, save backup copies somewhere else.
  • Be smart about downloads. Only use downloads from a reputable seller. Beware of pop-ups or unsolicited notices warning you of an impending problem. Download a so-called antivirus solution, and chances are good that the download will infect your phone.

Vigilance is the best way to protect yourself. Don’t get lazy about passwords or complacent about backing up data you keep on your cell phone. Above all, take advantage of all the safeguards and password protection programs that are made available to you.

Social Security Benefits Increase Along With Medicare Costs


Mosman Council via Flickr

About 55 million seniors receiving Social Security benefits and 8 million recipients of Supplemental Security Income will enjoy a 3.6 percent cost-of-living adjustment increase beginning with their January 2012 monthly checks. This is the first COLA increase since January 2009.

With declining consumer prices in the aftermath of The Great Recession, there were no increases in 2010 or 2011. Before then, COLA had increased each year from 1975 through 2009. Legislation was enacted in 1973 tying increases to the Consumer Price Index for Urban Wage Earners and Clerical Workers, as calculated by the Bureau of Labor Statistics.

Keeping Up With Inflation?

The law is designed to make sure Social Security benefits don’t fall behind the inflation rate by comparing the average third-quarter CPI-W for the current year with the average CPI-W for the last year that the COLA was increased. If inflation increases, so does the COLA.

For the average retiree, next year’s increase will equal about $43 in additional Social Security benefits per month, or $516 per year. But if you’re a senior looking forward to a larger check in 2012, don’t make plans for that extra money just yet.

Give a Little, Take a Little

While welcome news for seniors, many of who need every dollar of the additional cash, the COLA increase comes with some less-good news. Basic Medicare Part B premiums (which cover doctors visits), withheld from Social Security checks before they are sent to recipients, are projected to rise by about $3.50 in 2012 for most recipients ($7 less than projected as recently as May) and equal to about 8.1 percent of the average COLA increase they’ll be due. Some could see a slightly smaller net increase in Social Security income than they are expecting. More recently enrolled retirees will actually pay less (a $99.90 cost for most, compared to the $115.40 they pay now).

The deductible on Part B will drop $22 to $140; the Part A (hospital) deductible will increase $24 to $1,156 for those who are admitted as inpatients.

In years when there is no COLA increase, Social Security’s hold harmless provision prohibits Medicare Part B premiums from reducing Social Security payments for 75 percent of recipients; however, there is nothing in the law that prevents the premiums from reducing checks by up to the amount of any COLA increase.

When the COLA goes up, that same 75 percent of recipients must pay the extra premium out of their checks. The other 25 percent would actually see a reduction in Part B premiums – this is the same group that pays higher premiums (a large percentage of it covered by state Medicaid funds) to make up the difference in the years without a COLA increase.

Prepare for Changes

Meanwhile, Congress continues to look for ways to save money, such as raising the Social Security retirement age or implementing a change in the formula for figuring the COLA in order to reduce future increases. This could mean even lower adjustments in future years, leaving states and wealthier retirees to take up the slack by paying higher Medicare Part B premiums. Advocates for retirees argue that the current formula for measuring inflation does not account for the fact that older Americans spend more money on medical care than the general population and that COLA increases are already too small.

With more lower and middle income retirees relying on Social Security benefits to help bridge the gap between their savings and their needs, knowing what to expect from Social Security and Medicare will help you avoid surprises and plan for the future. Whether you are currently retired or just looking forward to eventually retiring, it’s always a good idea to consult with a financial advisor about what you can do to better manage your plan for the future.


Mid-Year Tax Planning for Individuals

1040taxplanningAs we approach the mid-year mark for 2011, have you considered reviewing your current tax situation?  Taking into account all of the events of the past six months, such as getting married, having a baby, or even losing a loved one can have dramatic effects on your year-end tax situation.  Life changing events can cause your potential tax liability to either increase, or decrease, depending on the variables involved.  Having a reputable tax professional review your tax situation throughout the year can help prevent end of the year surprises and keep you ahead of the game as far as taxes are concerned.


Taking the time to sit down with your tax professional can really improve your overall tax strategy as well.  You can consider the tax implications of contributing to an IRA, donating unused household items to increase your charitable contribution write-off, or other tax deductions or tax credits.


Make an appointment today to consult with your trusted tax advisor so you can feel confident heading into the second half of the individual tax year.  It just may make the difference between you breaking even or owing a large amount of money to the IRS at year end.


IRS Tax Calendars (Publication 509) Outlines Important Tax Deadlines

IRS Tax Calendars (Publication 509)Most individuals making an income in the United States know about the standard tax deadline of April 15th every year, but how about all the other important tax deadlines that individuals and businesses have to take note of throughout the year?  This is where the IRS Tax Calendars (or Publication 509) can act as a general reference guide, along with consulting your trusted tax advisor for clarification on complex tax subjects.


Three Basic Sections and Three Tax Calendars


The IRS Tax Calendars (Publication 509) for 2011 contains three basic sections.  There is a section on how to use the tax calendars, a section that contains the three tax calendars (general, employer’s, and excise), and a section that includes a table showing semiweekly deposit due dates for 2011.


General Tax Calendar


The majority of the due dates for most taxpayers will be found under the General Tax Calendar.  Employers and persons who pay excise taxes also should use the Employer’s Tax Calendar and the Excise Tax Calendar.


Employer’s Tax Calendar


Employers can find various due dates that mainly pertain to the following federal taxes:  income tax you withhold from your employees’ wages or from nonpayroll amounts you pay out, social security and Medicare taxes (FICA taxes) you withhold from your employees’ wages and the social security and Medicare taxes you must pay as an employer, and federal unemployment (FUTA) tax you must pay as an employer.


Excise Tax Calendar


The Excise tax Calendar provides the due dates for filing returns and making deposits of excise taxes.  There is an additional publication to consult, along with several instructions for the Forms to be used when dealing with dealing with excise taxes.


More Information About IRS Tax Calendar (Publication 509)


The IRS Tax Calendar (Publication 509) for 2011 can also be found on their website in PDF format here:  You can contact your tax advisor for help with more specific questions regarding any of the topics covered here.


Attending College Allows Benefits of College Tuition Tax Credits

irspublication970If you are attending college, you may qualify for college tuition tax credits that can reduce your tax liability when filing.  The federal government offers a couple different college tuition tax credit programs that can be discussed with a tax professional in greater detail to ensure you claim the proper credits for the greatest tax benefit.


How Can a Tax Credit Benefit Me?  The basics.


When filing your income tax return with the federal government, your total taxes due can be decreased by a tax credit.  When you pay for college tuition, you are able to reduce your tax bill by a certain amount based on which college tuition tax credit you may qualify for.  If someone else pays the tuition costs for you, they may be entitled to the tax credit instead of you.


There are two different college tuition tax credit programs available.  The credit amount differs based on various rules, depending on which credit is used, what the money is spent on, and where you live.  Only one credit can be claimed per student per tax year.


American Opportunity Credit


The American Opportunity Credit has replaced the Hope Tax Credit for 2011 and 2012.  The major difference is that the new credit allows lower income families that owe little or no taxes to receive part of the credit paid to them as a tax refund.  The new credit also allows for course books and supplies to be included in the calculation of the credit, as well as tuition and fees like the old credit allowed.  Additional criteria to claim this credit include the student being in their first four years of college, and being enrolled at least half-time in an undergraduate degree program or other reasonable education credential.


Lifetime Learning Credit


The Lifetime Learning Credit requires that the money claimed must have been spent on tuition and fees.  This credit can be claimed for an undergraduate degree program, or a graduate degree program.  This credit can even be used for single courses taken to obtain or develop job skills.


Who Gets to Claim the College Tax Credit?


If a tax filer has a dependent listed on their return, and they paid for the tuition and/or other expenses for that dependent, they may claim the credit.  If you pay your own tuition and aren’t listed as a dependent on another person’s return, you may claim the credit.


More Information About College Tuition Tax Credits


Certain other restrictions and rules apply to College Tuition Tax Credits, so as always, consult with your tax professional prior to filing you federal income tax returns.  The IRS Publication for 2010 returns can also be found on their website in PDF format here:

Small Businesses Overwhelmed by Tax Reporting Obligations

smallbizobligationsSmall businesses are feeling overwhelmed with the reporting obligations imposed on them every year when dealing with federal taxes.  A recent survey conducted by the National Small Business Association found that one-third of small-business owners spend two full work weeks every year dealing with federal taxes, and 87 percent need to pay an outside accountant or other tax return preparer to do their taxes.


Tax Reporting- Drain on Time and Money


The survey also found that, for the most part, the complexity and inconsistency within the Tax Code are draining small businesses of their time and money just in order for them to deal with the administration of federal taxes.


Payroll taxes ranked as the most difficult taxes to deal with for small businesses, both administratively and financially.  Even though only 44 percent of small businesses use an external payroll company, those that used an outside payroll company still spent a large amount of time dealing with payroll taxes.  The amount of time spent will soon increase even further when the new W-2 reporting requirement takes effect at the beginning of 2012.  This new requirement has employers now also reporting their health care spending.


IRS Audits, Funding for Enforcement Activities Continue to Rise


To make matters worse, the IRS continues to place excessive obligations for the tax gap on small-businesses.  Less that 47 percent of eligible small-business owners are claiming the home office deduction they are entitled to due to concerns it will “red-flag” their tax return for an IRS audit.


NSBA president Todd McCracken stated that “The time for a serious debate on broad tax reform is now.  The ever-growing patchwork of credits, deductions, tax hikes and sunset dates is a roller coaster ride without the slightest indication of what’s around the next corner.  This is unsustainable and unacceptable.”


Since roughly 83 percent of small businesses are pass-through entities and pay business taxes at the individual income level, the majority favors proposals reducing corporate and individual income tax rates and eliminating certain deductions, as well as comprehensive changes aimed at simplifying the Tax Code.

State of Oregon Budget Hurting Due to Unpaid Taxes



The State of Oregon, which relies heavily on income taxes to help balance the state budget, is hurting due to an estimated $1.25 billion in unpaid taxes.  This amount of unpaid taxes accounts for roughly an 18.5% failure rate on the collection of state income taxes.


Old Technology and Inefficient Systems to Blame






An audit released in August 2010 performed by the Secretary of State’s office found that around 66,000 people had filed federal tax returns but neglected to file their state taxes without getting caught.  In the audit, the Secretary of State criticized the Oregon Department of Revenue for relying on ““cumbersome and limited” technology, missing opportunities due to non-comprehensive systems, and failing to act in a timely manner”.  The current technology systems in place consist of roughly 70-80 big systems and 220-250 little systems that have been developed to meet needs over time without any particular strategy.  The accounting system is the oldest and was developed in the late 1980’s.


Current and Future Improvements Proposed for Technology Systems


An employee at the Department of Revenue stated that to help address the issues found in the audit they have set firm deadlines for contacting taxpayers, set up a phone system to avoid “phone tag”, increased the amount of employees who work in the collections department, increased information sharing with other state agencies, and worked with other companies that specialize in financial data.  The state authorized the hiring of 35 new staff members two years ago to concentrate on collections.  This group alone has helped to bring in $38.5 million in outstanding revenue to the state.


The Oregon Department of Revenue recently prepared a request for proposal (RFP) in order to find potential companies to revamp their currently outdated systems.  Over the next three to five years, at an approximate cost of $100 million, they plan on implementing a new system that would “see a huge increase in productivity and pay for itself pretty quickly”.  They know they can’t continue to do things the same as they have been.

Are My Paychecks Having Enough Taxes Withheld From Them?

2011 Form W-4Do you ever wonder if you are having enough taxes withheld from your paychecks? Do you either have large refunds or balances due when you file your tax returns? Proper planning based on what you currently take in as income throughout the year, and factoring other areas of your tax profile with a trusted advisor will increase your chances of having less of a potential liability or large refunds.


Tax Withheld based on Form W-4 and Earnings

The Form W-4 that you fill out with your place of employment, along with how much you earn, will determine the total amount of tax withheld automatically from each paycheck. The amount withheld can fluctuate based on changes in income or changes to the variables on Form W-4. You can obtain a copy of the 2011 Form W-4 from the IRS website here: You should consider adjusting your Form W-4 each year, and when financial or personal circumstances change.


Form W-4 Accuracy Considerations

In most cases, properly filling out Form W-4, will help the amount your employer withholds come fairly close to what your actual tax should be on your tax return. Other situations that could affect your tax situation and make your withholding inaccurate even if you filled out Form W-4 correctly might include some of the following:


  • You have multiple jobs
  • You have a spouse that also works
  • You have other income such as interest, dividends, alimony, unemployment compensation, or self-employment income
  • You owe additional taxes for self-employment, unreported social security and Medicare, IRAs, other qualified retirement plans, etc.
  • You had life changing situations that should have been changed on Form W-4 such as getting married/divorced, added a dependent, or your income fluctuated throughout the tax year


To ensure you are taking into account all the possible scenarios that could affect your yearly tax liability, you should consult with your tax professional throughout the year. They understand how life events can change your year-end financial situation.

Still Haven’t Filed Your 2007 Income Tax Return? You are in Jeopardy of Losing Your Refund.

If by chance you haven’t done your legal duty as an American taxpayer and filed your 2007 Income Tax Return, you could soon lose out on laying claim on any refund owed to you by the IRS.


On April 18, 2011, the statute of limitations runs out on receiving a refund for your 2007 tax returns.  If you do not claim your refund by this time, the IRS can then legally keep any refund you would have gotten had you filed your 2007 Income Tax Return.  There are many tax scenarios that might help you qualify for a tax refund, so consulting with a Certified Public Accountant to check your eligibility would be wise.


The IRS website states that “Losing your refund.  There is no penalty for failure to file if you are due a refund.  However, you cannot obtain a refund without filing a tax return.  If you wait too long to file, you may risk losing the refund altogether.  In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.”  See the Internal Revenue Manual, section, for the official wording on the statute here: .


The IRS estimates that half of these returns may net a refund of $640 or more from taxes withheld or estimated payments made during 2007.  In addition, many qualifying low to moderate income workers might not have claimed their Earned Income Credit.


The IRS says that “a taxpayers 2007 refund will be held if they have not filed for 2008 and 2009 or applied to any amounts owed to the IRS, or used to offset unpaid child support or past due federal debts.