Do you owe your mother a gift for her birthday? If yes, do you plan on getting her one? If that reads like an interrogation designed to whip your conscience into shape, it is.
It's also the type of passive-aggressive inquiry that self-employed and small-business owners face this tax season. Only it won't be regarding their mothers. It'll be about paying Uncle Sam.
Congress and the Internal Revenue Service are on a mission to cut down on unreported income.
One initiative involving credit card payments created so much additional work and complaint from the finance industry that the IRS already backed down and postponed it for a year.
But a second -- a two-question grilling at the top of a couple of tax forms -- lives on, likely to entrap a few of you.
New questions on Schedules C and E
If you have profits or losses from a business, a rental, a partnership, an estate or a trust, you file Schedule C or E with your federal 1040 return.
At the top of the 2011 versions, you'll find these new zingers:
"Did you make any payments in 2011 that would require you to file Form(s) 1099?"
"If 'Yes,' did you or will you file all required Forms 1099?"
Form 1099s are information returns. They make the IRS aware that someone else has received income from you.
Generally speaking, if you paid any one person or entity $600 for services last year, tax law requires you to send them and the IRS a 1099-MISC. That MISC is for "miscellaneous" income.
Not everyone does that right now, accountants say. Consider the small building contractor who pays his painter, drywaller and other subcontractors in cash. He might not have filled out a 1099 for each. A self-employed consultant who pays a graphic artist $600 for marketing material must file one, too.
This year, for the first time, the IRS is reminding all these taxpayers of their legal obligation directly on tax forms. They're also getting taxpayers on record as to whether they complied.
See what I mean. It's "Law & Order: Special IRS Agents Unit."
"Taxpayers who don't handle these questions the right way are opening themselves up to penalties," said Troy Thompson, a tax lawyer and certified financial planner in Portland. "Perhaps not fraud, but I do expect vigorous assertion of the penalty for intentionally disregarding the requirements."
That could be up to $250 for each 1099 the IRS didn't get and $250 for each 1099 a contractor didn't get, with no cap on the amount. The IRS also might disallow expenses claimed as deductions if they're not documented as they should be on 1099s, Thompson said.
For a while, it looked as if landlords would have to worry about this, too. But last spring, Congress repealed requirements that rental property expenses be documented on 1099s. Only in limited cases do rental property owners need to issue 1099s, said Benson Goldstein, senior technical manager at the American Institute of CPAs.
The deadline to comply with these requirements is coming up. Most 1099-MISCs must be mailed to contractors by Jan. 31. They must be sent to the IRS by Feb. 28, though you have until March 31 if you file them electronically.
"Putting these kinds of 'gotcha' questions on the return is an increasingly common and I think potentially very effective tool in tax administration," Thompson said.
1099-Ks
A second change involves how electronic payments get reported to the IRS. It seems aimed squarely at keeping eBay sellers honest, but affects far more businesses.
A new law requires payment-settlement entities -- the banks, Visas, MasterCards and PayPals of the world -- to report transactions directly to the IRS. PayPal and similar third-party networks need do this only for merchants who bring in $20,000 and conduct 200 transactions a year.
These payments are supposed to be reported on a 1099-K to both the IRS and the merchants. The IRS expected to receive 53.8 million such forms this season.
Payment processors threw such a fuss about complying with this new law that the IRS in November announced it wouldn't penalize anyone this year who failed to comply. But they're still supposed to go out.
Your business might have a new obligation under this law as well. If you issue a 1099-MISC to a vendor or subcontractor, you're supposed to exclude any amounts paid by debit, gift or credit card or PayPal. That's to avoid duplicate reporting to the IRS.
Payments by cash or check, however, still must be included on those 1099s.
That's going to complicate bookkeeping for coffee shops, restaurants and contractors. It could actually lessen paperwork for those who make all vendor payments electronically.
"I might suggest pay credit card all the time," said Goldstein of the CPAs group. "Therefore, I don't have to issue 1099s."
Others predict many businesses will mistakenly include card payments, meaning some income will get reported twice.
"It's going to be a headache," said Greg Rogers, a certified public accountant in Oregon City.
Valerie Calley, owner of Oregon Trail Yarn & Books in Milton-Freewater, says this new requirement won't hamper most eBay business. She downloads PayPal transactions directly into her QuickBooks accounting software and pays taxes on all Internet sales.
"The 1099-K will be just one more piece of paper to give to the tax accountant," Calley said via e-mail. "I don't think Congress will realize the increased revenue they hoped for from the enhanced reporting requirements."
A spokeswoman for Intuit Inc. said its 2012 QuickBooks and TurboTax software will help users identify and exclude electronic payments from their 1099-MISCs. Instead of upgrading, customers with older QuickBook versions can also download a 99-cent app to exclude such payments.
That's good news for business owners who keep good records. Not so for others.
"A lot of small businesses, frankly, don't pay real good attention to their bookkeeping," said Susan High, licensed tax consultant and owner of Clackamas Income Tax & Accounting Inc. in Gladstone. "Especially ones that try to do it themselves."
It's Only Money believes you can do finances and taxes yourself. But if you're overwhelmed or panicked, seek help. Over the next couple of weeks, I'll explain the types of tax preparers you can use and how to best pick one.
Tuesday, January 24, 2012
Tuesday, January 17, 2012
Watchdog: Growing IRS Workload Hurting Taxpayers
January 11, 2012 (Associated Press) — WASHINGTON - The Internal Revenue Service can't keep up with surging tax cheating and isn't sufficiently collecting revenue or helping confused taxpayers because Congress isn't giving it enough money to do its job, a government watchdog said Wednesday.
To cope with its growing and increasingly complex tasks, the agency is relying more on computer software designed to weed out fraud, Nina E. Olson, the national taxpayer advocate, said in her annual report to lawmakers.
But errors are abundant, creating additional work for the agency when taxpayers dispute its findings, the report said. The agency's use of computer systems sometimes ends up eroding taxpayers' rights, and people are having a harder time getting through to the IRS by telephone or letter, she said.
"The overriding challenge facing the IRS is that its workload has grown significantly in recent years while its funding is being cut," said Olson, an independent watchdog within the IRS. "This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers - and at the same time reduces the IRS' ability to deliver on its core mission of raising revenue."
IRS spokeswoman Michelle Eldridge said to combat burgeoning cases of fraud, the IRS uses congressionally approved compliance programs that are constantly audited to make sure people's rights are protected.
"While fewer dollars in a tight budget environment impacts elements of taxpayer service, it does nothing to erode our protection of taxpayers," she said.
By pointing her finger at the IRS budget, Olson was highlighting a politically sensitive issue. Especially in times of huge federal deficits, many lawmakers have shown little interest in being generous to the widely unpopular agency, which processes 141 million individual tax returns annually, including almost 120 million requests for refunds.
Congress cut the IRS budget to $11.8 billion this year. That is $300 million less than last year and $1.5 billion below the request by President Barack Obama, who argued that boosting agency spending would fatten tax collections and improve service.
Those arguments did little to persuade lawmakers.
"Like families across the country, the IRS will have to do more with less," Rep. Jo Ann Emerson, R-Mo., who heads the House Appropriations subcommittee that controls the agency's budget, said last fall.
Olson's report came days after the IRS estimated that people and companies underpaid their taxes by a huge $385 billion last year after audits and other enforcement efforts, compared with around $2.3 trillion the agency collected. Those underpayments come as lawmakers hunt ways to pare federal deficits exceeding $1 trillion yearly.
"Yet obtaining a little extra money to bring in a lot of extra money remains an intractable challenge for the IRS, and that is unfortunate," the report said.
Underscoring the IRS' volume of work, the report said the agency contacted taxpayers 15 million times in 2010 to change their claimed tax liability. Only 1 in 10 of those contacts was considered an audit, meaning most were denied the additional rights audits allow, including the ability to go to tax court.
The agency's increased reliance on computers means it is having less personal contact with taxpayers. The IRS is increasingly using "practices and procedures that harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage or allow taxpayer response," the report said.
It said the number of returns seeking refunds that agency computers set aside for screening for possible fraud grew by 72 percent, to 1.1 million, from 2010 to 2011.
The report blamed growing numbers of people who submit multiple false returns via electronic filing. The growth of refundable tax credits for purchases of first homes, college costs and other expenses is also encouraging bogus claims, since refundable credits can produce cash payments to people owing no taxes.
Olson's report said the IRS handled more than 226,000 cases claiming identity fraud in 2011, a 20 percent increase over 2010. Thieves often request refunds by using the Social Security number of a person they falsely claim as a relative, frequently early in the filing season before the actual taxpayer submits his or her return.
"You want to make sure you're not abusing the taxpayers by letting dollars go out the door," Olson said in an interview. Otherwise, "taxpayers are going to get disgusted" and lose faith in the tax system.
In one measure of errors, Olson's bureau received 21,000 complaints from taxpayers last year after the IRS blocked requested refunds because it suspected fraud. Three in four of them eventually qualified for the refunds, which averaged $5,600 and typically took six months to reach taxpayers.
In addition, the IRS corrected 10.6 million "mathematical errors" in taxpayers' returns in 2010, more than double the 4 million it corrected in 2005, the report said. But the IRS itself made mistakes - out of 300,000 returns on which it disallowed exemptions for dependent children, it had to restore the exemption just over half the time.
The report said that at the end of last year, it took the agency more than six weeks to answer nearly half of taxpayers' letters and faxes dealing with adjustments to their returns. The agency does not accept emails from taxpayers, Olson said.
And between 2004 and last year, the portion of taxpayers' phone calls the IRS answered fell from 87 percent to 70 percent.
"Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls," the report said.
Highlighting tax code complexity, 4,428 changes have been made to the 3.8 million-word code over the past decade, the report said, including an estimated 579 changes in 2010.
To cope with its growing and increasingly complex tasks, the agency is relying more on computer software designed to weed out fraud, Nina E. Olson, the national taxpayer advocate, said in her annual report to lawmakers.
But errors are abundant, creating additional work for the agency when taxpayers dispute its findings, the report said. The agency's use of computer systems sometimes ends up eroding taxpayers' rights, and people are having a harder time getting through to the IRS by telephone or letter, she said.
"The overriding challenge facing the IRS is that its workload has grown significantly in recent years while its funding is being cut," said Olson, an independent watchdog within the IRS. "This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers - and at the same time reduces the IRS' ability to deliver on its core mission of raising revenue."
IRS spokeswoman Michelle Eldridge said to combat burgeoning cases of fraud, the IRS uses congressionally approved compliance programs that are constantly audited to make sure people's rights are protected.
"While fewer dollars in a tight budget environment impacts elements of taxpayer service, it does nothing to erode our protection of taxpayers," she said.
By pointing her finger at the IRS budget, Olson was highlighting a politically sensitive issue. Especially in times of huge federal deficits, many lawmakers have shown little interest in being generous to the widely unpopular agency, which processes 141 million individual tax returns annually, including almost 120 million requests for refunds.
Congress cut the IRS budget to $11.8 billion this year. That is $300 million less than last year and $1.5 billion below the request by President Barack Obama, who argued that boosting agency spending would fatten tax collections and improve service.
Those arguments did little to persuade lawmakers.
"Like families across the country, the IRS will have to do more with less," Rep. Jo Ann Emerson, R-Mo., who heads the House Appropriations subcommittee that controls the agency's budget, said last fall.
Olson's report came days after the IRS estimated that people and companies underpaid their taxes by a huge $385 billion last year after audits and other enforcement efforts, compared with around $2.3 trillion the agency collected. Those underpayments come as lawmakers hunt ways to pare federal deficits exceeding $1 trillion yearly.
"Yet obtaining a little extra money to bring in a lot of extra money remains an intractable challenge for the IRS, and that is unfortunate," the report said.
Underscoring the IRS' volume of work, the report said the agency contacted taxpayers 15 million times in 2010 to change their claimed tax liability. Only 1 in 10 of those contacts was considered an audit, meaning most were denied the additional rights audits allow, including the ability to go to tax court.
The agency's increased reliance on computers means it is having less personal contact with taxpayers. The IRS is increasingly using "practices and procedures that harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage or allow taxpayer response," the report said.
It said the number of returns seeking refunds that agency computers set aside for screening for possible fraud grew by 72 percent, to 1.1 million, from 2010 to 2011.
The report blamed growing numbers of people who submit multiple false returns via electronic filing. The growth of refundable tax credits for purchases of first homes, college costs and other expenses is also encouraging bogus claims, since refundable credits can produce cash payments to people owing no taxes.
Olson's report said the IRS handled more than 226,000 cases claiming identity fraud in 2011, a 20 percent increase over 2010. Thieves often request refunds by using the Social Security number of a person they falsely claim as a relative, frequently early in the filing season before the actual taxpayer submits his or her return.
"You want to make sure you're not abusing the taxpayers by letting dollars go out the door," Olson said in an interview. Otherwise, "taxpayers are going to get disgusted" and lose faith in the tax system.
In one measure of errors, Olson's bureau received 21,000 complaints from taxpayers last year after the IRS blocked requested refunds because it suspected fraud. Three in four of them eventually qualified for the refunds, which averaged $5,600 and typically took six months to reach taxpayers.
In addition, the IRS corrected 10.6 million "mathematical errors" in taxpayers' returns in 2010, more than double the 4 million it corrected in 2005, the report said. But the IRS itself made mistakes - out of 300,000 returns on which it disallowed exemptions for dependent children, it had to restore the exemption just over half the time.
The report said that at the end of last year, it took the agency more than six weeks to answer nearly half of taxpayers' letters and faxes dealing with adjustments to their returns. The agency does not accept emails from taxpayers, Olson said.
And between 2004 and last year, the portion of taxpayers' phone calls the IRS answered fell from 87 percent to 70 percent.
"Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every 10 calls," the report said.
Highlighting tax code complexity, 4,428 changes have been made to the 3.8 million-word code over the past decade, the report said, including an estimated 579 changes in 2010.
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