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CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2011 CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.
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CCH Identifies Top Tax Blunders That Can Land You in Hot Water at Tax Time(RIVERWOODS, ILL., January 2011) – There are plenty of ways to work within the tax system to benefit from qualified credits and deductions when filing your return. But those trying to “game the system” in their favor by claiming illegitimate tax breaks could face fines, tax evasion charges and possible prison time, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com). “It can be tough to keep up with changing tax laws and honest mistakes happen,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “The IRS can be reasonable when issuing tax oversight penalties, but intentional attempts to avoid taxes will be dealt with much more severely.” So, what circumstances should you steer clear of when preparing your return? CCH reviews top tax blunders that could get taxpayers in hot water with the IRS. 1. Not paying taxes on income earned abroad or from offshore accounts. Taxpayers must report worldwide income, within and outside of the United States, on their tax returns. That includes income from foreign customers and applies even if you didn’t received Forms W-2, 1099 or their foreign equivalents. Those who don’t report all taxable income from overseas business transactions or offshore accounts could face civil and criminal penalties. “In years past, people conducting business overseas thought they could stash money in foreign bank accounts that they thought were out of the IRS’s reach,” said Luscombe. “However, recovering millions of dollars in unpaid taxes owed from offshore tax havens and cracking down on abusive tax schemes continue to be major IRS objectives.” 2. Not reporting income from gambling or illegal schemes. Form 1040, line 21 and Schedule A, line 28 of the tax return are a bit of a catch-all for reporting various financial gains and losses. Whether you had a lucky night at the casino or financially benefited from an illegal transaction, such as a Ponzi scheme, embezzlement or other types of fraud, line 21 is the taxpayer’s opportunity to tell all. For those who choose not to report gambling winnings or ill-gotten gains, they could be facing income tax evasion charges down the road. On the flipside, victims of embezzlement can report the amount lost from embezzlement as theft loss and deduct this from their taxes. To qualify as a theft loss there has to be an allegation by someone that there was a criminal theft, however, this generally is the case with Ponzi schemes and other embezzlement situations. 3. Under-withholding of taxes. Generally, income tax follows a pay-as-you-go approach, meaning taxpayers must pay taxes on income they earn during the year it’s earned. This is done through withholding or by paying estimated taxes on a quarterly basis. Under-withholding results in owing back taxes as well as a possible penalty, which is typically interest on the amount under-withheld. The penalty can be waived under certain circumstances, like failing to make estimated payments due to casualty or disaster. A simple way to avoid under-withholding is making sure you pay at least as much in taxes as you did the previous year (110 percent of prior year if your adjusted gross income exceeds $150,000). Another way is to pay through withholdings or estimated taxes (90 percent of what is owed for the current year). Self-employed taxpayers are most likely to fall into under-withholding, particularly those who have highly fluctuating incomes that make accurate estimating difficult. For 2010, many learning they weren’t entitled to the Making Work Pay Credit could run into under-withholding issues if they did not adjust withholding or pay estimated taxes to offset withholding reductions. 4. Non-authorized use of the First-Time Homebuyer Credit. Under the American Recovery and Reinvestment Act of 2009 (ARRA), the First-Time Homebuyer Credit was increased to $8,000 and extended into 2010 with the following provisions:
“This credit has been a moving target, so it’s not surprising that some people may inadvertently be claiming the credit when they’re not qualified. However, other people may be up to date on the rules but simply trying to take advantage of them anyway,” said Luscombe. The credit is claimed on Form 5405, First-Time Homebuyer Credit. To avoid problems, taxpayers must meet certain requirements and use the right forms to claim the credit:
Also taxpayers must remember to include regular wage and tax statements, Form W-2, W-2G or 1099-R, or enclose their 1040-V payment voucher, as applicable. 5. Not paying taxes on unemployment, wages, tips or other income. Under the ARRA the first $2,400 in unemployment benefits was excluded from 2009 income. However, for 2010, beneficiaries are expected to pay taxes on all benefits they received. Likewise, workers are expected to report all their income from work – whether it comes in the form of wages or tips. All investment income, including interest, dividends and capital gains, also is income and has its own tax ramifications. “Generally, the biggest abuses come from people who earn part of their income from tips or those who are working off-the-books, for example doing side jobs and simply not reporting the income,” said Luscombe. 6. Not paying taxes on household help. Taxpayers who employ a nanny or other household workers are required to withhold and pay FICA taxes if cash wages totaled $1,700 or more. They also have to report and pay the required employment taxes for domestic employees on Schedule H, Household Employment Taxes, with the tax amount then transferring to the appropriate line on their Form 1040 or 1040A. Taxpayers with household workers may also want to consider paying the tax on a quarterly basis by having an additional amount withheld from their salary or by making a bigger quarterly estimated payment to ensure they are not underpaying taxes, which would subject them to additional penalties. 7. Not reporting gifts given over $13,000. When someone receives a gift, its value is excludable from their gross income, meaning it’s not taxable to them. However, if they later sell it or receive any other income from the gift, that amount is taxable. Taxpayers giving gifts in excess of $13,000 as a single filer or $26,000 as a split gift by joint filers have two options to satisfy their tax obligation. They can either pay taxes on the amount above this limit or apply it against their lifetime gift tax exemption (which currently is $1 million for 2010 and $5 million starting in 2011). The tax on gifts ranges from 18 percent on taxable gifts below $10,000 to 35 percent on gifts of $1.5 million or more for 2010 and $5.5 million or more beginning in 2011. Not reporting the gift is considered tax evasion. Gifts are reported on Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return. “As a single filer, if you gave your niece a car valued at $20,000 last year, you need to decide if you want to pay taxes on the $7,000 in excess of the allowable gift tax or have that amount applied to your lifetime gift tax exemption,” said Luscombe. “Your niece owes no taxes on receiving the gift. However, if she sells it a few years from now, she owes taxes on any gain on the sale amount.” 8. Inflating the value of charitable donations. The IRS expects people donating items to qualified charitable organizations to use fair market value in determining what each items is worth. For non-cash donations of more than $500, a written description of the donated property must also be furnished and non-cash donations of more than $5,000 must be appraised. Additionally, cash donations of any amount require proof, such as a cancelled check, credit card statement or receipt from the charity. Contributions of $250 or more also require a letter from the organization specifying the name of the donor, the amount given and the date received. 9. Exaggerating business expenses. The IRS pays close attention to fraudulent tax abuses such as inflating business expenses or attempting to write-off personal and family expenses under the guise of a home-based business, where deductions are clearly invalid or where a business doesn’t exist. For expenses to qualify as business deductions they must be ordinary and necessary expenses paid or incurred in carrying on a trade or business. Taxpayers must have proof to legitimize business deductions such as receipts. If they cannot show proof of expenses, they will be required to pay back taxes and interest on non-substantiated deductions. The IRS may take other measures depending upon the extent of the abuse. “Some home-business owners are under the misperception that as long as they keep their receipts everything is deductible,” said Luscombe. “However, the costs of heating your entire home just to keep the office warm or payments to your kids for doing household chores are not deductible expenses for your business.” Sole proprietorships may claim business expenses on Schedule C, Profit or Loss from Business. Partnerships and joint ventures generally report expenses on Form 1065 or 1065-B. 10. Not filing a tax return. Ever since the enactment of the federal income tax in 1913, there have been many legal challenges to the system that have fallen short. Most people are required to file a federal income tax return. Income thresholds for those who must file range based on age and filing status. For single filers under age 65, returns must be filed if they earn $9,350; returns must be filed for married couples under age 65 filing jointly if their income is $18,700 or more. Not filing a tax return when required is considered income tax evasion with penalties including paying back taxes, interest, possible fines and potentially serving a prison sentence in the most serious cases. 11. Other common mistakes on tax returns:
2011 Filing Deadline Extended to April 18For 2011, you have a couple of extra days to file a return after the usual April 15 deadline date. This tax season’s deadline filing date is Monday, April 18. Taxpayers can request an extension until October 15, but they must file that request (using IRS Form 4868) by April 18. About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com). -- ### -- nb-11-19
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