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Do I Need to Keep That?

It happened again last week. A tax client e-mailed me to ask for a copy of her 2016 income tax returns. She was refinancing her home and the lender had asked for two years of tax information. As required, I had sent a file copy of her tax returns after they were electronically filed. She apparently did not save it.

I was happy to send her another copy. But what were her options if I was not available to help? What if she had prepared her own returns and not kept a copy? Is this really a big deal?

The short answer is “yes”. Taxpayers should keep a copy of their past tax returns and supporting documents for at least three years. Taxpayers claiming certain securities or debt losses should keep their tax returns and documents for at least seven years.

Here are five tips about prior-year tax records:

  1. Save time – Keeping copies of prior year tax returns saves time. Often, prior-year tax information is needed to file a current year tax return or to answer questions from the IRS.
  2. Validate identity – Taxpayers using tax filing software for the first time may need their adjusted gross income (AGI) amount from their prior year’s tax return to verify their identity. Learn more at Validating Your Electronically Filed Tax Return.
  3. Order a transcript – A tax transcript that summarizes tax return information and includes AGI can be ordered for free from the IRS. Transcripts are available for the current tax return, plus the past three tax years. Plan ahead, though, because delivery typically takes five to 10 days from the time the IRS receives the request.
  4. Get an actual tax return copy – This option costs $50 per copy and requires taxpayers to complete and mail Form 4506 to the appropriate IRS office listed on the form.
  5. Verify tax payments – Good news! You don’t need a transcript or return copy to find out if you owe the IRS. Taxpayers can verify payments or amounts owed in the last 18 months. Just click on this link – view their tax account.

The bottom line is simple. Save time and aggravation by keeping prior-year tax information. Most taxpayers should keep tax returns and supporting documents for at least three years, seven years for taxpayers with securities transactions or losses. Keeping these records yourself prevents all the time and effort to get them from your tax preparer or the IRS.

Children and Dependents under the New Tax Law

One of the news headlines about the 2017 Tax Cuts and jobs Act was the elimination of personal exemptions, which took away a $4,050 tax deduction for each taxpayer, spouse and qualified dependent. Families with several children were pretty unhappy to hear about losing that hefty tax deduction, and even unhappier to wait for the IRS regulations to understand how this change would impact their tax bill.

Well, the wait is over. In November 2018, the IRS issued notices and regulations to clarify the new tax law regarding the Child Tax Credit, the Additional Child Tax Credit, and the new Credit for Other Dependents. Here are the details you’ll need to understand for your 2018 income tax return:

  • Child Tax Credit

Beginning in 2018, you may able to claim the Child Tax Credit if you have a qualifying child under the age of 17 and meet other qualifications, like the tests for support and residency. The maximum amount for the Child Tax Credit is $2,000 per qualifying child. Each qualifying child must have a Social Security Number issued by the Social Security Administration before the tax return due date, including extensions.

  • Additional Child Tax Credit

Qualifying taxpayers may take up to $1,400 of an Additional Child Tax Credit for each qualifying child under the age of 17. This credit is refundable, meaning that the credit may give you a refund even if you don’t owe any federal taxes.

  • Credit for Other Dependents

Dependents who can’t be claimed for the Child Tax Credit may still qualify for the Credit for Other Dependents of up to $500. Examples include children 17 years of age or older or parents for whom you provide 50% or more of financial support. This credit is non-refundable, meaning that it can only be used to offset tax liability. No refund is provided if taxes are not due or the credit is greater than the taxes due.

Not sure if your dependents qualify you for the Child Tax Credit, the Additional Child Tax Credit, or Credit for Other Dependents? The IRS has you covered. Use their Interactive Tax Assistant to see if you’re eligible.

Will You Owe Tax Penalties for 2018?

Tax withholding tables and tax rates changed in February 2018, due to the 2017 Tax Cuts and Jobs Act. Doing a “Paycheck Checkup” was promoted by the IRS and in the news all year to help taxpayers avoid an expensive surprise when filing their 2018 income tax returns in 2019. You’ve been meaning to Checkup on your Paycheck, but it’s already late November.

Will you have to pay a tax penalty if you owe? Maybe not…

To avoid a penalty for 2018, your tax paid or withheld must total 90% of your 2018 tax liability, or 100% of your 2017 tax liability, whichever is lower. Since 2010, the number of taxpayers assessed underpayment penalties and interest has increased by 40%, from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That really adds up!

Here are four ways to avoid tax penalties:

  1. Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2018 refund.
  2. Pay estimated taxes if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15 and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due stops the clock on 2018 interest accruals for those balances.
  3. Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.
  4. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired. Do your homework to see if you belong in one of these categories.

 

Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. Tools are available for a Paycheck Checkup at https://www.irs.gov/paycheck-checkup.

Automation Saves Money and Time

Would your organization save money by doing more in less time, with greater accuracy? Would having complete, accurate reports available at the push of a button save time and inform decision making? Could reducing errors and identifying suspicious activity minimize financial losses?

Yes, yes and yes!

Increasing productivity, reducing errors, informing decisions and minimizing losses all happen when organizations automate their processes and controls. Automation is the single best way to effectively manage and get visibility to an organization’s finances and operations. Plus, organizations with a higher percentage of automated controls have better safeguards to protect assets and lower the risk of fraud.

Sure, automating is an investment. But the cost of the technology has come way down, while the tools have gotten more powerful. Advanced automation is now accessible even to smaller organizations, and the return on investment is high. Automation, when well-planned and implemented, not only reduces errors and identifies risk. It frees your team to focus on high-value work, keeping them interested and engaged.

Automation will not replace your team. There will always be a need for skilled financial and operations professionals to assess the results of automated reports and any anomalies that are identified. Manual processes and controls greatly enhance the opportunities for fraud and abuse to occur and go undetected, draining money from the organization. Organizations that have a high percentage of automation have a more comprehensive approach that increases confidence that organizational assets are safeguarded.

Automation allows organizations to quickly analyze huge volumes of data from multiple systems, flagging potential fraud patterns as they happen. Instead of a laborious, hands-on process of performing spot checks on random samples of data, software runs continuously in the background, doing the tedious work of scanning everything from emails to purchase orders, looking for patterns and anomalies, and flagging outliers for further investigation.

Organizations that fall into the low end of the range on the percentage of automated processes and controls should take out some time to look at the available software tools that can help crunch much more data, more thoroughly, in less time. Some options are affordable for small businesses and nonprofits. Once automated controls are in place, you’ll wonder how you ever got by without them.

 

Will the IRS Be Ready for the 2019 Tax Season?

Believe it or not, the 2019 tax season is almost here! The Internal Revenue Service has been working for months to be ready to process more than 150 million tax returns that will be filed for the 2018 tax year. Meeting the deadline could be tight — hundreds of forms, instructions, and publications required updating because of the Tax Cuts and Jobs Act, passed in December 2017.

We are still waiting to see all the new forms, but the IRS circulated a copy of the new Form 1040 to the tax community not long ago. The new 1040— about half the size of the current version— would replace the “old” Form 1040, Form 1040A and Form 1040EZ. Consolidating the three “old” versions allows all taxpayers to use the same form.

Here’s what you can expect to see on your 2018 individual income tax return:

  1. The new Form 1040 uses a “building block” approach that reduces the return to one simple form that is supplemented with additional schedules if needed. Taxpayers with simple tax situations will only file this new 1040 with no additional schedules.
  2. Several additional new schedules have been developed to supplement the new Form 1040 to report other income, adjustments, credits, and items that appeared on the longer, “old” version of the Form 1040.
  3. The new schedules are designated by numbers instead of letters. Here’s a quick overview of the new schedules and what they are for:
    • Schedule 1 is for taxpayers with additional non–wage sources of income or adjustments to income, such as IRA contributions, student loan interest, and health savings account contributions.
    • Schedule 2 is for taxpayers with additional taxes, such as alternative minimum tax or excess advance premium tax credit repayment.
    • Schedule 3 is for nonrefundable tax credits such as the foreign tax credit, education credits or residential energy credit.
    • Schedule 4 is where taxpayers will add up certain taxes, such as self-employment tax, and household employment taxes.
    • Schedule 5 is to add up tax payments, such as estimated tax payments or amounts paid with an extension.
    • Schedule 6 is used to report a foreign address or appoint a third-party designee to discuss the tax return with the IRS on your behalf.

Will the IRS be ready for the 2019 tax filing season? If changes to the Form 1040 are any indication, it could be a tight dash to the deadline. Have questions? Check out www.irs.gov or call your tax professional.

Real Estate and the New Tax Law

If you’ve been house hunting recently, you know that it’s pretty complicated. Negotiating a price and getting mortgage financing are time consuming and challenging tasks. Throw in the new Tax Cuts and Jobs Act and it’s confusing, too. The new tax law passed in December 2017 changed a lot of the rules that drive your decisions about real estate. Not knowing about the new tax rules could mean an expensive surprise derails your plans.

Not sure where to turn? Well, you’re in luck because I’m co-presenting a workshop with Arlington Community Federal Credit Union on Thursday, December 6, 2018, where all of your most complicated questions will be answered. The workshop is designed to raise the awareness of prospective and existing real estate owners about how the new tax law impacts decisions for purchasing and financing a home or rental property.

Three experienced professionals – a real estate agent, mortgage lender and tax practitioner (yes, that would be me) – share their insights based on questions and issues they encounter day-to-day with their clients. Participants are encouraged to bring their own questions about real estate purchasing, financing and related tax matters and hear what the subject matter experts have to say.

Some of the highlights we will address include:

  • The home mortgage interest deduction for purchases after December 31, 2017, is limited to $750,000 of indebtedness for first and second residences, including home equity used for home purchase/improvement. This will impact a significant percentage of taxpayers in the DC area and other relatively expensive real estate markets, like San Francisco.

 

  • The combined deduction for state and local income, sales and property taxes is limited to $10,000. This limit will significantly impact many high-income taxpayers and home owners in states with high real estate tax rates, such as New Jersey and New York.

 

  • Lower individual income tax rates reduce the tax savings aspect of home ownership. On the other hand, real estate is often an appreciating asset. With careful planning, real estate can be a great security blanket in retirement after the mortgage is paid off.

 

  • The new tax law does not impact real estate held for investment or business. No worries about the new individual tax deduction limits for mortgage interest and state/local taxes. Nice to know that some things stay the same.

 

Want to know more? Join us on Thursday, December 6, 2018, from 6:00 – 7:00 PM and learn about how the new Tax Cuts and Jobs Act impacts your real estate purchase and financing decisions. Register here: https://bit.ly/2BYekUj

Prevent Fraud in Your Nonprofit

Nonprofits are even more susceptible to fraud losses than other organizations because of typically lower levels of staffing and technology. Fraud is also more prevalent in nonprofits due to a common assumption that everyone working there, especially volunteers, is nice, honest, and trust-worthy.

Unfortunately, high levels of trust and low levels of staffing and technology can give free reign to people who are unscrupulous or experiencing extreme financial pressures. A lack of processes and controls can give those individuals the opportunity to steal donations that nonprofits work really hard to raise. Not to mention that being a good nonprofit steward is part of the trust relationship with financial donors.

Recognizing that fraud can happen and implementing a proactive action plan help to prevent nonprofit fraud. Nonprofits can implement practical and cost-effective steps to minimize the chance that a fraudulent act will occur by taking these three fraud prevention tips:

 

  • Separate Tasks – The most powerful weapon against fraud is separating tasks or duties. Separation of duties prevents one person from having too much control over financial activities, like separating expense approval and check signing from the person who reconciles the bank account.

 

  • Report Anomalies – Identify anomalies, or exceptions, from expected conditions or results highlights events or actions for additional review and action. Reporting unusual activity or results to an independent reviewer could end up drawing attention to and ending fraudulent activities.

 

  • Independent Oversight – Periodic independent reviews performed by a knowledgeable party is another way to safeguard nonprofit financial assets. Methods include audits and effective governance, such as the Board’s financial statement review and the Treasurer’s review of all expenses incurred by the Executive Director.

 

Recognizing that fraud can happen and implementing a proactive action plan to minimize the risk are important steps for preventing nonprofit fraud. Powerful weapons like separating tasks, reporting anomalies and independent oversight reduce the risk of losing donations that nonprofits work really hard to raise.

Award or Cyber Threat?

I don’t generally believe in coincidences, but one sure happened to me last week. On the very same day that I was talking to a colleague about how obvious phishing e-mails can be, I received a cleverly-disguised phishing message that was very tempting…at first.

Many scam e-mails come from someone you know who has been hacked. A message is sent to everyone in that person’s contacts. It contains a link and urges recipients to click on it to see something amazing. Clicking on that link infects your computer with malware or ransomware.

Another version is phishing for your banking and other financial information by masquerading as a bank that has an incoming wire transfer for your account. All you need to do is approve the transfer by clicking on a link that similarly infects or compromises your computer and your data.

My tempting phishing message was cleverly planned just for me (aren’t I special?). It did not come through my regular e-mail; it was sent as a Request for Service on my business website. The title was “Nominated for Best Business Award” and said I had been nominated for Best Consulting Business in Arlington, Virginia, where my business is located. All I needed to do was to click on the link. The message even contained a password I was to use to access the link.

How cool is it to be nominated for an award? Who could resist learning more? I knew of the Arlington Best Business Awards, sponsored by the Arlington Chamber of Commerce, and Arlington’s Best Business Awards, sponsored by Arlington Magazine. I was super excited to be nominated!

But not too excited to stop and make a few observations. For example, the message came from a third party that I did not recognize. The award category was not familiar, based on my attendance at award recognition events in the last few years. Then, I vaguely remembered that the 2018 Chamber and Arlington Magazine awards were already celebrated earlier in the year.

It was a scam! After a little detective work on the internet, I was sure that I was not nominated for an award and that I was targeted for a cyber threat. I searched the name on the e-mail extension and found that it led to a website that my computer’s security wouldn’t let me access because the site was infected. I looked at Arlington Magazine’s and Arlington Chamber’s websites and found that not only had the 2018 awards been bestowed, there was no category for Best Consulting Business.

I felt very lucky that I resisted temptation to click on that link, even if it meant that I was not nominated for an award. At work or at home, your confidential information is at risk. Spending money and time on computer security protection won’t do any good if you or someone who works with you clicks on a cyber threat disguised as an award, a funds transfer, or something amazing to see.