Q&A: Lost tax return

Dear Liz: My CPA sent my completed tax return to my home address via first-class mail with no tracking number. The large envelope should have arrived in two days. Over a week has passed and it’s nowhere in sight. I am freaking out as it has all my financial data and is a gateway to fraud of every sort!

The various post office officials have really done nothing to assist in its location. I have credit freezes at all three bureaus and my bank accounts require passwords. What else can I do to try to avert disaster? I have been so distraught it has literally made me ill. And before you say it, yes, this mode of transit will never happen again.

Answer: It shouldn’t have happened in the first place.

With so much identity theft and tax refund fraud these days, it’s astonishing that tax preparers continue to send sensitive, personal information through the U.S. mail with no tracking — and in envelopes helpfully marked with the CPA firm’s name to make the returns easier for thieves to spot.

Your credit freezes should prevent identity thieves from opening new credit accounts in your name using purloined information, but they won’t stop tax refund fraud.

There’s typically not much you can do to protect yourself from this crime. People who have already been the victims of such fraud can request an “identity protection personal information number” or IP PIN from the Internal Revenue Service to prevent future fraudulent filings.

The IRS also allows residents of Florida, Georgia and the District of Columbia to request IP PINs as part of a pilot program, but residents of other states aren’t eligible.

You can try to file as early in the year as possible, but that’s no guarantee a criminal won’t file using your Social Security number first — and then it can take months to get any money you’re owed.

To help protect your bank accounts, see if your bank offers something called “two-factor authentication.” Two-factor authentication requires something you know, such as a password, plus something you have, such as a token that creates unique number codes or code that’s texted to your cellphone.

If your bank doesn’t offer this layer of protection, and only ascertains your identity with the use of security questions, strongly consider moving your accounts to another bank.

Security questions are easy to hack, as evidenced by the massive breach of the IRS’ Get Transcript service, where hackers were able to successfully answer the security questions for hundreds of thousands of taxpayer accounts.

Four ways to get a jump on tax season

bigstock-U-s-Income-Tax-Return-Form-28476797-e1390508229663Taxpayers face a cliffhanger again this year as Congress dithers about extending more than 50 expired tax breaks, including popular deductions for college tuition and fees, mortgage insurance and sales taxes.

As we wait for lawmakers to act, though, we still have time left in the year to make adjustments based on changes that have already happened. In my latest for Reuters, I share four ways to get a head start on tax season.

In my latest for Bankrate, how to find an honest financial advisor.

Q&A: The legitimacy of tax reduction companies

Dear Liz: I fell behind on making my quarterly estimated tax payments for a long list of reasons, and when I file my return, the IRS will find out. I have heard they can seize your IRAs, which I have but do not want to cash out to pay.

I found a service on the Internet with good references and no bad reviews. The company said it can help get a payment program and often a reduction in the amount owed. It seems worth a couple thousand dollars to try it. Your thoughts?

Answer: There are a number of reasons why a company might have no negative reviews online. Maybe it’s a great company. Or maybe it’s not, but it just launched or took over a legitimate firm with the intention of fleecing as many people as possible.

Don’t be persuaded by the idea that the company might reduce what you owe. Settlements aren’t impossible, but the taxpayers who get them (typically after long and drawn-out battles) are those whose financial situations are dire and not expected to improve.

The IRS has many, many ways to collect its due and won’t just roll over because you don’t want to pay.

In any case, you don’t need to hire someone else to set up a payment plan for you.

If you owe $50,000 or less as an individual or $25,000 or less as a business, you can request an installment plan online and get an immediate response. If you owe more than those amounts, you can request an installment agreement using Form 433F.

The costs are low. If you can pay your balance within 120 days, the plan is free. Otherwise you’ll pay $52 for a direct debit agreement or $105 for a standard or payroll deduction agreement. Lower-income taxpayers can get a reduced fee of $43.

For more, visit http://www.irs.gov/Individuals/Payment-Plans-Installment-Agreements.

If you can’t pay your balance in the allotted time, you may need to hire some help. You can get referrals to CPAs who can represent you in front of the IRS from www.aicpa.org.

Q&A: State tax breaks for 529 plans

Dear Liz: You recently answered a question from grandparents who were contributing $20,000 to their grandson’s college education. You correctly told them they did not qualify fdownloador federal education tax credits or deductions because he was not a dependent. You might let grandparents know, however, that they may get a state tax break for contributing to a 529 college savings plan.

Answer: Most states that have state income taxes offer some sort of a tax break for 529 college savings plan contributions. (The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey and North Carolina, according to SavingForCollege.com. Tennessee has a tax on interest and dividends but no 529 tax break.) In some states, even short-term contributions qualify for a deduction, so grandparents could contribute money that’s quickly withdrawn to pay qualified higher education expenses and still get the break. SavingForCollege has details on each state’s tax benefits.

Q&A: IRA contributions and tax deductions

Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.

I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?

Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.

When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.

When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.

Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.

If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.

You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.

If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.

In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.

Q&A: IRS Electronic Payment System

Dear Liz: I was intrigued by your answer to the question about paying taxes through the IRS Electronic Tax Payment System. I went to the website you mentioned (www.irs.gov/payments) and found that there was a fee.

You didn’t point this out, and I think it is relevant. My quarterly estimated payment would be $1,726 and the fee for a Visa payment would be 2.29%, which equals $39.55. If my math is correct, that is quite a significant amount. Did I reach the correct interpretation of fees being charged?

Answer: If you return to www.irs.gov/payments, you’ll see two big blue buttons. The one on the left, IRS Direct Pay, takes you to the IRS’ free payment system for individuals. Directly below that button is a link for the Electronic Federal Tax Payment System, which offers a free method for businesses to pay their taxes.

Only if you choose the button on the right that says “Pay by Card” will you be taken to various payment processors that charge a fee. Those fees can be significant, which is why it’s worthwhile to take the time to explore the free options.

Q&A: IRS direct pay

Dear Liz: Regarding the reader whose tax payment never made it to the IRS: I agree that electronic payments are the best and safest, but you might want to emphasize that the payments should be done directly through the IRS website.

I made the mistake of scheduling a couple of payments through my online banking, and a month later I received a notification from the IRS that I was in arrears, although the bank statement indicated that the payment has been debited.

It took several months of correspondence before the IRS acknowledged that the money was received. Luckily, the penalties and interest were only about $20, so I didn’t have to go through the additional hassle and filling out forms to reclaim it. The IRS website is very easy to use, and I haven’t experienced any problems since.

Answer: The IRS’ Electronic Tax Payment System, which was designed primarily for businesses, has been around for nearly two decades, but the agency only recently added a “Direct Pay” option expressly for individuals to make estimated tax payments and pay bills.

These methods and others, including electronic funds withdrawal when you e-file your return, are explained at http://www.irs.gov/payments.

Q&A: Electronic Federal Tax Payment System

Dear Liz: I’m often required to make estimated quarterly payments and was always concerned I would miss one of them.

A few years ago, I came across the Electronic Federal Tax Payment System (EFTPS) that is offered by the U.S. Treasury. The beauty of the system is that once it is set up, there is nothing more for me to do. I set up all the payments I need to make and the system takes care of it.

I just have to set it up each year at the time I file my tax return. I have been using the system for several years and have had no issues whatsoever with it.

Answer: Thanks for sharing your experience with EFTPS. While that system allows you to schedule payments up to 365 days in advance, the Direct Pay option for individuals allows scheduling only up to 30 days in advance.

Q&A: Lost tax payment

Dear Liz: I just received a letter from the IRS informing me that I missed a quarterly tax payment last September with several resulting penalties. I made that payment with a check from a securities trust account that I don’t closely monitor, so I didn’t realize the check hadn’t been cashed. The check was placed in a pre-addressed envelope with the IRS payment notice, stamped and deposited at the post office and has never been seen since. Do I have any recourse, and should all payments to the IRS be sent by certified mail with receipt required?

Answer: Electronic payments are typically the best and safest method for getting money to the IRS. Electronic payments generate a digital trail that shows the money leaving your account and landing at the IRS.

If you insist on paying with checks, use certified mail, return receipt requested. This paper trail isn’t a sure way of proving your case — after all, you could have mailed an empty envelope — but at least you’d have something to show the IRS.

Still, you shouldn’t give up hope of getting the penalties waived, said tax pro Eva Rosenberg, an enrolled agent who publishes the Tax Mama site. You can request a penalty abatement based on “reasonable cause,” Rosenberg said. According to the IRS site, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.”

The IRS may say that you didn’t exercise “ordinary business care and prudence” since you didn’t use certified mail. But you can make the counter-argument that you’ve consistently made previous estimated tax payments this way without incident and this is the first time you’ve encountered a problem.

Rosenberg said the key to prevailing is to keep trying. The IRS may reject your first and second attempts to get a penalty waived but acquiesce on the third, she said.

“Don’t give up after the first two rejections,” Rosenberg said.

One more thing: Given the high rates of identity theft and database breaches, closely monitor all your financial accounts. That means checking them at least monthly, if not weekly. If you have more accounts than you can adequately monitor, consider consolidating accounts.

Q&A: Thrift Savings Plan

Dear Liz: I turned 50 last year but did not make the catch-up contributions I was eligible to make to my government Thrift Savings Plan. This mistake cost me approximately $5,000 in additional taxes in 2014.

To make matters worse, my wife also did not make catch-up contributions in 2014 or for the previous four years for which she was eligible to do so. Can we retroactively make catch-up contributions for the last three tax years and file amended tax returns so we can get additional tax refunds?

Answer: It’s highly unlikely you cost yourself $5,000 in additional taxes, since the catch-up contribution for people 50 and older in 2014 was only $5,500. Your federal tax rate would have been limited to your tax bracket, which is likely somewhere between 15% and 28%. You could have cost yourself $5,000 if you didn’t make any contribution to the plan, since last year’s limit was $17,500 or a total of $23,000 with the catch-up.

The short answer to your question about whether you can catch up with catch-ups is no.

Contributions to workplace retirement plans typically have to be made before the end of the plan year. IRAs, meanwhile, allow contributions until the due date for filing your returns, so that contributions for 2014 could be made until April 15, 2015, and contributions for 2015 could be made until April 15, 2016.

Presumably you’re now signed up to contribute the maximum to each plan.

If you have extra cash to invest, both you and your wife could open IRAs even though you’re covered by workplace plans. If your modified adjusted gross income (MAGI) as a married couple is $96,000 or less, you can deduct the full contributions of $6,500 ($5,500 plus a $1,000 catch-up) each. You can get a partial deduction if your MAGI is between $96,000 and $116,000.

If you can’t deduct your contribution, consider putting the money in Roth IRAs if you can. Roths don’t allow upfront deductions — but the money is tax free when withdrawn in retirement. You and your wife could contribute $6,500 each to a Roth if your MAGI is under $181,000.