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Taxes Category

Get advice before transferring house deed

Jul 23, 2012 | | Comments Comments Off

Dear Liz: My mother will be 88 in August. She owns her own condo, which is worth about $95,000, and has $5,000 in life insurance. She is in good health and lives comfortably on a monthly pension. She wants to put her condo in the names of my brothers and myself. What is your advice?

Answer: This is probably a bad idea for a couple of reasons. You and your siblings wouldn’t get the “step up” in tax basis that would be available if you inherited the property. In other words, you might owe capital gains taxes when you sell that could have been avoided if you had inherited the property rather than received it as a gift.

A potentially bigger issue: Medicaid look-back rules. If your mom needs nursing home care, her eligibility for the government program that pays for such care could be compromised by such a transfer. Many elderly people transfer their homes to children hoping to “hide” the asset from Medicaid, but all such transfers typically do is delay the older person’s eligibility for help.

Before she does anything, take her to an elder-law attorney who can help her — and you — plan sensibly for her future. You can get referrals from the National Academy of Elder Law Attorneys at http://www.naela.org.

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Watch out for tax refund theft

Jul 09, 2012 | | Comments Comments Off

Dear Liz: My cousin had his house broken into a little over a year ago. A lot of things were taken, but insurance replaced most of what he thought was missing. This year after he filed his return he was contacted by the IRS, which told him that a return using his information had already been filed and the refund check cashed. The IRS is investigating the situation now, but I really worry about what is going to happen to his Social Security in the future if someone else is using his numbers or those of his children. Do you have any information on what steps he should take?

Answer: Theft of tax refunds is a growing problem. In fact, tax identity theft is the No. 1 fraud on the IRS’ list of Dirty Dozen Tax Scams of 2012.

The fraud is often perpetrated by organized criminal gangs that con, steal or buy people’s personal information to create bogus returns. Some people fall right into the bad guys’ hands by responding to emails that purport to be from the IRS. (The IRS doesn’t email people to request personal or financial information.)

If the problem isn’t resolved within a few months, your cousin should contact the agency’s Identity Protection Specialized Unit at (800) 908-4490.

Since the criminals already have his Social Security number and other important financial information, he also should put security freezes on his credit reports at all three bureaus. Links to the bureaus and other information for identity theft victims can be found on the IRS’ site at http://www.irs.gov.

Categories : Identity Theft, Q&A, Taxes
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Who pays for tax pro’s mistake?

Apr 23, 2012 | | Comments Comments Off

Dear Liz: Last year I bought an electric vehicle, motivated in part by the $7,500 federal tax credit. I consulted with my tax preparer, a CPA, to ensure I would generate enough income to fully use the one-time, use-it-or-lose-it credit. In December 2011, I informed her of the exact type of that year’s income (earned income, capital gains, dividends, interest and so on) and detailed all my deductions. She assured me that based on those numbers my tax burden was $8,600, more than sufficient to use the credit. It was enough, in fact, that I could use more deductions and losses, so I made some charitable contributions and sold a losing investment. The final numbers were very close to the estimates she received from me in December. Now that she has completed my federal tax return, however, my tax burden turns out to be far less than she estimated. In fact, it’s zero. Ordinarily I’d be delighted, but I specifically consulted with her to ensure I had a large-enough tax burden to use up the credit. I could have sold some winning investments to generate a bigger tax burden, but have now lost that credit forever. So far she has not responded fully to questions about what happened, and I now suspect she may simply have guessed at the tax burden and not run the numbers through any tax preparation software. I feel that she has in effect cost me $7,500. Am I right to be aggrieved and do I have any recourse?

Answer: Of course you’re right to be aggrieved. One of the reasons to hire a tax professional is to get good advice about managing your tax bill.

Human beings make errors, of course. No one is perfect. But it’s disturbing that your CPA hasn’t told you clearly why she made the mistake she did or, apparently, offered any kind of recompense.

When tax pro mistakes cost you money, it’s typically because the preparer underestimated your tax burden and the IRS catches the error. In that case, your tax pro shouldn’t be expected to pay the extra tax, since you would have owed the money anyway if she’d done the return correctly. But many tax preparers will offer to pay any penalties or interest the taxpayer owes because of their errors, said Eva Rosenberg, an enrolled agent who runs the TaxMama.com site.

In this case, of course, your pro overestimated your tax burden, ultimately costing you a valuable credit. You could always ask her to compensate you for some or all of that lost credit. At the very least, she should be willing to refund any fee she charged you for her advice, Rosenberg said.

You may want to review your own behavior to make sure you didn’t contribute to this situation. Given the amount at stake, you should have called to set up a formal appointment in which the two of you could go over the numbers and your previous year’s tax return, if she didn’t prepare it. That would ensure she had enough information to make a reasonable prediction. If instead you called her up with a “quick question” — tax questions are rarely quick, by the way, and the answers almost never are — then you helped set yourself up for a disappointing outcome.

In any case, you should find another tax pro, since this incident — and her handling of it — indicates she’s not quite up to the job of being your advisor.

Categories : Q&A, Taxes
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Wait 7 years to shred tax documents

Feb 27, 2012 | | Comments Comments Off

Dear Liz: With tax time coming up, I have an important question. For years I have been told that the IRS has three years to audit you and after three years, supporting documentation can be shredded. But I read from other sources (including you) that we should wait seven years. So, which is it?

Answer: Your biggest risk of audit is definitely in the first three years after your tax return is due or the date it was filed, whichever deadline is later. But the IRS has another three years to audit you if it suspects you have underreported your income by 25% or more. (There’s no limit if it suspects you deliberately committed fraud.)

The seven-year recommendation stems from how we file tax returns — our 2011 return will be filed by April 2012, for example. Adding seven years to the year on the tax return should help most law-abiding taxpayers remember how long they need to hang on to supporting documentation.

Consult with your tax pro, but you may be able to save time and space by scanning your documents and keeping electronic, rather than physical, copies. The IRS accepts digital data as long as it can’t be altered.

Categories : Q&A, Taxes
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Dear Liz: Your recent column about disclosing Social Security numbers raises an important question. Federal tax law requires millions of Americans to disclose their Social Security numbers to those who pay a recipient at least $600 in a year. In practice, many payers request this information when paying much less than that. Millions of people have their Social Security numbers floating around on millions of computers, many of which are not secure. Why doesn’t anyone write about this or discuss the consequences of being required by law to disclose your Social Security number all over the place? This requirement is a recipe for identity theft.

Answer: You’ve pointed out another problem with using Social Security numbers as an all-purpose identifier. Federal and state laws require businesses that collect Social Security numbers to protect that information. But the fact remains that the more entities that have your number, the more vulnerable you may be to identity theft.

As an individual, you’re unlikely to change the IRS’ mind about the necessity of collecting this information. But when you’re asked for your Social Security or tax ID number, it’s fair to ask the requester how your information will be protected. That at least puts the requester on notice that you expect the laws regarding the safeguarding of personal information to be followed.

Categories : Identity Theft, Q&A, Taxes
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Don’t be too quick to destroy paperwork

May 23, 2011 | | Comments Comments Off

Dear Liz: I’ve seen some writers suggest that people can destroy financial and tax information after three years. Let me tell you my story. Before my sister died, I had to take care of her finances. She had little money left but she had to go into an assisted-living facility. I had to show proof of five years’ earnings and financial statements. So please tell people not to shred or discard information after three years.

Answer: It sounds as if you were getting your sister qualified for Medicaid, the government program that covers health and custodial care for the indigent. Medicaid now has a five-year “look back” period that penalizes transfers of money or assets when people apply for coverage. The look-back period is designed to discourage people from artificially impoverishing themselves by transferring assets to others so that they can qualify for Medicaid to cover nursing home bills.

You’re right that destroying financial documents after three years may be a bit precipitous. The IRS typically has three years from the due date of the return, or the date it was filed, whichever is later, to conduct most audits. But the deadline can be extended an additional three years if the IRS believes you significantly underreported income. And certain documents need to be retained longer. That’s why many tax experts recommend hanging on to supporting documents for your tax return for at least seven years, and keeping the tax returns themselves indefinitely. You also might consider scanning important financial documentation into your computer and keeping back-ups offsite.

The good news is that many of the statements you’re likely to need can be reordered from the financial institution that originally issued them. There may be fees involved, but many banks, brokerages and credit card firms easily can provide you with statements dating back six years, if not longer.

Categories : Q&A, Taxes
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Dear Liz: I read your column about the reader whose tax papers were missing and couldn’t believe my eyes. A similar thing happened with me. My accountant mailed my returns to me as always, but this time they did not arrive the next day as they always did. I was worried sick because, of course, the Social Security numbers and all of our banks are listed in the returns. I was very worried that someone had stolen our returns and would use them either for identity theft or to drain our bank accounts. I filed a theft report with the Postal Service and fraud alerts with credit reporting agencies. Three long weeks later, I got an envelope from the IRS with the returns in it, requesting the missing signatures on the returns. Apparently the returns had been sent to the IRS rather than to us. I strongly suspect there is a flaw in the software the accountants are using this year that is sending the returns directly to the IRS instead of to the accountants’ clients for signatures. If you have the email address of your reader, please have him or her call the IRS, and I bet they have the return and all of the original paperwork.

Answer: Actually, the reader followed up to say her supporting paperwork eventually made its way to her mailbox. The return itself, as noted in the column, was electronically filed without her permission or review.

Whether there’s a software glitch or simply overworked preparers making mistakes is unclear. But these experiences do highlight the risks of using the U.S. mail for sensitive information. Here are another reader’s thoughts on the subject:

Dear Liz: As a tax preparer, I deal with clients who live 100 or more miles away, and I have never had a problem with mailing of documents in either direction. Perhaps they may be delayed somewhat, but they have always arrived. As to the issue of the preparer filing electronically without permission, the IRS mandates that a return can be filed electronically only after the preparer receives the taxpayers’ approval (IRS Form 8879 must be signed by the client). Therefore it appears that the tax preparer in this case may have acted in a manner not acceptable by taxing agencies. This is something taxpayers should be wary of in dealing with tax preparers.

Answer: That’s definitely true, but perhaps you should consider being a little more wary of the mail system. Just because nothing has happened yet to all that sensitive data doesn’t mean something can’t or won’t. It may cost a little more, but if your clients can’t drop off information and pick it up themselves, paying for delivery services that offer tracking information is a way to make these transactions more secure.

Categories : Q&A, Taxes
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Dear Liz: I sent my tax preparer everything he needed for my return, including the originals of my W2 forms, bank 1099s, property tax bills (including a copy of the check showing the payment) and a year-end mortgage statement. A week later he said it was done and that he had mailed the return and paperwork back to me. It’s been three weeks and I still haven’t received the paperwork. What I did get was a direct deposit of my refund, so apparently he filed the return without telling me. I am sick to death that all my private financial information is floating around in the mail system somewhere and that it could get into the hands of a dishonest person.

Answer: You’ve learned a couple lessons, foremost among them that you need a new tax pro. Filing your return without letting you see it was a definite no-no.

Another lesson is that your private financial data probably shouldn’t be entrusted to the U.S. mail system. It’s more secure to drop your documents off with your tax preparer and pick them up yourself, along with a copy of your return, when he or she is done. The original return can be electronically filed using the IRS’ secure, encrypted system, eliminating the need to use the mail.

You can put 90-day fraud alerts on your credit reports at the three major bureaus (Experian, Equifax and TransUnion). Fraud alerts notify lenders that they should take extra steps to verify identity before opening accounts in your name. For more protection, you may want to consider a credit freeze, which doesn’t rely on lenders’ sometimes-wavering vigilance but that allows you to shut off access to your credit reports, preventing thieves from opening new credit accounts. For more information, visit the Consumers Union site www.financialprivacynow.org.

Categories : Identity Theft, Q&A, Taxes
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