Ask Liz Weston

Get smart with your money

Taxes

Q&A: Delayed tax refunds

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Dear Liz: How long is too long for an IRS tax refund to be disbursed? I got my state tax refund in a matter of weeks. The IRS refund has been “under review” for almost five months.

Answer: A sizable surge in tax refund theft as well as a database breach that exposed more than 300,000 taxpayers’ returns have kept the IRS pretty busy. At the same time, big budget cuts have left the agency with fewer people to help with these issues.

Five months is a long wait, but people who have been the victims of refund theft report waiting nine months or more to get their money back.

You can try contacting the IRS directly at (800) 829-1040, although you’re likely to be on hold for quite a while. If you can’t get a response, you can contact the IRS’ Taxpayer Advocate at (877) 777-4778, but be advised its resources have been trimmed as well and it may just refer you back to the IRS.

Q&A: Lost tax return

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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

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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

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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

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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

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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.