Cliff Beacham CPA | email cliffbeacham@cpa.com | California | Tel: (949) 813-1349
The IRS Dozen
Here is the IRS list for its 2012 dirty dozen.
1.
Identity Theft An IRS notice that a taxpayer has filed more than one return or that wages were received from an
unknown employer may be the 1st alert that you are a victim of identity theft. Attempts to use a legitimate
taxpayer's identification and personal information to file a tax return and claim a fraudulent refund are on the
rise. If you suspect anything similar, immediately contact the IRS Identity Protection Specialized Unit
2.
Phishing Unsolicited email or a fake websites may be trying to lure you to provide personal or financial
information. Keep in mind that the IRS does NOT initiate contact with taxpayers by email or other electronic
communications such as text messages or social networks. If you receive an unsolicited email from the IRS or a
related organization, report it by sending it to phishing@irs.gov
3.
Return Preparer Fraud Some tax preparers have been known to skim off their clients refunds, charge inflated
fees for tax preparation and promise guaranteed or inflated refunds. So beware if your return preparer doesn't
sign the return, place a required Personal Tax Identification Number (PTIN) on it, or doesn't give you a copy of the
return
4.
Hiding Income Offshore If you maintain foreign accounts, note that there are reporting requirements that need
to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure
requirements are breaking the law and risk significant penalties and fines, this can include criminal prosecution
5.
"Free Money" from the IRS & Tax Scams Involving Social Security Flyers and advertisements for free money
from the IRS have been appearing in community churches around the country. The targeted victims are usually
low income individuals and the elderly
6.
False/Inflated Income and Expenses Claiming income that you did not earn or expenses you did not pay in
order to obtain large refundable credits, such as the EIC (Earned Income Credit), is another popular scam For
example: Taxpayers whose income and occupations are unreasonable, claiming fuel tax credits for using off-
highway fuel for a business purpose
7.
False Form 1099 Refund Claims A fake information return or Form 1099 Original Issue Discount, is filed to justify
a false refund claim on a corresponding tax return. If you are a party to such schemes, you could be liable for
financial penalties and criminal prosecution
8.
Frivolous Arguments Be alert to anyone promoting unreasonable and outlandish schemes to avoid paying the
taxes you owe
9.
Falsely Claiming Zero Wages Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as
a way to improperly reduce taxable income to zero. Filing this type of return may result in a $5,000 penalty
10.
Abuse of Charitable Organizations and Deductions There has been numerous incidences of the intentional
abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation
and attempts by donors to maintain control over donated assets or the income from donated property. Included
are: Overvalued non-cash donations, >1 organizations claiming the same contributions and promises of
repurchases between the charitable organization and the donor
11.
Disguised Corporate Ownership Phony corporations are formed to underreport income, claim fictitious
deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and
financial crimes
12.
Misuse of Trusts While there are legitimate uses of trusts in tax and estate planning, some highly questionable
transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or
gift taxes. The IRS has seen an increase in the improper use of private annuity trusts and foreign trusts to shift
income and deduct personal expenses
Cliff Beacham CPA | email cliffbeacham@cpa.com |
California | Tel: (949) 813-1349
The IRS Dozen
Some hobbies generate income; some may eventually develop into
a business
The IRS treats hobbies differently from a trade or business. The crux
of the matter is that the IRS does not want a taxpayer to be able to
write off hobby expenses by calling them trade or businesses
expenses
So, the first question is whether the activity is a hobby or a trade or
business
The tax law does not define a “trade or business” but for it to be a
trade or business, an activity must have a profit motive and some
kind of economic activity
So what defines a profit motive –
The IRS uses a list of things to consider whether an activity is for
profit
- all of which must be considered together:
What is the possibility of profit?
Does the taxpayer depend on the activity as a source of
income?
Is the activity carried out in a businesslike manner?
How much time and effort does the taxpayer spend on the
activity?
Are losses from the activity the result of sources beyond the
taxpayer’s control?
Has the taxpayer changed business methods in attempts to
improve profitability?
What is the taxpayer’s expertise in the field?
What success has the taxpayer had in similar operations?
Will there be a possibility of profit from asset appreciation?
Presumption of profit motive: If an activity shows a profit for any 3
or more years during a period of 5 consecutive years then the IRS
will presume that a taxpayer has a profit motive
Note: if the activity involves breeding, training, showing or racing
horses, the period is 2 out of 7 years
Of course, any activity that is reported on a tax return as a business
but has had year after year of losses and no gains will probably
eventually come under scrutiny by the IRS
Tax Treatment of Hobbies - if an activity is deemed to be a hobby,
then “hobby loss” rules – apply. Under these rules, any income
from the hobby is reported on the face of the tax return, and the
expenses are only deductible if a taxpayer itemizes their
deductions on Schedule A. In addition, hobby expenses are limited
by category as follows:
Category 1: In this category expenses are reported on the
appropriate lines of Schedule A as they would be if no hobby
activity existed and includes deductions for home mortgage
interest, taxes, and casualty losses
Category 2: Most expenses that a business would incur, such as
those for advertising, insurance premiums, interest, utilities,
wages, etc., belong in this category. They don’t result in an
adjustment to the basis of property but only to the extent that
gross income from the activity is greater than the deductions
under Cat 1
Category 3: Depreciation and amortization belong in this last
category. These deductions are allowed, but only to the extent
that the gross income from the activity exceeds the deductions
under categories 1 & 2 above. In other words category 3 is not
intended to create a loss as a net result
Note: Taxpayers have to claim the amounts in categories (2) and (3)
(as miscellaneous deductions on Schedule A) which are subject to
the 2% AGI reduction; as a result, they are not deductible for AMT
2. Call Cliff at (949) 813-1349
