IRS Aims to Improve Tax Preparer Security to Combat ID Theft
By Michael Cohn
The Internal Revenue Service has launched the second year of its public awareness campaign aimed at improving taxpayer security in partnership with tax software companies, tax preparation chains and state tax authorities.
The campaign from the IRS and its partners in its Security Summit program includes a series of security awareness tax tips, a set of suggestions on the Taxes. Security. Together. web page and the single-page Publication 4524, Security Awareness for Taxpayers.
IRS Commissioner John Koskinen spoke about the agency’s security efforts and how it is working with tax professionals during the American Institute of CPAs’ National Tax Conference in Washington, D.C., on Tuesday.
“While much credit goes to our dedicated and talented workforce, I remain convinced that the IRS would not be able to fulfill its mission if we couldn’t rely on our partners in the tax preparation community,” he said. “One of the most important things I learned early on after becoming IRS commissioner was the vital role that preparers play, year in and year out, in helping taxpayers meet their tax obligations. Over the past three years my appreciation for all you do for tax administration has not only deepened, but it continues to grow, and I welcome the opportunity to thank all of you in person for the work that you do.”Partner Insights
Koskinen pointed to the success of this past filing season. He noted that the extra $290 million in funding provided by Congress last year for this past tax season helped the IRS improve its ability to help taxpayers and practitioners when they called with questions about their tax returns. The extra money was earmarked by Congress toward taxpayer service, cybersecurity and identity theft prevention. “As a result we were able to add during the filing season 1,000 additional personnel to be able to answer the phone, with the result of a significant increase in the level of service on those phones,” he said.
The agency went from 37 percent to over 70 percent in the service level for answering phone calls.
“Most importantly for you, we always have prized the relationship with the tax preparation community and one of the things I was most concerned about was the decline in service on the Practitioner Priority Line,” said Koskinen. “At one point, it took as long to get through on the priority line as it did if you went through the regular approach to the IRS, so the Practitioner Priority Line became a bit of an oxymoron. But last year, the level of service on the Practitioner Priority Line went to over 80 percent.”
Since the extra funding ran out after tax season, the level of service for regular taxpayers has declined, Koskinen admitted, but the level of service on the Practitioner Priority Line has remained above 80 percent.
He remains concerned about the level of funding the IRS will receive from Congress next year. However, he assured the audience that during the presidential transition will remain focused on its mission as it continues to be run by career employees and civil servants.
“As we move forward and look at the funding levels we’re involved with, we are also dealing aggressively with the issue of stolen identity and refund fraud,” said Koskinen. “A year and a half ago we brought together the CEOs of the major tax preparers, the software developers, financial institutions, Green Dot the major debit card company, and all of the tax commissioners, and I told them when we gathered that the purpose was not to tell them what to do, but the purpose was to form for the first time a real partnership to deal with stolen identities and refund fraud. I told them there was no way any one of us or any group of us was going to be able to solve this problem.”
They created working groups to deal with various aspects of the problem, adding extra authentication to verify the identities of taxpayers and share data elements that could point to signs of fraudulent returns. As a result, the IRS has been able to significantly reduce the instance of tax fraud tied to identity theft.
“Through the first nine months of this year, the number of taxpayers who have filed an affidavit with us noting that they’ve been a victim of identity theft and therefore refund fraud dropped by over 50 percent,” said Koskinen. “We’ve made progress over the years, but up ’til now we’ve never been able to make that kind of a dent in the problem. And it’s a direct result of the partnership and the cooperation we’ve had with the private sector, with the states, with the software developers.”
He pointed to new initiatives this year to increase the probabilities of success in the battle against identity theft, including new Form W-2 codes to authenticate taxpayers and stop suspicious returns. However, he warned tax preparers against complacency.
“One of the things we know is that it’s an ongoing battle,” said Koskinen. “We are no longer dealing with just individual criminal entrepreneurs, although they probably started with prisoners 10 years ago. We’re now dealing with organized crime syndicates around the world. The amount of information they have on the so-called ‘dark net’ is stunning. There’s a group in Eastern Europe with allegedly a billion user IDs and a billion passwords, and they’re able to ping banks and accounts in financial institutions with the user IDs and then the passwords. And once they get a match, because a lot of people use the same user ID and password, they can now ping financial institutions and track down accounts. So it’s no longer beanbag that we’re playing. We’re actually waging a serious ongoing battle.”
One of the concerns, he noted, has been to try to get ahead of the game by trying to predict where criminals are going next. And they seem to be going after tax preparers, which is why the Security Summit has been doing more outreach to tax practitioners.
“One of the things we’ve been concerned about is the threat to tax preparers,” said Koskinen. “To the extent that you can’t get into our system as easily as you used to, and you can’t get into the state systems, the logical next place to go is to tax preparers because if they can hack into your systems and get the data about your clients in detail, they are then much better able to file a more authentic-looking fraudulent return.”
In response the Security Summit launched the “Protect Yourself. Protect Your Clients” initiative to provide as much information as possible to individual practitioners and larger groups about steps they can take to protect their systems. However, he said the IRS would not mandate security standards for preparers.
Among the recommendations are:
• Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update. Encrypt sensitive files such as tax records you store on your computer. Use strong passwords.
• Learn to recognize and avoid phishing emails, threatening calls and texts from thieves posing as legitimate organizations such as your bank, credit card company and even the IRS. Do not click on links or download attachments from unknown or suspicious emails.
• Protect your personal data. Don’t routinely carry your Social Security card, and make sure your tax records are secure. Treat your personal information like you do your cash; don’t leave it lying around.
“Fortunately the number of intrusions is relatively small,” said Koskinen. “Equally fortunately, whenever there have been those handful of problems, the preparers have been able to let us know immediately. We’ve let our partners know, and we’ve been able to protect taxpayers in those systems.”
Ten Year-end Tax Planning Tips
1. Accelerate Deductions and Defer Income
It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
2. Bunch Itemized Deductions
Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
3. Make Up a Tax Shortfall with Increased Withholding
Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
4. Leverage Retirement Account Tax Savings
It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).
5. Reconsider a Roth IRA Rollover
It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.
6. Get Your Charitable House in Order
If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
7. Give Directly from an IRA
Congress finally made permanent a provision that allow taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
8. Zero out AMT
Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
9. Don’t Squander Your Gift Tax Exclusion
You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
10. Leverage Historically Low Interest Rates
Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever
Information provided by Grant Thorton.
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Trump plans to introduce tax reform legislation in first 100 days
by: Michael Cohn
Newly inaugurated President Donald Trump has released a “Contract with the American Voter,” outlining his 100-day plan to “make America Great Again,” including plans for a Middle Class Tax Relief and Simplification Act.
The details are sparse, but according to the description, the bill would entail “an economic plan designed to grow the economy 4% per year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief and lifting the restrictions on American energy. The largest tax reductions are for the middle class. A middle-class family with two children will get a 35% tax cut. The current number of brackets will be reduced from seven to three, and tax forms will likewise be greatly simplified. The business rate will be lowered from 35% to 15%, and the trillions of dollars of American corporate money overseas can now be brought back at a 10% rate.”
Another piece of legislation, the “End the Offshoring Act,” could also entail tax reform. It would establish “tariffs to discourage companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free.”
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While Trump’s tax plan differs in significant respects from the one advanced by House Republicans, including House Speaker Paul Ryan, R-Wis., and Ways and Means Committee chairman Kevin Brady, R-Texas, Trump has recently been in discussions with Brady and Republicans in Congress on a “border adjustment tax” that would discourage companies from moving jobs, research or corporate headquarters abroad.
“From this moment on, it’s going to be America First,” Trump said during his inauguration speech Friday. “Every decision on trade, on taxes, on immigration, on foreign affairs, will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”
Trump and congressional Republicans have also pledged to repeal the Affordable Care Act within the first 100 days. The details on any replacement for the health care legislation are still being worked out, but according to Trump’s plan, it would replace Obamacare with health savings accounts and the ability to purchase health insurance across state lines, and it would give states more authority to manage Medicaid funds. The replacement for the various tax subsidies and tax levies in the ACA are not detailed in Trump’s plan, but he has promised to release legislation after his nominee for Health and Human Services Secretary, Rep. Tom Price of Georgia, is confirmed by the Senate. House Republicans unveiled a framework for their own replacement health care reform plan last year, but those proposals are expected to change once the Trump administration releases its plan.
Michael CohnMichael Cohn, editor-in-chief of AccountingToday.com