Are Scholarships Taxable?

Every fall, students all over the country set off to attend various colleges and universities. With the rising cost of higher education, many of these students are looking forward to receiving some form of scholarships to pay a portion or, in some cases, all of their tuition. With the law known as the Tax Cuts and Jobs Act (TCJA) signed into law in 2017, this income, which is subject to the "kiddie tax" rules, is taxed at estate and trust tax rates, which can quickly climb to as much as 37%.

Taxable scholarships

In many cases, scholarships are not taxable. In fact, most students do not need to fear paying any tax on scholarships and fellowship grants because they are excluded from gross income as long as they are used for qualified tuition and related expenses, have not been earmarked for other purposes, and go to a student who is a candidate for a degree at a qualified educational organization. Qualified tuition and related expenses in this case include required tuition, fees, books, supplies, and equipment.

An expense that most people commonly assume to be included in the qualified tuition and related expenses list is room and board, but it is not. Any scholarship or fellowship grant that is used to pay for room and board, or something else that is not considered qualified tuition or a related expense, is taxable. In addition, a scholarship may also be taxable when the scholarship is earmarked for a non-qualifying purpose such as room and board or travel. In these situations, the amount of the earmark is taxable.

Not all payments made to a student or the school he or she is attending for qualified tuition or related expenses meet the requirements to be classified as a scholarship for purposes of the exclusion. In general, a payment for services is not excluded from gross income. There are exceptions to this rule for the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, and a comprehensive student work-learning-service program. Also, qualified tuition reductions for graduate students are tax-free if the graduate student performs teaching or research activities for an eligible educational institution. Unless one of these exceptions applies, the student should receive a Form W-2, Wage and Tax Statement, for the income earned for the service performed. Any income reported on a Form W-2 will be considered earned income.

In addition, any qualifying payment received through the Department of Veterans Affairs that is used to pay for education or training, such as funds received under the GI Bill, are not included in income.

Exceptions for athletic or other scholarships that require services to be performed

Athletic and certain other scholarships that require effort from the participant, such as those that require students to be in musical ensembles, have historically not been included in gross income. This IRS ruling is based on the U.S. Supreme Court's decision in Bingler v. Johnson and the Tax Court case Heidel. In Bingler, the Supreme Court held that compensation exists if there is a quid pro quo relationship between the parties. In other words, a person receives a payment only in response to an action the recipient produced, whether in the past, present, or future. Heidel involved a student who would continue to receive the scholarship even if the student did not actually participate in the sport because of injury or even a lack of desire. According to the Tax Court, receiving a scholarship with no strings attached does not meet the quid pro quo test and therefore qualifies to be excluded from gross income.

Whether athletic or similar service-based scholarships still qualify under the no-strings-attached test is debatable, but at this point the IRS has chosen not to press the issue. Assuming there is no change in treatment for these scholarships, they would be treated like any other qualifying scholarship. However, if the IRS were to push the issue, especially for athletic programs of larger schools where it is not uncommon for student athletes to receive full tuition, room and board, and possibly other funds for their service in the athletic program, a court might find that the holding in Bingler did not apply. Many of these programs would likely stop providing a scholarship to any student who decided to no longer participate in the activity, demonstrating the quid pro quo relationship and the conditions that are inherently attached to the scholarship. Thus, a court could find that the facts were distinguishable from those in Bingler and hold that the funds the student-athlete received were earned income that must be included in gross income rather than nontaxable scholarship payments.

Kiddie tax background

To understand the kiddie tax implications of the recent TCJA changes, it is instructive to first review how earned income differentiates from unearned income, the history of the kiddie tax, and when the kiddie tax applies.

Earned vs. unearned income

The tax code defines earned income as "wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered." In essence, it includes all forms of compensation that are paid for work the taxpayer performed. Any compensation that does not fall into the earned income category is considered unearned income, which by default includes any income that is not earned. Form 8615, Tax for Certain Children Who Have Unearned Income, which reports the kiddie tax, calculates unearned income for a qualifying child by taking all the child's income and subtracting both earned income and any penalties paid for early withdrawal of savings. This means the unearned income includes, but is not limited to, income from dividends, interest income, certain royalties, most rent income, and capital gains. An often-overlooked form of unearned income for a child is taxable scholarship income for which a Form W-2 is not issued because it is not earned income.

History of the kiddie tax

The kiddie tax, which was first introduced in the Code by the Tax Reform Act of 1986, applied to tax years beginning after Dec. 31, 1986. At that time, the kiddie tax applied only to children who were under the age of 14. Over the next 30 years, the scope of the tax has progressively increased, and it may now apply to college students from 19 to 23 years old, some of whom could be receiving scholarships that pay other costs besides tuition and qualifying expenses.

In addition, the TCJA made a significant change to the tax rate of the kiddie tax. The child is no longer taxed at the parent's top marginal tax rate and is instead taxed at a modified tax rate that is based on the rate that applies to estates and trusts. The incomes for those other individuals either may not be available or, possibly, the parent or sibling may not want to reveal to the child that information. This information is no longer needed.

When does the kiddie tax apply?

As of 2018, the kiddie tax affects anyone who meets the following criteria:

  1. The child is:

    1. Under the age of 18;

    2. 18 and has earned income that is less than half the person's own support; or

    3. 19 to 23, a full-time student, and has earned income that is less than half the person's own support.

  2. Has at least one living parent; and

  3. Is not married and filing a joint return with the spouse.

Although scholarships in some cases are considered income that is taxable to the child, they do not count toward the child's own support when determining if the child qualifies for the kiddie tax.

It is important to note that a child over 18 years but less than 24 years old will not be subject to the kiddie tax if he or she is a part-time student or not a student at all; gets married (and files a joint return); has earned income that is more than half of his or her own support; or loses both parents.

Change in tax rates

Whether the new rules produce a more favorable or more unfavorable result than the old rules depends on the circumstances. In general, children whose parents are in higher tax brackets will pay less taxes than they would have under the old rules, while children who have a larger amount of unearned income and parents in lower tax brackets will pay more taxes than they would have pre-TCJA.

One notable advantage of the change implemented by the TCJA is the child's ability to use rates from the lower modified trust and estate tax brackets, thereby saving some tax on the first portion of the child's unearned income. Before, the child was most likely paying tax at the parent's top marginal tax rate for all of his or her income with little, if any, advantage of a progressive tax table. Today, there are fewer tax brackets within the modified trust and estate tax table, but the child is able to take advantage of all of them, depending on the child's income.


Reporting on Form 1098-T

Every eligible educational institution is required to file a Form 1098-T, Tuition Statement, for each student that is enrolled and has a reportable transaction. However, some exceptions apply for courses taken for no academic credit, for nonresident alien students, and for students whose qualified tuition is paid in full by scholarships or waived.

On the Form 1098-T, the educational institution is to report amounts received as payment for qualified tuition and related expenses less reimbursements or refunds during the calendar year in box 1 and all scholarships or grants in box 5. The scholarships that are listed in box 5 include all scholarships the institution knows or should know about, regardless of whether the payment is received directly by the institution, or a check is endorsed by the student.

From the Form 1098-T requirements, one can see that in many cases, in an ideal world, as long as the educational institution properly completes the Form 1098-T, any total scholarship amount received in excess of qualified tuition should be easily calculated by taking the scholarships listed in box 5 and subtracting qualified tuition payments as reported in box 1. However, it is not so straightforward. Form 1098-T has specific exceptions where the form does not need to be filed, such as when qualified tuition is paid in full. In many of the cases where scholarships end up being taxable, the tuition is paid in full and thereby a Form 1098-T is not required. In addition, the educational institution will most likely report any scholarship that is received by the institution, but there may be situations where the scholarship is received directly by the student and not reported to the institution. Both of these situations present a gap in the amount of taxable income that can be calculated from the Form 1098-T by the taxpayer and by the IRS.

Details for the account the student has with the college/university may be needed in some situations. The account detail should show information for charges such as tuition, fees, room and board, and possibly other charges for items such as books. It will also present what the institution shows for financial aid, which includes grants and scholarships. In addition to Form 1098-T and the student's account detail, a general inquiry for any other scholarships received or expenses paid may be necessary.

Strategy to reduce unearned income

Students who find themselves in a situation where they have taxable scholarships can make adjustments in certain cases. Additional expenses, above those reported on Form 1098-T, should be considered by the taxpayer to reduce the taxable scholarship amount. The institution is only required to report on Form 1098-T qualified tuition and related expenses that are billed. However, additional expenses may qualify as qualified tuition and related expenses. To be allowable, the expenses must be required of all students in the course and cannot be considered incidental expenses.

Incidental expenses include costs associated with room and board, travel, research and clerical help, and equipment that is not required for either enrollment or attendance at an educational institution, or in a course of instruction at the institution. For example, a textbook that is listed as optional on the course syllabus would not qualify, but a course book that is listed as required would be. Additional expenses, such as required books or equipment that are not run through the educational institution's billing software, may increase the qualified tuition and fees.

When looking for other expenses, the list of qualified tuition and related expenses listed above should not be confused with what expenses qualify for a distribution from qualified tuition programs such as a college savings plan. These types of programs are more liberal and include additional costs such as equipment and room and board (with limitations).

Because unearned income may come from other sources, taxpayers who are affected by the kiddie tax should look for ways to reduce all unearned income. This can be done by shifting income to nontaxable accounts, deferring income to a period in time when the taxpayer is not affected by the kiddie tax, or recognizing losses that reduce unearned income. While not the focus of this article, the following general strategies can help reduce overall unearned income:

  • Switch dividend-paying stocks to ones that do not pay dividends and hold the stocks until the student is age 24;

  • Sell stocks that have a capital loss to reduce unearned income, up to $3,000 per year; and

  • Move investments into a qualified retirement plan when possible — any income and gains produced by the portfolio are not taxable as current-year income.

Scholarship recipients beware

Being accepted into the college or university of choice is a wonderful feeling for many students, and receiving scholarships to help pay for school will reduce the overall cost. While most scholarships are excluded from gross income, students need to be aware of situations where scholarships need to be reported as income and that the income that is reported in some cases could be subject to the new kiddie tax. 

Source: https://www.thetaxadviser.com/issues/2019/jul/kiddie-tax-unearned-income-scholarships.html

Rebekah Roy
Estimated Taxes

June 15th falls on the weekend this year, so the due date for the second installment of estimated taxes is the next business day, June 17, which is just around the corner. So, it is time to determine if your estimated tax payment should be lowered if you overestimated your income for 2019 or increased if you underestimated it. 

Unlike employees, a self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties. 

The self-employed are not the only ones who are subject to estimated tax requirements, which also apply to anyone who has income that is not subject to withholding taxes and even to those whose taxes are not sufficiently withheld. Thus, if you have income from stock sales, property sales, investments, alimony, partnerships, S-corporations, inherited pension plans, or other sources that are not subject to withholding, you may also be required to pay either estimated taxes or an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees. 

Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter. 

*If the due date falls on a Saturday, Sunday, or holiday, the payment is due on the next business day.

*If the due date falls on a Saturday, Sunday, or holiday, the payment is due on the next business day.

An underestimate penalty won’t apply if the tax due on a return (after withholding and refundable credits) is less than $1,000; this is the “de minimis amount due” exception. When the tax due is $1,000 or more, underpayment penalties are assessed. 

These underpayment penalties are determined on a quarterly basis, so an underpayment in an earlier quarter cannot be made up for in a later quarter; however, an overpayment in an earlier quarter is applied to the following quarter. 

The amount of an estimated payment is determined by estimating one fourth of the taxpayer’s tax for the entire year; the projected tax is paid in four installments. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form, and the underpayment penalty is based on actual income for the period. 

For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, Uncle Sam also provides safe-harbor estimates. 

However, even these can be tricky. Generally, a taxpayer can avoid an underpayment penalty if his or her withholding and estimated payments are equal to or greater than: 

  • 90% of the current year’s tax liability or

  • 100% of the prior year’s tax liability

However, these safe harbors do not apply if the prior year’s adjusted gross income is over $150,000, in which case, the safe harbors are:

  • 90% of the current year’s tax liability or

  • 110% of the prior year’s tax liability

Sometimes, individuals who have withholding on some (but not all) of their sources of income will increase that withholding to compensate for the additional income that comes from sources that have no withholding. Although this may work, withholding adjustments are not as precise as quarterly payments and should be used with caution. Similarly, when the safe harbor method based on the prior year’s tax liability is used, and the taxpayer has some withholding and also makes estimated tax payments, it’s important to monitor the current year’s withholding to be sure that the combined withholding and estimated installment prepayments will meet the safe harbor target amount. 

This office can assist you in estimating payments, adjusting withholding, and setting up safe-harbor payments. Please call for assistance.

Rebekah Roy
Tax Law Changes

The House Ways and Means Committee has drafted a secret “Extenders-Plus” package. This proposal would retroactively reinstate all 29 provisions that expired at the end of 2017 and 2018. This includes the following popular credits/deductions:

  • Credit for certain non-business energy property (sec. 25C(g))

  • Credit for construction of new energy efficient homes (sec. 45L(g))

  • Energy efficient commercial buildings deduction (sec. 179D(h))

  • Exclusion from gross income of discharge of indebtedness on principal residence (sec. 108(a)(1)(E))

  • Deduction for qualified tuition and related expenses (sec. 222(e))

  • Medical expense deduction: adjusted gross income (AGI) floor 7.5 percent (sec. 213(f))

You can read the full proposal here. For more information please contact our office.

Rebekah Roy
Outrageous Tax Deductions Approved by the IRS

Getting creative at tax time is something many people do, pushing the limits on deductions to reduce their tax bill. The goal is to receive the maximum amount of deductions without getting a knock on the door from Uncle Sam. You may be surprised at what the IRS allows tax filers to deduct - everything from music lessons to organic foods.

If your deduction seems like a stretch, your tax practitioner should be informed and savvy enough to scour previous tax court cases or IRS filings in order to back up your claim. Of course, accurate record keeping to back up your deductions is required - make sure to keep receipts for medical expenses, donations, or business expenses. If your deduction is denied, you could face back taxes, plus interest and penalties.

Here are some ten unusual deductions approved by the IRS.

Cat Food

South Carolina scrap yard owners in 2001 wrote off $300 for the cost of cat food as a business expense, claiming the food attracted wild cats to the business to scare off snakes and rats. The deduction was approved.

Organic Foods

To treat severe allergies to chemically contaminated food, a Chicago couple in 1971 could eat only pricey organic food as prescribed by three different doctors. The pair deducted as a medical expense the difference in price between the organic food and regular food treated with chemicals. The U.S. Tax Court allowed the $3,000 deduction.

Boarding School

In 1944, the U.S. Tax Court said a taxpayer from Cleveland could write off almost $1,000 for costs related to sending his daughter to a boarding school in Tucson, Arizona. The five-year-old girl suffered from chronic bronchitis, sinusitis and asthma, and was sent to the school in the warmer weather for her health — on doctor’s orders. Her health improved and the deduction was considered a medical expense.

Tanning Oil

A Wisconsin bodybuilder deducted almost $14,000 from 1999 to 2001 for the cost of three body oils — including a tanning product — that helped his career. The U.S. Tax Court allowed the business expense write-off because the oils were primarily marketed in bodybuilding magazines, instead of sold to the public.

Clarinet Lessons

In 1962, the IRS ruled that a taxpayer could deduct the costs of a clarinet and clarinet lessons for his son because an orthodontist recommended playing the instrument as a way to treat his severe overbite.

Breast Implants

An exotic dancer in 1988 wrote off about $2,000 for the depreciation of her breast implants, arguing to the U.S. Tax Court that the implants were a “stage prop” that boosted her earnings substantially. Before the implants, she made up to $750 a week. After, her earnings in a 20-week period were $70,000, or about $3,500 a week. The U.S. Tax Court ruled that her implants — size 56N after a second surgery — were for work rather than a personal benefit, and allowed the deduction.

Cat Food, Part 2

A woman used her own money to care for feral cats that she fostered in her home for a charity that specialized in the neutering of wild cats. She spent more than $12,000 of her own money paying for vet bills, food and other items.

The Tax Court ruled that she can claim a charitable deduction for her expenses, but limited her write-off because she didn’t meet the substantiation rules, failing to procure a contemporaneous written acknowledgment from the charity each time she spent $250 or more on the charity’s behest. With the proper documentation, she could have deducted all the costs she incurred for the organization.

Babysitting Fees

Fees paid to a sitter to enable a parent to get out of the house and do volunteer work for a charity are deductible as charitable contributions even though the money didn't go directly to the charity, according to the Tax Court. The court expressly rejected a contrary IRS revenue ruling.

Swimming Pool

A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded the amount it added to the value of the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area are treated as medical expenses.

Airplane

Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss on the condo.

Denied!

There is such a thing as going to far with unique deductions. Here are five instances when odd deductions were denied by the IRS.

  • Writing off your life: One taxpayer with a real estate business calculated the value of his life, time and expertise to his business, coming up with $1.75 million. He then tried to amortize that amount as a business expense, but the IRS said no.

  • Deducting crime costs: The owner of a failing furniture store paid someone to burn down his store. As he should, he reported the insurance he received as income to the IRS. But he went one step too far and deducted what he paid the arsonist as a consulting fee — and admitted that during the IRS audit. Oops!

  • Dress for success: A businessman tried to write off the cost of a mink coat for his wife to wear to business functions. It wasn’t allowed.

  • Groceries as medicine: A diabetic on a restrictive diet tried to deduct the costs of lettuce, tomatoes, artificial sweeteners and reduced-salt foods as medical expenses. The IRS denied the claim.

  • Super Bowl gambling loss $2: That's not a misprint. One client wanted to file for a gambling loss on a $2 bet on the Super Bowl. While gambling losses can be deducted by following instructions from the IRS, $2 leaves a bit to be desired. Better luck next year.

Rebekah Roy
Tax ID Theft

Tax ID theft: Here’s what to look for and what to do when it happens

Tax-related identity theft occurs when a thief uses someone’s stolen Social Security number to file a tax return and claim a fraudulent refund. The victim may be unaware that this has happened until they e-file their return. Even before the victim files their return, the IRS may send the taxpayer a letter saying the agency identified a suspicious return using the stolen SSN.

Here are some things you should know about identity theft, including warning signs and steps to take after identity theft occurs.

Warning signs that a theft occurs
Taxpayers should be alert to possible tax-related identity theft if they are contacted by the IRS or their tax preparer about:

  • More than one tax return being filed using the taxpayer’s SSN.

  • Additional tax owed.

  • A refund offset.

  • Collection actions taken against the taxpayer for a year when they did not file a tax return.

  • IRS records indicating they received wages or other income from an employer for whom the taxpayer did not work.

If you suspect you are a victim of ID theft, you should continue to pay their taxes and file their tax return, even if you must do so on paper.

Remember, the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and through social media channels.

Please contact us if you suspect there has been ID theft and we can help you take necessary steps to protect yourself.

Rebekah Roy
What to do if your employer closed and you are missing your tax forms

Employers are legally required to provide each employee with From W2 that reports earnings for the tax year. However, if your former employer has closed the business and you are unable to contact them, there are steps that can be taken to ensure your filing requirements are met.

We can help! Contact us today to file your tax return on time and avoid any penalties from the IRS.

Rebekah Roy
What to Expect From the IRS During the Shutdown

The current government shutdown has taxpayers on edge with tax season right around the corner. Earlier this month, the Internal Revenue Service (IRS) announced that tax filing season opens on January 28, 2019 and that tax refunds will be issued during the shutdown.

The details about IRS plans to operate during the government shutdown can be found ion the Treasury website n the updated Lapsed Appropriations Contingency Plan. You can read all 132 pages here.

For a quick snapshot of what’s happening, here you go:

  • Returns will be accepted

  • Refunds will be paid

  • The IRS website will be operational

  • No live person assistance is available by phone or appointment

  • No new audits

The IRS will accept paper and electronic tax returns during the filing season. Filing electronically will speed processing and refunds.

The IRS has confirmed that “refunds will be paid” but taxpayers are cautioned that returns would continue to be subject to refund fraud, identity theft, and other internal reviews (as in prior years).

If you have a scheduled appointment related to an examination/audit, collection, Appeals or Tax Advocate case, you should assume those meetings are canceled during the shutdown. The IRS says that it will reschedule those meetings after the IRS reopens.

The IRS is opening the mail and they are cashing checks (I can attest to the latter on behalf of my clients). However, the IRS will not respond to most paper correspondence during the shutdown. Taxpayers who mail letters or other correspondences to the IRS during the shutdown should expect to wait for a response. Remember, even after the IRS reopens there will be a delay in response due to “a growing correspondence backlog.”

Tax Court is closed. Trial sessions which were scheduled for this week (January 14, 2019) were not affected. However, some trial sessions scheduled during the week of January 28, 2019, have been canceled. A decision regarding trials sessions scheduled for the week of February 4, 2019, will be made on or before January 18, 2019 (more here).

Finally, a significant number of Criminal Investigation (CI) employees will continue to work. CI is expected to operate at close to normal levels which makes sense as the bad guys aren't taking a break.

If this feels overwhelming, there are a few bright spots: The IRS will not be conducting audits, and no collection activity will generally occur except for automated collection activity. However, that doesn’t mean that letters won’t go out. Automated initial contact letters for audits, as well as automated IRS collection notices, will still be issued.

That’s a snapshot of the IRS plan during the shutdown as of today. The takeaways: Be prepared to wait. And, of course, be patient.

Rebekah Roy
2019 Mileage Rates Announced

2019 Mileage Rate Increase

Starting on Jan. 1, 2019, the standard mileage rates for the use of a vehicle will be:

- 58 cents for every mile of business travel driven, an increase of 3.5 cents from the rate for 2018.
- 20 cents per mile driven for medical or moving purposes, an increase of 2 cents from the rate for 2018.
- 14 cents per mile driven in service of charitable organizations.

You also have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.



Rebekah Roy
Let's Talk Taxes

Home Office Deduction

You’ve decided to start a small business working out of your home. Life is great and you can’t beat the commute. Now, how will this affect your income taxes? Can you deduct expenses for use of your home? The answer is that it depends…on a lot of things.

First of all, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you’ve set up a room with a desk, computer, file cabinets, and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.

What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.

Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39 years (commercial use value). When you sell the home, you must make an adjustment for the amount of the depreciation taken. This depreciation adjustment is recaptured on your tax return at the 25% tax rate.

Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky; therefore it is wise to get professional tax help from an enrolled agent, America’s tax expert.

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Rebekah Roy
Let's Talk Taxes

Greetings from the IRS

You’ve just picked up your mail and … uh oh, there among the ads, bills and too numerous offerings for credit cards is that official looking letter from the Internal Revenue Service. A feeling of dread comes over you…but don’t panic or toss it, and please DO open it. It might even be good news.

Usually, mail from the IRS is a notification that they need verification of documents or substantiation of an amount you have claimed on your tax return. Read the letter thoroughly. Determine what they are looking for, and then provide the information. Some of the most commonly missed items on a return are simple things: you forgot to sign the 1040; you didn’t attach W-2’s and required statements; if you’re paying quarterly, maybe you claimed the wrong amount as estimated tax; or, perhaps the income you listed doesn’t match the figure that was reported to the IRS on a Form 1099 by someone who paid you during the tax year.

If you have the correct information, it’s a simple matter to fix. Make copies of your documents verifying the information on your return and send the copies back to the IRS along with a copy of the letter they sent to you. If, in fact, you didn’t include an amount on your return that should have been there, sign the form agreeing to the change and send them a check for the amount of tax due by the deadline date given for compliance. Usually, penalties and interest will be added—so, the sooner you comply, the less it will cost.  

If your IRS letter advises you that your return has been selected for audit, you would be wise to seek professional advice. If you prepared your own return, you may wish to contact an enrolled agent immediately. Enrolled agents are authorized by the U.S. Treasury Department to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals. 

Now you’re thinking, what about that possible good news mentioned earlier? It could be that the notice is for an unexpected refund, of course. Now, open that letter!

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

 

 

 

Rebekah Roy
August Newsletter

Are you ready for qualified education expenses and important tax deadlines?  Here are our tax insights for August.  Stay up to date with our monthly newsletter.  Contact us today to review your situation and ensure there are no surprises later!

Rebekah Roy
July Newsletter

It's time for a mid year checkup on your tax "health".  Stay up to date with our monthly newsletter.   Contact us today to review your situation and ensure there are no surprises later!

Rebekah Roy
Taxpayer Alert
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A sophisticated phone scam targeting taxpayers has recently been reported to Maine Revenue Service. The automated call claims to be from MRS and tells the taxpayer they overpaid taxes in 2016 and is owed a refund. They alter the caller ID to make it look like the call is coming from a legitimate State of Maine phone number. MRS will not call a taxpayer about a refund and has reported this incident to Maine State Police Computer Crimes Unit.

Rebekah Roy