Here's How to Avoid Tax Traps and IRS Audits
BY JIM GERMER
Special to the Herald
Working extra hours, ordering lots of toner, and praying for the "right" staff is routine for CPAs preparing for tax season. Florida also requires CPAs, like me, to master complex new IRS regulations, rulings and government-mandated tax law changes.
Most accountants stay abreast of new tax changes by attending rigorous, expensive and somewhat-boring tax seminars. I just completed NCPE's individual income tax workshop, and here are highlights:
Audit risk using TurboTax
Many time-consuming, and expensive to resolve, IRS issues can be avoided by simply not misusing TurboTax and home tax preparation software. TurboTax and other online providers, unfortunately, can't -- or chose not to -- resolve most IRS inquires and tax audits of their users.
TurboTax users, as many CPAs and enrolled agents know, often omit documents or mishandle reporting income from retirement plans and IRA rollovers. Amounts received from IRAs, 401(k)s, annuities, pensions and life insurance proceeds, according to the IRS, are increasing IRS inquiries.
Inserting high numbers for deductions and low income figures into TurboTax, trying to get a bigger refund than entitled, is a major weakness of TurboTax and other software. IRS computers can easily discover discrepancies and errors in tax returns prepared, for example, with TurboTax and financial information that's been reported to the IRS.
Taxpayers, according to the IRS, get notices and penalties for failing to enter official IRS documents, such as 1099-MISC forms for self-employment income, and not recording stock sales properly.
I know it can be super-boring and monotonous going through the lengthy TurboTax Interview, but -- do it anyway to avoid IRS correspondence, taxes and penalties. More important, honesty is the best policy: Report all your income and only take genuine deductions.
Uninsured health insurance penalty
Uninsured adults, under Obamacare, will likely pay $325, or more, for not having health insurance. Add $162.50 for each child who's not covered, too. You may have to pay 2 percent of household income, in excess of the filing threshold, subject to a maximum penalty of $2,570 for singles and $5,140 for families, if it's higher than the fixed minimum.
Next year, actually, the penalty for being uninsured gets worse. Penalties may increase to $695 for adults, $347.50 for uninsured children, and the percentage calculation of household income, in excess of the filing threshold, increases to 2.5 percent. Looks like the government, with punitive penalties, is encouraging everybody to get health insurance. It's possible for some taxpayers to use relief provisions, such as having an income below the IRS filing threshold and lack of affordability, to avoid these penalties.
Expect some new reporting forms from health insurance organizations and employers. The government now mandates using forms 1095-B and 1095-C, curiously, to prove health insurance coverage. Issuers provide coverage information to the IRS so they can assess a penalty to those falsely, or erroneously, stating that they were covered by health insurance.
Student tax breaks
The American Opportunities Tax Credit has been made permanent by Congress. Deduct up to $2,500 per year for tuition, fees and educational supplies. Students who file their own taxes, and parents who claim students for dependents, can claim the American Opportunities Tax Credit. Individuals earning $80,000 and married couples earning up to $160,000 can take advantage of this credit. Interestingly, this credit can be refundable -- even if you don't owe income tax.
New IRS tax deadline
Thanks to Emancipation Day, which is celebrated in Washington, D.C., you get an extra three days to file your tax return. All individual tax returns that haven't been extended are now due on Monday, April 18, 2016.
Report foreign bank accounts
Many of you may have bank accounts in foreign countries. The IRS is vigilantly pursuing individuals keeping money in tax havens. Make sure you electronically file FinCEN Foreign Bank Account Report, form 114, by June 30. Starting in 2017, you'll need to file FinCEN Foreign Bank Account Report by April 15. File form 8938 with your tax return if you have substantial foreign assets.
Jim Germer is a Bradenton CPA and financial adviser at Cetera Financial Specialists, LLC, member FINRA/SIPC.