Tag: Tax Tips

Kienitz FeaturedImage June

How to Avoid an IRS Tax Audit

Posted by Kienitz Tax Law on with 0 Comment

Paying taxes to the IRS is bad enough, but getting audited might be worse. It’s one thing to get an
unexpected tax bill, but spending so much time gathering documents and complying with revenue agent
requests makes it feel like the IRS is adding insult to injury. While there’s no comprehensive list of IRS
audit triggers, the following is a discussion of red flags that could lead to an audit.

Underreporting Income

One of the biggest reasons for a tax audit is that the income reported on a tax return doesn’t match
income information that the IRS receives from third parties. Your employer, bank and any other
institutions where you generate reportable income usually report that income directly (or indirectly) to
the IRS with W-2s and 1099s.

Using Round Numbers

Whether it’s income or an itemized deduction, very few independent contractor taxpayers rarely make
exactly $70,000 annually or have deductible business expenses for travel and client lunches that add up
to a perfect $4,000 for the year. Using round numbers probably doesn’t automatically result in an audit,
but likely serves as one of several factors when deciding who to audit.

Unusual Tax Deductions

If you claim a large number of deductions or deductions that seem out-of-place for your profession,
then those could potentially raise audit red flags. For example, if you work from home, then a home-
office deduction is to be expected. But if this deduction is also claimed along with an energy-efficient
commercial building deduction, then that could seem a bit odd to the IRS.

Another example is one or more large charitable deductions when you earned a comparably small
income. Think about it, it’s not unusual to earn $50,000 in a year and claim a $300 deduction to a local
charity organization. But if you earned $20,000 and made a $8,000 charitable donation, that’s a bit
unusual and could trigger the IRS asking that you produce documents to substantiate the deduction
and/or your income.

Consistent Business Losses

The IRS is wary of individuals who try to claim business-related deductions and losses for activities that
are hobbies. You might enjoy fishing and think you can write off the cost of your fishing boat as a
business expense because you also claim you’re a professional angler.

One way for the IRS to see if you really use your fishing skills to pay your bills and feed your family is to
see if your business turns a profit. It’s common for businesses to have down years, but the IRS often
views several consecutive years of business losses as a possible sign that someone’s engaged in a hobby
and not a career. If the IRS has this suspicion, they sometimes conduct an audit to see if they’re right.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is often improperly claimed. This is usually the result of confusion
about credit eligibility. However, as a result of the high frequency of EITC errors, the IRS pays special
attention to tax returns that claim these credits.

Earning Too Much or Too Little

Generally speaking, taxpayers at the lower and higher-income scales are at higher risk of audit .
Specifically, the biggest risk of an audit came from those earning less than $50,000 or more than $1
million per year. This makes sense, as lower-income filers tend to be more likely to claim certain tax
credits, such as the EITC and higher-income filers have money to make an audit and other tax collection
activities worth the IRS’ time and effort. There’s also the fact that wealthier taxpayers often engage in
more aggressive tax avoidance strategies.

Inconsistent Income

Large swings in income can sometimes indicate that the income isn’t being properly reported to the IRS.
For instance, if you earned $145,000 per year for five years, then your income dropped to $65,000 for
the next few years, that probably won’t lead to an audit in and of itself. But change things around a bit
and you go from earning $145,000 for five years, then $65,000 for one year, then back up to $150,000 in
the next year. Now the IRS might suspect you underreported your income during the year you made
$65,000.

Worried About a Tax Audit?

The exact triggers for an IRS audit aren’t publicly known, but the above should give you a rough idea of
things you can try to reduce your chances of an audit. If you’re particularly worried about an audit, it
might be worth talking to a tax professional. They can help you identify potential risks and should you
get audited, assist you through the process.

 

 

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal
Get a FREE Case Evaluation

Kienitz FeaturedImage May

What to Do if You Can’t Pay Your Taxes?

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For many, taxes are annoying. This is especially true when it comes to filing tax returns. Then some oppose taxes on moral grounds. 

Another reason to hate taxes is the difficulty in paying them. This can sometimes arise when an unexpected tax bill arrives in the mail.

So, what happens if you can’t afford to pay your taxes? This is a common problem, so the IRS has several options available. Most of these require paying your entire tax debt over time, plus any applicable penalties and interest. In rare cases, the IRS will “forgive” some or most of the tax debt. But before you get your hopes up, let’s look at how these tax resolution possibilities work.

Offer in Compromise (OIC)

This is one of the most talked-about tax relief options, and for good reason. It allows eligible taxpayers to settle their tax debts for less than the full amount. The IRS agrees to consider a tax debt as “fully paid” through the use of an OIC in three scenarios:

  • Doubt as to Liability: There’s a legitimate question as to whether you owe the tax debt in question or, if you do owe it, there’s uncertainty as to the total amount you owe.
  • Doubt as to Collectibility: You don’t have the financial resources to pay the full tax debt.
  • Effective Tax Administration: You can afford to pay the full tax debt, but doing so would create an unreasonable economic hardship or be inequitable.

Getting the IRS to accept your OIC request is difficult. Statistics vary each year, but acceptance rates typically range between 34% and 50%. The application process can be extensive, requiring significant effort to compile and complete the necessary paperwork. And it can take up to two years for the IRS to review your request and make a decision. 

Currently Not Collectible (CNC) Status

If you’re financially unable to make even partial payments to the IRS to pay off your tax debt over time, the IRS will place your tax account in “currently not collectible” status. While in CNC status, the IRS won’t take any tax collection efforts until your financial situation gets better. As nice as this sounds, there are several caveats to know about.

First, this doesn’t make the tax debt go away, and because the balance remains, any applicable penalties and interest continue to accrue. Second, it’s not easy to receive CNC status, as it often only applies to taxpayers who are in severe financial trouble. Third, the IRS may file a tax lien against your property while you have CNC status. Fourth, this temporary delay is just that—temporary. This means the IRS will periodically review your financial situation to reassess your ability to pay your unpaid taxes.

Payment Plans and Installment Agreements

This is probably the most popular option for taxpayers who can’t pay their entire tax bill all at once. With a payment plan (also called a short-term payment plan), you have an extra 180 days to fully pay your tax bill. Payment plans are only available if you owe less than $100,000 in taxes, penalties, and interest.

With an installment agreement (also called a long-term payment plan), you can take up to 72 months to pay off your tax debt. To be eligible for an installment agreement, your outstanding balance must be less than $50,000 in taxes, penalties, and interest.

In special situations, you might be eligible for a Partial Payment Installment Agreement (PPIA). This is an installment agreement where you agree to make monthly payments until the statute of limitations for the IRS to collect your tax debt expires (usually referred to as the CSED, or Collection Statute Expiration Date). At this point, any remaining balance you have with the IRS is wiped away or “forgiven.”

Penalty Relief

One of the easier ways to lower your tax bill so that you can settle it for less than the full amount is with penalty abatement. This is where the IRS agrees to remove some of the tax balance attributable to penalties in situations where you tried to do the right things with your taxes but were unable to do so for reasons beyond your control. Penalty relief is available for a wide variety of penalties, such as: 

  • Failure to File
  • Failure to Pay
  • Accuracy-Related
  • Dishonored Check
  • Underpayment of Estimated Tax

There are several types of penalty relief available:

  • First Time Penalty Abate
  • Administrative Waiver
  • Reasonable Cause
  • Statutory Exception

The penalty relief request process depends on which penalty you’re trying to reduce and your reasons for making the request. In some cases, a simple phone call to the IRS asking for penalty relief will suffice. In other cases, a more formal written request is needed.

Have a Tax Debt You Can’t Afford to Pay?

If you’re having trouble paying a tax bill from the IRS (or the California FTB), there are tax relief options available. They may not be perfect, but they can help. To learn more, contact a tax professional.

 

 

Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal
Get a FREE Case Evaluation

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What’s a Tax Identification Number (TIN)?

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If you’re filing a tax return, chances are high that you need a tax identification number (TIN) to do so. As its name implies, it’s a number the IRS uses to help identify taxpayers, whether they’re an organization or individual. If you’re like most individuals, you’re probably using your Social Security number (SSN) as your TIN. However, there are other identification numbers used by the IRS. Let’s take a look at some of these and why they exist.

Employer Identification Number (EIN)

This is the tax identification number for most businesses and tax-exempt organizations. It’s also used by trusts and estates with reportable income.

If you need an EIN, you can apply for one for free online. It should only take a few minutes if you have all of the necessary information available (type of organization and the TIN of the responsible party who controls the organization).

Individual Taxpayer Identification Number (ITIN)

This is a TIN for individuals who aren’t eligible for an SSN. The ITIN is a nine-digit number presented in the same format as an SSN (XXX-XX-XXXX), but always begins with the number “9.” Most people who use an ITIN are resident or nonresident aliens (and/or their spouses and dependents).

To obtain an ITIN, you must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number.

Taxpayer Identification Number for Pending U.S. Adoptions (ATIN)

The ATIN is one of the rarest of all TINs, as it’s a temporary nine-digit number that the IRS gives to individuals who are in the process of adopting a child. ATINs exist for situations where the adopting parents are unable to obtain an SSN for their child in time to file their tax returns.

Parents can obtain an ATIN by completing IRS Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions. Keep in mind that this form isn’t used if the child being adopted is not a U.S. citizen or resident.

Preparer Taxpayer Identification Number (PTIN)

These are numbers used by tax preparers to identify themselves on returns they help prepare for their clients. Since 2011, all paid tax preparers have had to use a valid PTIN for all tax returns they were paid to prepare. The reason for this rule was to protect the preparers’ private information, as they previously had to use their SSNs when filing tax returns for their clients.

There are two ways to obtain a PTIN. First, you can apply online. Second, you can apply by mailing in IRS Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application and Renewal. It should be noted that the online process is much faster, taking as little as 15 minutes compared to the paper method which can sometimes take over a month to process. Because PTINs expire at the end of each year, you’ll need to reapply each year to keep your PTIN active.

Identity Protection PIN (IP PIN)

This isn’t technically a TIN, as it’s not used to help identify the taxpayer filing a return. Instead, it’s used to confirm the identity of the person filing a tax return. Therefore, the goal of the IP PIN is to prevent tax-related identity theft.

The IP PIN works because it’s a six-digit number that only the IRS and the taxpayer is supposed to know. When an identity thief tries to file a tax return using someone else’s SSN and doesn’t provide the correct IP PIN (or doesn’t provide one at all), the IRS will recognize that return as fraudulent. This can help prevent scammers from stealing tax refund checks, for example.

Even if an individual isn’t required to file a tax return for a given year, the IP PIN can still be helpful because it can protect that individual’s IRS account from scammers trying to access or alter personal information.

If the IRS confirms that you’ve been the victim of tax-related identity theft, you’ll automatically get an IP PIN from the IRS when it mails you a CP01A Notice each year. Yet you don’t need to wait until you’re an ID theft victim to obtain an IP PIN.

To obtain an IP PIN as a preventative measure, you can request one through your online IRS account. If you do this, you’ll need to sign onto your online IRS account each year to obtain your new IP PIN. These are typically issued starting in mid-January.

Do Not Ignore Your Tax Problems!

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Copy of Kienitz FeaturedImage Tax Scams (1)

New Tax Scams for 2025 to Watch Out For

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Tax season is in full swing, which means tax scammers are working overtime to find new targets. Over the next month or two, these con artists will make use of the complexity of the tax code and take advantage of taxpayers feeling financial pressure to pay their taxes and meet the April 15 filing deadline. The following is an overview of some of the more recent tax scams, many of which utilize the same strategies from years past, but with slight changes to take advantage of new technology.

Tax Scam #1: Phishing Schemes

Phishing has been around for decades, but with advancements in artificial intelligence (AI), they’re getting more sophisticated. For example, emails and text messages have been traditionally used for phishing cons, but most of the time, they’ve been fairly easy to spot.

They would often contain poor wording, incorrect identifying information, and typos, all of which made them stand out. But with the help of AI, these fake emails and texts are much harder to notice. Scammers use AI to generate more realistic messages that contain the personal information of the recipient, such as their name and address.

If you receive an email or text message purporting to be from the IRS, a bank, or other financial institution, don’t click on any links contained in the message. If you think it’s a legitimate message, use a search engine, like Google, to find a link to that organization’s website.

Finally, phishing scams can be found in other contexts, such as social media. A scammer might send you a DM or make a post about “secret” or “unknown” tax hacks or laws that can save you money or get you an unclaimed tax refund. Do not click on the links contained in these messages, as they may take you to a website designed to steal your personal information.

One thing to remember is that the IRS won’t initiate contact with you via email or text. If there’s an unclaimed tax refund or tax issue that needs your attention, the IRS will first send you a letter. They usually won’t text, call, or email you about a tax issue until after they’ve already brought the issue to your attention by letter or you’ve given the IRS permission to contact you in that particular way. The IRS has a great webpage that explains how and when they’ll contact you.

Tax Scam #2: AI-Generated Phone Calls

AI isn’t limited to just phishing messages. One of their best and newest applications has been with AI-powered phone calls. Scammers used to make the calls themselves or employ an easy-to-detect recording to try to trick targets. But now, with access to AI, these scammers can take a voice recording of a real person to create a personalized message that asks you for personal information.

AI may also be used to engage in fake conversations with you. The AI algorithms are designed to answer some of the more common questions or give preprogrammed responses to anticipated reactions from targets. As a result, it’s sometimes hard for potential targets to know they’re talking to a computer and not a human.

The best way to detect these sophisticated scam calls is to ask random questions. Instead of asking why “they” need the information, instead ask about the caller’s hometown or how long they’ve been working for the IRS. AI has come a long way over the past few years, but they’re not quite advanced enough to handle these unexpected questions from humans…at least for now.

Tax Scam #3: Fraudulent Tax Preparers

Some scammers pose as tax preparers who often lure victims with promises of money, such as large tax refund checks or other tax benefits. Their goals are usually two-fold. First, it’s to obtain personal information, such as date of birth, address, and Social Security number, and use that to file a fake tax return and steal a tax refund check. Second, it’s to obtain a fee for fake tax services.

For instance, they might say they can prepare your tax return and promise you a massive check from the IRS. In return, they need you to first pay them a tax preparation fee. After you pay this fee, they ghost you with no realistic chance of you ever getting your money back.

The good news is that most of these tax scammers can be spotted in advance. Here are some common fake tax preparer red flags:

  • Promises or guarantees of large tax refunds.
  • Can’t provide you with a Preparer Tax Identification Number, or PTIN.
  • Asks you to sign your tax return before you can review it.
  • They don’t show up in an online search, or if they do, they have a lot of negative reviews.

Conclusion

Tax scams can target you at any time, but the time before the April 15 filing deadline is when they’re most likely to reach out to you. If you believe someone has tried to use a tax scam on you, you should report it to the Federal Trade Commission, Internet Crime Complaint Center, or the Treasury Inspector General for Tax Administration.

Do Not Ignore Your Tax Problems!

Tax Law is Our Specialty. Contact us to Get Your Life Back to Normal.