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The IRS issued a statement last month revealing that their website had been used by a "sophisticated" and well funded group attempting to steal tax forms containing personal identifying and financial information.  The thieves used the popular IRS website tool "Get Transcript" to access this information on roughly 200,000 taxpayers.  They successfully obtained  tax data on just over half.

The Get Transcript tool is an extremely handy way for taxpayers and their accountants to gain access to tax data.  This can come in handy when apply for mortgages or financial aid and is extremely useful when filing or amending returns for prior years.  The IRS has tried to safeguard the system by having the user answer a series of security questions.  The questions are often things like a prior address from a very long time ago that only the taxpayer should know.  Evidently, the security questions were not effective in this case because the crooks already had some identifying information on their target individuals.

The IRS has temporarily disabled the Get Transcript tool.  We will likely have to resort to mailed transcripts until they can shore up their system.  Hopefully, we wont go back to 4 week wait times!

For a more complete account of the situation please read the IRS statement below.

The IRS announced today that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address. These third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer. 

The matter is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation unit, and the “Get Transcript” application has been shut down temporarily. The IRS will provide free credit monitoring services for the approximately 100,000 taxpayers whose accounts were accessed. In total, the IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. As always, the IRS takes the security of taxpayer data extremely seriously, and we are working aggressively to protect affected taxpayers and continue to strengthen our protocols. 

ADDITIONAL INFORMATION -
The IRS announced today it will be notifying taxpayers after third parties gained unauthorized access to information on about 100,000 accounts through the “Get Transcript” online application. 

The IRS determined late last week that unusual activity had taken place on the application, which indicates that unauthorized third parties had access to some accounts on the transcript application. Following an initial review, it appears that access was gained to more than 100,000 accounts through the Get Transcript application. 

In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer. The IRS temporarily shut down the Get Transcript application last week after an initial assessment identified questionable attempts were detected on the system in mid-May. The online application will remain disabled until the IRS makes modifications and further strengthens security for it. 

The matter is under continuing review by the Treasury Inspector General for Tax Administration and IRS offices, including Criminal Investigation. 

The IRS notes this issue does not involve its main computer system that handles tax filing submission; that system remains secure. 

On the Get Transcript application, a further review by the IRS identified that these attempts were quite complex in nature and appear to have started in February and ran through mid-May. In all, about 200,000 attempts were made from questionable email domains, with more than 100,000 of those attempts successfully clearing authentication hurdles. During this filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts. 

In addition, to disabling the Get Transcript application, the IRS has taken a number of immediate steps to protect taxpayers, including: 
1. Sending a letter to all of the approximately 200,000 taxpayers whose accounts had attempted unauthorized accesses, notifying them that third parties appear to have had access to taxpayer Social Security numbers and additional personal financial information from a non-IRS source before attempting to access the IRS transcript application. Although half of this group did not actually have their transcript account accessed because the third parties failed the authentication tests, the IRS is still taking an additional protective step to alert taxpayers. That’s because malicious actors acquired sensitive financial information from a source outside the IRS about these households that led to the attempts to access the transcript application. 
2. Offering free credit monitoring for the approximately 100,000 taxpayers whose Get Transcript accounts were accessed to ensure this information isn’t being used through other financial avenues. Taxpayers will receive specific instructions so they can sign up for the credit monitoring. 

The IRS emphasizes these outreach letters will not request any personal identification information from taxpayers. In addition, the IRS is marking the underlying taxpayer accounts on our core processing system to flag for potential identity theft to protect taxpayers going forward – both right now and in 2016. 

These letters will be mailed out starting later this week and will include additional details for taxpayers about the credit monitoring and other steps. At this time, no action is needed by taxpayers outside these affected groups. 

The IRS is continuing to conduct further reviews on those instances where the transcript application was accessed, including how many of these households filed taxes in 2015. It’s possible that some of these transcript accesses were made with an eye toward using them for identity theft for next year’s tax season. 

The IRS emphasizes this incident involves one application involving transcripts – it does not involve other IRS systems, such as our core taxpayer accounts or other applications, such as Where’s My Refund. 

The IRS will be working aggressively to protect affected taxpayers and strengthen our protocols even further going forward. 

As of Jan. 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 57.5 cents per mile for business miles driven.
  
• 23 cents per mile driven for medical or moving purposes.
  
• 14 cents per mile driven in service of charitable organizations.

".. the budget environment of the last five years has brought about a devastating erosion of taxpayer service, harming taxpayers individually and collectively", said the The National Taxpayer Advocate Nina Olson referring to the IRS in the 2014 annual report released this week. Here are some hi-lights:

• The IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43%.  
  
• Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times. I myself have been on hold for over 4 hours in recent weeks.
  
• The IRS will answer far fewer tax-law questions than in past years. During the upcoming filing season, it will not answer any tax-law questions except "basic" ones. After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.
  
• Tax return preparation assistance has been eliminated.
  

In addition to these service declines, the budget cuts will have a negative financial impact as well. IRS Commissioner John Koskinen outlined how the already strapped agency will absorb the latest cut of  $346 Million to their fiscal year 2015 budget.  The consequences include fewer audits and case closures.  Fewer automated collections system and field collection case closures. A continued hiring freeze which should result in the loss of 1800 employees through attrition during 2015. The resulting reduced enforcement staffing means that the agency will lose at least 2 billion in revenue that otherwise would have been collected.

In Mid December the Senate passed, and President Obama signed, a one-year tax extender bill extending more than 50 tax provisions through Dec. 31, 2014. The long-term fate of these on-again off-again tax breaks will have to be decided in the next Congress.  For many years (most of my career) annual tax legislation was passed in a timely manner and without much controversy.  Recent battles in congress over taxes and spending have resulted in last minute and retroactive legislation.  The result is generally a late start to tax season while the IRS responds to the changes with updated forms, instructions, and publications.  These retroactive changes also make tax planning a challenge.


With over 50 provisions impacted a complete discussion of the new law isn't practical. The majority of the provisions pertain to businesses. Some of the individual highlights include:

Deduction for teachers' expenses- This measure allows educator to deduct up to $250 for the costs of classroom supplies that they buy with their own money. 

State and local sales tax deduction- If you itemize your taxes, this measure lets you deduct the state and local sales taxes you've paid in lieu of state income taxes.

Tuition deduction- Taxpayers meeting certain income limits may deduct up to $4,000 in qualified tuition, fees and related expenses for post-secondary education, such as college and graduate school. The deduction may be taken for yourself, your spouse or your dependents.

Deduction for mortgage insurance premiums-  This tax break allows for individuals to claim the cost of mortgage insurance premiums as an itemized deduction (subject to income limitations).

Income exclusion for mortgage debt that's been forgiven-  Losing your home in foreclosure or selling your home in a short sale can frequently result in forgiveness of debt income.  The IRS treats this forgiven debt income as taxable.  This bill extends a provision to exclude this income under certain circumstances.

You can read more about this bill at congress.gov.

Employees May Contribute up to $18,000 to their 401(k) plans in 2015

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000

Employees may contribute up to $12500 to their SIMPLE retirement account

SIMPLE account salary deferrals for 2015 have increased from $12,000 to $12,500. The additional "catch-up" contribution for people age 50 and older has increased from $2500 to $3000 bringing the total SIMPLE contribution possible to $15500.

SEP (Simplified Employee Pension) plans continue to be limited to 25% of compensation (or self employment earnings).

The maximum amount that may be contributed to a SEP or other defined contribution plan has increased from $52,000 in 2014 to $53000 for 2015.

Annual IRA contribution limits remain unchanged at $5500 ($6500 for individuals age 50 or older)

Individual who have earned income (compensation or self-employment income) may contribute and deduct up to $5500 ($6500 over age 50).  The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000.  For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Individuals who exceed these deduction phase out amounts may still contribute to their IRA but the contribution will not be deductible.

Single individual with total income under $129000 and married individuals with total income below $183000 may qualify to make ROTH IRA contributions

Like traditional IRA's, ROTH IRA contributions are limited to $5500/6500 and contributors must have earned income at least equal to the contribution amount.  

Unlike traditional IRA's, Roth IRA's have an income test for eligibility.  Individuals with income exceeding certain levels may not contribute to a ROTH IRA.  The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014.  Folks in this range will have their maximum contribution amount "phased out" with the amount at the lower end being close to the maximum allowed contribution and the amount at the upper end being close to zero.  Once income exceeds this upper limit no ROTH IRA contribution is allowed for the year.  For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000.  For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Here are some typical Itemized deductions that you may be qualified for:

Medical expenses - Medical expenses in excess of 10% of AGI are deductible as itemized deductions. If you or your spouse is age 65 or older by year end, you may deduct medical expenses in excess of 7.5% of AGI. Medical expenses are deductible in the year paid.  

Taxes - State and local income taxes as well as real estate taxes for all property owned are deductible in the year paid.  In years past you could deduct the larger of state income taxes or sales taxes.  The sales tax deduction provision expired at the end of 2013 but there may be some changes to this  as congress is expected to pass a last minute extender bill which MAY address this issue.  Most income taxes paid to a foreign country or US possession are either deductible as an itemized deduction or can be taken as a credit against tax.

Mortgage interest - Mortgage interest paid is deductible, with limitations.  Mortgage interest is deductible on up to two homes with a combined secured acquisition debt of $1.1 million.  Home equity debt is generally limited to $100,000. Points on the purchase or a refinance to make major improvements are deductible, but they may need to be amortized over the life of the loan.

The second home for purposes of this deduction can be a vacation home or even a motor home or boat.  To qualify as a home it must have sleeping, cooking and toileting facilities.  Interest on a home that you rent out, well, that’s a whole different story and will require a separate blog entry.

Charitable contributions - Generally you may deduct amounts given to qualifying charities with certain limitations. Qualifying organizations have tax exempt status granted by the IRS under section 501(c)(3).  Gifts to individuals are never deductible.  If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.  Most contributions will be limited to 50% of your AGI.  Non cash contributions will generally be limited to the fair market value of the item donated.  In some instances they may be limited to your cost.  Be sure to provide your preparer sufficient detail to determine the type of asset donated so that they can apply the proper limitations. (See our Resources page for a tool to help you value your non-cash charitable contributions).

It’s important that you have the proper documentation to support your charitable contributions as the IRS has strict rules in this area. You must have written substantiation for all contributions. If less than $250 is given at one time, a bank draft is sufficient. If the gift is $250 or greater, a written acknowledgement of receipt from the charity is required. 

Casualty and theft losses - A casualty is defined as damage, destruction, or loss of property resulting from an identifiable event that was sudden, unexpected, or unusual.  Casualty and theft losses can be deductible if they are not reimbursed by insurance.  However, because of the following limitations, we do not see a lot of them.  The losses are subject to a $100 "floor" amount and are further reduced by 10% of your AGI per  loss.

Miscellaneous deductions - Miscellaneous itemized deductions include expenses incurred for generating or protecting income, investment advisory fees, unreimbursed employee business and other job related expenses to name a few.  Expenses in this category are deductible only to the extent that they exceed of 2% of your AGI. 

Other miscellaneous deductions - There are some miscellaneous itemized deductions that are not subject to the 2% of AGI reduction. Some examples are gambling losses up to the amount of gambling winnings, and special job-related expenses of the disabled.

Be sure to let your tax advisor know if you feel you could be eligible for any of these deductions. There are sections for these expenses on our tax organizer.  If you do not see your particular section, please attach a note

You may be qualified for these adjustments to income:

Educator expenses -  This deduction applies to K – 12th grade educators, and is limited to $250 of documented supplies per qualified taxpayer. Expenses exceeding $250 can be taken as a miscellaneous itemized deduction. 

A health savings account - Health savings accounts, or HSA's, are accounts set up exclusively for paying the qualified medical expenses of the account beneficiary or the beneficiary’s spouse and dependents.  Health savings accounts are designed to accompany specific insurance policies with high deductibles.  Be sure to discuss this with your return preparer to see if you qualify.

Moving expenses - If you moved more than 50 miles for employment purposes you may be entitled to deduct the cost of moving your-self and your household goods.  You may deduct qualified out-of-pocket expenses or an employer reimbursement that was included in your W-2 form. If you received a non-taxable reimbursement, you cannot deduct the expenses.

Self-employment tax - If you are a sole-proprietor, active partner or have miscellaneous income subject to self-employment tax, you can deduct half of the self-employment tax. 

Self-employed pension plans - You can deduct all qualified contributions to self-employed SEP, SIMPLE, or other qualified plan.  See related articles under "retirement plans" for limitations and details.

Self-employed health insurance deduction -  Sole proprietor's, active partners with net business income, and greater than than 2% shareholders of an S-corporation may deduct the cost of health insurance for themselves and their families.  The deduction is limited to net profit or, in the case of an S corp shareholder, Medicare wages reported on the W-2 from that S corp. Qualified long-term care insurance premiums, subject to age limitations, are also deductible.

Penalty on early withdrawal of savings - These penalties, which are typically incurred when you cash a CD prematurely, are deductible. You will find this fee on your form 1099-INT. 

Alimony - Court ordered alimony paid is deductible, subject to certain rules. Your return must include the Social Security number of the recipient.

IRA deduction -  If you have compensation or self-employment income and are not covered by an employer plan, or meet certain income limitations, you may deduct contributions to a traditional IRA. For tax year 2014 you are limited to $5500 ($6500 if you are over 50). Roth IRA contributions are not deductible but possess other tax benefits.

Student loan interest - Up to $2,500 of the interest paid on a qualified student loan is deductible (subject to certain income limitations). You should receive a Form 1098-E from the entity to which you paid the student loan interest.

Tuition and fees deduction - Up to $4,000 of higher education tuition and fees can be deducted by taxpayers with an AGI under $80,000 if single, or $160,000 if married filing jointly.  It may be more advantageous for you to claim either the American opportunities credit or the lifetime learning credit.  All of these education benefits have different limitations and requirements.  .  You can find an in depth article on the credits under the education category of this blog.  Please discuss this with your tax advisor to claim the credit or deduction that is most advantageous for you

With another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American Opportunities and Lifetime Learning Credits are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

• The credit is only available for 4 tax years per eligible student. 
• The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

• Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
• Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
• Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

• Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Student loan interest deduction of up to $2,500 per year.
• Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

Received a bill from the IRS that needs to be paid?  Have an estimated tax payment due on September 15th?  On extension until October 15th and need to pay your balance due?  The IRS has a relatively new way for you to pay your taxes from the convenience of your own computer. Direct Pay is the latest addition to the IRS's online tools.  Available through the Pay Your Tax Bill  icon on IRS.gov, Direct Pay allows individuals to e-pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without any fees or pre-registration.
Because Direct Pay allows taxpayers to schedule payments up to 30 days in advance, now is a good time for those who are making estimated tax payments for 2014 to set up their third quarter payment due Sept. 15. In addition, anyone who received an extension until Oct. 15 to file their 2013 federal return and now finds they owe additional tax can also use Direct Pay to e-pay the additional amount due.

Direct Pay is available 24 hours a day, seven days a week. Any taxpayer who uses the system receives instant confirmation that their payment was submitted. 

Direct Pay cannot be used to pay business taxes. Taxpayers who wish to e-pay their federal business taxes should enroll in the Electronic Federal Tax Payment System (EFTPS), or click on the Pay Your Tax Bill icon to check out other payment options.

I've had calls recently from some of our clients wanting to know if the call they just received from the IRS was a real call or a phone scam.  Unfortunately, such scams have become common.   The IRS recently published the following article addressing the issue:

Five Easy Ways to Spot a Scam Phone Call

The IRS continues to warn the public to be alert for telephone scams and offers five tell-tale warning signs to tip you off if you get such a call. These callers claim to be with the IRS. The scammers often demand money to pay taxes. Some may try to con you by saying that you’re due a refund. The refund is a fake lure so you’ll give them your banking or other private financial information.

These con artists can sound convincing when they call. They may even know a lot about you. They may alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS badge numbers. If you don’t answer, they often leave an “urgent” callback request.

The IRS respects taxpayer rights when working out payment of your taxes. So, it’s pretty easy to tell when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a sign of a scam. The IRS will never:

1. Call you about taxes you owe without first mailing you an official notice.
2. Demand that you pay taxes without giving you the chance to question or appeal the amount they say you owe.
3. Require you to use a certain payment method for your taxes, such as a prepaid debit card.
4. Ask for credit or debit card numbers over the phone.
5. Threaten to bring in local police or other law-enforcement to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what to do:

• If you know you owe taxes or think you might owe, call the IRS at 800-829-1040 to talk about payment options. You also may be able to set up a payment plan online at IRS.gov.
• If you know you don’t owe taxes or have no reason to believe that you do, report the incident to TIGTA at 1.800.366.4484 or at www.tigta.gov.
• If phone scammers target you, also contact the Federal Trade Commission at FTC.gov. Use their “FTC Complaint Assistant” to report the scam. Please add "IRS Telephone Scam" to the comments of your complaint.

Remember, the IRS currently does not use unsolicited email, text messages or any social media to discuss your personal tax issues. For more information on reporting tax scams, go to www.irs.gov and type “scam” in the search box.