Good News!!!

Additional Federal refunds are on the way to more than 2.8 million people due to changes made by the American Rescue Plan Act. Please lookout for the green and yellow cheques, don’t discard them.

Here are some of the provisions resulting in a tax refund:

Unemployment Tax Credit

If you received unemployment benefits in 2020, you may be eligible for a refund from the IRS. The first $10,200 in Unemployment benefit income is free of federal income tax, due to changes made by the American Rescue Plan Act passed in March.

This means for any eligible taxpayer who has already filed and reported their unemployment compensation as fully taxable the IRS is automatically adjusting their return and providing them this tax REFUNDS. Based on this adjustment, refunds are being issued starting June and continuing through the summer.

Advance Premium Tax Credit

The act suspends the requirement that the taxpayers repay their excess advance payments of the premium tax credit for tax year 2020. Taxpayers who have already filed their 2020 tax return and who have excess APTC for 2020 do not need to file an amended tax return or contact the IRS. The IRS will reduce the excess repayment amount to zero with no further action needed by the taxpayer. The IRS will REFUND people who have already repaid any excess advance Premium Tax Credit on their 2020 tax return.

Child Tax Credit

The extra money may be coming your way soon since changes in the American Rescue Plan Act includes an advance on your 2021 child tax credit as soon as July. New changes to the child tax credit may provide families with monthly payments worth up to $250 per child (and $300 per child under 6) as soon as this summer. The recent updates to the child tax credit do not require you to make any changes to your 2020 tax return. Eligibility is simply based on your 2019 or 2020 tax return information, depending on when you filed.

IRS is Eyeing Wealthy Taxpayers

IRS is planning to target “Wealthy Taxpayers.” There is a new push from the Biden administration to close the revenue gap, and the president calls it tax fairness. President Biden is giving IRS $70 billion over 10 years and IRS estimates the new funding will bring in an additional $700 billion in tax dollars for the same period to help bridge the budget gap.

The proposal in a nutshell is to give IRS a lot of money for enforcement efforts so that it could audit more wealthy individuals (>$400K). IRS would use this money to hire and train revenue agents to specialize in complex audits. IRS states that the audit rates wouldn’t increase for the taxpayers with income under $400K i.e., the push for the increased IRS scrutiny and audits is for the taxpayers with income more than $400K.

Here are the main things IRS would be looking out for:

1. Income Level: IRS statistics show that people with incomes of $200K or higher had an audit rate of 1.25% (more than twice of average audit rate) and people with incomes of $1 million or higher had an audit rate of 3.2% i.e. The higher the income, higher the probability of being audited.

2. Not reporting ALL income: IRS gets copies of all 1099s and W-2s you receive, so make sure you report all income on your return. A mismatch sends up a red flag and causes the IRS to review a return.

3. Rental Losses: IRS actively scrutinizes rental real estate losses that are claimed for active participation, especially those written off by taxpayers who have W-2 income and/or other non-real estate businesses income.

4. Hobby Losses: You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income only. The law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted as the business with the reasonable expectation of making a profit.

5. Cash Intensive Business: Business owners in cash-intensive businesses e.g. taxis, car washes, bars, hair salons, retail stores, restaurants are a tempting target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income, so IRS agents are trained to determine the average cash collected by each business by region.
I would like to emphasize that everyone’s situation is different so it’s important to fully consider your specific situation before claiming a particular expense. The list does not guarantee that a person will (not) be audited, and most agencies and tax courts typically look at the totality of the circumstances to determine if a tax return should be audited, but the list is very helpful in understanding the thought process.

IRS warns people about a widespread telephone scam

With the upcoming tax deadlines, IRS warns people about scammers, who are using a sophisticated phone scam to target taxpayers throughout the country. The scammers tell their victims that they owe money to the IRS and must pay it promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, the scammers threaten them with arrest, deportation, or suspension of a business or driver’s license.

Other characteristics of this scam include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
• Sometimes Scammers are even able to recite the last four digits of a victim’s Social Security number.
• Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
• After threatening victims with jail time or driver’s license revocation, scammers hang up and someone else soon calls back pretending to be from the local police or Department of Motor Vehicles, and the caller ID supports their claim.

Please note that IRS does not, and will not, ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer. If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling. If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040 to understand your tax liability or let me know.