A MEDIA-SAVVY IRS often announces that one of its top priorities is combatting criminals who steal tax-related information. The good news: Reports of tax identity theft have declined markedly in recent years. The bad news: Resourceful identity thieves remain active and constantly introduce new schemes.
One consistently remunerative ploy is to use stolen Social Security numbers and other information to file fraudulent tax returns that claim hefty refunds—claims that generally are submitted at the start of the filing season. In my experience, most taxpayers are unaware that they can avail themselves of an uncomplicated, perfectly legal way to limit the personal impact of such thefts—by endeavoring to file tax returns where there’s a balance due.
How can they do that? Let’s start with employees. Sally receives wages from employment. She could decrease her withholding by revising her W-4, the form workers provide to employers to determine withholding from paychecks. Some reminders for Sally and other employees who go that route: Head to IRS.gov for the W-4 that was recently updated to reflect changes introduced by the new tax law. Also check out the IRS’s newly released tax withholding calculator. It provides the information needed to revise a W-4.
Next, let’s move onto freelancers and other self-employed individuals. Mary is a freelance writer. Unlike Sally, whose taxes are paid through withholding, Mary makes quarterly payments of estimated taxes. Mary and other self-employed persons could decrease their estimated payments.
Finally, let’s consider retirees. Tess supplements her Social Security with a pension from her former job and money she removes from her IRA. Like Mary the freelancer, Tess could decrease her estimated payments. Unlike Mary, Tess and other retirees could even skip their estimated payments entirely, while also adjusting the withholding from their pensions, annuities, Social Security benefits and distributions from IRAs, 401(k)s and other tax-deferred retirement plans.
How badly could things turn out if Sally, Mary and Tess don’t decrease withholding or estimated payments, and instead file returns that claim refunds? If their identities have been stolen, they may receive impersonal responses from the IRS that go something like this: “This is to acknowledge our previous receipt of a 1040 showing your name and Social Security number and claiming a refund. Alas, we paid it. Be patient while an understaffed and underfunded agency undertakes what could prove to be an interminable investigation. You should eventually get the refund to which you’re entitled, but don’t expect to get it any time soon.”
Contrast their possibly prolonged plights with what happens if they submit 1040 forms showing a balance due. All three send a check for the amount owed. Their returns reach the IRS after the agency received 1040s from thieves, which show their names and Social Security numbers, and which claimed refunds that a snookered IRS promptly paid.
In this second scenario, where there’s a balance due, Sally, Mary and Tess should look forward to a terse response from the IRS: “We’ve already received a return from you, or so we thought. Still, we’ll accept your return and cash your check.” Cue enlightened IRS sleuths. They’re tasked with tracking down the thieves, which isn’t a concern for Sally, Mary and Tess. Still, it’s best they check whether the thieves have defrauded them in other ways—for instance, obtained loans or made purchases in their names. This would be a good moment to check their credit reports.
Meanwhile, even though their 1040s show they owed money, they probably needn’t fret that the IRS will exact penalties for underpayment of taxes. Generally, filers are off the hook for penalties, provided they satisfy one of several requirements.
First, the IRS doesn’t seek penalties from filers whose balance due is less than $1,000. What if the amount owed is north of $1,000? The agency doesn’t penalize those who paid at least 90% of the actual taxes they owe for the current year or 100% of the taxes shown on their 1040 for the prior year. The 100% requirement rises to 110% for those whose adjusted gross income exceeds $150,000 ($75,000 for those who are married and filing separately from their spouses).
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Right on Schedule, No Substitute and Rendering Unto Caesar. This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.
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