IRS provided

Frequently Asked Questions (FAQ)

§ 199A Deduction for Qualified Business Income (QBI)

Basic questions and answers on new 20% deduction for pass-through businesses

Below are answers to some basic questions about the new 20% deduction for pass-through businesses. Also known as the section 199A deduction or the deduction for qualified business income, the deduction was created by the 2017 Tax Cuts and Jobs Act.

Q1. What is the Deduction for Qualified Business Income?

A1. Section 199A of the Internal Revenue Code provides many taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. The deduction has two components.

(1) Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
 

(2) Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.

The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain. For details on figuring the deduction, see Q&A 6 and 7. The deduction is available for taxable years beginning after Dec. 31, 2017. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

Q2. Who may take the section 199A deduction?

A2. Individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction. In some cases, patrons of horticultural or agricultural cooperatives may be required to reduce their deduction. The IRS will be issuing separate guidance for co-ops.

Q3. How do S corporations and partnerships handle the deduction?

A3. S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1 so the shareholders or partners may determine their deduction.

Q4. What is qualified business income (QBI)?

A4. QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.

Q5. What is a qualified trade or business?

A5. A qualified trade or business is any trade or business, with two exceptions:

(1) Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers
 

(2) Performing services as an employee

Q6. How is the deduction for qualified business income computed?

A6. The SSTB limitation discussed in Q&A 5 does not apply if a taxpayer’s taxable income is below $315,000 for a married couple filing a joint return and $157,500 for all other taxpayers; the deduction is the lesser of:

       A) 20 percent of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income

     B) 20 percent of the taxpayer’s taxable income minus net capital gains.

If the taxpayer’s taxable income is above the $315,000/$157,500 thresholds, the deduction may be limited based on whether the business is an SSTB, the W-2 wages paid by the business and the unadjusted basis of certain property used by the business. These limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500. The threshold amounts and phase-in range are for tax-year 2018 and will be adjusted for inflation in subsequent years.

Q7. I have income from a specified service trade or business. How does that affect my deduction?

A7. The SSTB limitation does not apply to any taxpayer whose taxable income is below the $315,000/$157,500 threshold amounts discussed in Q&A #6. For taxpayers whose taxable income is within the phase-in range discussed in Q&A #6, the taxpayer’s share of QBI, W-2 wages and UBIA of qualified property related to the SSTB may be limited. If the taxpayer’s taxable income exceeds the phase-in range, no deduction is allowed with respect to any SSTB. The threshold amounts and phase-in range are for tax year 2018 and will be adjusted for inflation in subsequent years.

Q8. In 2018, I will report taxable income under $315,000 and file married filing jointly. Do I have to determine if I am in an SSTB in order to take the deduction? Is there any limitation on my deduction?

A8. No, if your 2018 taxable income is below $315,000, if married filing jointly, or $157,500 for all other filing statuses, it doesn’t matter what type of business you are in. You will be able to deduct the lesser of:

a) Twenty percent (20%) of your QBI, plus 20 percent of your qualified REIT dividends and qualified PTP income, or

b) Twenty percent (20%) of your taxable income minus your net capital gains.

Q9. In 2018, I will report taxable income between $157,500 and $207,500 and file as single. I receive QBI. Does it matter if it is from an SSTB?

A9. Yes, because your taxable income is above the threshold amount, your section 199A deduction with respect to any SSTB will be limited. However, because you are within the phase-in range, you may be allowed some section 199A deduction with respect to an SSTB. In addition, for taxpayers above the threshold amount, the section 199A deduction with respect to any trade or business, including an SSTB, may be limited by the amount of W-2 wages paid by the trade or business and the UBIA of qualified property held by the trade or business. The phase-in range is $315,000 to $415,000 for joint filers and $157,500 to $207,500 for all other filing statuses. Section 1.199A-1 of the proposed regulations provides additional information.

Q10. In 2018, I am single and will report taxable income over $207,500. My only income is from an SSTB. Am I entitled to the deduction with respect to the SSTB?

A10. No. The same is true for a married couple filing a joint return whose taxable income exceeds $415,000. However, you may be entitled to a deduction for QBI earned from another trade or business that is not an SSTB or from qualified REIT dividends or qualified PTP income.

Q11. In 2018, I am single and will report taxable income over $207,500. I am NOT in an SSTB.  Am I entitled to the deduction?

A11. Yes, if you have QBI, qualified REIT dividends or qualified PTP income. For eligible taxpayers with total taxable income in 2018 over $207,500 ($415,000 for married filing joint returns), the deduction for QBI may be limited by the amount of W-2 wages paid by the qualified trade or business and the UBIA of qualified property held by the trade or business. The proposed rules provide additional information on these limitations. The IRS also issued a notice of proposed revenue procedure providing methods for determining W-2 wages for purposes of the limitation.

Q12. How do co-ops qualify for the 199A deduction?

A12. The IRS will be issuing separate guidance for co-ops.

Zaher Fallahi, CPA, Tax Attorney, advises taxpayers including Americans Living Abroad, in resolving their tax problems, and Offshore Accounts (OVDP, FBAR, FATCA). Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

IRS Tips on Income Taxes and Selling a Home

Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home. Below are tips to keep in mind when selling a home:

Ownership and Use

To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

1- Owned the home for at least two years  

2- Lived in the home as their main home for at least two years.

3- Gain. If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return.

4- Loss. A main home that sells for lower than purchased is not deductible.

Reporting a Sale

Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Possible Exceptions

There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.

Worksheets

Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

1- Adjusted basis of the home sold

2- Gain (or loss) on the sale

3- Gain that can be excluded

Items to Keep In Mind:

1- Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.

2- Taxpayers who used the first time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account looks-up to get account information such as the total amount of your credit or your repayment amount.

3- Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.

4- Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.

5- Taxpayers who purchased health coverage through the Health Insurance should notify the Marketplace when moving out of the area covered by the current Marketplace plan.

Avoid scams

The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can  view their tax account information on IRS.gov to find 

Zaher Fallahi, CPA, Tax Attorney, assist taxpayers including Americans Living Abroad, in resolving their tax problems and undisclosed foreign bank accounts; FBAR, FATCA and Offshore Voluntary Disclosure Program (OVDP).  Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

IRS Helpful Tips About Gambling Winnings and Losses

Taxpayers must report all gambling winnings as income and must be able to itemize deductions to claim any gambling losses on their tax return. Here are the helpful IRS tips for taxpayers who gamble to know:

Gambling income

Income from gambling includes winnings from the:

(a) lottery

(b) horseracing

(c) casinos and

(d)  Cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips to the IRS.

Payer tax form

The payer may issue a Form W-2G, Certain Gambling Winnings, to winning taxpayers based on the type of gambling, the amount they win and other factors. The payer also sends a copy of the form to the IRS. Taxpayers should also get a Form W-2G if the payer withholds income tax from their winnings.

How to report winnings

Taxpayers must report all gambling winnings as income and they normally should report all gambling winnings for the year on their tax return as “Other Income.” This is true even if the taxpayer doesn’t get a Form W-2G.

How to deduct losses

Taxpayers are able to deduct gambling losses on Schedule A, Itemized Deductions, but keep in mind, they can’t deduct gambling losses in excess of their winnings.

Keep gambling receipts

Keep records of gambling wins and losses. This means gambling receipts, statements and tickets or by using a gambling log or diary.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

The IRS offers the following tax tips for taxpayers with a summer job:

1- Withholding and Estimated Tax

Students and teenage employees normally have taxes withheld from their paychecks by the employer.  Some workers are considered self-employed and may be responsible for paying taxes directly to the IRS. One way to do that is by making estimated tax payments during the year.

2- New Employees

When a person gets a new job, they need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to calculate how much federal income tax to withhold from the employee’s pay. The IRS Withholding Calculator tool on IRS.gov can help a taxpayer fill out the form.

3- Self-Employment

A taxpayer may engage in types of work that may be considered self-employment. Money earned from self-employment is taxable. Self-employment work can be jobs like baby-sitting or lawn care. Keep good records on money received and expenses paid related to the work.  IRS rules may allow some, if not all, costs associated with self-employment to be deducted. A tax deduction generally reduces the taxes you pay.

4- Tip Income

Employees should report tip income. Keep a daily log to accurately report tips. Report tips of $20 or more received in cash in any single month to the employer.

5- Payroll Taxes

Taxpayers may earn too little from their summer job to owe income tax. Employers usually must withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer, in a timely manner.

6- Newspaper Carriers

Special rules apply to a newspaper carrier or distributor. If a person meets certain conditions, then they are self-employed. If the taxpayer does not meet those conditions, and are under age 18, they may be exempt from Social Security and Medicare taxes.

7- ROTC Pay

If a taxpayer is in a ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive may not be taxable, see Publication 3 for details.

8- Use IRS Free File

Taxpayers can prepare and e-file their federal income tax return for free using IRS Free File.  Free File is available only on IRS.gov. Some taxpayers may not earn enough money to have to file a federal tax return, by law, but may want to if taxes were withheld. For example, a taxpayer may want to file a tax return because they would be eligible for a tax refund or a refundable credit.  IRS Free File can help with these issues. 

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

The IRS offers numerous payment options where taxpayers can pay their tax liabilities immediately or through installments. Those who receive a bill from the IRS should not ignore it, but decide on a payment plan. A delay may cost more in the end. As more time passes, the more interest and penalties accumulate.  Here are some ways to make payments using IRS electronic payment options:

Direct Pay

Pay tax bills directly from a checking or savings account free with IRS Direct Pay. Taxpayers receive instant confirmation once they have made a payment. With Direct Pay, taxpayers can schedule payments up to 30 days in advance. Change or cancel a payment two business days before the scheduled payment date.

Credit or Debit Cards

Taxpayers can also pay their taxes by debit or credit card online, by phone or with a mobile device. A payment processor will process payments.  The IRS does not charge a fee but convenience fees apply and vary by processor.

Those wishing to use a mobile devise can access the IRS2Go app to pay with either Direct Pay or debit or credit card. IRS2Go is the official mobile app of the IRS. Download IRS2Go from Google Play, the Apple App Store or the Amazon App Store.

Installment Agreement

Taxpayers, who are not able to pay their tax debt immediately, may make monthly payments. Before applying for any payment agreement, taxpayers must file non-filed required tax returns. Apply for an installment agreement with the Online Payment Agreement tool.

Who's eligible to apply for a monthly installment agreement online?

1- Individuals who owe $50,000 or less in combined tax, penalties and interest and have filed all required returns

2- Businesses that owe $25,000 or less in combined tax, penalties and interest for the current year or last year's liabilities and have filed all required returns

Those who owe taxes are reminded to pay as much as they can to minimize interest and penalties. Visit IRS.gov/payments for all payment options.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

Last-Minute Tax Tips to Consider

The IRS urges taxpayers to avoid waiting until April 18 to file their taxes. For those who do wait, the IRS has easy-to-access online resources to help. Following are eight tips from the IRS can help make filing less taxing:

1- Review your tax returns carefully

Taxpayers who rush to beat the tax filing deadline may miss a tax benefit or, worse, make mistakes. Errors delay tax refunds and could cause the IRS to send you a letter.

2- Validate e-signature

If a taxpayer changed tax software for 2017, they may need their prior-year adjusted gross income (AGI) to validate their electronic signature. To learn about how to verify their identity and electronically sign a tax return at Validating Your Electronically Filed Tax Return. Always keep a copy of tax returns.

3- Visit IRS.gov

Go online for tax related resources. The Interactive Tax Assistant, Tax Trails, Frequently Asked Questions, Tax Topics, and IRS Tax Maps are useful resources.

4- Use IRS Free File

Taxpayers who made $64,000 or less they can use free tax software to prepare their federal tax return. Free File Fillable Forms is available for those who made more than that. These are electronic versions of IRS paper forms.

5- File electronically

Kick the paper habit and e-file. IRS e-file is safer, easy and more accurate. Taxpayers are 20 times less likely to make a mistake with an e-filed return compared to filing a paper return. Tax software catches and corrects common paper filing mistakes. It also warns you to overlooked tax credits and deductions.

6- File on time

Taxpayers who owe taxes but can’t pay in full by the April 18 due date, should still file on time and pay as much as possible. This will reduce potential IRS penalties and interest charges. For unpaid taxes, people may apply for an installment agreement to pay over time. The easiest way to apply is to use the Online Payment Agreement application on IRS.gov. To apply by mail, use IRS Form 9465, Installment Agreement Request.

7- Request an extension of time to file

Taxpayers can request a six-month extension electronically through tax software, including FreeFile, by using  Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Taxpayers may also make an electronic payment and designate it as a “Form 4868” payment. A reminder: An extension of time to file a tax return is not an extension of time to pay taxes. Be sure to e-file or mail the form and pay an estimate of any tax due by the April 18 due date to avoid penalty and interest charges. The IRS has the flexibility to work with those who cannot pay all taxes owed.

8- Visit a Local IRS Office

IRS Taxpayer Assistance Centers now operate by appointment only. Taxpayers can find most answers online at IRS.gov, but if they need in-person assistance, they will need to make an appointment.

Taxpayers should keep a copy of their tax return and the supporting documents. Beginning in 2017, taxpayers using a software for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Learn more about how to verify your identity and electronically sign your tax return at Validating Your Electronically Filed Tax Return.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

If taxpayers gave cash or non-cash goods to a charity in 2016, they may take a deduction on their federal tax return. Taxpayers can use the Interactive Tax Assistant tool, Can I Deduct my Charitable Contributions?, to help determine if their charitable contributions are deductible.

Here are six important facts to know about charitable donations:

1- Qualified Charities

Taxpayers must donate to an IRS approved charity. Gifts to individuals, political organizations or candidates are not deductible. To find out the status of a charity, use the IRS Select Check tool. 

2- Itemize Deductions

To deduct charitable donations, taxpayers must file Form 1040 and itemize deductions on Schedule A, Itemized Deductions, with a federal tax return.

3- Benefit in Return

If taxpayers get something in return for their donation, they may have to reduce the value of their deduction. Taxpayers can only deduct the amount that exceeds the fair market value of the benefit received. Examples of benefits include merchandise, meals, event tickets or other goods and services. 

4- Type of Donation

If taxpayers give non-cash property instead of cash, their deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price they would get if the property sold on the market. If they donate used clothing and household items, those items must be in good condition or better. Special rules apply to cars, boats and other types of property donations. 

5- Noncash Charitable Donations

File Form 8283, to claim Noncash Charitable Contributions, if all noncash gifts are in excess of $500 for the year. Complete section-A for noncash property contributions worth $5,000 or less. Complete section-B for noncash property contributions more than $5,000 and include a qualified appraisal to the return.

Taxpayers may be able to prepare and e-file their tax return for free using IRS Free File. The type of records they must keep depends on the value and type of their contribution. To learn more about what records to keep, see Publication 526, Charitable Contributions. 

6- Donations of $250 or More

If taxpayers donated cash or non-cash goods of $250 or more, they must have a contemporaneous written statement from the charity. It must show the amount of the donation and a description of any property donated. It must also say whether they received any goods or services in exchange for the gift.

Taxpayers should keep a copy of their tax return

Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses and dependents took post-high school coursework in 2016, they may be qualify for a tax credit or deduction.

The following are some facts from the IRS about tax benefits for higher education.

For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) that may reduce the income tax owed. Use  Form 8863 to claim the related education credits.

I- The American Opportunity Credit (AOC) is:

1- Worth a maximum benefit up to $2,500 per eligible student.

2- Only for the first 4 years at an eligible college/vocational school.

3- For students pursuing a degree or other recognized higher education credential.

4- For students enrolled at least ½ time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first 3 months of 2017 as long as they paid qualified expenses in 2016.

II- The Lifetime Learning Credit (LLC) is:

1-Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.

2-Available for years of postsecondary education and for courses to acquire/ improve job skills.

3-Available for an unlimited tax years

The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may benefit taxpayers who do not qualify for the AOC or the LLC. Use Form 8917 to claim the deduction.

III-The Tuition and Fees Deduction is:

1-Worth a maximum benefit up to $4,000,

2-Claimed as an adjustment to income,

3-Available even if a taxpayer doesn’t itemize deductions on Schedule A,

4-Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.

IV- Additionally:

1-Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions. See Publication 970 for more details.

2-They may only claim qualifying expenses paid in 2016.

3-They can’t claim either credit if someone else claims them as a dependent.

4-They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.

5-Income limits could reduce the amount of credits or deductions they can claim.

6-The Interactive Tax Assistant tool on IRS.gov can help check eligibility.

IRS Free File

Taxpayers can use IRS Free File to prepare and e-file their federal tax returns for free. File Form 8863, Education Credits, with your Form 1040. Free File is only available at IRS.gov/freefile.

The IRS reminds students using the Free Application for Federal Student Aid (FAFSA) that the IRS Data Retrieval Tool currently is unavailable.  This does not limit an individual’s ability to apply for aid. Applicants can manually provide their tax return information. The IRS offers alternatives for the retrieval of the income information needed.

Zaher Fallahi, CPA, Tax attorney, advises taxpayers including Americans-living abroad, with their taxes, IRS representation, foreign accounts (FBAR, FATCA, OVDP, foreign trusts). Telephones (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail to:  taxattorney@zfcpa.com

IRS “Dirty Dozen” Series of Tax Scams for 2017 Includes Return Preparer Fraud; Choose Reputable Return Preparers

February 6, 2017, WASHINGTON — The IRS today warned taxpayers to be on the lookout for unscrupulous tax return preparers, one of the most common “Dirty Dozen” tax scams during tax season. 

The vast majority of tax professionals provide honest, high-quality tax returns. But there are some un-unscrupulous preparers who set up shop each year to fraud, identity theft and other scams that hurt taxpayers. That's why unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds make the Dirty Dozen list every year. 

"Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected," said IRS Commissioner John Koskinen. "Most preparers provide high-quality service but we run across cases where unscrupulous preparers steal from their clients and misfile their returns."  

Return preparers are a vital part of the U.S. tax system. About 60% of taxpayers use tax professionals to prepare their annual ax returns.  Illegal scams can lead to significant penalties, interest and potential criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the perpetrators. 

Choosing Return Preparers Carefully 

It is important to choose carefully when hiring an tax prepare. Well-intentioned taxpayers can be misled by preparers who do not understand taxes and mislead people into taking credits or deductions they are not entitled to in order to increase their own fees. Every year, these types of tax preparers face everything from penalties to jail time for defrauding their clients. 

Here are a few tips when choosing a tax preparer:

Ask the tax preparer if she or he has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, obtain a PTIN and include it on the second page of the Form 1040.

Inquire if the tax preparer has a professional credential (enrolled agent, certified public accountant or attorney), belongs to a professional organization or attends continuing education classes. A number of tax law changes can be complex, and competent tax professional needs to be up-to-date in the new laws. Tax return preparers are not required to have a professional credential. Visit the IRS website for more information regarding the national tax professional organizations.

Check the preparer’s qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help locate a tax return preparer with your desired qualifications

The IRS Directory is a searchable and sortable listing of certain preparers registered with the IRS. It includes the name, city, state and zip code of:

1) Attorneys

2) CPAs

3) Enrolled Agents

4) Enrolled Retirement Plan Agents

5) Enrolled Actuaries

6) Annual Filing Season Program participants

Check the preparer’s history. Inquire of the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with your State Board of Accountancy. For attorneys, check with you State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory.

Ask about service fees. Avoid preparers who base fees on a percentage of their client’s refund or boast bigger refunds than their competition. Don’t give your tax documents, SSNs, and other information to a preparer when only asking about their services and fees. Unfortunately, some preparers have improperly filed returns without the taxpayer’s permission once they obtain the records.

Ask to e-file your return. Be sure your preparer offers e-filing service. Paid preparers who prepare taxes for more than 10 clients generally must file electronically. The IRS has processed more than 1.5 billion e-filed tax returns. It’s the safest and most accurate way to file a return.

Provide records and receipts. Good preparers will ask to see your records and receipts. They will ask questions to determine your total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file your return using your only last pay stub instead of your annual Form W-2. This is against IRS e-file rules.

Make sure the return preparer is available. In the event questions come up about your tax return, you may need to contact your preparer after the return is filed. Avoid fly-by-night preparers.

Understand who can represent you. Attorneys, CPAs, and enrolled agents can represent any client before the IRS in any situation, subject to limitation. Annual Filing Season Program participants may represent you in limited situations if they prepared and signed your return. However, non-credentialed preparers who do not participate in the Annual Filing Season Program may only represent clients before the IRS on returns they prepared and signed on or before Dec. 31, 2015.

Never sign a blank tax return. Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.

Review your tax return carefully before signing, and ask questions if something is not clear. Make sure you are comfortable with the accuracy of the return before you sign it and that your tax refund goes directly to you – not into the preparer’s bank account. Reviewing the routing and bank account number on the completed return is always recommended.

Report abusive tax preparers to the IRS. You can report abusive tax return preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your permission, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov.

To find other tips about choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS tax preparer directory, and learning how to submit a complaint regarding a return preparer, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what is on their tax return even if someone else prepares it. Make sure the preparer you hire is up to the task.

Zaher Fallahi, CPA, Tax Attorney, is a Tax Resolution Attorney and defends taxpayers before the IRS (FBAR, FATCA and OVDP), FTB, EDD and BOE. Telephone: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), or e-mail: taxattorney@zfcpa.com

Scams continue to use the IRS as a lure.

These tax scams take many different forms. The most common scams are phone calls and emails from thieves who pretend to be from the IRS. Scammers use the IRS name, logo or a fake website to try and steal money from taxpayers. Identity theft can also happen with these scams.

Taxpayers need to be wary of phone calls or automated messages from someone who claims to be from the IRS. Often these criminals will say:

i) Taxpayer owes money;

ii) Demand payment right away;

iii) They are due a refund; and,

iv)  Ask for bank account information over the phone.

The IRS warns taxpayers not to fall for these scams and follow several tips that may help filers avoid becoming a scam victim. IRS employees will NOT:

1) Call demanding immediate payment, without first sending a bill in the mail.

2) Demand payment without allowing people to question or appeal the taxes owed.

3) Require the taxpayer pay a certain way; for example, taxpayers use a prepaid debit card.

4) Ask for credit or debit card numbers on the phone.

5) Threaten to contact local enforcement agencies to arrest you for non-payment of taxes.

6) Threaten to bring a legal action.

If you don’t think you owe any tax, then:

1) Report to the Treasury Inspector General for Tax Administration (TIGTA) “IRS Impersonation Scam Reporting”.

2) Report to the Federal Trade Commission FTC); “FTC Complaint Assistant” .

In most cases, an IRS phishing scam is an unsolicited, bogus email that claims to be from the IRS. Criminals often use fake refunds, phony tax bills or threats of an audit. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information and use it to steal a victim’s money and their identity.

For those taxpayers who get a ‘phishing’ email, then:

1) Do not reply to the message.

2) Do not give out your personal or financial information.

3) Forward the email to phishing@irs.gov. Then delete it.

4) Do not open any attachments or click on any links. They may have malicious code that will infect your computer.

Zaher Fallahi, CPA, Tax Attorney, represents taxpayers before the IRS, FTB, EDD and BOE. Telephones:  (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County) or e-mail taxattorney@zfcpa.com