How Entrepreneurs Can Avoid IRS Tax Scams

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IRS tax scams continue to occur every year, and scammers update their tactics to be more sophisticated. As an entrepreneur, here’s how to steer clear of these frauds

One of the most common types of scams out there is related to alleged tax crimes. These scammers take advantage of the fact that taxes are complicated and that many Americans may not fully understand all laws and regulations and what’s expected of them.

And for entrepreneurs—whether they’re business owners or freelancers—taxes can be an even more complex process to deal with each year. Because of common insecurities about taxes and owing money to the IRS, many individuals are often more vulnerable to attempts at fraud.

It’s important to know the warning signs and to be prepared to detect when you’re being tricked. Here’s more information about what to look for and what you can do if you find yourself in trouble:

Where do scammers usually start?

According to the IRS, the most common type of tax scams occur over the phone or via email, when the scammer pretends to be a representative from the IRS and demands that the person pay up or provide personal information. Email fraudsters will often use the IRS logo and even fake IRS badge numbers to try to look legitimate.

How to detect the warning signs

First of all, the IRS says it would never leave a recorded message that is “urgent or threatening” regarding a tax issue. And it will not call taxpayers if they owe money until the organization has already sent a bill via the regular mail service.

The IRS warns that some of these voicemail messages will claim that the victim will be subject to arrest if they don’t respond. Because callers can get fake numbers to appear on your caller ID, it can be hard to know who is calling from where especially if you recognize the area code and think it is just a normal call.

With email messages, it’s the same story—the IRS doesn’t reach out to taxpayers via email asking for any kind of personal information. While they do occasionally call a taxpayer or visit their home, this is due to overdue or delinquent tax returns or other tax issues that may involve an investigation.

It’s important to be wary of any phone or email message that you receive from someone claiming to be from the IRS. They’ll often ask you to provide your bank account information or personal information in attempts to steal money and identities.

The IRS says it will never:

  • Make demands about payment via these methods and without giving the taxpayer the opportunity to appeal or question what is owed
  • Require payment in one specific way
  • Ask for payment information over the phone (e.g., credit or debit card number)
  • Threaten arrest
  • Threaten legal action

These methods are simply not the way the IRS notifies taxpayers about issues, so if you experience any of the above, you are dealing with a scammer.

Recent tax crimes to be aware of

The IRS cites two examples of recent tax scams they’re been dealing with. One relates to social security numbers, where the scammer claims that a victim’s SSN could be suspended or canceled. They take a similar approach to the IRS impersonation methods mentioned above.

The other happens when scammers pretend to be from a fake tax agency called “The Bureau of Tax Enforcement” or something similar. This is not, of course, a real entity.

It’s important to be aware of these two new developments in tax scamming, and to be on the lookout for similar attempts that will likely arise in the next year.

What to do if you are a victim of a tax scam attempt

If one of these scams happens to you, the IRS has a reporting method. You can send any emails from scammers pretending to be the IRS to phishing@irs.gov.

And if you’ve fallen for fraud and lost any money because of one of these incidents, the IRS suggests reporting it to the Treasury Inspector General Administration and to also file a complaint with the Federal Trade Commission.

The IRS also has a webpage that covers the ins and outs of what kind of tax fraud activity you may have experienced and the steps you should take next.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and business strategy, and to find out how we can help your business exceed your expectations.

U.S. Taxes for Ex-Pat Entrepreneurs

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Pay close attention to U.S. tax laws even if you live and run your business overseas

One of the perks of being an entrepreneur or self-employed worker is that you can live and work from anywhere, including other countries. However, taxes still need to be filed in the U.S., even if you’re living and working on growing your business overseas.

Here are tips and important information to know when filing taxes in the U.S. as an ex-pat entrepreneur.

Self-employed general tax requirements

First, let’s cover the basics of self-employment taxes that you’d have to pay whether living here or abroad. If you make over $400 in a given year, you must file a tax return that includes Schedules C and C-EZ. There are two components that make up the self-employment tax rate of 15.3 percent: 12.4 percent for social security and 2.9 percent for Medicare. These payments would normally be taken out of your pay check if you worked for an employer.

Self-employed professionals also must pay quarterly tax payments that are estimated taxes owed. Without paying quarterly taxes, or the adequate amounts on these quarterly payments, penalties may be incurred when you file your annual tax return.

Now that you know these basics of what self-employment taxes entail, let’s look at what’s different for those living outside of the U.S.

Taxes for ex-pats

The U.S. taxes its citizens even if they’ve lived outside of the country for years. Income received when working from any country must be reported.

However, the Foreign Earned income Exclusion (FEIE) allows qualifying ex-pats to make around $100,000 a year without having to pay any income taxes. This applies to many working people living abroad. Additionally, if you’re paying income tax wherever you live (outside of the U.S.), these tax payments can be considered credits on your taxes. But this doesn’t apply to income from things like interest, dividends, or social security payments, among others.

Remember that where you live matters. Some countries outside of the U.S. will not charge business tax, while others could be as high as 40 percent.

Deductions

Another positive for the self-employed is the deductions. And ex-pat entrepreneurs can take advantage of reporting expenses for business-related things like travel expenses, supplies, rent, and taxes. These deductions help to offset the tax burden on entrepreneurs.

Vendors

Many ex-pats may do business with vendors in countries outside of the U.S. There are tax laws that apply in these cases, including withholding rules and procedures. One rule is that vendors should file out a W-8 to keep on file, which can also be used to justify a withholding rate or an exemption.

Type of business

Entrepreneurs’ taxes are affected by what kind of business structure is set up; for instance, an LLC (limited liability company). For a foreign LLC, Forms 8832 and 8858 must be filed each year for the LLC to be “disregarded,” which means that the company can be reported on your individual tax return and it doesn’t require separate corporate reporting.

There is also a repatriation tax that is paid by U.S. citizens who are owners of foreign businesses.

FATCA

FATCA, which is the Foreign Account Tax Compliance Act, indicates that the IRS can enforce taxes on transactions that don’t take place in the U.S. This could include passive foreign income or subpart F income, and a controlled foreign corporation that gets more than 75 percent of its income from dividends or royalties and the like is then considered a Passive Foreign Investment Company.

Local taxation

Wherever you’re living, be aware that certain tax benefits in the U.S. could be eliminated or changed because of local taxation. For instance, retirement plan tax benefits could be reduced because of the interactions of local laws with U.S. laws. Some bilateral tax treaties determine whether or not ex-pats have to pay the self-employment tax as well. This is because some countries will allow the ex-pat to pay a similar tax in their country, so the American citizen wouldn’t have to pay both. This also means that ex-pats could take advantage of retirement benefits in the country where they’re living and running their business as well.

Other considerations

Many analysts suggest that ex-pats don’t incorporate their businesses overseas because of the complexities of filing their taxes and hidden fees, among other reasons.

Another important point is that the Foreign Bank Account Report (FBAR) requires ex-pats to file FBAR if they have over $10,000 in their foreign bank account. This applies even if separate accounts don’t equal $10,000 on their own but do if combined. FBAR isn’t something that is filed with the IRS—it is an electronically filed report with the Treasury Department.

It’s always smart to sit down with a tax professional to ensure that all laws and regulations are being followed to avoid penalties and headaches. Provident CPA & Business Advisors is here to help you navigate guidelines and file taxes wisely—no matter where you live and work.

Cybersecurity Best Practices for Taxpayers: How to Stay Safe

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When it comes to cybercrime, nobody is safe. From government agencies to senior citizens, online scams surge around tax time to exploit human and digital vulnerabilities.

April is a busy month for law-abiding taxpayers and the individuals who help them file. It’s also the busiest month for criminals out to exploit the personal data and finances of millions of Americans. According to the Federal Trade Commission (FTC), scam attempts peak in the days between April 15 and April 21 and gradually tail off toward the end of the month.

The old approach of scam phone calls is still active, but now unsuspecting recipients can fall afoul of year-round emails ready to exploit their lack of awareness. These fake communications come loaded with misleading links and virus-packed attachments that do a lot more than hijack a web browser; they can make off completely with your identity.

The growing danger of cyberattacks on taxes

The IRS issued a warning ahead of the 2019 tax filing period, alerting the public to the huge increase in ever-more-sophisticated scams and highlighting how the holidays are just as likely a time for criminals to strike as April.

Incidents were up 60 percent from the previous year, as phishing scams stole Social Security numbers, bank details and more. The troubling and simultaneously comforting fact is that the public is the only real line of defense against phishing scams—the more we know, the less effective these slippery attacks will be.

It’s not just the public who is being attacked. The IRS itself has been operating with an outdated and overwhelmed cyber framework for years, an issue it vowed to correct in a statement released in April. Page 30 of the full IRS Integrated Modernization Business Plan details the cybersecurity steps they’re taking (as does this shorter IRS factsheet).

Even so, it will take six years to fully roll out and protect the IRS from the 1.4 billion cyberattacks the agency is subjected to every year. What can taxpayers do to be safer in the meantime?

Taxpayers should take these steps

It bears repeating that cyber criminals hunt for targets year-round, not just during holidays and filing time. Everyone should be aware of the hallmarks of fraudulent communications:

  • Beware of tax-related emails which claim to come from legitimate sources like the IRS, business partners, or even friends and family. Cybersecurity experts and the IRS recommend a healthy dose of distrust, no matter who the sender seems to be. A legitimate party could have had their account compromised without their knowledge and it’s now under the control of a scammer.
  • There are usually links and attachments connected to emails that, if followed or opened, will take personal data or infect a device with malicious software that will steal that data. Never click on either of these.
  • These emails are typically overly insistent and even threatening in nature, designed to play on people’s fear of punishment by demanding information or contact.
  • Broken English is another giveaway, but this is a flaw that’s gradually disappearing.

Assuming that a tax payer avoids this particular danger, they’re still taking a huge risk by not operating with security protection like anti-malware/anti-virus software, a strong password, and multi-factor authentication on their accounts and devices. These should be applied wherever possible when dealing with tax-related matters and also to anything related to personal/business finances.

Likewise, the same strict standards should apply to an individual’s entire online life. Never provide personally identifying information or financial data to any website that isn’t trusted or fully security encrypted—at minimum, look for the https prefix (vs. http) on any website address in your browser. It’s a short step from purchasing groceries online to finding your entire identity has been stolen and exploited.

Some cyber criminals aren’t looking to download data; they simply want to destroy it. We recommend that businesses and individuals always back up their tax documents on a secondary, removable or cloud drive to provide a further security layer.

One of the most important pieces of advice we can offer is to thoroughly check the credentials of the tax professionals you’ve chosen to work with. Scammers go so far as to pretend to be established tax agencies offering a helping hand, when they’ve only appeared in time to steal details and exploit them. Worse, some established agencies or their representatives may operate to defraud their clients of funds.

One last tip is a perennial piece of advice from tax pros—file your taxes early. This increases security because the IRS only accepts one tax return per Social Security number, meaning that if the real taxpayer files first, any subsequent attempt by a cybercriminal using stolen details will be rendered impossible.

The bottom line is to stay vigilant, question every tax-related communication, and protect all online activity with the proper cybersecurity measures.

Who should taxpayers tell if they suspect a scam?

Inform the IRS if any digital communications seem suspect—it never hurts to be cautious. If you’ve received a demand for an outstanding amount and aren’t sure if it’s legitimate, then there are two ways to verify without complying with a suspicious request: individuals can view their personal IRS account, and businesses or their designated third party can receive a free transcript of their account on request.

The Federal Trade Commission can and should be contacted via the Complaint Assistant. For further information on crime prevention, businesses can benefit from the National Institute of Standards and Technology’s handbook for data security.

Stay safe out there!

Provident CPA and Business Advisors offer a wide range of services in taxes, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

Tax 101 for Gig Economy Entrepreneurs

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Remote and “gig” work are on the rise, and that means there are new tax considerations for this new sector of the workforce

Many workers across the nation are taking advantage of the rising gig economy—whether taking on side jobs to earn extra income, like driving for Uber on the weekends, or freelancing full-time. Some estimates show that around a third of the workforce is taking part in the gig economy, and that number may continue to increase, as workers want better work/life balance, flexible work arrangements, and the potential for higher overall income.

With this surge in self-employment, taxes have become confusing for workers, especially after the Tax Cuts and Jobs Act (TCJA) made some significant changes.

Here are important tax considerations and recent changes for gig economy workers to keep in mind.

1099 forms

First, 1099 forms are likely the most common tax document that a self-employed worker will see. Usually, a company will send a 1099-MISC to freelancers with all income reported above $600. Or, a 1099-K may be sent from third-party providers if a worker had more than 200 transactions and earned at least $20,000. The 1099-K form is meant to report payments that a business receives from credit or debit cards or processors such as PayPal.

However, these forms can create confusion for freelancers, as some clients may not provide them. Gig economy workers should be aware that they need to report all income, even if they made below these thresholds and/or didn’t receive the forms.

Self-employment taxes

Another important tax item to be aware of is the self-employment tax. This is a 15.3 percent tax in addition to income tax. The reason this extra tax exists is so that self-employed workers can pay Social Security and Medicare taxes that would normally be taken out by a traditional employer.

Even though this may seem like a pretty high tax, freelancers can deduct half of it to offset income.

Qualified business income pass-through deduction

The TCJA added a qualified business income deduction of 20 percent, which means that certain businesses could owe less tax. This deduction applies to the following entities, with certain qualifying factors:

  • Sole proprietorships
  • Partnerships
  • S-corporations
  • Some estates and trusts

This is a pass-through deduction that intends to provide help to smaller businesses, as the income limit is $157,500 per year or $315,000 for joint filers. Gig economy workers who are incorporated in certain ways may be able to take advantage of this deduction, in addition to their other qualifying business expenses. Consult with a qualified tax advisor to determine if and how you may be eligible.

Quarterly taxes

Another important part of paying taxes as a freelancer or gig economy worker is the fact that quarterly taxes are often now due. These are estimated tax payments due four times per year, and if freelancers fail to pay them, they’ll could have to pay tax penalties at the end of the year.

This requirement is due to the fact that taxes aren’t automatically withheld from freelance income, as with a traditional employer. Note, however, that gig economy workers who have a main salary that does have taxes withheld may not need to make quarterly estimated tax payments—though it’s advisable to avoid a potentially surprising, large tax bill on the freelance income when April rolls around.

Business equipment deduction

The TCJA increased the deduction amount for business equipment. Now, up to $1 million can be deducted in equipment purchases, including computers, furniture, software, and more. However, actual business income will determine how much can be deducted and freelancers must carefully adhere to qualifying categories of equipment.

Other deductions for gig economy workers

The TCJA cut some deductions, including those for meals and entertainment. This means that some client expenses, such as a dinner meeting, won’t be able to be fully deducted. However, 50 percent of meals still may be eligible, so long as they were directly related to the business.

Other deductions that gig economy workers are eligible for include the home office deduction and the health insurance deduction (if they pay for their own insurance). Many other expenses related to running a business, such as a vehicle, a professional subscription, exchange rate fees, and more, may be deductible, so workers should keep track of all these expenses.

It’s important for those already in the gig economy and those considering entering it to understand these tax issues. Taxes need to be handled carefully so that all income is reported correctly and expenses are accurate.

Gig economy workers need to remember that:

  • Income must be reported regardless of whether a client sends a 1099 form
  • Self-employment tax is in addition to income tax
  • Freelancers may be eligible for the qualified business income deduction of 20 percent
  • Quarterly estimated taxes should be paid to avoid penalties or a surprising yearly payment
  • The TCJA increased the business equipment deduction
  • Meals and entertainment are no longer fully deductible

To discuss tax guidelines with a professional, contact Provident CPA & Business Advisors. We provide tax planning and business consulting services to help you navigate requirements while growing your business.