Cybersecurity for Taxpayers and Tax Professionals

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Cybersecurity is now a universal concern in every walk of life. What are the risks to tax professionals and their clients, and how can both parties mitigate them?

Data security is a major consideration for any industry and, unfortunately, tax preparation is no exception. Tax professionals need to ensure that appropriate safeguards are in place so that their business and clients are protected from cyberattacks, and individual and business filers need to remain equally vigilant.

Progress has been made to combat taxpayer identity theft. The IRS reported that the number of reported identity theft victims fell 71 percent between 2015 and 2018. However, identify theft tactics continue to evolve and pose risks to the data of the entire tax community regardless of this progress since scammers change their approaches when security is improved.

The 2019 Identity Fraud Study from Javelin found that while fraud overall was down 15 percent in 2018, more victims of the fraud were paying out of pocket to deal with it. These avoidable costs can add up fast for an individual and a business.

The most common types of fraud may change each year, but time and again attackers wait for tax season—and big impacts are felt by taxpayers and tax professionals alike.

Understand the risks and update safeguards

Tax season is one of the most common times that scams occur. Consider all of the data that’s shared online during this time: a host of financial information and personal details, like dates of birth, account statements, and Social Security numbers. Cybercriminals love to attack during tax season.

Identify thieves often use stolen information to file fraudulent tax returns or try to claim tax benefits. And they file as soon as they can since their scam will only work with returns that haven’t yet been filed by the people they’re claiming to be.

Start by reviewing your current security practices, whether you’re an individual or a business. Even if you’ve taken steps to better protect data, there are still recommendations that the IRS has made as a checklist to ensure that you’re doing everything you can to mitigate risk.

The checklist applies to both tax professionals and taxpayers since both groups are impacted by tax fraud and “everyone has a responsibility to protect sensitive data,” as the IRS says.

Employ the following recommended six security measures as the baseline for a cybersecurity plan:

  1. Anti-malware software
  2. A firewall
  3. Two-factor authentication
  4. Backup software or services
  5. Drive encryption
  6. Virtual private networks

Train yourself and other team members

Next, learn how to watch for phishing attempts and other scams that aim to collect personal information.

There are many red flags for tax professionals and taxpayers to watch out for, including if an individual receives an IRS letter that questions their tax return, if there are more tax returns filed than submitted for a given Electronic Filing Identification Numbers, and if tax transcripts are sent to clients when they didn’t request them.

Common tax scams that target taxpayers include phone scams, in which a scammer impersonates the IRS and tries to get personal information; phishing emails and malware schemes from cyber criminals; and fraudulent tax returns. Note that the IRS will never contact a taxpayer through the common phone and email methods with questions about an individual tax return.

Implement a recovery plan

In the instance that you become a victim of data theft, you’ll want to have a plan in place already to deal with this. The IRS offers this guidance:

  • Individuals and tax professionals must contact the local IRS Stakeholder Liaison right away.
  • Tax professionals must help the IRS in protecting all of their client accounts.
  • Implement cybersecurity measures—business professionals should engage the services of cybersecurity professionals to help set up a plan.

A data security plan should be revisited and updated regularly. Because identity theft adapts to new technologies, this isn’t something you can put together once and move on. The plan must also change with shifting scam tactics.

Some of the key areas of a business that a data security plan needs to address are:

  • HR: employee management and training
  • Information systems
  • System failure management and detection

While the number of tax-related identity theft cases has fallen a bit, it’s still crucial that tax professionals, other business owners, and individual taxpayers alike are aware of the risks and remain educated about how to both protect against them and deal with breaches if they should occur. By going through the checklist from the IRS and continuing to stay vigilant, the risks can be vastly mitigated during tax season.

The professionals at Provident CPA & Business Advisors implement strong security procedures while offering a range of tax planning services to a host of businesses and individuals. To discuss how our services can help you come tax time, get in touch with the Provident team today.

Strategies for Entrepreneurs and Contractors Paying Taxes in 2020

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As an entrepreneur, what strategies can you put in place to help you prepare for the next tax season?

As an entrepreneur, you’re tasked with running a complete business, including hiring and firing, scheduling, cash flow analysis, vendor payments, and much more. On top of it all, paying taxes can be a huge burden—both financially and administratively.

Fortunately, there are strategies to put into place now as you prepare to pay 2019 taxes in 2020. With the right plans, you can do what you do best—spend more time on running the business, and enjoy the flexibility that comes with being a business owner or contractor.

Making changes to your business structure

There are certain tax benefits if you decide to change your business structure. For example, if you run a sole proprietorship and your personal and business income are no different, your assets and liabilities are not tied to the business, and you’re responsible as an individual for them.

If you run a limited liability company (LLC), your personal assets and liabilities are separate from that of your LLC. You can pass through your profits as income on your personal tax return without paying tax on it at the business level. But self-employment taxes may still apply.

Because there are pros and cons to each type of business structure, it’s best to discuss your options with a tax professional who can help you manage your specific circumstances.

Get on top of your quarterly tax payments

Some self-employed individuals may become frustrated by the required quarterly estimated taxes that entrepreneurs have to pay. This is a requirement since you don’t have an employer who’s paying taxes on your income as you receive it. (Note that you may not have to pay quarterly taxes if you do have tax withheld on the main salary.)

Throughout the year, you’ll need to pay four estimated tax payments, and at the end of the year, adjustments will be made based on your actual income and deductions. If you fail to pay quarterly, you could see tax penalties.

Plan these payments out in advance by marking your calendar when the four payments are due, and make sure you save enough to cover these quarterly payments. You then have the option to pay online quickly via the IRS website.

Understanding the elimination of the shared responsibility payment

This year, the shared responsibility payment, also known as the individual mandate penalty, is eliminated. That means if you can afford health insurance but fail to get coverage, you’ll no longer have to pay a penalty under the Affordable Care Act, which initially created the mandate.

Using the per-person method, the fee in 2017 was $695 for adults and $347.50 for children under 18. In both 2017 and 2018, the penalty was 2.5 percent of household income using the income percentage method.

However, be aware that this is a federal tax change. You still could live in a state that requires you to have health insurance, and so a fee may still apply to your state tax return. Massachusetts, Vermont, New Jersey, and Washington, DC, moved forward with their own state-level mandates after the federal requirement was eliminated.

While this could be good news come tax time, make sure you fully understand your state’s requirements regarding health insurance to better plan for 2019 taxes.

Plan out spending and write-offs ahead of time

Another strategy to implement is to plan ahead for expenses and write-offs. For example, if you need to purchase new equipment that can be written off as a business expense, plan that out with your tax professional so that major purchases are impacting your taxes positively.

Also, make sure you’re taking advantage of all of the tax breaks available to you. This can include utilities, office supplies, your home office, inventory costs, business insurance, your car (if used for your business), and many more.

Getting the best deduction

The standard deduction went up for the tax year 2019. Joint filers’ standard deduction is now $24,400, and for single taxpayers, it’s $12,200. However, there are strategies you can take to get the most out of your deduction by itemizing instead of going the standard route, including combining applicable deductions into a single year to get a bigger deduction.

This works out great if your itemized deductions are nearing the standard deduction limit. Then, though you’d have fewer deductions the next year since you bunched them into the previous tax year, you could still take advantage of that high standard deduction instead of itemizing.

When creating your tax strategy for 2020, it’s always smart to discuss your circumstances with a tax professional. Every entrepreneur is different, so there isn’t one simple answer. Meeting with a professional ensures you’re paying the least amount of tax legally possible and preparing your specific business for future success.

Talk to the professionals at Provident CPA & Business Advisors today to get started on tax planning for the upcoming year.

Focusing on Employee Health Could Net Organizations Tax Benefits

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Employers who provide paid family and medical leave to employees may qualify for a business tax credit through 2019

As the U.S. unemployment rate has seen record lows this year (3.7 percent in August), companies are scrambling to update their recruitment processes and benefits packages to stay competitive in the battle for talent acquisition.

As such, benefits like paid family and medical leave are being incorporated more and more, in addition to more standard health insurance and vacation benefits. Paid family and medical leave offers employees paid the time away to care for a new child or for a family member with a severe illness, or paid the time away for the employee if he or she has a medical issue rendering them unable to work.

The Family and Medical Leave Act of 1993 implemented entitlements for workers to have unpaid leave for these issues, but “no federal law requires private-sector employers to provide paid leave of any kind,” noted the Congressional Research Service in a recent report. Thus, paid leave is still dependent on the employer.

Research from the Bureau of Labor Statistics shows that in 2018, just 17 percent of all civilian workers had paid family leave benefits, while 89 percent had access to unpaid family leave. In private industry specifically, 16 percent of workers had paid family leave, and 88 percent had unpaid family leave.

So, even though paid family and medical leave may be becoming more commonplace, it’s clear that the majority of the workforce still doesn’t have access to these benefits which can encourage new mothers or those facing illnesses to return to their jobs after a necessary time away.

To incentivize organizations to include these offerings in their benefits packages, the IRS has implemented tax benefits to employers who provide paid family and medical leave for 2018 and 2019.

Details of the tax credit for employers

The Tax Cuts and Jobs Act (TCJA) of 2017 enacted the new tax credit for employers. For the purposes of this benefit, an employer is “any person for whom an individual performs services as an employee under the usual common-law rules applicable in determining the employer-employee relationship.”

The tax credit applies to wages paid after December 31, 2017, and before January 1, 2020. There are ways to claim the credit retrospectively if employers meet all the requirements. The credit is between 12.5 percent and 25 percent of the wages paid to an employee during his or her leave, for up to 12 weeks per taxable year. The minimum of 12.5 percent is increased in 0.25 percent increments for every percentage point by which the amount paid to the employee exceeds half of the employee’s wages, and the limit is 25 percent.

Eligibility requirements include the following:

  • There must be a written policy in place that states that full-time employees have at least two weeks of paid family and medical leave per year, and this amount can be pro-rated for part-time workers.
  • The family and medical leave pay must be at least 50 percent of the employee’s normal wages.
  • The employee must have been employed by the employer for at least one year and must not have earned more than $72,000 in compensation for the prior year (2017 or 2018).

Employers must also ensure that they do not “discharge or discriminate against any individual for opposing any practice prohibited by the policy,” according to the IRS.

The tax credit applies only to family and medical leave that was taken for:

  • The birth of and care for an employee’s child
  • A child was adopted by the employee or placed with them for foster care
  • The employee cared for a close family member—a child, spouse, or parent—with a serious health condition
  • The employee had a serious health condition, making them incapable of doing their job
  • There was a qualifying need for an employee’s absence related to their child, spouse, or parent being on covered active duty in the Armed Forces
  • A service member who is a child, spouse, parent, or next of kin to the employee needed care

Although the tax credit ends after 2019, it’s possible that it could be extended.

If you have questions about tax planning, get in touch with our team at Provident CPA & Business Advisors. We’ll walk you through applicable tax law, and help you pay the least amount of tax legally possible.

The Tax Benefits of Investing in Opportunity Zones

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Learn why opportunity zones continue may be an attractive option to some investors thanks to government tax incentives

The Tax Cuts and Jobs Act of 2017 (TCJA) brought many changes to the tax law, including changes to the standard deduction and tax brackets.

Another big change was the creation of tax incentives for investments in qualified opportunity zones, which, according to the IRS, are meant to encourage economic development and create jobs within “distressed” communities. Significant tax benefits can be had by investors who decide to invest capital into these opportunity zones.

This is a first-of-its-kind investment opportunity that has the potential to benefit both struggling communities and investors alike, through investing in some areas that carry a risk for commercial real estate projects.

So, what are opportunity Zones and Qualified Opportunity Funds, and what are the tax benefits of investing in them?

The definition of an opportunity zone

The creation of these zones is essentially an economic development tool from the government that’s meant to help develop low-income areas in urban, suburban, and rural areas of the U.S. In order for a location to qualify as an opportunity zone, it must be nominated by the state and must be certified by the Secretary of the U.S. Treasury. A Qualified Opportunity Fund is one that is created to invest in a qualified opportunity zone property and files a tax return that is either a partnership or corporation.

There are now opportunity zones within all 50 U.S. states, as well as the District of Columbia and five of the U.S. territories, according to the IRS. There are 8,700 opportunity zones in total.

The tax benefits of opportunity zone investment

Tax benefits are offered to investors in opportunity zones to encourage this new avenue of funding developing communities. Investors can defer tax on their qualified capital gains from their investments in a Qualified Opportunity Fund until the earlier of either the date when the investment is sold or exchanged or December 31, 2026.

If the investment is held in the fund for more than five years, there is a 10 percent exclusion of the deferred gain, and 15 percent if it’s held for more than seven years. If it’s held for at least 10 years, investors are then eligible for an increase in the basis of the investment equal to the fair market value on the date that the investment is sold or exchanged. Investors don’t have to live or run a business within an opportunity zone in order to take advantage of the tax benefits.

Because the opportunity zones are part of a 10-year program that is accretive in nature, investors should act soon to see the biggest advantages of these investments. The biggest returns will be seen by those who invested in the first year of the program.

To summarize, the tax benefits of opportunity zone investments are:

  • The deferral of capital gains reinvested in an opportunity fund
  • The step-up in basis when investments are held for five or seven years
  • A permanent exclusion of capital gains from taxable income if the investment is held for at least 10 years (on gains accrued after investment in an opportunity fund)

According to the Economic Innovation Group (EIG), the potential for this program to help communities is $6.1 trillion of unrealized capital gains. This number comes from an EIG analysis of the Federal Reserve Survey of Consumer Finances and Financial Accounts, which found that U.S. households alone were “sitting on” over $2 trillion in unrealized capital gains in stocks and funds at the end of 2015, and $3.8 trillion at the end of 2017. Add that number to unrealized capital gains of U.S. corporations ($2.3 trillion) and the total potential capital eligible for reinvestment in opportunity zones is $6.1 trillion.

Even if these numbers aren’t fully realized in the program, it’s clear that this program is both a huge step for community development as well as a community investment. Nevertheless, it has unique risks in terms of commercial real estate. Location, location, location is, of course, the mantra of real estate investing, and some of the distressed communities have significant challenges that spur the need for these incentives in the first place. Nevertheless, the right project may reap significant tax breaks that significantly reduce this risk and create the potential for significant rewards.

At Provident CPA & Business Advisors, our priority is helping you pay the least amount of tax legally possible. We’ll help you get total control over your tax expenses and provide you with proactive, safe, and proven ways to lower income taxes. Contact us today to learn more about our tax minimization and growth and profit improvement services.