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Why Are So Many Tax Refunds Unclaimed?

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More than a billion dollars is out there waiting to be claimed. Unfortunately, many businesses don’t know they may be entitled to a share of it

Each year before tax time, the IRS announces the amount of unclaimed money it’s holding due to people not properly filing their tax returns. In early 2019, the IRS said there were still unclaimed income tax refunds for the tax year 2015 to the tune of nearly $1.4 billion, and they estimate that there are 1.2 million taxpayers who still didn’t even file a tax return that year.

So, why is there so much in unclaimed funds? And what can you do to ensure you claim what you’re owed?

Where does that money come from?

If the government gets too much tax from individual paychecks or taxpayers otherwise overpay, the only way taxpayers will get those funds back is if they file a tax return at the end of the year and it has the correct information, such as address and payment details. Otherwise, they have three years from the tax return date to clear up any info or file the return and claim the refund. After that three year is up, the money becomes the property of the U.S. Treasury.

So why don’t people claim their tax refunds? There are a few answers, as two tax experts told CBS News earlier this year:

  • Some individuals simply aren’t educated about how to file a return or even the necessity of doing it.
  • Sometimes individuals believe that a smaller refund isn’t worth the fee taxpayers will have to pay a tax professional. So, they’ll avoid claiming their money even if they know they overpaid on taxes.
  • Some taxpayers may want to stay unknown to the IRS, whether due to debts they owe to the government, immigration status, or other reasons.

Another reason that the IRS is sitting on refunds could simply be that a taxpayer has forgotten about their refund and hasn’t done anything to follow up on the money they were supposed to receive. This can happen if a taxpayer provided incorrect bank account information or has a new address, for example.

When businesses can get a tax refund

It’s important to understand the different business structures and when you may be able to claim a tax refund.

A C-corporation is a type of business structure in which the owners or shareholders are taxed separately than the business income. This is the most prevalent type of corporation, and because the profits are taxed both at the corporate level and the personal level, a double tax occurs. However, there are benefits of a C corporation, one of which is the ability to reinvest any revenue back into the company at a lower tax rate.

Other business structures, such as S corporations or LLCs, separate the business’s assets from its owners, but they don’t see that double taxation since income is only taxed once.

Because profits of C corporations are taxed separately than their owners, these businesses are the only type of business that is eligible to receive a tax refund. As with an individual, if the C corporation paid more estimated tax throughout a year, it can technically get a tax refund. This would also be true if your business paid too much-estimated tax on payroll or sales taxes.

Sole proprietorships, S corporations, partnerships, and LLCs are pass-through entities because tax passes to individual tax returns. So, if you run a sole proprietorship, for example, you’ll report your business earnings on your normal individual tax return.

As an LLC business owner, the only way you’d get a tax refund is if your total payments and withholding are more than your total tax liability on your return.

Remember that as a small business owner, it’s not always positive to get a tax refund. If you get money back, that means you overpaid and could have been earning interest on those funds in the interim. This could also interrupt your cash flow.

Filing a tax return

You should never wonder whether you are owed money if you file a proper tax return—and self-employed individuals must file a return if they made over $400 that year. Not doing so comes with some stiff penalties and other consequences.

Beyond the basic legal necessity, it keeps your financial record updated and could help protect you against identity theft. When you file a return using your social security number, that prevents someone else from filing a fraudulent tax return with your number. Even if you’re only now filing for previous years, doing so could still uncover that there had been a fraudulent tax return years back.

When your tax return is past due, it’s important to file it ASAP. Otherwise, you’ll stack up interest charges and late payment penalties.

Finally, if you’re self-employed and you don’t file a federal income tax return, the income you earned won’t be reported to the Social Security Administration—and you thus won’t get the credits toward your social security or disability benefits.

Provident CPA & Business Advisors help successful professionals, entrepreneurs, and investors get more out of their business and work less. 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 discover how we help businesses exceed expectations.

How the HIT Tax Could Eventually Impact Individuals and Entrepreneurs

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Even though the health insurance tax (HIT) has been suspended, what will it mean for taxpayers, and especially entrepreneurs, if it’s finally introduced?

The health insurance tax (HIT) is intended as a fee imposed on insurance companies, though its implementation has been delayed by lawmakers since 2015. This year, lawmakers have proposed again suspending it through 2021 in an effort to help stabilize the healthcare market.

But if the suspension on the HIT finally ceases and it goes into effect, premiums will rise, and U.S. taxpayers will be faced with shelling out even more for healthcare than they already pay in the expensive marketplace.

So, what is the HIT? And if it ever goes into effect, what does it mean for entrepreneurs?

A rundown on the HIT

The health insurance tax is an annual fee that insurance companies would have to pay on their health policy premiums if they offer fully insured health insurance coverage. The $16 billion tax was introduced in Section 9010 of the Patient Protection and Affordable Care Act (ACA) of 2010. However, lawmakers have suspended the tax since 2015, and there is again a suspension for 2019.

In early 2019, representatives from both the House and the Senate supported a bill that further delayed the HIT from going into effect until 2021, but it is still set to lapse in 2020. As such, it’s uncertain whether or not the HIT will be applicable, and insurance companies continue to push for a total elimination of the tax.

So, as a taxpayer and small business owner, how would the HIT hit you if it finally takes effect?

What are the impacts on taxpayers?

Unfortunately, the additional costs that the HIT imposes on insurance companies are then passed onto their customers in an effort to make up for this tax. This means, of course, that insurance premiums will go up. This is a big reason that lawmakers from both sides of the aisle have continued to delay the tax—they agree it would negatively impact consumers.

One cost driver is the fact that the HIT is non-deductible on federal taxes for health insurers. And for every dollar that is paid, more than a dollar has to be added to premiums. In an analysis commissioned by UnitedHealth Group, global management consulting firm Oliver Wyman estimated that the impact on premiums in 2018 would have been an added $22 billion, and between 2018 and 2027 it would be over $270 billion.

The report also estimated that premiums would have increased 2.7 percent in 2018, and at a similar rate when projected for the following years. This would equal an additional:

  • $165 per individual in the non-group market
  • $193 for single contracts in small group
  • $523 for every family contract in small group
  • $196 for singles in a large group
  • $563 for family contracts in the large group
  • $255 for every Medicare Advantage member
  • $195 for every Medicaid managed care individual

In sum, this would mean over $2,000 for individuals and managed care enrollees, over $6,000 for families, and over $3,000 for Medicare Advantage members over the ten years following 2018. These are not small costs for self-employed individuals and small businesses.

The national association America’s Health Insurance Plans (AHIP) released a statement earlier this year saying that nearly 150 million Americans would pay more for their health insurance coverage because of the HIT.

Additional effects on entrepreneurs

It’s clear that tax burdens will rise for consumers if the HIT goes into effect. But this is an even bigger consideration for entrepreneurs and small businesses that are fully insured. Individuals who have to bear the full cost of health insurance plans will face increased costs in an already expensive insurance marketplace. As the Small Business and Entrepreneurship Council says, “The high cost of health coverage remains a pain point for small businesses and the self-employed.”

The UnitedHealth report outlines that the HIT going into effect would likely result in both individuals and groups delaying getting insurance coverage—and some individuals will remain completely uninsured because they will not be able to afford the increased rates.

Both individuals and groups may decide to forego coverage if they are younger and healthier, and this creates a “less-stable risk pool,” in addition to creating even higher premiums across the board, the report says.

It’s important to note that these increased premiums caused by the HIT will only impact individuals who purchase their own individual coverage, get it from their employer, or enroll in either Medicare Advantage or Medicare PDP; the government pays the HIT for individuals who are covered by exchange subsidies and Medicaid.

The future of the HIT remains uncertain, as some lawmakers are still pushing to have it totally repealed. But if it is finally implemented in the coming years, the HIT could mean thousands of dollars more in health insurance premiums for consumers, and more uninsured Americans. It’s important as a small business owner to keep up with the latest news regarding the HIT bills and factor this possible cost into future business strategy.

Provident CPA and Business Advisors are here to help you minimize your tax burden and assist you with growth and profit improvement. Get in touch with our experienced team today for more information.

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.