Tax preparer H&R Block still has not fully recovered from the loss of refund anticipation loans. Photo Credit: socialwoodlands/Flickr.com/CC-BY

Tax preparation giant H&R Block has just filed for another quarterly loss, despite it being the busiest quarter of the year. Though tax return season is when tax preparers make the bulk of their income, the loss of the refund anticipation loan product has cost Block dearly. The loan against tax refunds is facing extinction as a product.

Number of preparations increase but fail to keep Block in the black

H&R Block, the largest tax preparation service in the nation, has just released a quarterly earnings report, but there is little in the way of good news in it. In the recent report from Block, according to the Wall Street Journal, the company disclosed that the number of tax returns it had prepared in the previous year had increased by 5.7 percent in the period ending March 31. The company also reported that retail preparations had increased by 2.6 percent during March, but preparation fees had declined by 2.2 percent. Block expects to report more significant earnings after the month of April. However, the tax preparer has been hobbled by the loss of the popular refund anticipation loan product when its financing partner, HSBC bank, was forced to stop funding the loans with block.

Refund anticipation loan going extinct

Refund anticipation loans are popular for people short of cash around tax time, and also for tax preparation services because the loans are profitable. A person has their taxes prepared by a service, such as H&R Block or Jackson-Hewitt. The preparer offers them a loan against their tax refund, which is signed over to the preparer. The borrower gets a check for the amount of their refund, less a fee for the lender. It’s technically a short term loan, as it’s repaid very soon. The product is demonized as being similar to payday loans, though there will be few firms still offering the loans soon enough. The IRS can no longer report on the amount or status of a persons’ income tax return to certain types of loan lenders, which disqualifies most banks from meeting FDIC underwriting requirements for funding RALs for tax preparation services. At the end of this tax season, Republic Bank and Trust, a small bank in Louisville, Kent., will be the only bank in the nation providing funding for RALs, according to the Washington Post.

IRS urges electronic filing

The Internal Revenue Service has long advocated that people in a rush electronically file rather than resort to any loans against their tax refunds. Direct deposit can have tax refund money in a persons’ bank account in two weeks or less, but for those that really are counting on a return are not at a loss for finding out where their return is, according to Reuters. Simply head to the Where’s My Refund? section on the IRS Website, and enter the appropriate information. Do not go to any website other than the IRS site to track your refund, as it is likely a scam.

Sources

Wall Street Journal

Washington Post

Reuters

IRS Where’s My Refund?

Getting around taxes has been an American pastime since the 1773 Boston Tea Party. Image from Wikimedia Commons.

The amount of the average tax refund has been steadily increasing over the years, and so is the number of cases of tax fraud. The Internal Revenue Service has seen a rise in the number of fraudulent deductions taken on income tax returns. More people are trying to catch the government napping to scare up some extra cash.

Internal Revenue Service not amused with crazy deductions

Most Americans hate taxes, and finding ways to hoodwink, trick and blatantly lie to the tax man is practically a national pastime. The number of fraudulent tax returns, according to CNN, has skyrocketed since last year. The Internal Revenue Service received 335,341 tax returns that falsely claimed nearly $1.9 billion in deductions. That figure was a 181 percent increase over the number of similar returns last year, when the IRS received 119,484 returns that incorrectly claimed deductions totaling $721 million. However, not all of these returns were brazen acts of fraud, and the term “fraud” can be somewhat misleading.

False deductions aim to claim more money

The Internal Revenue Service investigated 230 people for questionable returns for Fiscal Year 2008 and 504 people for Fiscal Year 2010, according to the Internal Revenue Service website. In 2008, only 155 recommendations to prosecute were made and 301 were made in 2010. Those figures only include cases of bad deductions. The IRS made 1,507 recommendations for prosecution in total during 2010, according to USA Today. The reason people submit bad deductions on tax forms is simple — more deductions means more money. The average tax refund, according to the Wall Street Journal, was $3,003 for 2010, almost double the $1,698 average tax refund in 1999. The number of bad deductions in 2008 compared to 2010 suggests people are trying to claim greater deductions during lean years.

Houses, cars and kids most common bad deductions

The most common falsely or mistakenly taken deductions were for real estate, motor vehicles or children. The Treasury Inspector General for Tax Administration released a report that asserts the most problematic deductions were the Adoption Credit, the Qualified Motor Vehicle Deduction, the Non-Business Energy Property Credit, the Plug-in Electric Drive Motor Vehicle Credit and the First Time Homebuyer Credit. The Qualified Motor Vehicle Deduction and First Time Homebuyer credits caused the most trouble; the Treasury found that 218,069 people claimed $318 million in QMV deductions, but those people would have had to put off paying any sales tax or excise tax for 2009 and 2010. The First Time Homebuyer credit, according to the Los Angeles Times, paid out an estimated $513 million to people who didn’t necessarily qualify for it. At least $326 million was credited to 47,000 people who had previously owned homes.

Sources

CNN

Internal Revenue Service enforcement statistics

USA Today

Wall Street Journal

Los Angeles Times

Treasury Inspector General for Tax Administration

April 18 is Tax Day, and income tax returns are due to the Internal Revenue Service. Photo Credit: Saturnism/Flickr.com/CC-BY-SA

Federal income tax returns are due on April 18, 2011, and most Americans will dutifully fulfill their obligations to do so. There has been a lot of discussion about how large a tax burden is actually placed on the taxpayers, and how oppressive the income tax is. Nearly 50 percent of income tax filers will not owe the government a dime.

55 percent of Americans pay income tax

Tax Day 2011 falls on April 18 rather than April 15. This year nearly 45 percent of households will not have to pay any taxes on their 2010 income, according to Bloomberg. Low-income households receive exemptions and deductions, such as the Earned Income Credit and the Making Work Pay Credit. Those who pay no income taxes are very low income or living on a fixed income such as Social Security or disability income. People who have children but make very little also commonly pay no income taxes. The average tax refund, according to CNN, was $3,003 last year.

Wealthy paying less

The tax burden for the wealthiest taxpayers, according to Daily Finance, has been falling for some time. In 1992, the 400 returns with the highest reported incomes averaged a tax bill of 26 percent of their income, but that figure was 17 percent in 2007. Though the wealthiest 10 percent account for more than half the nation’s tax revenue by dollar amount and the wealthiest 5 percent account for 44 percent, the more lucrative tax breaks, such as for charitable contributions, are available to the rich. There are more than $1 trillion in tax breaks in the current U.S. tax code, enough to get an $8,000 refund per taxpayer per year. However, trying to catch the Internal Revenue Service napping is not a good idea. The IRS is more likely to press charges now than at any point in the past decade, according to USA Today.

Americans pay lower taxes than most developed countries

Though many people protest the U.S. tax system for myriad reasons, most technical literature reveals that Americans pay very little income tax compared with the rest of the developed world, according to MSNBC. The Organisation for Economic Co-operation and Development, or OECD, maintains data on taxes in the developed world. The OECD estimates that Americans average 24 percent of income paid in taxes, compared to 48 percent for Danes, 42 percent for the French, 37 percent in Germany and 27 percent in Australia.

Sources

Bloomberg

CNN

Daily Finance

USA Today

MSNBC

The government shutdown does not mean that people don't have to file their income tax return by the deadline. Image from Wikimedia Commons.

If the government has to shutdown because of the budget showdown, it will not affect the income tax return deadline. The Internal Revenue Service extended the deadline to April 18 this year because of a holiday in Washington D.C. However, tax return checks will be delayed.

IRS employees affected by shutdown

In the event of a government shutdown, there will be a few agencies that are unaffected in their operations. The Internal Revenue Service will not be among them, and all IRS agents and personnel will be told to stay home as long as the shutdown lasts. Unfortunately, according to Bloomberg, that does not mean that the deadline to file an income tax return is postponed. The government shutdown will, unless an unlikely deal is made at the 11th hour is made, begin on April 8.

Electronic filing urged

The IRS will not be able to receive any paper returns during the shutdown, delaying the issue of a tax refund check to those who filed a paper return. The IRS is urging taxpayers to file electronically because any online tax return filings will be processed as normal.

Government workers will be affected most

It is contended that the shutdown is going to occur because Congressional Republicans insist on defunding Planned Parenthood  because the organization provides abortions. Members of Congress, according to CNN, and the president, will still get their paychecks automatically. The people who will suffer are government employees. Those who are considered “unnecessary personnel,” or people who do not perform services for the government that guard the life or property of the people, will be sent home. Those who perform necessary services, like the Federal Bureau of Investigation and the military, will still have to go to work. However, they will have to work completely for free, and there’s no guarantee they will be reimbursed for that time.

Sources

Bloomberg

Time

CNN

Most people would rather get locked in the stocks than deal with an IRS audit, but the odds of getting audited are less than 1 percent for the typical person. Image from Wikimedia Commons.

Everyone dreads getting a notice of a tax audit from the Internal Revenue Service. There are few documents that cause as much terror as an audit notice. However, the odds of being audited are very low.

78 of 100 audits take place via correspondence

According to a recent post on CNN, up to 78 percent of tax audits in the year 2009 took place via mail correspondence. The article also clarified that “22 percent took place in person.” That means fewer Internal Revenue Service agents are being dispatched out to conduct audits. Performing audits via correspondence is cost effective for the IRS, and it is happening more frequently because the IRS has already had to deal with diminishing budgets and is facing a further $600 million in cuts from its budget. A Taxpayers Advocacy Service survey cited in the CNN piece revealed, however, that more people would prefer an audit in person because the legalese is difficult to understand. However, normal taxpayers should fear not, because only 1.6 million people were audited in 2009. That’s less than 1 percent of the U.S. population.

Rich audited more often

Those most likely to be audited by the IRS are the wealthy. According to Forbes, those with an income of $200,000 or more per year stand a 2.7 percent chance of an audit, and the Wall Street Journal reports that those making $10 million or more stood an 18 percent chance of being audited. Forbes and the Wall Street Journal noted that the rate at which the wealthy were being audited was increasing. Though that is awful news for Donald Trump, the rest of us can rest easy knowing there is a 1 percent or less chance of being audited.

If an audit does come around

Beware of any phone calls or emails concerning an IRS audit; those are scams. The Internal Revenue Service only communicates in an official capacity by mail. According to Investopedia, should always keep at least the last three years of income tax returns and related records on hand. Most audits happen for a reason and are triggered by red flags in a person’s tax file. The IRS has a lot of people and a lot of data to keep track of and won’t take the time to perform an audit unless it thinks it should. The most common penalties are 20 percent and 75 percent of the amount of tax that should have been paid.

Sources

CNN

Forbes

Wall Street Journal

Investopedia

E-file that 1040, and with direct deposit you may not need a Refund loan. Image from Wikimedia Commons.

The Internal Revenue Service has announced that it will no longer provide certain information to tax preparers issuing refund anticipation loans. More than once has the product been decried. Opponents have contended that they can be worse than payday loans. An RAL, or Refund Anticipation Loan, is a loan product that depends on the tax return of a borrower. A portion of the total is deducted, and the filer is given a check that day. The only hitch is that this short term loan is not that simple should the return not get accepted.

Even the IRS thinks refund loans are bad

Internal Revenue Service Commissioner Doug Schulman announced in a press release on Aug. 5 that the IRS would no longer provide a “debt indicator” figure to tax preparers for the purposes of administering a refund anticipation loan. He also stated that it no longer seemed prudent to do so. The Internal Revenue Service allows people with adjusted gross incomes (AGI) less than $57,000 to e-file for free and have their returns wired via direct deposit within 10 days.

Electronic filing has become the rule

More than 70 percent of all tax returns are filed electronically. According to Bloomberg, H&R Block reports its average RAL loan to be about $3,000, and the average fees are $62. The term is just less than two weeks, which is about the average term of a payday loan or small personal loan. An RAL with the preparation fee and interest carries a fee of $187 on average. H&R Block, one of the largest tax preparation services in America, lent more than 2 million of these loans last year. The change in policy will affect the 2011 tax season.

Expensive way to get some cash

Refund anticipation loans carry more risk than your average cash advance. If a tax return is accepted, the transaction is closed and a person has just accepted a little less than they would get for instant cash. If a return is not accepted, the principle plus fees and penalties must be paid, which is a hard dollar for people that are already hard up. The usual RAL borrower, according to the Washington Post, has an AGI of $35,000 or less.

Further Reading

Statement from the IRS

Bloomberg

Washington Post

Charles Ponzi, the man whose scheme launched a thousand frauds (Photo: Wikipedia)

Manhattan, New York investment adviser Ken Starr – not to be confused with the attorney made famous by the Bill Clinton-Monica Lewinsky scandal – is the latest shifty-eyed money man to get caught with his hand in the cookie jar. He has been arrested by federal authorities for allegedly brewing a $30 million Ponzi scheme, reports NBC New York. The full slate of charges include wire fraud, investment adviser fraud, money laundering, IRS fraud and lying to a federal officer. Some of Ken Starr’s clients include famous portrait photographer Annie Leibovitz, Uma Thurman, Martin Scorsese and Wesley Snipes.

Ken Starr and Andy Stein were arrested

Ken Starr, an accountant and head of New York-based Starr and Co., was arrested by federal officers for the Ponzi scheme along with Andy Stein, former Manhattan borough president and the president of the New York City Council. Stein’s charges will likely include lying to law enforcement officers who were conducting the probe. Starr’s company has refused comment, while Stein’s office has yet to respond to press inquiries. Surely they’ll want the best attorneys paydayloans can buy.

Some of Ken Starr’s clients had their own troubles with the law

Wesley Snipes, star of the “Blade” film series, was a client of Ken Starr. Snipes had been convicted in 2006 for not filing tax returns in his home state of Florida. By 2008, Snipes was cleared of tax fraud and conspiracy. During the trial, Ken Starr was called upon to testify, and he told the court that he’d personally advised Snipes not to run afoul of the IRS.

Starr may have led Leibovitz and Sylvester Stallone into bad deals

In 2007, Ken Starr began an adviser-client relationship with photographer Annie Leibovitz. Allegedly, Leibovitz was advised to invest in Art Capital Group, a private bank that provides exclusive services to the art world. Leibovitz took a $24 million dollar loan in order to invest, but was unable to keep up with payments as the investment allegedly didn’t produce the returns Starr had promised. Five years earlier, Hollywood star Sylvester Stallone slapped Ken Starr with a lawsuit because the advice about investing in Planet Hollywood restaurant chain didn’t bear the returns Stallone was expecting.

Sources:

NBC New York

The complaint against Ken Starr

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During tax season, many people look forward to refunds of money owed to them by the IRS. They anticipate using their refunds for investments, repayment of personal loans, vacations, or any number of other worthwhile things. For other people, however, tax season is a very stressful time of year. It’s a time to review finances, to account for money spent and income received for the entire year, and to figure out how much they owe to Uncle Sam.

Every year, a large number of these people fail to pay their taxes and they eventually find themselves owing a serious tax debt to the IRS. Many begin to avoid the agency, believing that their debt is too large to overcome and that they may lose all of their investments and savings when and if the IRS ever catches up with them. However, the IRS may actually be able to help a person owing a tax debt if that person is willing to communicate with the agency and explore avenues of repayment.

Installment plans are available for many

For someone who’s never been delinquent with the IRS before, an installment plan may be an option. Generally, this option is only made available to those who owe less than $25,000. However, even people who owe more $25,000 may request an installment plan. When the debt exceeds $25,000, the payment-plan approval process may be a bit more involved. For instance, the account may be assigned to a special revenue officer for the duration of the payment plan.

Offers in compromise work for some

Under some circumstances, the IRS may accept less than the total amount owed in full satisfaction of the debt. This sort of arrangement is called an offer in compromise, and it requires the taxpayer to make one lump-sum payment for the total amount agreed upon in order to satisfy the debt. The lump-sum payment may be a significant amount, but frequently it will be much less than the original amount owed.

Bankruptcy won’t make the IRS go away

Sometimes, people who are indebted to the IRS seek to avoid paying by filing for bankruptcy. However, a bankruptcy does not necessarily eliminate IRS debt. In some cases, a bankruptcy may result in the creation of a plan to pay the debt in installments over time, and it may prevent additional penalties and interest from accruing, but in most cases, IRS debt is not discharged in bankruptcy. A tax debtor should always get competent legal advice before filing bankruptcy.

IRS debt forgiveness is rare, but not impossible

In rare cases, the IRS may forgive tax debts when the amounts owed are the result of a tax return filed a certain number of years prior to filing for bankruptcy or if the taxes owed were assessed at least 240 days prior to the bankruptcy filing. A few other exceptions exist as well, such as when it is determined that an extreme hardship exists and the debt is not the result of the taxpayer attempting to evade tax laws. In some cases, a bankruptcy may make it easier to repay an IRS debt, but this is never a guarantee, and anyone owing a tax debt should obtain legal counsel before deciding whether to file a bankruptcy.

Communication is best way to resolve IRS debt

It is always best to pay taxes on time. Short of that, when an IRS debt is owed, making timely payments on an installment plan helps to avoid late penalties and other fees, and may also help a debtor to maintain a good credit standing. This is just as true for IRS debts as it is for credit-card and other debts. When a person falls behind on a tax debt, the absolute best way to resolve it is to communicate openly and clearly with the IRS to find out exactly what is owed and what repayment options are available. Communicating in this way can help people to gain control of their finances and eliminate tax debt along with enormous mental and emotional stress.

E-file. All the cool kids are doing it.

You probably already know that if you make a lot of money or have complicated taxes you won’t be able to file your taxes for free. Usually, for people with high incomes or a lot of assets, it makes sense, and it’s worth it, to pay someone to do your taxes. But, if you’re like me, filing your taxes is just a matter of plugging the right numbers into the right places.

Turbo Tax Free Edition is a good option for people in this situation. You can download this program from www.turbotax.com. If you’re worried that you need extra help to avoid tax debt, there are several different programs that you can pay for to e-file your taxes through Turbo Tax. Also, H&R Block has a free online program at www.hrblock.com.

2. IRS Free File

This program is a partnership between the IRS and private tax-preparation companies. You may only file for free if you made less than $57,000 in 2009. This program is only for filing federal taxes, so if you live in a state that has income tax, you’ll need to file those separately. IRS Free File is at www.irs.gov/efile.

IRS Free File gives you the option of using tax software with step by step help. You can also choose to fill in the tax forms and file them online without tax software.

3. TaxAct Free Federal

This program is actually the one I used last year. There is an option at the TaxAct web site for filing your state taxes, too, so this is a good option for anyone who doesn’t have complicated taxes. TaxAct is very simple to use and quicker than any other method I’ve used.

The address for TaxAct is www.taxact.com, simply enough. One of the best things about e-filing taxes is that it generally makes your return come more quickly, if you’re owed one, because you can get it directly deposited into your bank account.

Most people don’t. With more and more Americans retiring early in order to pursue other careers or small business opportunities, this question is being investigated more than ever. Myths abound, which lead people to believe that they must immediately roll all of their retirement savings into a single IRA account or, at least, cash out of their 401k plan all at once. This, of course, is not true, but without the benefit of good wealth education, few people actually know what their retirement plan options are.

Consider the following suggestions:

Suggestion Number One

If you were born before 1936 and have participated in your 401k for at least five years, it is possible that you qualify for an excellent tax strategy commonly referred to as a ten-year averaging. Such requires that you first withdraw your entire retirement savings at once. Upon doing so, you will figure your taxes on this amount by dividing the total by ten and then adding an additional $2,480 to the sum. Next, research the 1986 rate for single taxpayers and multiply that amount by ten. The resulting figure tells you how much you owe in taxes for your withdrawal using this option. If your 401k value is less than $400,000 in total, you may find that you can save a lot on taxes by using this ten-year averaging calculation.

Two things to note if you plan on using this strategy: First, the IRS will only allow you to use it once and, second, you can’t roll over part of your 401k and use ten-year averaging on the remaining amount. However, the benefit to using this strategy on your complete withdrawal is that taxes were a lot less in 1986 than they are now and using the rate for single taxpayers from that year will offer you far more savings.

Suggestion Number Two

Some companies allow retirees to leave some or all of their money in an existing 401k plan. Find out your company’s policy on doing so if you believe this will be of benefit to you.

Suggestion Number Three

Roll your money over into one or more IRA accounts. You can do this an unlimited number of times in as many IRAs as you like. Take the time to investigate this option on your own or with a qualified financial planner to determine if doing so fits your retirement needs. This might be an especially good idea if your company will allow you to leave some money in your 401k and roll over just a portion of the rest.

Suggestion Number Four

People who will be fifty-five years or older in the year that they retire may also consider cashing out of their 401k all at once or in part without penalties. Of course, ordinary taxes will be due on distributions, but, depending upon how much is in your account, this may be a smart option.

While these suggestions are meant to give you guidance on what to do with your 401k account when you retire, they should not be used in lieu of or to substitute the advice of a qualified professional. Also, do keep in mind that senior citizens age seventy and six months are required by law to begin taking money from all retirement accounts at this time. The only exception to this is money in a Roth IRA or if money is in a 401k with a company that still employs the person, provided that the employee does not own more than five percent of the company in question.

If you have ever experienced an audit by the IRS or had your tax deductions denied you have probably experienced the powerless feeling of being up against an impossible opponent. You may have taken some initial steps to appeal the decision, but then fell short of a victory and decided to concede to the formidable adversary. If you won the battle you are among the lucky few. Most taxpayers fold under the pressure of fighting the IRS, even when they feel strongly that they are in the right.

A Bold Move

According to a recent Wall Street Journal article, a nurse from Maryland has won just such a case against the IRS. In 2006 Lori Singleton-Clarke filed her tax return for the previous year and included among her deductions $14,747 in tuition expenses for the M.B.A. that she had been earning online through the University of Phoenix. The professional who prepared her return advised her to include this deduction, stating that her situation fell within the stringent rules for claiming this type of deduction.

The Uphill Battle

It probably comes as no surprise to most people that the large deduction was initially rejected by the IRS Feeling that she was justified in claiming the deduction, Singleton-Clarke decided to pursue the matter further. She carefully investigated the intricate regulations for claiming such a deduction and became more convinced that her original filing of this expense was accurate. She pressed on in her quest.

Sheer Determination

What started out as an exchange of paperwork between Singleton-Clarke and the IRS quickly escalated into a very hard fought battle. There were seemingly unending documents requested by numerous individuals involved in the audit. The process itself was complicated enough that it likely would have prompted most people to surrender. After all of this, Singleton-Clarke was denied again so she made the decision to go to Tax Court. Without the funds to pay an attorney though, she chose to represent herself.

One of the Few

In court Singleton-Clarke relied on her impeccable organization and record keeping to present her side of the case. These habits turned out to be very impressive to the judge and helped to clearly outline the necessary details. Even though only about 10 percent of cases waged against the IRS are won by the individuals who choose to fight their assessments, the judge ruled in Singleton-Clarke’s favor. She was absolutely in shock upon receiving the decision. This ruling may even go on to help other students deduct these types of costs in the future. This is one can of worms that the IRS may regret having opened up.

Can You Cover what You Owe?

Unfortunately not everyone is fortunate enough to have large deductions that they can claim on their tax return. With tax season coming up and the tough economy persisting, expenses can become even tighter. If you find yourself short on cash after taxes you may want to consider a personal loan. It can provide you with the quick cash you need to get through the rough patch and when you apply at a reputable online site the process can be even faster and far less frustrating.