IRS Warns of Back-to-School Scams; Encourages Students, Parents, Schools to Stay Alert

The Internal Revenue Service today warned taxpayers against telephone scammers targeting students and parents during the back-to-school season and demanding payments for non-existent taxes, such as the “Federal Student Tax.”

People should be on the lookout for IRS impersonators calling students and demanding that they wire money immediately to pay a fake “federal student tax.” If the person does not comply, the scammer becomes aggressive and threatens to report the student to the police to be arrested. As schools around the nation prepare to re-open, it is important for taxpayers to be particularly aware of this scheme going after students and parents.    

“Although variations of the IRS impersonation scam continue year-round, they tend to peak when scammers find prime opportunities to strike”, said IRS Commissioner John Koskinen. “As students and parents enter the new school year, they should remain alert to bogus calls, including those demanding fake tax payments from students.”

The IRS encourages college and school communities to share this information so that students, parents and their families are aware of these scams.

Scammers are constantly identifying new tactics to carry out their crimes in new and unsuspecting ways. This year, the IRS has seen scammers use a variety of schemes to fool taxpayers into paying money or giving up personal information. Some of these include:

• Altering the caller ID on incoming phone calls in a “spoofing” attempt to make it seem like the IRS, the local police or another agency is calling
• Imitating software providers to trick tax professionals--IR-2016-103
• Demanding fake tax payments using iTunes gift cards--IR-2016-99
• Soliciting W-2 information from payroll and human resources professionals--IR-2016-34
• “Verifying” tax return information over the phone--IR-2016-40
• Pretending to be from the tax preparation industry--IR-2016-28

If you receive an unexpected call from someone claiming to be from the IRS, here are some of the telltale signs to help protect yourself.

The IRS Will Never:

• Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail you a bill if you owe any taxes.
• Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
• Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• Ask for credit or debit card numbers over the phone.

If you get a suspicious phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

• Do not give out any information. Hang up immediately.
• Search the web for telephone numbers scammers leave in your voicemail asking you to call back. Some of the phone numbers may be published online and linked to criminal activity.
• Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page or call 800-366-4484.
• Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
• If you think you might owe taxes, call the IRS directly at 800-829-1040.

Moving Expenses Can Be Deductible

Did you move due to a change in your job or business location? If so, you may be able to deduct your moving expenses, except for meals. Here are the top tax tips for moving expenses.

In order to deduct moving expenses, your move must meet three requirements:

1. The move must closely relate to the start of work.  Generally, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.
   
2. Your move must meet the distance test.  Your new main job location must be at least 50 miles farther from your old home than your previous job location. For example, if your old job was three miles from your old home, your new job must be at least 53 miles from your old home.
   
3. You must meet the time test.  After the move, you must work full-time at your new job for at least 39 weeks in the first year. If you’re self-employed, you must meet this test and work full-time for a total of at least 78 weeks during the first two years at your new job site. If your income tax return is due before you’ve met this test, you can still deduct moving expenses if you expect to meet it.

See Publication 521, Moving Expenses, for more information about these rules. It’s available on IRS.gov/forms anytime.

If you can claim this deduction, here are a few more tips from the IRS: 

• Travel.  You can deduct transportation and lodging expenses for yourself and household members while moving from your old home to your new home. You cannot deduct your travel meal costs.
  
• Household goods and utilities.  You can deduct the cost of packing, crating and shipping your things. You may be able to include the cost of storing and insuring these items while in transit. You can deduct the cost of connecting or disconnecting utilities.
  
• Nondeductible expenses.  You cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. See Publication 521 for a complete list.
  
• Reimbursed expenses.  If your employer later pays you for the cost of a move that you deducted on your tax return, you may need to include the payment as income. You report any taxable amount on your tax return in the year you get the payment.
  
• Address Change.  When you move, be sure to update your address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.

Premium Tax Credit – Changes in Circumstances. 

If you or anyone in your family purchased health coverage through the Marketplace and had advance payments of the premium tax credit paid in advance to your insurance company to lower your monthly premiums, it is important to report life changes to the Marketplace when they happen. Moving to a new address is one change you should report. Other things to report include changes in your income, employment, family size, and gaining or losing eligibility for other coverage. Reporting life changes as they happen allows the Marketplace to adjust your advance credit payments. This will help you avoid a smaller refund or unexpectedly owing taxes when you file your tax return.

IRS Provides Tax Relief to Louisiana Storm Victims; Various Tax Deadlines Extended to Jan. 17

Louisiana storm victims will have until Jan. 17, 2017, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.

Following this week’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency (FEMA), the IRS said that affected taxpayers in East Baton Rouge, Livingston, St. Helena and Tangipahoa parishes will receive this and other special tax relief. Other locations in Louisiana and other states may be added in coming days, based on damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 11, 2016. As a result, affected individuals and businesses will have until Jan. 17, 2017 to file returns and pay any taxes that were originally due during this period. This includes the Sept. 15 deadline for making quarterly estimated tax payments. For individual tax filers, it also includes 2015 income tax returns that received a tax-filing extension until Oct. 17, 2016. The IRS noted, however, that because tax payments related to these 2015 returns were originally due on April 18, 2016, they are not eligible for this relief. A variety of business tax deadlines are also affected including the Sept. 15 deadline for corporation and partnership returns on extension and the Oct. 31 deadline for quarterly payroll and excise tax returns.

In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 11 and before Aug. 26 if the deposits are made by Aug. 26, 2016. Details on available relief can be found on the disaster relief page on IRS.gov.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred, or the return for the prior year. See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

How Identity Theft Can Affect Your Taxes

Tax-related identity theft normally occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund. Many people first find out about it when they do their taxes.

The IRS is working hard to stop identity theft with a strategy of prevention, detection and victim assistance. Here are nine key points:

1. Taxes. Security. Together. The IRS, the states and the tax industry need your help. We can’t fight identity theft alone. The Taxes. Security. Together. awareness campaign is an effort to better inform you about the need to protect your personal, tax and financial data online and at home.
   
2. Protect your Records. Keep your Social Security card at home and not in your wallet or purse. Only provide your Social Security number if it’s absolutely necessary. Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for internet accounts.
   
3. Don’t Fall for Scams.  Criminals often try to impersonate your bank, your credit card company, even the IRS in order to steal your personal data. Learn to recognize and avoid those fake emails and texts. Also, the IRS will not call you threatening a lawsuit, arrest or to demand an immediate tax payment. Normal correspondence is a letter in the mail. Beware of threatening phone calls from someone claiming to be from the IRS.
   
4. Report Tax-Related ID Theft to the IRS. If you cannot e-file your return because a tax return already was filed using your SSN, consider the following steps: • File your taxes by paper and pay any taxes owed. • File an IRS Form 14039 Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. You may include it with your paper return. • File a report with the Federal Trade Commission using the FTC Complaint Assistant; • Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on your account;
   
5. IRS Letters. If the IRS identifies a suspicious tax return with your SSN, it may send you a letter asking you to verify your identity by calling a special number or visiting a Taxpayer Assistance Center. This is to protect you from tax-related identity theft.
   
6. IP PIN. If you are a confirmed ID theft victim, the IRS may issue an IP PIN. The IP PIN is a unique six-digit number that you will use to e-file your tax return. Each year, you will receive an IRS letter with a new IP PIN.
   
7. Report Suspicious Activity. If you suspect or know of an individual or business that is committing tax fraud, you can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.
   
8. Combating ID Theft.  In 2015, the IRS stopped 1.4 million confirmed ID theft returns and protected $8.7 billion. In the past couple of years, more than 2,000 people have been convicted of filing fraudulent ID theft returns. 
   
9. Service Options. Information about tax-related identity theft is available online. We have a special section on IRS.gov devoted to identity theft and a phone number available for victims to obtain assistance.

For more on this Topic, see the Taxpayer Guide to Identity Theft.

Tax Professionals: Monitor Your PTIN for Suspicious Activity

Tax preparers can help protect clients and their businesses from identity theft by checking their PTIN Accounts to ensure the number of returns filed using their identification number matches IRS records.

Criminals are increasingly targeting tax professionals, not only to steal client data but also to steal the professionals’ data such as PTINs, EFINs or e-Service passwords. The IRS has teamed up with state tax agencies and the tax industry for a “Protect Your Clients; Protect Yourself” campaign to help increase awareness among tax professionals.

The IRS offers many preparers the ability to monitor “Returns Filed Per PTIN.” This information is available in the online PTIN system for tax return preparers who meet both of the following criteria. You must have:

• A professional credential (Enrolled Agent, Certified Public Accountant, Attorney, Enrolled Retirement Plan Agent or Enrolled Actuary) or are an Annual Filing Season Program participant, and
• At least 50 tax returns from the Form 1040 series processed in the current year.

It is important to monitor this information even if you do not prepare returns or only prepare a small number of returns. If there is no data shown, less than 50 returns have been processed with your PTIN.

To access “Returns Filed Per PTIN” information, follow these steps:

1. Visit http://www.irs.gov/ptin and log into your PTIN account.
2. From the Main Menu, find “Additional Activities.”
3. Under Additional Activities, select “View Returns Filed Per PTIN.”
4. A chart labeled Returns Per PTIN should appear.
5. A count of individual income tax returns filed and processed in the current year will be displayed. 

The information in the Returns Per PTIN chart is updated weekly and it is important that you check this information regularly. If the number of returns processed is significantly more than the number of tax returns you’ve prepared and you suspect possible misuse of your PTIN, complete and submit Form 14157, Complaint: Tax Return Preparer, to the IRS.

Uber: Driving the On-Demand Economy

Whether we call them part of the “on-demand platform,” “ride-sharing apps,” or just Uber and Lyft, one term describes it all: big business. And the hottest thing in transportation has grabbed a lot of headlines recently.

A fair amount of the chatter has been debate about how the two mavericks classify their drivers and the tax consequences that topic may entail. With all the information flying around the Internet these days, we thought we’d try and sort things out for you and try to put things into perspective.

As it is with a lot of topics, the ride-sharing issue has both a strategic side and a tactical side. Strategic, in that some aspects of the big-picture debate will be settled by forces far outside our control or influence. Tactical, because some aspects of this story can indeed touch us as tax preparers.

So here’s the lay of this changing landscape as we know it.

The Big Picture

To get an Uber ride, a traveler uses the Uber smartphone app by tapping a button to send their location to the servers. Request a ride and input the destination address. To pay, you’ll charge your credit card – no need for cash.

On the other end, the driver opens the smartphone app at the beginning of his shift to log into the system. When a fare is assigned, the driver gets the information on the passenger and directions to the pick-up point, as well as directions to the destination. Payment for fares goes directly into the driver’s bank account – no need to carry cash for change.

While the concept behind a ride-sharing app may be simple, how it’s executed could leave room for varying outcomes.

Uber and Lyft, for example, were designed to use drivers as independent contractors. The Uber website seems to stress this, with a sign-up section that touts freedom of hours: “When you drive with Uber, you decide when and how long to work. So you’ll never have to choose between earning a living and living life.”

As simple as all this sounds, the American legal system has now kicked into overdrive. Just recently, Uber drivers in Massachusetts and California sued, seeking to be reclassified as employees instead of contractors and got a $100 million settlement. While the terms still have to be approved by a judge, the settlement also calls for Uber to stop claiming that tips are included in the fares and to better communicate reasons for termination.

But it appears that action was only the beginning. Now, similar lawsuits have been filed in Florida and Illinois, except that the latter action also seeks to recover tips for drivers, alleging tips earned were either “stolen” by Uber or lost due to the company’s communication and corporate policies.

Both the Florida and Illinois suits seek national, class-action status. If that’s granted, all Uber drivers in the U.S. (with the exception of California and Massachusetts) would have a stake in the outcome.
The elephant in the big-picture room, however, may be whether changes are needed to the American tax code to better handle new, emerging technologies and new ways of doing business.

One school of thought says the U.S. tax code presently has the tools to handle the on-demand economy’s needs. Rules are in place, they say, that can handle even the newfangled tax characteristics of internet apps.

An alternative view comes from a recent commentary for Tax Analysts’ Tax Notes, by Donald T. Williamson, executive director of the Kogod Tax Policy Center at American University in Washington, D.C. Williamson makes a case for simplifying the decision-making process for determining whether workers are employees or contractors.

At present, the tax code uses 20 factors to be considered in the equation, and there is “wiggle room” within that structure. Williamson writes that despite tweaking by the IRS to try and improve the process, there’s still too much gray area.

“Because the determination of the relationship is made on a case-by-case basis, disputes are legion and offer little definitive guidance that can be applied to employment relationships in general,” Williamson said.

While the employee-versus-contractor debate currently revolves around on-demand apps, Williamson sees a bigger impact if the complex process were replaced by a simpler “bright-line” test: The economy would realize bigger gains.

So, with all this talk about employee–versus-contractor class-action suits, where does that leave us as tax preparers? How do we make sense of it all?

The Wrap-Up

One thing is certain for Uber, Lyft, and others in the on-demand economy: They can expect plenty of changes down the road. But even with changes in the big picture, the traditional values of diligence, professionalism, and attention to detail will continue to serve tax preparers and their clients well.

 

Treasury Inspector General Finds Good News, Bad News in Audit of IRS Tax Lien Procedures

The Treasury Inspector General for Tax Administration (TIGTA) says the IRS gets a mixed report card when it comes to notifying taxpayers an IRS lien has been filed against them.


The audit looked at Form 668(Y)(c), Notice of Federal Tax Lien or NTFL. When the form has been filed against taxpayers, the IRS must notify them in writing within five business days, using the taxpayer’s last known address. A taxpayer’s right to appeal the notice in a timely fashion may be jeopardized if the notification procedure isn’t carried out.

Using a sample of NTFLs from July 1, 2014 to June 30, 2015, the audit examined notices that were sent out successfully – and those that had problems due to address issues.

TIGTA found the sample of successful NTFLs had been mailed out in a timely manner and had been sent to the correct addresses. The mailings included the taxpayers’ appeal rights as well as the lien notice.

However, in looking over 162 undelivered lien notices, TIGTA identified nine cases where the taxpayers didn’t get the notice because the NTFL had been sent to the individual’s old address – even though the IRS computer system listed the newer, last-known address. In seven of those cases, employees had not obtained a secondary address for the spouses.

The IRS did reissue lien notices in three cases when the original mailing came back undelivered, and the remaining six NTFLs were also reissued. However, TIGTA noted that all nine cases “involve potential legal violations because the IRS did not meet its statutory requirement to timely send lien noticed to the taxpayer’s last known address.”

IRS regulations require that a taxpayer’s representative be supplied with copies of all correspondence with the taxpayer. However, the audit found that in six of the 37 cases sampled that involved a taxpayer’s representative, the IRS failed to notify the representative of the NTFL filings. TIGTA estimates more than 22,000 taxpayers may have been affected by this action alone.

Recommendations

TIGTA recommended that the applicable division director:

• Determine if a secondary address for a spouse can be uploaded into the IRS computer system for NTFLs with joint tax liabilities;
• Require employees to research and obtain a last known address for the secondary spouse in cases of joint liability;
• Make procedures pertaining to courtesy copies of lien notices applicable to Automated Collection System employees; and
• Remind workers to update the mail status of the lien notice with the appropriate transaction code and action code combination.

The IRS agreed with the findings and all the recommendations of the report.

 

AICPA Asks IRS for Clarification on Virtual Currency

The Internal Revenue Service recently issued their guidelines as far as how Bitcoin and the other virtual currencies fit into the scheme of the American tax structure. But the American Institute of CPAs (AICPA) still has plenty of questions about how this new form of money should be treated for tax purposes.


The idea of virtual currency – devised to freely pay for goods and services through the Internet and across all borders – challenges economies worldwide as they attempt to integrate virtual currency into rules written for paper currency systems. The European Central Bank defines virtual currency as ”a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”

Bitcoin has a slightly different take on the concept of virtual currency, however.
“Bitcoin isn’t owned by anyone. Think of it like email. Anyone can use it, but there isn’t a single company that is in charge of it. Bitcoin transactions are irreversible. This means that no one, including banks, or governments can block you from sending or receiving bitcoins with anyone else, anywhere in the world. With this freedom comes the great responsibility of not having any central authority to complain to if something goes wrong” (Bitcoin.com).

So how does an invisible currency that isn’t owned by anyone translate into a tax system with roots at the beginning of the previous century? The IRS made a start with its directions in Notice 2014-21. And while the AICPA applauded the initial steps by the IRS to define how such digital money should be treated, the organization still sees some murky areas. So they’ve written a letter to IRS Commissioner John Koskinen seeking some answers.

Could You Elaborate?

The initial IRS guidance came in the form of answers to frequently asked questions (FAQs) about digital currency. It recommends taxpayers use “a reasonable manner that is consistently applied” to calculate the fair market value of digital currency. The AICPA letter to the IRS asks just what “reasonable manner” means exactly.

Also, different virtual currency exchanges list different values for the same virtual currency at the same time, so which value is used for tax purposes?

Another area of confusion comes from the cost of acquiring virtual currency. Particularly, the AICPA wants to know when, if ever, any costs of acquiring virtual currency are capitalized.

Other Questions

AICPA sees confusion in calculating gain or loss using virtual currency, since, “in many cases, it is impossible for a taxpayer to track which specific virtual currency was used for a particular transaction.”

And if a donation of virtual currency above $5,000 is made to a qualified charity, does it fall under the rule requiring a qualified appraisal of the donation? And again, how should the donation value be documented?

Direction is also sought on whether virtual currency is considered a commodity that’s subject to mark-to-market accounting. That’s an issue that’s also being examined by the Commodity Futures Trading Commission, according to the AICPA.

The AICPA’s letter stresses that as the use of virtual currencies expands, reporting a client’s income and tax responsibilities becomes more difficult. “The issuance of clear guidance in this area will not only reduce the confusion and burden for tax preparers, but also will allow taxpayers to accurately comply with IRS rules,” says the letter.

 

Remind Clients Not to Jeopardize Premium Tax Credit Advance Payments

If you have clients who filed for an extension of time to file their 2015 returns, and they receive advance payments of the premium tax credit, those taxpayers should file their income tax return sooner rather than later.


PTC recipients must file a 2015 return and reconcile their advance payments to ensure they can continue receiving the advance payments in the future. Advance payments of the tax credit are reviewed every fall by the Health Insurance Marketplace for the next calendar year. It’s part of the annual re-enrollment and income verification process. But if your applicable clients don’t file and reconcile, they won’t be eligible for advance payments of the premium tax credit in calendar year 2017.

Use Form 8962, Premium Tax Credit, to reconcile any advance payments made on your clients’ behalf, and to maintain their eligibility.

PTC clients who got extensions to file do not need to wait until October to e-file their income tax returns. You can remind your clients that they can – and should – e-file as soon as they have the necessary documentation, in order to avoid being disqualified for advance payments of the credit.

 

Audit Finds Some Amended Returns Going Unchecked for Fraud

When taxpayers file an amended income tax return, it’s up to the Internal Revenue Service to review that return before it can be accepted. If the amended return includes a refund or a claim of less tax due, that review takes on a bigger role in order to head off possible fraud.


Unfortunately, the Treasury Inspector General for Tax Administration (TIGTA) says more than a few amended returns are slipping through cracks in the IRS review process.

TIGTA’s audit looked at a sample of 84 amended tax returns from fiscal year 2013 that had cleared the normal IRS review process. All the sampled returns included either a refund or a reduction of taxes owed. Of those 84, the audit found 31 returns that claims that were unsubstantiated or had “large, unusual or questionable items on the tax return” that weren’t considered and investigated adequately.

The report from auditors says a combination of factors contributed to the problem – and adds that the issue can be fixed with a change in tools and procedures.

Their full report – as well as their recommendations – were forwarded to IRS management.

 

Miscellaneous Deductions Can Trim Taxes

IRS Summertime Tax Tip 2016-09, July 22, 2016      
                                     
Miscellaneous deductions may reduce your tax bill. These may include certain expenses you paid for in your work if you are an employee. You must itemize deductions when you file to claim these costs.

Many taxpayers claim the standard deduction, but you might pay less tax if you itemize. Here are some IRS tax tips you should know about these deductions:

The Two Percent Limit. You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income. These include expenses such as:

• Unreimbursed employee expenses.
• Job search costs for a new job in the same line of work.
• Tools for your job.
• Union dues.
• Work-related travel and transportation.
• The cost you paid to prepare your tax return. These fees include the cost you paid for tax preparation software. They also include any fee you paid for e-filing of your return.

Deductions Not Subject to the Limit. Some deductions are not subject to the two percent limit. They include

• Certain casualty and theft losses. In most cases, this rule is for damaged or stolen property you held for investment This may include property such as stocks, bonds and works of art.
• Gambling losses up to the total of your gambling winnings.
• Losses from Ponzi-type investment schemes.

You can’t deduct some expenses. For example, you can’t deduct personal living or family expenses. Claim allowable miscellaneous deductions on Schedule A, Itemized Deductions. For more about this topic see Publication 529, Miscellaneous Deductions.

Protect Your Clients; Protect Yourself

Increasingly, tax professionals are being targeted by identity thieves. These criminals – many of them sophisticated, organized syndicates - are redoubling their efforts to gather personal data to file fraudulent federal and state income tax returns.

No one entity can fight this crime alone. It takes all of us, working together.

That is why the Security Summit - the unprecedented partnership between the IRS, state tax agencies, and the private-sector tax industry - came together to form a united and coordinated front against this common enemy. And, that’s why they are asking tax professionals nationwide to join this effort.

In addition to new security safeguards initiated for 2016 and planned for 2017, the Security Summit has launched a campaign aimed at increasing awareness among tax professionals: Protect Your Clients; Protect Yourself. This is a follow-up effort to the 2015 “Taxes. Security. Together.” public awareness campaign.

The IRS and its Security Summit partners will issue a series of fact sheets and tips on security, scams and identity theft prevention measures aimed at tax professionals and steps they can take to protect client data and their businesses.

Five Tax Tips about Hobbies that Earn Income

IRS Tax Tip 2016-15, August 5, 2016

Millions of people enjoy hobbies. Hobbies can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income from hobbies is different from how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

1. Business versus Hobby. There are nine factors to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses, to learn more. You can also visit IRS.gov and type “not-for-profit” in the search box.
   
   
2. Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
   
   
3. Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
   
   
4. How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.

Understanding Your IRS Notice or Letter

Your notice or letter will explain the reason for the contact and give you instructions on how to handle the issue.

If you agree with the information, there is no need to contact the IRS.

 *****Please contact a tax professional (Enrolled Agents (EA), certified public accountant (CPA) or attorney if you don't know what to do. This is to preserve your rights throughout this process. *****

Why was I notified by the IRS?

The IRS sends notices and letters for the following reasons:

• You have a balance due.
• You are due a larger or smaller refund.
• We have a question about your tax return.
• We need to verify your identity.
• We need additional information.
• We changed your return.
• We need to notify you of delays in processing your return.

Next Steps

Read
Each notice or letter contains a lot of valuable information, so it’s very important that you read it carefully. If we changed your tax return, compare the information we provided in the notice or letter with the information in your original return.

Respond
If your notice or letter requires a response by a specific date, there are 2 main reasons you’ll want to comply:

• to minimize additional interest and penalty charges.
• to preserve your appeal rights if you don’t agree.

Pay
Pay as much as you can, even if you can’t pay the full amount you owe. You can pay online or apply for an Online Payment Agreement or Offer in Compromise. Visit our payments page for more information.

Keep a copy of your notice or letter
It’s important to keep a copy of all notices or letters with your tax records. You may need these documents at a later date.

Contact the IRS
The IRS provide a contact phone number on the top right-hand corner of the notice or letter. Typically, you only need to contact them if you don’t agree with the information, if they requested additional information, or if you have a balance due. You can also write to them at the address in the notice or letter. If you write, allow at least 30 days for their response.

The location of the notice or letter number

You can find the notice (CP) or letter (LTR) number on either the top or the bottom right-hand corner of your correspondence.

When the notice or letter isn't listed on this page

The IRS will continue to add more correspondence to our website. If your notice or letter isn't listed on this page and you have questions, call them at the number on the top right-hand corner of your correspondence.

When the notice or letter looks suspicious

Please visit their Report Phishing page if you receive a notice or letter that looks suspicious and was designed to appear as though it came from the IRS. You can also call 1-800-829-1040. They will never ask taxpayers for personal information via e-mail or social media.

IRS Acquiescence Gives Unmarried Couples a Double Deduction

Mortgage interest deduction limit applies on per taxpayer basis

A year ago, a divided Ninth Circuit reversed the Tax Court in Voss v. Commissioner, allowing two unmarried co-owners of real property to each claim a home mortgage interest deduction. Now, the IRS has acquiesced in the decision, giving a bonus to unmarried individuals who buy property together.

Bruce Voss and Charles Sophy, unmarried co-owners of the property, each claimed a home mortgage interest deduction under Tax Code section 163(h)(3). The Code section allows taxpayers to deduct interest on up to $1,000,000 of home acquisition debt and $100,000 of home equity debt. The IRS said Voss and Sophy were jointly subject to section 163(h)(3)’s debt limits, and therefore disallowed a substantial portion of their claimed deductions.

Voss and Sophy claimed the provision applies on a per-taxpayer basis, so they were each entitled to deduct interest on up to $1.1 million. While the Ninth Circuit conceded the language of the Code is “anything but plain,” it agreed with the taxpayers.

The decision of the IRS to acquiesce opens the door for unmarried couples outside the Ninth Circuit to claim the deductions subject to the increased limit, and adds an additional element to the marriage penalty under the Code.

IRS Proposes to Change Rules for Tuition Expenses

The Internal Revenue Service has proposed new regulations that could change the rules for reporting qualified tuition and related expenses for students.

The proposed regulations would alter the rules for reporting qualified tuition and related expenses under section 6050S of the Tax Code on Form 1098-T, “Tuition Statement.” The proposals would conform the rules with changes made to the Tax Code by the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH Act, as well as the Trade Preferences Extension Act of 2015, or TPEA. The changes would affect educational institutions that are required to file Form 1098-T along with taxpayers who are eligible to claim an education tax credit.

The PATH Act made the American Opportunity Tax Credit permanent and retroactively extended the section 222(e) deduction for qualified tuition and related expenses for taxable years beginning after Dec. 31, 2014 and ending on or before Dec. 31, 2016. The PATH Act also amended the Tax Code to provide that the AOTC is not allowed if the student’s Taxpayer Identification Number and the TIN of the taxpayer claiming the credit are issued after the due date for filing the return for the taxable year. The AOTC is also not allowed if the tax return does not include the Employer Identification Number of the higher education institution to which the tuition and related expenses were paid.

The PATH Act requires eligible educational institutions to report their EIN on the tax return and statement. The law also eliminates the option for educational institutions to report the aggregate of the qualified tuition and related expenses they bill for the calendar year. Instead, they must report aggregate payments they received during the calendar year.

Both the PATH Act and the Trade Preferences Extension Act added new requirements for claiming education tax benefits. For example, under the TPEA, a student is required to receive a Form 1098-T in order to claim the Lifetime Learning Credit or the AOTC or to claim the deduction under section 222. The PATH Act further restricts the ability to claim the AOTC. First, a taxpayer can claim the AOTC only if the return on which the credit is claimed includes the EIN of any educational institution to which the qualified tuition and related expenses are paid. On top of that, taxpayers can claim the AOTC only if the student’s TIN and the taxpayer’s TIN, on the return for which the credit is claimed, are issued on or before the due date of the original return.

Form 1098-T helps taxpayers find out if they are eligible to claim education tax credits under section 25A or the deduction for qualified tuition and related expenses under section 222. However, before the TPEA, there was no requirement that a taxpayer—or their dependent, if the taxpayer’s dependent is the student—receive a Form 1098-T to claim the tax benefits. Section 804 of the TPEA institutes those requirements. For qualified tuition and related expenses paid during taxable years beginning after June 29, 2015, the TPEA provides that a taxpayer must receive a Form 1098-T to claim either a credit under section 25A or a deduction under section 222.

The proposed regulations reflect these changes. A public hearing on the proposed rules is planned for November 30.

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Back to School? Learn about Tax Credits for Education

IRS Summertime Tax Tip 2016-14, August 3, 2016

If you pay for college in 2016, you may receive some tax savings on your federal tax return, even if you’re studying outside of the U.S. Both the American Opportunity Tax Credit and the Lifetime Learning Credit may reduce the amount of tax you owe, but only the AOTC is partially refundable.

Here are a few things you should know about education credits:

• American Opportunity Tax Credit ‒ The AOTC is worth up to $2,500 per year for an eligible student. This credit is available for the first four years of higher education. Forty percent of the AOTC is refundable. That means, if you’re eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any tax.
  
• Lifetime Learning Credit ‒ The LLC is worth up to $2,000 per tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.
  
• Qualified expenses ‒ You may use only qualified expenses paid to figure your credit. These expenses include the costs you pay for tuition, fees and other related expenses for an eligible student to enroll at, or attend, an eligible educational institution. Refer to IRS.gov for more on the rules that apply to each credit.
  
• Eligible educational institutions ‒ Eligible educational schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren’t sure if your school is eligible:
  
• Ask your school if it is an eligible educational institution, or
• See if your school is on the U.S. Department of Education’s Accreditation database.
  
• Form 1098-T ‒ In most cases, you should receive Form 1098-T, Tuition Statement, from your school by February 1. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be either:  (1) the amount you paid for qualified tuition and related expenses, or (2) the amount that your school billed for qualified tuition and related expenses; therefore, the amounts shown on the form may be different than the amounts you actually paid. Don’t forget that you can only claim an education credit for the qualified tuition and related expenses that you paid in the tax year and not just the amount that your school billed.
  
• Income limits ‒ The education credits are subject to income limitations and may be reduced, or eliminated, based on your income.
  
• Interactive Tax Assistant tool ‒ To see if you’re eligible to claim education credits, use theInteractive Tax Assistant tool on IRS.gov.

How Selling Your Home Can Impact Your Taxes

IRS Summertime Tax Tip 2016-13, August 1, 2016                                                       

Usually, profits you earn are taxable. However, if you sell your home, you may not have to pay taxes on the money you gain. Here are ten tips to keep in mind if you sell your home this year.

1. Exclusion of Gain.  You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
   
2. Exceptions May Apply.  There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, seePublication 523, Selling Your Home.
   
3. Exclusion Limit.  The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain
   
4. May Not Need to Report Sale.  If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
   
5. When You Must Report the Sale.  You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale, you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
   
6. Exclusion Frequency Limit.  Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
   
7. Only a Main Home Qualifies.  If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
   
8. First-time Homebuyer Credit.  If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.
   
9. Home Sold at a Loss.  If you sell your main home at a loss, you can’t deduct the loss on your tax return.
   
10. Report Your Address Change.  After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. Mail it to the address listed on the form’s instructions. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.

IRS Offers Tips on Charity Travel

IRS Summertime Tax Tip 2016-12, July 29, 2016                                                      

Do you plan to donate your time to charity this summer? If you travel for it, you may be able to lower your taxes. Here are some tax tips that you should know about deducting charity-related travel expenses:

• Qualified Charities.  To deduct your costs, you must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. Ask the group about its status before you donate. You can also use the Select Check tool on IRS.gov to check a group’s status.
  
• Out-of-Pocket Expenses.  You may be able to deduct some of your costs including travel. They must be necessary while you are away from home. All  costs must be:
  
  • Unreimbursed,
  • Directly connected with the services,
  • Expenses you had only because of the services you gave, and
  • Not personal, living or family expenses.
    
• Genuine and Substantial Duty.  Your charity work has to be real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
  
• Value of Time or Service.  You can’t deduct the value of your time or services that you give to charity. This includes income lost while you serve as an unpaid volunteer for a qualified charity.
  
• Travel You Can Deduct.  The types of expenses that you may be able to deduct include:
  
  • Air, rail and bus transportation,
  • Car expenses,
  • Lodging costs,
  • Cost of meals, and
  • Taxi or other transportation costs between the airport or station and your hotel.
    
• Travel You Can’t Deduct.  Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or  vacation.

For more on these rules, see Publication 526, Charitable Contributions.