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1040ez form 5. 1040ez form   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. 1040ez form Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. 1040ez form When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. 1040ez form Otherwise, these are capital expenses that must be added to the basis of the land. 1040ez form (See chapter 6 for information on determining basis. 1040ez form ) Conservation expenses for land in a foreign country do not qualify for this special treatment. 1040ez form The deduction for conservation expenses cannot be more than 25% of your gross income from farming. 1040ez form See 25% Limit on Deduction , later. 1040ez form Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. 1040ez form These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. 1040ez form You must include in income most government payments for approved conservation practices. 1040ez form However, you can exclude some payments you receive under certain cost-sharing conservation programs. 1040ez form For more information, see Agricultural Program Payments in chapter 3. 1040ez form To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. 1040ez form Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. 1040ez form You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. 1040ez form You are not farming if you are engaged only in forestry or the growing of timber. 1040ez form Farm defined. 1040ez form   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. 1040ez form It also includes plantations, ranches, ranges, and orchards. 1040ez form A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. 1040ez form It does not include an area where they are merely caught or harvested. 1040ez form A plant nursery is a farm for purposes of deducting soil and water conservation expenses. 1040ez form Farm rental. 1040ez form   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. 1040ez form If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. 1040ez form   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. 1040ez form Example. 1040ez form You own a farm in Iowa and live in California. 1040ez form You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. 1040ez form You cannot deduct your soil conservation expenses for this farm. 1040ez form You must capitalize the expenses and add them to the basis of the land. 1040ez form     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. 1040ez form Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. 1040ez form If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. 1040ez form Keep a copy of the plan with your books and records to support your deductions. 1040ez form Conservation plan. 1040ez form   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. 1040ez form There are three types of approved plans. 1040ez form NRCS individual site plans. 1040ez form These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. 1040ez form NRCS county plans. 1040ez form These plans include a listing of farm conservation practices approved for the county where the farmland is located. 1040ez form You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. 1040ez form Comparable state agency plans. 1040ez form These plans are approved by state agencies and can be approved individual site plans or county plans. 1040ez form   A list of NRCS conservation programs is available at www. 1040ez form nrcs. 1040ez form usda. 1040ez form gov/programs. 1040ez form Individual site plans can be obtained from NRCS offices and the comparable state agencies. 1040ez form Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. 1040ez form These expenses include, but are not limited to, the following. 1040ez form The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. 1040ez form The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. 1040ez form The eradication of brush. 1040ez form The planting of windbreaks. 1040ez form You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. 1040ez form These expenses are added to the basis of the land. 1040ez form If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. 1040ez form See chapter 3 for information about payments eligible for the cost-sharing exclusion. 1040ez form New farm or farmland. 1040ez form   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. 1040ez form You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. 1040ez form The new farming activity does not have to be the same as the old farming activity. 1040ez form For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. 1040ez form Land not used for farming. 1040ez form   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. 1040ez form For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. 1040ez form You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. 1040ez form Depreciable conservation assets. 1040ez form   You generally cannot deduct your expenses for depreciable conservation assets. 1040ez form However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. 1040ez form See Assessment for Depreciable Property , later. 1040ez form   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. 1040ez form These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. 1040ez form You recover your capital investment through annual allowances for depreciation. 1040ez form   You can deduct soil and water conservation expenses for nondepreciable earthen items. 1040ez form Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. 1040ez form Water well. 1040ez form   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. 1040ez form It is a capital expense. 1040ez form You recover your cost through depreciation. 1040ez form You also must capitalize your cost for drilling a test hole. 1040ez form If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. 1040ez form You can recover the total cost through depreciation deductions. 1040ez form   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. 1040ez form Abandonment means that all economic benefits from the well are terminated. 1040ez form For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. 1040ez form Endangered species recovery expenses. 1040ez form   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. 1040ez form Otherwise, these are capital expenses that must be added to the basis of the land. 1040ez form   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. 1040ez form See Internal Revenue Code section 175 for more information. 1040ez form Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. 1040ez form You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. 1040ez form Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. 1040ez form This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. 1040ez form The depreciable property must be used in the district's soil and water conservation activities. 1040ez form However, the following limits apply to these assessments. 1040ez form The total assessment limit. 1040ez form The yearly assessment limit. 1040ez form After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. 1040ez form The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040ez form See Table 5-1 for a brief summary of these limits. 1040ez form Table 5-1. 1040ez form Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. 1040ez form Your deductible share of the cost to the district for the property. 1040ez form Your gross income from farming. 1040ez form No one taxpayer can deduct more than 10% of the total assessment. 1040ez form Any amount over 10% is a capital expense and is added to the basis of your land. 1040ez form If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040ez form If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. 1040ez form You can deduct the remainder in equal amounts over the next 9 tax years. 1040ez form Limit for all conservation expenses, including assessments for depreciable property. 1040ez form Amounts greater than 25% can be carried to the following year and added to that year's expenses. 1040ez form The total is then subject to the 25% of gross income from farming limit in that year. 1040ez form To ensure your deduction is within the deduction limits, keep records to show the following. 1040ez form The total assessment against all members of the district for the depreciable property. 1040ez form Your deductible share of the cost to the district for the depreciable property. 1040ez form Your gross income from farming. 1040ez form Total assessment limit. 1040ez form   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. 1040ez form This applies whether you pay the assessment in one payment or in installments. 1040ez form If your assessment is more than 10% of the total amount assessed, both the following rules apply. 1040ez form The amount over 10% is a capital expense and is added to the basis of your land. 1040ez form If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. 1040ez form Yearly assessment limit. 1040ez form   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. 1040ez form If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. 1040ez form If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. 1040ez form You can deduct the remainder in equal amounts over the next 9 tax years. 1040ez form Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040ez form Example 1. 1040ez form This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. 1040ez form Of the assessment, $1,500 is for digging drainage ditches. 1040ez form You can deduct this part as a soil or conservation expense as if you had paid it directly. 1040ez form The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. 1040ez form The total amount assessed by the district against all its members for the depreciable equipment is $7,000. 1040ez form The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. 1040ez form The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. 1040ez form To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. 1040ez form Add $500 to the result for a total of $570. 1040ez form Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). 1040ez form You can deduct the balance at the rate of $70 a year over the next 9 years. 1040ez form You add $70 to the $1,500 portion of the assessment for drainage ditches. 1040ez form You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. 1040ez form Example 2. 1040ez form Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. 1040ez form The total amount assessed by the district against all its members for depreciable equipment is $5,500. 1040ez form The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. 1040ez form The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). 1040ez form Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. 1040ez form You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. 1040ez form Sale or other disposal of land during 9-year period. 1040ez form   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. 1040ez form Death of farmer during 9-year period. 1040ez form   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. 1040ez form 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. 1040ez form Gross income from farming. 1040ez form   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. 1040ez form Gains from sales of draft, breeding, or dairy livestock are included. 1040ez form Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. 1040ez form Carryover of deduction. 1040ez form   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. 1040ez form However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. 1040ez form Example. 1040ez form In 2012, you have gross income of $32,000 from two farms. 1040ez form During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. 1040ez form However, your deduction is limited to 25% of $32,000, or $8,000. 1040ez form The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. 1040ez form The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. 1040ez form Any expenses over the limit in that year are carried to 2014 and later years. 1040ez form Net operating loss. 1040ez form   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. 1040ez form If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. 1040ez form When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. 1040ez form If you do not choose to deduct the expenses, you must capitalize them. 1040ez form Change of method. 1040ez form   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. 1040ez form To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. 1040ez form You or your authorized representative must sign the request. 1040ez form   The request must include the following information. 1040ez form Your name and address. 1040ez form The first tax year the method or change of method is to apply. 1040ez form Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. 1040ez form If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. 1040ez form The total expenses you paid or incurred in the first tax year the method or change of method is to apply. 1040ez form A statement that you will account separately in your books for the expenses to which this method or change of method relates. 1040ez form Send your request to the following  address. 1040ez form  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. 1040ez form Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). 1040ez form However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. 1040ez form Gain on sale of farmland. 1040ez form   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. 1040ez form If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. 1040ez form See Section 1252 property under Other Gains in chapter 9. 1040ez form Prev  Up  Next   Home   More Online Publications
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IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

IR-2014-16, Feb. 19, 2014

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2014:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Pervasive Telephone Scams

The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov.  Please add "IRS Telephone Scam" to the comments of your complaint.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.

False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty.  The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.   

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability.  The promoters of abusive tax schemes often employ financial instruments in their schemes.  However, the instruments are used for improper purposes including the facilitation of tax evasion.

The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.

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Page Last Reviewed or Updated: 21-Feb-2014

The 1040ez Form

1040ez form 8. 1040ez form   Foreign Insurance Taxes Table of Contents Premium. 1040ez form Tax is imposed on insurance policies issued by foreign insurers. 1040ez form Any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit they are made, signed, issued, or sold, is liable for the tax. 1040ez form The following tax rates apply to each dollar (or fraction thereof) of the premium paid. 1040ez form Casualty insurance and indemnity, fidelity, and surety bonds: 4 cents. 1040ez form For example, on a premium payment of $10. 1040ez form 10, the tax is 44 cents. 1040ez form Life, sickness, and accident insurance, and annuity contracts: 1 cent. 1040ez form For example, on a premium payment of $10. 1040ez form 10, the tax is 11 cents. 1040ez form Reinsurance policies covering any of the taxable contracts described in items (1) and (2): 1 cent. 1040ez form However, the tax does not apply to casualty insurance premiums paid to foreign insurers for coverage of export goods in transit to foreign destinations. 1040ez form Premium. 1040ez form   Premium means the agreed price or consideration for assuming and carrying the risk or obligation. 1040ez form It includes any additional charge or assessment payable under the contract, whether in one sum or installments. 1040ez form If premiums are refunded, claim the tax paid on those premiums as an overpayment against tax due on other premiums paid or file a claim for refund. 1040ez form When liability attaches. 1040ez form   The liability for this tax attaches when the premium payment is transferred to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer) or to any nonresident agent, solicitor, or broker. 1040ez form A person can pay the tax before the liability attaches if the person keeps records consistent with that practice. 1040ez form Who must file. 1040ez form   The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return. 1040ez form Otherwise, any person who issued or sold the policy, or who is insured under the policy, is required to pay the tax and file the return. 1040ez form    The person liable for this tax must keep accurate records that identify each policy or instrument subject to tax. 1040ez form These records must clearly establish the type of policy or instrument, the gross premium paid, the identity of the insured and insurer, and the total premium charged. 1040ez form If the premium is to be paid in installments, the records must also establish the amount and anniversary date of each installment. 1040ez form   The records must be kept at the place of business or other convenient location for at least 3 years after the later of the date any part of the tax became due, or the date any part of the tax was paid. 1040ez form During this period, the records must be readily accessible to the IRS. 1040ez form   The person having control or possession of a policy or instrument subject to this tax must keep the policy for at least 3 years after the date any part of the tax on it was paid. 1040ez form For information on reinsurance premiums paid from one foreign insurer to another foreign insurer, see Rev. 1040ez form Rul. 1040ez form 2008-15. 1040ez form You can find Rev. 1040ez form Rul. 1040ez form 2008-15 on page 633 of I. 1040ez form R. 1040ez form B. 1040ez form 2008-12 at www. 1040ez form irs. 1040ez form gov/pub/irs-irbs/irb08-12. 1040ez form pdf. 1040ez form Treaty-based positions under IRC 6114. 1040ez form   You may have to file an annual report disclosing the amount of premiums exempt from United States excise tax as a result of the application of a treaty with the United States that overrides (or otherwise modifies) any provision of the Internal Revenue Code. 1040ez form   Attach any disclosure statement to the first quarter Form 720. 1040ez form You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement. 1040ez form See the Instructions for Form 720 for information on how and where to file. 1040ez form   See Revenue Procedure 92-14 in Cumulative Bulletin 1992-1 for procedures you can use to claim a refund of this tax under certain U. 1040ez form S. 1040ez form treaties. 1040ez form Prev  Up  Next   Home   More Online Publications