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File taxes 2012 2. File taxes 2012   Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. File taxes 2012 The pay may be in cash, property, or services. File taxes 2012 It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. File taxes 2012 For information about deducting employment taxes, see chapter 5. File taxes 2012 You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. File taxes 2012 Empowerment zone employment credit (Form 8844). File taxes 2012 Indian employment credit (Form 8845). File taxes 2012 Work opportunity credit (Form 5884). File taxes 2012 Credit for employer differential wage payments (Form 8932). File taxes 2012 Reduce your deduction for employee wages by the amount of employment credits you claim. File taxes 2012 For more information about these credits, see the form on which the credit is claimed. File taxes 2012 Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. File taxes 2012 Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. File taxes 2012 These and other requirements that apply to all business expenses are explained in chapter 1. File taxes 2012 In addition, the pay must meet both of the following tests. File taxes 2012 Test 1. File taxes 2012 It must be reasonable. File taxes 2012 Test 2. File taxes 2012 It must be for services performed. File taxes 2012 The form or method of figuring the pay does not affect its deductibility. File taxes 2012 For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. File taxes 2012 Test 1—Reasonableness You must be able to prove that the pay is reasonable. File taxes 2012 Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. File taxes 2012 If the pay is excessive, the excess pay is disallowed as a deduction. File taxes 2012 Factors to consider. File taxes 2012   Determine the reasonableness of pay by the facts and circumstances. File taxes 2012 Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. File taxes 2012   To determine if pay is reasonable, also consider the following items and any other pertinent facts. File taxes 2012 The duties performed by the employee. File taxes 2012 The volume of business handled. File taxes 2012 The character and amount of responsibility. File taxes 2012 The complexities of your business. File taxes 2012 The amount of time required. File taxes 2012 The cost of living in the locality. File taxes 2012 The ability and achievements of the individual employee performing the service. File taxes 2012 The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. File taxes 2012 Your policy regarding pay for all your employees. File taxes 2012 The history of pay for each employee. File taxes 2012 Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. File taxes 2012 Employee-shareholder salaries. File taxes 2012   If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. File taxes 2012 The excessive part of the salary would not be allowed as a salary deduction by the corporation. File taxes 2012 For more information on corporate distributions to shareholders, see Publication 542, Corporations. File taxes 2012 Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. File taxes 2012 For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. File taxes 2012 Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. File taxes 2012 If you give property to an employee as an employee achievement award, your deduction may be limited. File taxes 2012 Achievement awards. File taxes 2012   An achievement award is an item of tangible personal property that meets all the following requirements. File taxes 2012 It is given to an employee for length of service or safety achievement. File taxes 2012 It is awarded as part of a meaningful presentation. File taxes 2012 It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. File taxes 2012 Length-of-service award. File taxes 2012    An award will qualify as a length-of-service award only if either of the following applies. File taxes 2012 The employee receives the award after his or her first 5 years of employment. File taxes 2012 The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. File taxes 2012 Safety achievement award. File taxes 2012    An award for safety achievement will qualify as an achievement award unless one of the following applies. File taxes 2012 It is given to a manager, administrator, clerical employee, or other professional employee. File taxes 2012 During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). File taxes 2012 Deduction limit. File taxes 2012   Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. File taxes 2012 $400 for awards that are not qualified plan awards. File taxes 2012 $1,600 for all awards, whether or not qualified plan awards. File taxes 2012   A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. File taxes 2012   A highly compensated employee is an employee who meets either of the following tests. File taxes 2012 The employee was a 5% owner at any time during the year or the preceding year. File taxes 2012 The employee received more than $115,000 in pay for the preceding year. File taxes 2012 You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. File taxes 2012   An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. File taxes 2012 To figure this average cost, ignore awards of nominal value. File taxes 2012 Deduct achievement awards as a nonwage business expense on your return or business schedule. File taxes 2012 You may not owe employment taxes on the value of some achievement awards you provide to an employee. File taxes 2012 See Publication 15-B. File taxes 2012 Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. File taxes 2012 However, the total bonuses, salaries, and other pay must be reasonable for the services performed. File taxes 2012 If the bonus is paid in property, see Property , later. File taxes 2012 Gifts of nominal value. File taxes 2012    If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. File taxes 2012 Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. File taxes 2012 For more information on this deduction limit, see Meals and lodging , later. File taxes 2012 Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. File taxes 2012 Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. File taxes 2012 For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. File taxes 2012 Fringe Benefits A fringe benefit is a form of pay for the performance of services. File taxes 2012 You can generally deduct the cost of fringe benefits. File taxes 2012 You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. File taxes 2012 You also may not owe employment taxes on the value of the fringe benefits. File taxes 2012 See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. File taxes 2012 Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. File taxes 2012 Certain fringe benefits are discussed next. File taxes 2012 See Publication 15-B for more details on these and other fringe benefits. File taxes 2012 Meals and lodging. File taxes 2012   You can usually deduct the cost of furnishing meals and lodging to your employees. File taxes 2012 Deduct the cost in whatever category the expense falls. File taxes 2012 For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. File taxes 2012 If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. File taxes 2012 Deduction limit on meals. File taxes 2012   You can generally deduct only 50% of the cost of furnishing meals to your employees. File taxes 2012 However, you can deduct the full cost of the following meals. File taxes 2012 Meals whose value you include in an employee's wages. File taxes 2012 Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. File taxes 2012 This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. File taxes 2012 Meals you furnish to your employees at the work site when you operate a restaurant or catering service. File taxes 2012 Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. File taxes 2012 Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). File taxes 2012 This does not include meals you furnish on vessels primarily providing luxury water transportation. File taxes 2012 Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. File taxes 2012 This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. File taxes 2012 Employee benefit programs. File taxes 2012   Employee benefit programs include the following. File taxes 2012 Accident and health plans. File taxes 2012 Adoption assistance. File taxes 2012 Cafeteria plans. File taxes 2012 Dependent care assistance. File taxes 2012 Education assistance. File taxes 2012 Life insurance coverage. File taxes 2012 Welfare benefit funds. File taxes 2012   You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. File taxes 2012 For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. File taxes 2012 ). File taxes 2012 Life insurance coverage. File taxes 2012   You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. File taxes 2012 See Regulations section 1. File taxes 2012 264-1 for more information. File taxes 2012 Welfare benefit funds. File taxes 2012   A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. File taxes 2012 Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. File taxes 2012   Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. File taxes 2012 If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. File taxes 2012   Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. File taxes 2012 The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. File taxes 2012 The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. File taxes 2012 These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. File taxes 2012   For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. File taxes 2012 Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. File taxes 2012 However, if the employee performs no services, treat the amount you advanced as a loan. File taxes 2012 If the employee does not repay the loan, treat it as income to the employee. File taxes 2012 Below-market interest rate loans. File taxes 2012   On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. File taxes 2012 See Below-Market Loans in chapter 4. File taxes 2012 Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. File taxes 2012 The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. File taxes 2012 You can claim the deduction only for the tax year in which your employee includes the property's value in income. File taxes 2012 Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. File taxes 2012 You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. File taxes 2012 Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. File taxes 2012 These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. File taxes 2012 Restricted property. File taxes 2012   If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. File taxes 2012 However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. File taxes 2012    “Substantially vested” means the property is not subject to a substantial risk of forfeiture. File taxes 2012 This means that the recipient is not likely to have to give up his or her rights in the property in the future. File taxes 2012 Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. File taxes 2012 However, your deduction may be limited. File taxes 2012 If you make the payment under an accountable plan, deduct it in the category of the expense paid. File taxes 2012 For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. File taxes 2012 If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. File taxes 2012 See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. File taxes 2012 Sick and Vacation Pay Sick pay. File taxes 2012   You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. File taxes 2012 However, your deduction is limited to amounts not compensated by insurance or other means. File taxes 2012 Vacation pay. File taxes 2012   Vacation pay is an employee benefit. File taxes 2012 It includes amounts paid for unused vacation leave. File taxes 2012 You can deduct vacation pay only in the tax year in which the employee actually receives it. File taxes 2012 This rule applies regardless of whether you use the cash or accrual method of accounting. File taxes 2012 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 File Taxes 2012

File taxes 2012 Publication 946 - Additional Material Table of Contents Appendix B — Table of Class Lives and Recovery PeriodsHow To Use the Tables This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Appendix A Please click here for the text description of the image. File taxes 2012 Table A-1 and A-2 Please click here for the text description of the image. File taxes 2012 Table A-3 and A-4 Please click here for the text description of the image. File taxes 2012 Table A-5 and A-6 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-7 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-8 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-8 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-9 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-9 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-10 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A–10 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-11 Please click here for the text description of the image. File taxes 2012 Table A-11 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-12 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-12 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-13, A-14 and A-14 (continued. File taxes 2012 1) Please click here for the text description of the image. File taxes 2012 Table A-14 (continued. File taxes 2012 2) Please click here for the text description of the image. File taxes 2012 Table A-15 Please click here for the text description of the image. File taxes 2012 Table A-15 (continued) Please click here for the text description of the image. File taxes 2012 Table A-16 Please click here for the text description of the image. File taxes 2012 Table A-16 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-17 Please click here for the text description of the image. File taxes 2012 Table A-17 (continued) Please click here for the text description of the image. File taxes 2012 Table A-18 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-18 (continued) This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table A-19 and Table A-20 Please click here for the text description of the image. File taxes 2012 Quality Indian Reservation Property Tables Please click here for the text description of the image. File taxes 2012 Qualified Indian Reservation Property Tables 2 Appendix B — Table of Class Lives and Recovery Periods The Table of Class Lives and Recovery Periods has two sections. File taxes 2012 The first section, Specific Depreciable Assets Used In All Business Activities, Except As Noted, generally lists assets used in all business activities. File taxes 2012 It is shown as Table B-1. File taxes 2012 The second section, Depreciable Assets Used In The Following Activities, describes assets used only in certain activities. File taxes 2012 It is shown as Table B-2. File taxes 2012 How To Use the Tables You will need to look at both Table B-1 and B-2 to find the correct recovery period. File taxes 2012 Generally, if the property is listed in Table B-1 you use the recovery period shown in that table. File taxes 2012 However, if the property is specifically listed in Table B-2 under the type of activity in which it is used, you use the recovery period listed under the activity in that table. File taxes 2012 Use the tables in the order shown below to determine the recovery period of your depreciable property. File taxes 2012 Table B-1. File taxes 2012   Check Table B-1 for a description of the property. File taxes 2012 If it is described in Table B-1, also check Table B-2 to find the activity in which the property is being used. File taxes 2012 If the activity is described in Table B-2, read the text (if any) under the title to determine if the property is specifically included in that asset class. File taxes 2012 If it is, use the recovery period shown in the appropriate column of Table B-2 following the description of the activity. File taxes 2012 If the activity is not described in Table B-2 or if the activity is described but the property either is not specifically included in or is specifically excluded from that asset class, then use the recovery period shown in the appropriate column following the description of the property in Table B-1. File taxes 2012 Tax-exempt use property subject to a lease. File taxes 2012   The recovery period for ADS cannot be less than 125 percent of the lease term for any property leased under a leasing arrangement to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership). File taxes 2012 Table B-2. File taxes 2012   If the property is not listed in Table B-1, check Table B-2 to find the activity in which the property is being used and use the recovery period shown in the appropriate column following the description. File taxes 2012 Property not in either table. File taxes 2012   If the activity or the property is not included in either table, check the end of Table B-2 to find Certain Property for Which Recovery Periods Assigned. File taxes 2012 This property generally has a recovery period of 7 years for GDS or 12 years for ADS. File taxes 2012 See Which Property Class Applies Under GDS and Which Recovery Period Applies in chapter 4 for the class lives or the recovery periods for GDS and ADS for the following. File taxes 2012 Residential rental property and nonresidential real property (also see Appendix A, Chart 2). File taxes 2012 Qualified rent-to-own property. File taxes 2012 A motorsport entertainment complex placed in service before January 1, 2014. File taxes 2012 Any retail motor fuels outlet. File taxes 2012 Any qualified leasehold improvement property placed in service before January 1, 2014. File taxes 2012 Any qualified restaurant property placed in service before January 1, 2014. File taxes 2012 Initial clearing and grading land improvements for gas utility property and electric utility transmission and distribution plants. File taxes 2012 Any water utility property. File taxes 2012 Certain electric transmission property used in the transmission at 69 or more kilovolts of electricity for sale and placed in service after April 11, 2005. File taxes 2012 Natural gas gathering and distribution lines placed in service after April 11, 2005. File taxes 2012 Example 1. File taxes 2012 Richard Green is a paper manufacturer. File taxes 2012 During the year, he made substantial improvements to the land on which his paper plant is located. File taxes 2012 He checks Table B-1 and finds land improvements under asset class 00. File taxes 2012 3. File taxes 2012 He then checks Table B-2 and finds his activity, paper manufacturing, under asset class 26. File taxes 2012 1, Manufacture of Pulp and Paper. File taxes 2012 He uses the recovery period under this asset class because it specifically includes land improvements. File taxes 2012 The land improvements have a 13-year class life and a 7-year recovery period for GDS. File taxes 2012 If he elects to use ADS, the recovery period is 13 years. File taxes 2012 If Richard only looked at Table B-1, he would select asset class 00. File taxes 2012 3, Land Improvements, and incorrectly use a recovery period of 15 years for GDS or 20 years for ADS. File taxes 2012 Example 2. File taxes 2012 Sam Plower produces rubber products. File taxes 2012 During the year, he made substantial improvements to the land on which his rubber plant is located. File taxes 2012 He checks Table B-1 and finds land improvements under asset class 00. File taxes 2012 3. File taxes 2012 He then checks Table B-2 and finds his activity, producing rubber products, under asset class 30. File taxes 2012 1, Manufacture of Rubber Products. File taxes 2012 Reading the headings and descriptions under asset class 30. File taxes 2012 1, Sam finds that it does not include land improvements. File taxes 2012 Therefore, Sam uses the recovery period under asset class 00. File taxes 2012 3. File taxes 2012 The land improvements have a 20-year class life and a 15-year recovery period for GDS. File taxes 2012 If he elects to use ADS, the recovery period is 20 years. File taxes 2012 Example 3. File taxes 2012 Pam Martin owns a retail clothing store. File taxes 2012 During the year, she purchased a desk and a cash register for use in her business. File taxes 2012 She checks Table B-1 and finds office furniture under asset class 00. File taxes 2012 11. File taxes 2012 Cash registers are not listed in any of the asset classes in Table B-1. File taxes 2012 She then checks Table B-2 and finds her activity, retail store, under asset class 57. File taxes 2012 0, Distributive Trades and Services, which includes assets used in wholesale and retail trade. File taxes 2012 This asset class does not specifically list office furniture or a cash register. File taxes 2012 She looks back at Table B-1 and uses asset class 00. File taxes 2012 11 for the desk. File taxes 2012 The desk has a 10-year class life and a 7-year recovery period for GDS. File taxes 2012 If she elects to use ADS, the recovery period is 10 years. File taxes 2012 For the cash register, she uses asset class 57. File taxes 2012 0 because cash registers are not listed in Table B-1 but it is an asset used in her retail business. File taxes 2012 The cash register has a 9-year class life and a 5-year recovery period for GDS. File taxes 2012 If she elects to use the ADS method, the recovery period is 9 years. File taxes 2012 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-1 Please click here for the text description of the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. File taxes 2012 Table B-2 This image is too large to be displayed in the current screen. File taxes 2012 Please click the link to view the image. 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