Most of us go through life without being concerned with, or ever checking on, our Social Security records. We assume the money deducted each payday and an equal amount paid in by our employer is applied properly to this valuable retirement benefit.

Ignoring is problematic

The Social Security Administration (SSA) receives a vast amount of paperwork each year. They can and do make errors and omissions. Unfortunately, the only way these problems are caught is if YOU catch them. Waiting until retirement may be too late to correct an error made 10 to 20 years back. Common problems and their impact are:

Incorrect amounts. If the SSA does not receive a W-2 wage statement from an employer, you will not see credit for these earnings. Result: Your Social Security retirement check amount averages your life-time earnings. If you have earnings that are missing, your retirement check will be permanently lower!

Missing earnings. In addition receiving credit for earnings, you also need to work a certain number of quarters to be eligible for retirement benefits. These missing earnings reports reduce your number of working quarters. Mess up here and you may not qualify for benefits at all!

The three-year correction time limit. Per the SSA, an earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived. While there are exceptions for fraud and obvious clerical errors, why risk the hassle by not finding errors and fixing them when they happen?

Action to take

Thankfully, it is now easier to confirm the accuracy of your account as the SSA has an online tool that allows you to review your historic earnings statements online at www.ssa.gov.

To use the tool, you will need to go through an online signup process that includes many safety measures to ensure your identity is protected.

If you see an error on your statement, you should immediately correct it. You can do this by contacting the SSA:

Telephone:

1.800.772.1213

By mail:

Social Security Administration Office of Earnings Operations
PO Box 33026
Baltimore, MD 21290-3026

The message? Since you are receiving a new W-2 right now, make reviewing your Social Security retirement account part of your annual tax filing experience.

Your grandson needs a car, but cannot afford the payments. As a favor, you provide the $25,000 to purchase the car. You tell your grandson to pay you back when he can, but there is no loan document. The IRS sees this payment during an audit and asks you where your interest income is for this loan. Should this happen, you will quickly understand the meaning of AFRs.

AFRs Defined

AFRs stand for Applicable Federal Rates. They are minimum interest rates that the IRS applies to a transaction when no rate is stated or implied. In other words, you may have a transaction that the IRS believes has an interest income/expense element to it, but none has been claimed by you. These minimum interest rates are published each month by the IRS for three different loan terms: Short-term (0 to 3 years); Mid-term (4 to 9 years); and Long-term (over 9 years).

When does the AFR apply?

You may think that money you gave to a friend or that car sale to your cousin with repayment over time has no interest rate, but the IRS often sees it differently. If no interest rate is stated, the IRS will apply the applicable AFR and you could be in for a tax surprise. Here are some common examples when the AFR rates can come into play:

• Loans to family and friends.
• Buying anything over time. If you take possession of an item, but can pay for it over a length of time, imputed interest is involved.
• Employee advances. This can include giving an employee the rights of stock ownership, but not expecting payment for the stock right away.

How to use the AFR knowledge to your advantage

1. Create a loan document. Whenever you establish a transaction that has the expectation of repayment, write up a simple loan agreement. Not only will it clarify your repayment expectation, it also establishes the repayment terms. Ensure both parties sign and date the document.
2. Establish a safe interest rate. Use the AFR tables to establish an audit-safe interest rate. Remember, AFRs are also used if the IRS believes your stated interest rate is too low.
3. Leverage gift rules. Remember you (and your spouse) can each gift up to $15,000 to an individual. If you stay under this threshold, you could defend your money transfer as a non-interest bearing gift and not a loan.
4. Caution with housing transactions. Banks are asking buyers to document where they receive their money for their down payment. If the money comes from you, it could establish a potential implied loan document that you might need to defend. If you plan to help with a down payment in the future, try to understand the bank’s look-back rules for this disclosure reporting and use this knowledge in conjunction with the IRS gift rules to avoid creating implied interest.

Should you wish to see the published AFR rates, they are available on the IRS website at www.irs.gov AFRs.

Here are six tax topics that seem innocent but can cause problems if not handled correctly.

1. Gambling winnings. If you receive a tax form at a casino for your winnings, that information is sent to the tax authorities. Since the form typically only contains the amount you won, save copies and records of any gambling losses.

2. Maturing CDs. Be careful with maturing CD’s in a retirement account that are rolled over into new CDs. Your financial institution may provide you with tax forms showing the distribution, but not the rollover. You will need to account for this on your tax return. In this case, there is not a taxable event, but the IRS may think there is!

3. Retirement distributions. Make note of any distributions from your retirement accounts and note the type of account. You should receive informational 1099’s for the distributions. Depending on your age and the type of retirement account, a number of tax surprises could occur if not properly recorded. This includes early withdrawal penalties, potential required minimum distribution penalties, and income tax on the withdrawals. Remember that required minimum distributions are not required in 2020. The early withdrawal penalty is also waived in 2020.

4. Gifts over $15,000. If you provide gifts in excess of $15,000 ($30,000 for a couple) to any one person during the year, you must fill out a gift tax return.

5. Contemporaneous documentation. The time to put together proper documentation to support your deductions is when the activity takes place. For example, if you misplace a receipt for a charitable donation, you can go back to the organization and ask for a copy of the “old receipt,” but a new receipt to replace the one you lost is not valid documentation. Common areas where this is important are charitable contributions, mileage logs, and other itemized deductions.

6. Unemployment income. Unless specifically excluded by the federal government, unemployment income is taxable. Many taxpayers become surprised by an unwanted tax bill if federal withholdings are not taken out of these payments.

The IRS is expanding a pilot program that uses Identity Protection Personal Information Numbers (IP PINs) to provide an extra layer of security for all taxpayers. Here is what you need to know.

IP PIN program details

The IRS’s IP PIN program is an additional layer of security to ensure your tax identity and withholdings are not stolen. When you register in the program, the IRS will mail you a six-digit numeric IP PIN. You must enter this number on your tax return or the return will be rejected. It is a one-time use IP PIN. In other words, you will receive a new number every year.

So why get an IP PIN?

The IRS uses the IP PIN to better verify your identity. It can prevent clever hackers from using your Social Security number to file fraudulent returns or access returns you’ve already filed.

Keep in mind that if you choose to get an IP PIN, you’ll need to use an IP PIN for all future filings. While the IRS is planning to add the ability to opt out of the program, it is not yet available. So once you are in the program, you must stay in it. If need be, you can still paper file your tax return if you lose your IP PIN.

Getting your IP PIN

You can use special IRS tools to obtain an IP PIN and verify your identity through a two-factor authentication process. Go to the Get an IP PIN page on the IRS website to get started.

To get the IP PIN, you will be asked to register for an online account with the IRS. The process to open the account requires an independent ID verification prior to establishing the account. Once approved, you can then register for the program.

Final thoughts

Remember, a new IP PIN is generated for every filing season. It may be retrieved mid-January by logging into your account.

If you have experienced ID theft, the IRS automatically puts you into this program. So the IRS will continue to issue new IP PINs to taxpayers who have already been victimized by tax-related identity theft.

Remember, if you are in the program, you must protect this number. Do not tell it to anyone other than those who need the information to file a tax return. Also know that the IRS will never ask you for this number, so do not give it out.

Virtually every small business, including sole-proprietors, must issue at least one 1099 each year. And this year there is a new one called the 1099 NEC. Here is a summary of the most common of these informational tax forms that you will need to file your tax return this year.

The Form 1099

The Form 1099 is an informational tax form that captures economic activity that is then reported to you and the tax authorities. The primary purpose of the form is to ensure you are reporting your taxable income. The forms are typically required to be sent to you on or before January 31st each year. The same information is due to the IRS on or before February 28th (March 30th if the form is filed electronically).

The 1099 NEC

Beginning this year, nonemployee compensation will be reported to you on 1099 NEC. In prior years, this income was reported in box 7 of form 1099 MISC. So if you are a consultant or work for Uber or any other gig economy job, you will need to look for this form.

Common 1099 Forms

To help navigate the numerous forms here is a list of what you can expect to receive.

What you need to know

• Use the information in this tip to ensure you are receiving the necessary 1099’s to file your tax return.
• To be sure, create a list to confirm receipt of the necessary 1099’s. Missing 1099’s is a common reason for a delay in filing your tax return.
• There are other types of 1099’s. If you receive a 1099 and are not sure what the form is, ask for clarification.
• When you receive the form, double check the accuracy of the form. If there are errors, try to get them corrected as soon as possible.

Remember, the IRS receives these forms. Their computers will run a cross-check against your return to ensure you have not omitted any of them.

Each year thieves try to steal billions in federal withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.

Early tax filing season is the worst time

Your federal tax account at the IRS has plenty of money in it from all the taxes withheld from your paycheck during the course of the year. Until you file your tax return, the IRS does not know whether you need to pay more in or they need to refund you the excess amounts withheld.

Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. By doing this, they can steal some of your withholdings and be long gone by the time you file your own tax return. So what can you do?

1. File early. The sooner you file your tax return, the less likely a thief will beat you to your refund.
2. Get an Identity Protection PIN. All taxpayers who can verify their identity can get an Identity Protection PIN (IP PIN) from the IRS. The IP PIN is a six-digit code known only to you and the IRS that helps prevent identity thieves from filing fraudulent tax returns. If you want an IP PIN, visit irs.gov/IPPIN.
3. Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.
4. Protect your ID. Be suspicious. Never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who called you, use the password function on your phone, be aware of strange mail, and shred important documents. Your best defense to IRS ID theft is to use best practices to protect your information.

The IRS is becoming a better spotter

If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:

• Respond immediately. Get the direct contact information from the IRS website and let them know that you have a possible identity theft problem.
• File an Identity Theft Affidavit (IRS Form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.
• File a police report.
• Contact the credit bureaus.

Having your identity stolen is one thing. Having your tax withholding stolen and then needing to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Is there good news in all this? If the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.

Are you an independent contractor or an employee? As the pandemic continues, many long-time employees are now picking up jobs as contractors. In the meantime, states like California are trying to force the definition of employees upon companies. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.

The basics

As a contractor. If you are the worker and you are not considered an employee you must;

• pay self-employment taxes (Social Security and Medicare related taxes)
• make estimated federal and state tax payments
• handle your own benefits, insurance, and bookkeeping

As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;

• payment and penalties related to Social Security and Medicare taxes
• payment of possible overtime including penalties for a contractor reclassified as an employee
• legal obligation to pay for benefits

Determining the answer: things to consider

Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess your level of independence. Here are some tips.

• The more the employer has the right to control your work, when the work is done, how the work is done, and where the work is done, the more likely you are an employee.
• The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
• The more business-like the arrangement the more likely you have an independent contractor relationship.

Don’t forget your obligations

With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3 percent of your income due for FICA (Social Security and Medicare), forgetting to pay this can quickly become a financial nightmare.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.

Here are the standard mileage rates for 2021.

Are you capturing all the tax benefits built into homeownership? Here are the most common.

Each year the IRS publishes the top dozen tax scams it encounters over the prior year. One of them that makes an all too common appearance on their list is the phishing scam. Here is what you need to know.

Phishing requires bait

Phishing is the act of creating a fake e-mail or website that looks like the real thing. This “bait” is then used to bring you into the scam by asking for private information. This includes your name, address, or phone number. It could also include potentially dangerous ID theft information like your Social Security number, a credit card number or banking information. The bait is often very real looking – just like correspondence from the IRS or the IRS web site.

How to avoid the lure

How do you know the phishing is fake? Here are some tips.

1. The IRS never initiates contact via email. If you get an unsolicited e-mail from the IRS requesting a response, do not reply! Instead forward the email to phishing@irs.gov.
2. Never click or download. Perhaps even more important, never click on a link or open a file on a suspicious email. This is true even if the email comes from someone you know. Too often phishing comes from someone impersonating someone you know.
3. Know the web site. This includes the appearance, but more importantly the address. The valid address for the IRS is www.irs.gov. For Social Security, the address is www.ssa.gov.
4. They may already have info about you. Good phishers already have parts of your identity, so just because they know things like your middle name and birth date does not make them legitimate.
5. Phishing over the phone. Phishing can also take place over the phone. If you receive an unsolicited phone call, get the person’s name and ID, then hang up. Then go to the IRS (or vendor) web site, take down their phone number and call them back using this phone number. Most fake calls are ended quickly when taking this approach.
6. Don’t forget social media. Phishing can also happen via social media and texting. Virtually every digital resource has the potential to be used as a tool for theft.

What do phishers do?

When the phishers have your information, they can file false tax returns requesting refunds, steal bank information, set up fake credit cards, establish false IDs, plus much more. Remember, if it smells like a phish, it probably is.