IRS Transcripts and Tax Return data stolen: What? How?

What happened?

According to IRS statements available online, 100,000 taxpayers had their transcripts stolen from the IRS Get Transcript website. Of the 100,000 tax payers

·         About 35,000 had already filed their 2014 income tax returns before the unauthorized attempts at access. This means that these taxpayers’ 2014 returns and refund claims were not affected by this fraudulent activity, because any fraudulent return subsequently filed in their names would be automatically rejected by IRS systems;

·         For another 33,000, there is no record of any return having been filed in 2015.

·         Unsuccessful attempts were made to file approximately 23,500 returns. These 23,500 returns were flagged by our fraud filters and stopped by our processing systems before refunds were issued; and

·         Since this activity occurred, about 13,000 suspect returns were filed for tax year 2014 for which the IRS issued refunds. Refunds issued for these 13,000 suspect returns totaled about $39 million

How did this happen?

"In this sophisticated effort, third parties succeeded in clearing a multi-step authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The multi-layer process also requires an additional step, where applicants must correctly answer several personal identity verification questions that typically are only known by the taxpayer."  IRS Statement online

Because the thieves already had the information, they were most likely looking to increase the value of the information by either ‘cashing in’ in the data with a fraudulent tax return filings or gaining additional information (e.g. spousal or dependent identification for future use).  Here is a good example of just one thief who was able to purchase stolen information from a website and used it to file false tax return information.  But keep in mind we are dealing with someone or some organization who had (at the VERY least) 200,000 sets of taxpayer’s personal and financial data.

So where did the criminal(s) get the taxpayer information?  Perhaps the investigation will be able to draw a link to the source but if the data came from a random data sample from a larger database breached from a credit bureau than small correlations in the victim’s data may by unhelpful in identifying who is really at fault.   Some other possibilities are large banks or government agencies.  It is clear in IRS Commissioner’s Koskinen’s statement before the senate that he recognizes an exponentially growing problem and states that he believes that he is fighting organized crime syndicates. 

How do I know if my tax return transcript was stolen?

If your transcript was one identified as being stolen, you will be getting a letter from IRS.

What I do?

We are talking about institutional sized leaks so there is often little that the individual can do other than protecting the access to and the ‘need to know’ of sensitive data whenever possible.  Generally, organizations who have your data should use heightened clearances (like multi-step authentication logins and risk profiling of employees) while concurrently reducing the number of people who have access to that data.  

Thieves will usually go to places where they can get the most data for their effort (large business or governments), however even the smallest business, NGO, or governments with access to sensitive data should be concerned with protecting their patrons. Written information security policies (WISPs) concurrent with the size of the business, type of data, and  amount of stored data are a good start to begin the discussion.  Here is a link to a nice two page Massachusetts WISP regulation (.pdf).

In accordance with our policy, all prepared employees use multi-factor authentication for all email, drive, and virtual network access. That way if someone at google sells our login information to a thief, that thief would need our key generator as well to log in. Additionally, prepared accountants only have access to the network folders of the clients that they are working on.   

One other things that can be done is to file your tax returns early.  If you file your tax return first, than the fraudulent efile would be rejected.  Although many of the fraudulent efiles could be prepared prior to the efile season's opening and be ready file at the gate,  it would not hurt to gather your complete information and meet with your tax preparer as soon as possible in the new year. 

How do I extend / file an extension for my Federal or Massachusetts Tax return?

Form 4868 should be filed alongside payment (use a 1040-V).

An extension is only valid for filing the return and avoiding failure to file penalty; if you do not pay your tax liability by 4/15 you be subject to the failure to pay penalty and interest on whatever you end up owing.

The failure to pay penalty is ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.

The Interest rate is the current short term AFR + 3% APR (.25%/month)

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Do I need to file a 1099 for a Corporation, LLC?

There is a requirement for businesses and rental property owners to prepare and file Form 1099-MISC for any persons who were paid in excess of $600 and who are not (W-2) employees.  If you choose not to file, there is a risk of the deduction being disallowed in the event of an examination even if it is for an appropriate business purpose and otherwise properly documented.  

A person in the eyes of tax law is The term “person” is an individual, a trust, estate, partnership, association, company or corporation.  That means everybody gets a 1099 unless there is an exception; there is an exception for entities taxed a corporations and LLCs taxed as corporations.  

Real World Tip:  If you are not sure if your contractor's LLC is treated as a corporation, you might not want to waste valuable time getting through gatekeepers with eyebrow raising questions about organizational tax elections.  Our advice is to just ask them for a W-9 and you will see the tax classification. 

As is par for the course, there are exceptions to the exceptions and the biggest one for most people is Attorney's Fees.  SO, If your attorney works for a corporation and she replied to one or two emails and charged you $600, you need to give her a 1099 to protect your deduction which could be the only thing that made you feel better about paying her $600 for two emails. 

What information do I need to file the 1099?  

All the contractor information you need is on form W-9 and all the payment amount information should be in your business books.  It is ordinary for businesses who employ domestic contractors to request a form W-9 from anyone doing contract work for them. 

When do I need to file 1099s?

Form 1099-MISC is sent to the payee (your contractor), the state, and the US Treasury;   Respective deadlines for electronic filing are 1/31, 2/28 (Mass), and 3/31.

Real World Tip: You should wait to file the 1099s with the State and IRS until the respective due dates in case you have to change information on a form (such as a businesses EIN).

What receipts do i need to keep for my business taxes?

In order to protect your deduction in the event of an IRS audit examination you should be able to 'substantiate' your expenses.  Otherwise, even if the expense was for a business purpose and otherwise eligible for deduction on your tax return the IRS can disallow the expense if they decide to pin you with regulations.  

Here are four classes of expenses requiring substantiation:

1.       Travel expenses (including mileage, meals and lodging while away from home)

2.       Entertainment, amusement, or recreation expenses in nature

3.       Business gifts (limited to $25 per client, unfortunately)

4.       Listed property expenses defined in Section 280F(d) (like luxury cars)


So what do I have to document? 

At a minimum, you have to document amounts, time and place, business purpose, and note the affiliation with the vendor.  Furthermore, the character of these expenses must be evidenced. Was the character of the expense for business or personal use? Are these expenses “ordinary and necessary” under Section 162?  For gifts, meals, and entertainment you are also required to record the attendees names.

So how should I save my receipts?

We find that just doing it as you go or when you regularly clean out your bill fold helps prevent year end stress (not to mention giving your strong "contemporaneous" records).

We use the quickbooks online mobile app to take pictures of things like receipts (or our clients being entertained) as a mobile and 'contemporaneous' way to create and keep records together and paperless.  You can even document your business purpose in the memo line!  

Real World TIP:  Try not to whip out your phone and snap pictures of receipts while your client is watching, you are supposed to be entertaining them with good stories and bad karaoke. 

If you spend cash from your personal account or drive your personal car, you can use an app like Expensify to generate an expense report that you can submit to your corporation for things like mileage or  out of pocket 'cash only' entertainment venues.  

Bottom line is, especially for anything that could be argued to be personal or luxurious, taking the time to record and save a few details could save you bunches in the event of an audit.  

IRS Correspondence Audits, welcome to the machine, please hold


It has become increasingly difficult to reach a human at IRS in the event of an examination or a notice of proposed changes to a tax return as funding for the IRS has been reduced and budgetary pressure to collect has increased.   Like so many other businesses with limited resources, the IRS has turned sharply towards automated processes at the expense of customer service.  

4 out of 5 audits are now being done by correspondence (mail for now) where you will not have a single agent assigned to your case.  To get anything truly considered adequately requires you to call in and wait on hold for an average of 18 minutes (sometimes an hour) before you can speak to a Revenue officer; even then you will have a different person every time.  Like when dealing with other authorities you should really know your rights and fight any incorrect adjustments to your tax return despite any failure of IRS to respond to your communication with clear, prompt, and fair consideration.

Fun fact from Taxpayer advocate Nina Olson:

"Last year, the IRS received about 8.4 million letters from taxpayers responding to proposed adjustments to their tax liabilities. As of the end of the fiscal year, 53 percent of taxpayer letters in the IRS’s “adjustments” inventory were considered “over age” (generally, more than 45 days old)"  - Taxpayer Advocate 2013 annual report to congress



Lets say you did your own taxes for 2012 and did a $110k Kickstarter.  You reported the kickstarter income on your tax return in the amount that hit your bank account ($100k because amazon and kickstarter charged you 10%).  

The 1099 that amazon sends to you and the IRS says 110K so the IRS automated system is looking for $110k of gross income on your schedule C line 1.   Because IRS only sees $100k it sends you a notice CP2000 saying that the propose a $10K increase to your taxable income because it only sees 100k on your return.  You fax them a letter saying, "Wait, the fees were 'inside' the 100K amount instead of being listed as an expense so it is just cosmetic and I should not owe anything".  You are in line for an IRS fail.

 You hear nothing for 50 days and all of a sudden you get a 2626C letter.  This letter makes no comment about what you sent them other than a "thank you for your response of (date of fax)"... now please sign this consent to an increase in tax and give up your rights to appeal (no amounts...hmmm) and we will be sending you a notice of deficiency in the mail saying you have 90 days to petition the tax court.  If you read and sign the vague letter you give up your right to dispute the adjustment in court.  So don't do it.  Unreal?  Sad, but true.

What has happened to you is indicative of the kind of 'automated collection' that the IRS has been increasingly using to collect without any human contact with the taxpayer.   They say that your correspondence was received and matched it to your case, but no trained tax professional really looked at it and they didn't change anything from the original proposed adjustment.  They simply put your letter on the shelf and went straight to the assessment process whether they have processed your response or not.  Now you are wasting your time freaking out about what to do because the process has been obfuscated by poor and passing communication in an aggressively automated process.     

What you can do with your rights as a taxpayer:

Like when dealing with other authorities you should really know your rights.  Remember that your rights as a taxpayer include the right to quality service which includes receiving "clear and easily understandable communications from the IRS...".  You also have the right to "expect that the IRS will consider your timely objections and documentation promptly and fairly and to recieve a response if the IRS does not agree with your position".  

We recommend that you contact a tax professional who has had experience with IRS examinations and at least discuss how you should go about handling the communication or an actual agent (who will have the authority to expand the audit). 

You may also request that a correspondence audit be transferred to a local IRS office so that you deal with a single (human) agent.  You must request this in writing and explain the reasons in a letter sent to the contact information in the initial IRS notice.  

Timing your year-end crowdfunding campaign for survival, tax


You have a great business idea and you are eager to raise some cash to launch using Kickstarter or Indiegogo or gofundme.  Lets say you are getting stretched thin because you have almost spent all of your runway money from your last job so you want to launch your $51k campaign ASAP in 2014.  However, if you really needed to you could wait until 2015 by polishing your pitch while selling holiday wreaths for cash to get you though November and December.  

Wait to receive your funds until 2015 for tax timing purposes. 

Why wait? because you know that you are going to crush your real entrepreneurial debut in 2015 because you read this blog and have an extra year with $10k of your $51k to help you get off the ground.

Individuals and most businesses file tax returns on a calendar year basis.  If you get control of your funds prior to the end of the calendar year you will pay sooner and pay more.  If you wait you will have more time to spend the money to keep you in a lower income tax bracket AND by waiting you defer paying any tax for another 12 months.


Let us say you are a single individual and all of your time in 2014 has been spent coming up with business ideas so you have no other income.  You plan a gofundme and you raise $51k that requires actual business expenses of $25k for the first year with no other income (yet).   Here are two scenarios with very different outcomes.

Scenario 1: You cant wait and take the money December 20th, 2014 (year 1) so you only have time to spend $1k on business expenses in the week and a half before the end of the year.  

On April 15th, your CPA tells you that you have $50k in net income on your 2014 tax return which sadly equates to you paying up on a $9.5k Federal Tax bill and an  $2.3k Massachusetts tax bill for a total of $10.8k in tax due on April 15th, 2015.   Sure, in 2015 you spend the $25k in expenses and create a big tax loss that you can carry back to get your cash back but your cash was in the federal and state coffers when you needed it most.  One of a few problems is that you needed that cash to feel comfortable bringing on that smart employee whose idea would have saved your business with a big sale in 2016.

Scenario 2: Same profit scenario except you bite the bullet and wait until 2015 to take the money.  You take the 51k on January 2, 2015 and spend said 25k in expenses during the year. Now you have zero tax due April 15th, 2015 and a total tax bill due in 2016 is only $2.4k for fed and less than $1k for Massachusetts. Total tax of $3.4k.

Your CPA says "Nice one!" and "your tax bill is less because of progressive tax brackets".  The extra cash and the extra time with the cash in your pocket allows you to bring that smart employee on and keep business open for another 3 months.  You survive 2016 and IPO in 2020 selling your shares and moving to Hawaii to surf for the next 10 years.

Here are some ideas to help you wait and maybe even make waiting fun and increasing donations:

A New Years Eve Party ending the funding at midnight.  

Pictures of your prototype with a different cat for every day in December.

Create special gift incentives for every holiday to encourage donors to give while they are feeling generous anyways but not actually ending the funding until after 12/31/14. 





IRS Phone Scam, what not to do, ever


Spot - a - scam

There are many highly aggressive scammers who are getting better every day and can be highly convincing (they might even know the last 4 of your social or your address) especially for people who do not like conflict.  

Scammers will email you or call you using a badge number and title.  If they miss you they will probably leave a message; if you call them back then they will try and bully you all they way to the nearest place to make an irrevocable payment.

The IRS almost always does business through the mail (USPS).  

The likelihood that you will ever get an unexpected call or voicemail from a real tax-related government agent (especially on a Saturday or Sunday) is practically nil.  

Additionally, there is never going to be a legitimate IRS collection situation for which you have not received multiple mail notices about (proposed changes to your tax return, assessment of additional tax, demand for payment, intent to levy, etc.).  Furthermore, there will never be a unexpected correspondence from an IRS agent that will result in you being arrested or requiring you to do anything with cash that same day.

How "they" might lie to you:

1.  We have issued an arrest warrant with the sheriff's office or local authorities in one hour.   

2.  Do not interrupt me while I read you this affidavit; you can ask me questions at the end.

3.  If you don't pay this today there will be additional penalties, seizure of bank accounts, arrests made, etc.  Do not hang up or the resolution process will be over.

4.  You are a liar, you are going to jail, your credit score would be penalized, there is a judgement in your name, there are local authorities coming to house, you ignored a certified letter from IRS, your accounts will be frozen, your drivers licence will be suspended, there is a federal investigation against your spouses social security number. 

What not to do, ever

1.  Never pay any immediately/today for any Federal or State Government official for any amount based on a phone call or email that you did not see coming from several mailed notices.

2. Never pay a tax bill (even a real one) that you do not understand or agree with.  Always contact a tax professional before paying additional assessments or agreeing to any changes to your tax return.  It is always harder to get your money back.

3.  Never pay anybody you don't already know with any kind of money order, pre-paid card from CVS, 7-Eleven, or Walgreens, Western Union, or Supermarket payment system.   

4.  Do not buy any "government-issued bonds" at a local retailer.   

5.  Do not divulge any personal information or answer any questions about previous legal matters that might give them more ways to scam you.

Here is what you can do to help:

1. Go to this FTC Consumer Protection webpage and comment on what they said and post the phone number you were called from.   This should get their latest tricks on the web, fast.

If you want to report it. Here’s how: