What is 401(k) plan?

What is 401(k) plan?

by | Feb 20, 2020 | 401(k), contributions, Distributions

What is 401(k) plan?

401(k) plan can be said to be a defined contribution plan in which an employee can contribute from his salary which can be either before the tax or after the tax based upon the options which are offered in the plan. It can be also described as a qualified retirement plan which allows the eligible employees of an organization to save and also invest for their retirement purpose on a tax-deferred basis. The contributions which are made move into the 401(k) account and the employee can choose the investments depending upon the options which are mentioned in his plan. Only the employer can be able to sponsor a 401(k) plan for his employees and are also known as the “plan sponsor”. In many cases, the employer makes contributions that match up to the contributions of the employees up to a particular percentage.

The employee will decide on how much money he wants to be deducted from his pay cheque and be deposited into the 401(k) plan based upon the limits which have been determined by the IRS. Since the employers are in the responsibility to sponsor the plan, they will run the plan according to the laws, rules, regulations, and provisions of the plan. This will also include who is eligible for the plan, how much the employer needs to contribute to the plan, how often you can be able to reallocate your assets, what type of options will be available for investment, etc.

In other words, the 401(k) plan can also be known as a Qualified Deferred Compensation Plan and the deferred compensation is not subject to any Income Tax withholding. The deferred compensation is also not reported as wages in Form 1040 or Form 1040-SR. However, in the social security and Medicare tax system the deferred compensation is reported as wages. Moreover, the employer should report the elective contributions as wages that are subject to Federal Unemployment taxes. There are some plans in which employees can select the option for making elective contributions.

Contributions

There is a limit on the amount that an employee would elect for deferring in a 401(k) plan. This limit is enforced by the Internal Revenue Code. The elective contributions which you are making can also be limited based upon the terms mentioned in the 401(k) plan.

Distributions

The 401(k) plan specifies the form of distribution and some distributions from a 401(k) plan can be eligible for lump-sum distribution treatment or rollover treatment.

Important points to keep in mind about 401(k) plan

  1. 401(k) plan is a plan meant for safeguarding your post-retirement period. It is not a savings account. The money which you have placed in your account for the 401(k) plan cannot be accessed easily. However, there are features like loans and hardship withdrawals but there are rules which make this procedure even complicated.
  2. In case of huge and immediate financial requirements, employees can make some withdrawal from the account meant for a 401(k) plan in the form of a hardship withdrawal. Hardship distribution from a 401(k) plan is limited to the amount of the employee’s elective contribution and does not include into it any amount which is earned on the amount which is deferred.
  3. Even if you think you will not be able to afford the 401(k) plan, you should not give up the idea. It is necessary and even it is good to start contributing to your retirement planning as soon as possible. The sooner you start the better your standard of living would be after retirement.  So, even if it is a contribution of just 1% or 2% it is going to be effective in the long run.
  4. Your plan sponsor i.e. your employer will give you a Summary Plan Description. You can read it and know much more about how your plan works, who are your trustees, options available and much other information.

Conclusion

Hence, you should be well aware of your 401(k) plan and the advantages your plan can provide. It is necessary to educate yourself and know more about the plan.

Reference

  1. https://www.irs.gov/taxtopics/tc424
  2. http://www.401khelpcenter.com/401k/how-does-a-401k-work.html#.Xj0q3TIzbIU
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/definitions

 

Tax scams, phishing, fraud schemes, and cons: IRS wants you to know!

Tax scams, phishing, fraud schemes, and cons: IRS wants you to know!

by | Feb 17, 2020 | Foreign Trust Schemes, Fraud Schemes, Tax Scams

Tax scams, phishing, fraud schemes, and cons: IRS wants you to know!

In the US, there are thousands of people who have lost a huge amount of money due to various tax scams. These tax scammers are highly dangerous and tend to use the telephone, regular mail, etc. to make an impression and appear like businesses, payroll, and tax professionals. Educating yourself and being alert is the best way by which you can avoid being prey to these dangerous scammers.

The IRS would never contact you by any text messages, emails or telephone calls. You should consider this as a thumb rule for identifying fraudulent tax scams. Moreover, if you are participating in an illegal scheme for avoiding the payment of taxes then it is an offense that can lead to re-payment of taxes along with payment of penalties and interest. 

Tax scams include a plethora of illegal and abusive methods used for filing tax returns or reducing taxable income, etc. Some of the common inclusions under the tax scams being carried out in the US can be summarized below.

  1. Phishing
  2. Abusive Tax Return Preparer
  3. Abusive Tax schemes

Phishing

Some unsolicited emails or websites pose to be legal ones and try to find out personal information from you. You would not have slightest of doubt on these websites as they appear to be completely legitimate but would be very risky in actual. This practice is known as phishing and is quite a common tax scam. 

Abusive tax return preparer

Tax return preparer fraud mainly involves the preparation and filing of false income tax returns either in the paper form or electronic form by any unscrupulous tax preparer.  An abusive tax return preparer can make false claims in your tax return by

  1. Making false deductions
  2. By increasing or inflating the business and personal expenses
  3. By claiming fraudulent tax credits
  4. By claiming false dependents
  5. By claiming false Schedule E, losses and supplemental income as well

The majority of the people prefer electronic mediums for filing tax returns and this increased use of the electronic medium is the main cause of frauds committed by tax return preparers. It is necessary to be careful while selecting tax return preparers and always opt for the reputed ones.

Abusive tax schemes

Various abusive tax schemes which will lead to a reduction in the taxable income or involving other partnerships, trust, and nominees, etc. for portraying the wrong income are quite common. Some of the major abusive tax schemes are mentioned below.

a.Abusive Foreign Trust Schemes

This scheme consists of a series of domestic trusts layered upon each other. This set up is made in such a way that it appears that you have turned your business and assets over to a trust and you no longer have any control over your assets. Then once the business and assets are transferred to the domestic trust they are passed on to foreign trusts, especially which are in tax haven countries. The trust documentation and business records will make it appear as if you are not in control of the assets or business anymore but in reality, nothing changes. 

b.International Business Corporation (IBC)

In this case, you will create an IBC with the same name as that of your business.  The IBC which you have created will also have a bank account in a foreign country. When you receive a cheque from customers, you can send those to the foreign country’s bank account.  The foreign bank will use the correspondent account to process the cheque received and it would never be known to the customer. When the cheque is cleared, the IBC account is credited with the payment. So, by this, you have been able to transfer your unreported income offshore without any notice.

c.False Billing Schemes

You will set up an IBC with your nominee as the owner of the IBC in a tax haven jurisdiction. You can then open a bank account under the IBC. You would be a signatory of the bank account according to the records of the bank. Your nominee would issue invoices to the business for those goods which have been purchased by you. You can now send the payment to the IBC which is deposited in the joint account held by you and the IBC. You can now display your taxable income as reduced and also would have been successful in placing unreported income into a foreign bank account.

Combating tax scams in the US

It is one of the most important priorities of the IRS. The IRS has been organizing various awareness campaigns and even circulates educational materials that can educate people. The IRS Lead Development Center constantly works on keeping the tax scams under control in the country. Whenever a referral is received LDC would follow up on them and even conduct civil and criminal investigations.

The IRS would also need the support of common people in this procedure of combating fraudulent tax scams. Whenever you are suspicious about an email or a message related to tax exemption you should report about it to the IRS.

Conclusion

Hence, tax scams, abusive tax return preparers, abusive tax schemes, etc. can be very dangerous and put you into huge monetary losses. The only effective method to avoid such losses is to be alert, educate yourself and support the IRS in keeping a check on the number of such scams.

Reference

  1. https://www.irs.gov/compliance/criminal-investigation/irs-wants-you-to-know-about-schemes-scams-and-cons
  2. https://www.irs.gov/businesses/small-businesses-self-employed/tax-scams-how-to-report-them
  3. https://www.irs.gov/businesses/small-businesses-self-employed/abusive-tax-schemes-and-abusive-tax-return-preparers-irs-lead-development-center
  4. https://www.irs.gov/compliance/criminal-investigation/tactics-used-by-dishonest-abusive-return-preparers
  5. https://www.irs.gov/compliance/criminal-investigation/what-are-some-of-the-most-common-abusive-tax-schemes

 

The truth behind tax fraud alerts

The truth behind tax fraud alerts

by | Feb 15, 2020 | IRS, Scams, Tax Abusive Promoters, Tax Frauds, Tax Return Preparer

The truth behind tax fraud alerts

Tax fraud and scams are becoming quite common in the US and the taxpayers need to be alert about these fraud scams. The IRS constantly warns the taxpayers to be cautious against these types of scams and frauds which can be very dangerous.In case of any scheme which is offering you exemptions from your obligations while paying taxes, you need to consult a tax professional or IRS before subscription to the scheme.  The electronic filing of tax returns has made it easier for these tax scams to be operative frequently.

 

Let us find out some of the common tax frauds and scams occurring in the US.

Phishing

Tax scams can be considered as an illegal practice for avoiding the payment of taxes.  These practices can result in imprisonment, payment of fines and tax re-payment along with fines. One of the common tax scams is Phishing which can be carried out by unsolicited email addresses or websites. These email addresses or websites act as legitimate websites for common people and lure them to provide their financial information. You should report about these tax scams such as receiving any emails from a source claiming to be the IRS, any monetary losses occurring due to the IRS, etc. to the IRS.   

Abusive Tax Return preparer

You should be very careful while choosing a tax preparer for preparing his tax returns. Most of the tax return preparers will offer great services to their clients. However, some preparers can file fraudulent tax returns on your behalf and you are to be legally prosecuted for the tax returns. A tax return preparer can be defined as a person who can be a part of a partnership or a corporation and prepares for the compensation or a portion of refund or makes claims for refund under the provisions of the IRS. These abusive tax return preparers will use several fraudulent means for making illegal deductions which reduces your taxable income. Some of these dishonest means can be listed below.

  1. Claiming of false dependents
  2. Preparation of Schedule C by fraudulent means, claiming of the deduction for those expenses which have not been paid by taxpayers, income earned from other external sources of employment, etc.
  3. Claiming of false Schedule E, Supplemental Income and Loss, etc.
  4. Adding up false itemized deductions such as charity and medical, dental expenses.

There are some basic tips that you can follow to avoid such abusive tax preparers.

  1. You should avoid tax return preparers who claim of obtaining larger refunds than others. 
  2. You should avoid signing blank tax form and must avoid return preparers who base their fees on the percentage of refund obtained.
  3. You must consider a well-reputed tax professional that prepares your tax returns, provides you with a copy of the return and is also available for answering questions even after a long time of filing tax returns.

Abusive tax schemes

Tax evasions are very common nowadays especially by the use of foreign jurisdiction. These can involve several foreign and domestic trusts, partnerships, nominees, etc.  These abusive tax schemes have gradually evolved into a fraudulent arrangement which gives the impression that you are not in control of your money and handed it over to some trusts. But, you will be receiving your funds through some other loans or your debit/credit card. These abusive tax schemes can involve banking offshore and can also lead to the establishment of scam corporations. 

Some of the common abusive tax schemes which are quite common in the US are mentioned below

  1. Abusive foreign trust schemes
  2. International business corporations
  3. False billing schemes

Non-filer Enforcement

Numerous individuals have continuously argued that the imposition of taxes on the citizens is illegal and should be voluntary. However, the IRS has always rejected these types of frivolous arguments and has imposed financial penalties on these individuals. You must be careful about these types of frivolous arguments.

IRS Lead Development Center

However, the IRS continuously works on keeping the common people safe from these tax frauds and scams. There are various educational materials and public awareness campaigns organized by the IRS for making the common people aware of these fraudulent practices.

Moreover, the IRS also organizes civil and criminal investigations which can result in penalties for those carrying such tax scams.

The IRS Lead Development Center also constantly works towards the eradication of these tax abusive promoters, fraudulent tax preparers and hence protects the common people.

Conclusion

Hence, tax scams, fraudulent tax preparers, and abusive tax schemes cause a lot of harm to the Government and the common people. It is necessary for taxpayers to be aware of these scams, educate themselves and report immediately to the IRS in case of any tax fraud.

Reference

  1. https://www.irs.gov/compliance/criminal-investigation/tax-fraud-alerts
  2. https://www.irs.gov/compliance/criminal-investigation/what-are-some-of-the-most-common-abusive-tax-schemes
  3. https://www.irs.gov/compliance/criminal-investigation/irs-wants-you-to-know-about-schemes-scams-and-cons
  4. https://www.irs.gov/businesses/small-businesses-self-employed/tax-scams-how-to-report-them

 

How to sign your tax refund electronically after the tax refund is submitted?

How to sign your tax refund electronically after the tax refund is submitted?

by | Feb 12, 2020 | IRS e file Return, Personal Identification Number, Practitioner PIN, Self Select PIN, Tax Refund

How to sign your tax refund electronically after the tax refund is submitted?

Tax returns when filed electronically are convenient and can help you in getting back your tax refund very quickly as compared to filing a tax return by paper. In case of electronic filing of tax returns, after filing of the tax return you will have to do your signature electronically.

A tax return can be signed electronically by the use of a PIN (Personal Identification Number). PIN is a six-digit number that is assigned to taxpayers to prevent the misuse of their SSN (Social Security Number) in making fraudulent tax returns. By a PIN, IRS can identify an eligible taxpayer and thus, accept his tax return which has been filed electronically. So, if you have your PIN then it will not allow anyone else to file a federal tax return by using your SSN. 

For signing your tax return which you are filing electronically, you will need the use of

  1. Self-Select PIN
  2. Practitioner PIN

Self-Select PIN

By the self-select PIN (SSP) method, you can select any five-digits except all digits being zero. This five-digit number helps in serving as your electronic signature. You can use your date of birth, prior SSP or your original prior-year adjusted gross income (AGI). This will help in authenticating your identity and no one can misuse your identity.

Original Prior Year Adjusted Gross Income (AGI) is used by many taxpayers as SSP for authenticating their identity. Usually, tax-preparing software will use the information of the previous years for the returning customers but if you are using tax-preparing software for the first time then there are various methods to determine your AGI such as

  1. In your Form-1040 of last year, you would find out the AGI on Line 7.
  2. If you have used a paid tax-preparer last year, then you will be able to obtain a copy of the tax return done last year from the preparer.
  3. In case you are using the same tax-preparer as that of the last year, it will most probably have your prior year Adjusted Gross Income.
  4. Also, if you are using different tax-preparing software this year you can access the previous year software and get a copy of the tax return filed.
  5. In case you are above the age of 16 years and are filing the tax returns for the first time then you can use one single zero as your AGI.

Practitioner PIN

By the practitioner PIN method, you are authorizing your tax practitioner to generate your PIN. By this method, the tax-preparer will verify your identity and then give a signed Authorization form to the tax practitioner. This form is Form-8879 which is the IRS e-file Signature Authorization form and you must provide this form to your tax professional along with your SSP which you would have determined. However, in this method, there is no need for determining your previous AGI, date of birth, etc.

Some of the taxpayers such as primary taxpayers who are below the age of 16 years and have never filed a tax return previously or secondary taxpayers who are below the age of 16 years and have not filed the tax return in the previous year cannot use SSP method for identity authentication. However, they can use the Practitioner PIN method for making an electronic signature after-tax refund is filed.

 Again while filing your tax returns; if you have to submit specific documents then you can do that by Form-8453 which is the US Individual Tax Transmittal for an IRS e-file return. This form will help in the transmission of paper documents or any supporting documents. IRS always advises the taxpayers to keep a copy of your tax returns and Form-8879 for future form.  

Conclusion

Hence, even though the electronic medium of filing tax has made the entire process easier there is a need for maintenance of security while the operation is being performed. This is feasible by authenticating your identity through your electronic signature and the use of self-select PIN, practitioner PIN.

Reference

  1. https://www.irs.gov/taxtopics/tc255
  2. https://www.irs.gov/individuals/electronic-filing-pin-request
  3. https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin

 

New to the US? Here are the taxes paying options that you should be aware of.

New to the US? Here are the taxes paying options that you should be aware of.

by | Feb 10, 2020 | Tax Installments, Tax Payment Methods, taxes

New to the US? Here are the taxes paying options that you should be aware of.

In the US, taxes must be paid on time failing which you might have to pay heavy penalties. You must always try to make the tax payment in full and on time. There are various methods by which the tax payment can be done.

a.Electronic mode of payment

You can pay your tax directly from your bank account through the electronic mode of payment. This electronic mode of payment can include making your payment through your phone, any other mobile device or by the use of cards. 

When you are making your tax payment with the help of either your debit card or credit card, you can use any of the three processors which co-ordinate with the IRS i.e. World Pay US, Link2GocCorporation or Official payments. The service fee which is charged by these processors is tax-deductible. You can make an electronic payment using the IRS2Go app as well. By visiting the Payment page, the payment can be done instantly and even payment can be scheduled in advance. By using a phone or other mobile device you can make the payment for the Electronic Federal Tax Payment System. After your payment, you can receive instant confirmation about the payment.

b.IRS Direct Pay

This is a secure service that you can use for making your tax payment for Form 1040 and estimated taxes. This payment is done directly from your bank account without any charges being levied on you. It is easier for you to check the status of your payment and even receive notifications about your payment. It is also possible to cancel your payment or make changes in the payment for 2 business days before your scheduled payment date arrives. 

c.By cash

You can also make your tax payment by cash at participating retail outlets like 7-Eleven. There is a service tax charged for this and it takes 5-7 business days for processing of the payment.

d.By cheque, money order or cashier’s cheque

You can enclose your cheque, money order or your cashier’s cheque along with a copy of your tax return. You have made this payable to the United States Treasury and also provide name, address, TIN, Tax year, Notice number, etc.

In case you are not able to make the full tax payment immediately, you can avail the provision of additional time i.e. up to 120 days and make the payment in full. There are no additional charges levied for this but there is an interest that gets accumulated till the entire amount is paid off. This facility can be availed by the help of the Online Payment Agreement (OPA) or by using toll-free numbers.

e.Pay tax in installments

In case, you are not able to make your full tax payment by the due date or within 120 days then you can opt for a Monthly Installment Plan for making your tax payment.  You can request making tax payment in installments by using the OPA application, Installment Agreement Request or Form 9465. You can make your monthly installment payments by using several payment options like 

  1. Payment by debit card or credit card
  2. Payment by cheque or money order
  3. Payment by the Electronic Federal Tax Payment System (EFTPS)
  4. Payment through cash with the help of a retail partner
  5. Payment is done by direct debit from the bank account
  6. Payment is done by deduction from payroll

 When you are selecting the tax payment to be done by direct debit from a bank account or deduction from payroll, the process is automated and there would be no chances of missing the default payment date.

Usually, if you are selecting a payment plan then IRS would charge additional fees from you for this purpose but if you belong to the low-income taxpayer group then this fee would be reduced or waived based on specific conditions.

Conclusion

Hence, with the various forms of convenient tax-paying options available in the US; filing of tax returns would not be difficult even if you are new to the US.

Reference

https://www.irs.gov/taxtopics/tc202

https://www.usatoday.com/story/money/2019/04/11/how-pay-taxes-installments-and-other-tax-payment-options/3434002002/