Chapter 3

Income Tax Identity Theft Baffles IRS

“Income tax identity theft is a huge problem that is only getting worse.”

According to a 2015 report of the General Accountability Office (GAO), the IRS paid out $5.8 billion in bogus refunds to identity thieves for the 2013 tax year–the latest year that complete data are available.  To make matters worse, the actual dollar amount is probably higher because of the difficulty of knowing the amount of undetected fraud.

To combat the problem, the IRS announced a new cooperative effort between the IRS, state tax administrators, and private tax preparation services to fight income tax identity theft.  A number of specific steps are outlined in this article.  Unfortunately, the experts admit there are additional problems to stopping identity thieves that are not addressed in the new program.  In fact, most experts agree that additional regulations are required to coordinate employer reporting of employee wages with Social Security reporting requirements.

For individual taxpayers, bogus tax returns become a very real and personal problem if their social security number is stolen and their personal tax return is flagged by the IRS as suspicious.  To help resolve disputed tax returns, the office of the National Taxpayer Advocate, which is an internal watchdog for consumers at the IRS, suggests that you file a police report and then mail a paper tax return with an attached Form 14039–Identity Theft Affidavit with a copy of the police report.  In addition to additional documentation, expect that it may take on average 278 days to resolve a claim if you become a victim of income tax identity theft.

For more information, click here.

Teaching Suggestions

You may want to use the information in this blog post and the original article to

  • Discuss the importance of protecting your personal identity and especially your social security number.
  • Stress the importance of monitoring your credit report and all financial documents that could indicate your personal identity has been stolen.

Discussion Questions

  1. What steps can you take to protect your personal identity?
  2. There are a number of credit monitoring services that will help protect your identity. Most charge $75 to $100 or more a year to monitor your financial and personal information.  Do you feel this  service is worth the cost?
Categories: Chapter 3, Chapter 5, Financial Planning, Identity Theft, Taxes | Tags: , , | Leave a comment

Personal Finance Stress Test

To avoid financial disaster, several measurements are available for assessing a person’s personal financial stress:

  1.  The Debt-to-Income Ratio is obtained by dividing your debts by pretax earnings.  Generally this number should be less than 28 percent, without your mortgage, or 36 percent, including your mortgage payment.
  2.  Discretionary Expenses involve spending for items other than fixed obligations and variable nondiscretionary items, such as food and utilities. Purely discretionary expenses may involve recreation and vacations.  An analysis of these categories will allow you to delay, reduce, or eliminate various expenses to avoid financial difficulties.
  3. Emergency Savings should be able to cover three to nine months of living expenses. These funds should be readily available in savings or other easily liquidated accounts. Greater financial greater obligations will require a larger emergency fund.
  1. Additional Income involving wages or tips from a part-time job or selling personal possessions can provide a cushion in times of financial difficulty.
  1. Total Assets, both liquid and non-liquid, will reduce your vulnerability to financial turmoil.

For additional information on the personal finance stress test, click here.

Teaching Suggestions

  • Have students calculate one or more of these measurements for their life situation.
  • Have students prepare a short creative video with a summary of these measurements.

Discussion Questions 

  1. Why is liquidity important for reduced financial stress?
  2. What actions would you recommend to for a person to reduce their personal financial stress?
Categories: Chapter 1, Chapter 3, Financial Planning, Savings | Tags: , , | Leave a comment

Tax Scams

Phone calls from criminals impersonating an Internal Revenue Service agent are the most common and serious tax scams reported by the IRS. Taxpayers should be aware the IRS never calls demanding payment or to ask for a credit card; the agency will first make contact by mail.

Phishing involves a taxpayer receiving an unsolicited email trying to obtain financial or personal information.  These phony emails often look very official with an IRS logo.  Tax-related identity theft occurs when a stolen a Social Security number is used to file a tax return for a refund.  Fraudulent tax preparation services prey on innocent taxpayers with promises of large refunds.  Be sure to investigate the credentials of the tax preparer and make sure the preparer will be available after April 15.  Avoid tax preparers who base their fees on a percentage of the refund or promise a large refund.

Other common tax scams include inflated refund claims, fake charities, filing false documents to hide income, abusive tax shelters, falsifying income to claim tax credits, and excessive claims for fuel tax credits.

For additional information on tax scams, click here:

Teaching Suggestions

  • Have students talk with others to obtain information about actions taken to file their taxes.
  • Have students prepare a list of warning signs of tax scams.

Discussion Questions 

  1. What attitudes and behaviors can result in a person being a victim of a tax scam?
  2. What actions can taxpayers take to avoid being a victim of a tax scam?
Categories: Chapter 3, Chapter 6, Frauds and Scams, Taxes | Tags: , , | Leave a comment

Your 2015 Tax Return and the Health Care Law

Certain provisions of the Affordable Care Act will probably affect your federal income tax return when you file this year.  The law requires that you and each member of your family have qualifying health insurance coverage for each month of the year, qualify for an exemption from the coverage requirement, or make an individual shared responsibility payment when filing your federal income tax return.

Most taxpayers will simply check a box on the tax return to indicate that each member of their family had qualifying health coverage for the whole year.  Qualifying health insurance includes coverage for most, but not all, types of health care coverage plans.  If you bought coverage through the Health Insurance Marketplace, you should receive Form 1095A, Health Insurance Marketplace Statement from your Marketplace by early February.

For more information, Click Here.

Teaching Suggestions

  • Ask students to search the Internet to gather more information about the new IRS requirements and the Affordable Care Act.
  • What are provisions that might affect an individual and their families?

Discussion Questions

  1. What are the reporting requirements when you file your federal income tax return this year?
  2. How can you determine if you are eligible for an exemption?
  3. What should you do if you are expecting to receive 1095A and you don’t receive it by early February.
Categories: Chapter 3, Chapter 9, Health Insurance, insurance, Taxes | Tags: , , , | Leave a comment

Absurdities at the IRS

As strange as it may sound, U.S. federal tax law requires that stolen property, bribes, kickbacks, and income from other illegal activities be reported as income. And,  embezzlers, thieves, and bootleggers are allowed to take deductions for costs relating to generating that criminal “income.”

Due to an extensive network of hidden criminal earnings and witnesses unwilling to testify against him (for fear of their lives), infamous American gangster Al Capone was not prosecuted for illegal activities. He was, however, targeted and convicted of not paying taxes.

The government can collect taxes on illegal activity if it can be proven that an individual received income.  Soviet spy Aldrich Ames earned more than $2 million cash for espionage. He was charged with tax evasion because none of the money was reported on his tax return.

Regarding stolen property, IRS instructions note that  “if you steal property, you must report its fair market value in your income in that year you steal it, unless in the same year, you return it to its rightful owner.”

The IRS allows embezzlers, thieves, and bootleggers to take deductions for costs related to their criminal activity.  A taxpayer who was guilty of violating the Securities Act of 1933 was allowed to deduct the legal fees spent defending himself.

For additional information on “tax absurdities” go to

Discussion Questions

  1. What may have been reasons for the tax law actions that may seem absurd?
  2. What changes would you recommend regarding current tax laws?
  3. How might a tax system be created to encourage business innovation and job creation?

Teaching Suggestions

  • Have students research various unusual examples of deductions that have been allowed or disallowed by the IRS.
  • Have students present proposals for revision in the current tax laws.
Categories: Chapter 3, Taxes | Tags: , | Leave a comment

Even the IRS Chief Says Tax Code Is Too Complex

The nation’s chief tax collector made a rare plea for overhauling the nation’s tax laws, saying the Internal Revenue Service is eager ‘to do whatever we can’ to help Congress simplify the tax code.”

John Koskinen, who rarely discusses the nation’s tax policy, told reporters the IRS needs to be involved in tax reform discussion to make sure the “simplication really is simple.” According to Koskinen, the two issues most in need of an overhaul are the taxation of American companies doing business abroad and the alternative minimum tax.

Koskinen also said it was a mistake to attempt to reform the multitudes of tax credits, deductions, and exemptions one by one. He likened that approach to fighting a “guerrilla war” with special interests. He indicated he would prefer to tackle tax reform all at once. He said “the advantage of doing it all at once is that the lobbyists can’t all get in the door at the same time.”

The last major tax reform of the nation’s tax code occurred in 1986.

For more information go to

Teaching Suggestions

You may want to use the information in this blog post and the original article to

  • Point out how complex the IRS tax code is for both individuals and businesses.
  • Help students determine if they should file their own tax return or pay a professional.
  • Discuss the need for tax reform in order to create a simpler method of collecting the money needed to operate the government.

Discussion Questions

  1. Given your current situation, would you file your own tax return or would you use a professional?
  2. While everyone agrees the U.S. tax code is too complex and too confusing, major reform is unlikely. What are the obstacles to tax reform and why can’t Congress take steps to create a simpler tax code?
Categories: Chapter 3, Taxes | Tags: , , | Leave a comment

The Slacker’s Guide to Saving for Retirement

Whether retirement is coming soon or feels far away, it’s something you need to think about.

This article encourages students to make retirement planning a part of their budget and one of their financial goals.   It also points out the benefits of starting early—even if students can contribute only a small amount because of other obligations that include paying off student loans and other debt obligations, paying rent, buying groceries, and establishing an emergency fund.

A very good suggestion included in this article is to start by saving just $25 from each paycheck, and then increase the amount until someone feels they have reached a limit they are comfortable with.

Other suggestions include participating in a 401(k) account at work and using bonuses and salary increases to boost the amount contributed to your retirement account.

For more information, go to

Teaching Suggestions

You may want to use the information in this blog post and the original article to

  • Encourage students to develop a long-term financial plan that includes retirement goals.
  • Discuss time value of money examples that show how small dollar amounts invested on a regular basis can help achieve long-term financial goals.
  • Launch a discussion about the different types of retirement accounts.

Discussion Questions

1.  Many people never begin saving or investing because there is never anything left over at the end of the month.  How can you find the money needed to begin saving and investing?

2.  Why should you begin to save for retirement now instead of waiting until later in life?

Categories: Chapter 1, Chapter 3, Chapter 4, Chapter_11, Chapter_14, Financial Planning, Investments, Retirement Planning, Savings, Taxes | Tags: , , , , , , , | Leave a comment

Do You Need the Retirement Estimator?

Are you saving enough for your retirement?  The Retirement Estimator gives you an estimate based on your Social Security earnings.  However, be aware that it is only an estimate since your earnings may increase or decrease in the future.  Moreover, your benefit amount may be affected by military service, railroad employment or pensions earned through work on which you did not pay Social Security tax.  Remember, your estimated benefits are based on current law and the law may change because by 2033, the payroll taxes collected will be enough to pay only 77 cents for each dollar of scheduled benefits.

For additional information about who can use Retirement Estimator and how you can estimate your retirement benefits go to

Discussion Questions

  1. How do you decide which calculator to choose?
  2. What are some other possible sources of income for retirees?
  3. How can the Internet assist you in your retirement?

Teaching Suggestions

You may want to use the information in this blog post and the original resource to discuss

  • What are the two primary reasons for increasing the normal retirement age?
  • What are some factors that may, or may not, affect your retirement benefits?
Categories: Chapter 1, Chapter 3, Chapter_14, Retirement Planning, Taxes | Tags: , , , | Leave a comment

Should You Worry About Estate Tax?

The estate tax is a tax on your right to transfer property at your death.  Most relatively simple estates do not require the filing of an estate tax return.  However, if your estate is $5,340,000 in 2014, your estate’s representative must file the return.

Who should you hire to represent you, prepare and fill your return?  The answer depends on how large and complex is your estate, how many beneficiaries you have and are they cooperative?

Discuss this matter with several estate tax professionals.  Ask about their experience and referrals.  Most estates hire the services of both attorneys and CPAs.

For additional information on estate planning and estate tax matters go to

Discussion Questions

  1. What is included in your estate?  What is excluded?
  2. What deductions are available to reduce the estate tax?
  3. What might be advantages of hiring the services of estate attorneys and CPAs?

Teaching Suggestions

You may want to use the information in this blog post and the original source to discuss

  • How can charitable gifts and bequests reduce estate and inheritance taxes.
  • Different types of taxes imposed on a deceased’s estate.
  • Arguments in support and against the estate tax.
Categories: Chapter 3, Chapter_14, Estate Planning, Taxes | Tags: , , | Leave a comment

Average Tax Refund More than $3,000 So Far

A month into the 2014 tax filing season, the IRS said the average tax refund is up 3 percent to $3,034.

This article also reports that more taxpayers are completing their own returns as opposed to using the services provided by tax professionals and filing their returns earlier this year when compared to 2013.   Already, the IRS has received nearly 40 percent of expected total returns during the first month of the filing season.

Finally, recent surveys indicate most Americans plan to use their tax refund to pay down debt, for shopping, or for entertainment.

For additional information, go to

Discussion Questions

1.  Assume you just received a $3,000 tax refund.  How would you use the money?

2.  If you received a $3,000 refund this year, what effect would it have on your tax planning for next year?

Teaching Suggestions

You may want to use the information in this blog post and the original article to discuss

  • If students should use a tax refund to pay down debt, start an investment program, or spend the refund.
  • Time Value of Money examples to show how a refund that is saved or invested can increase in value.
Categories: Chapter 3, Chapter 6, Chapter_11, Investments, Purchasing Strategies, Taxes | Tags: , , | Leave a comment

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