Cell Phone Deductibility

IRS discusses easing of cell phone recordkeeping requirements [Information Letter 2008-0012]:

The IRS has issued an information letter in response to a question regarding the noted difficultly that states and localities are having drafting cell phone policies that comply with IRS recordkeeping requirements.

Under IRC §162(a), individuals may take deductions for all ordinary and necessary expenses incurred in carrying on a trade or business. The expenses are considered tax-free working condition fringe benefits, not subject to FITW, FICA, and FUTA, if they are incurred by an employee on behalf of an employer. Cell phones are currently included in the definition of “listed property,” as defined in IRC §280F(d)(4).

Expenses related to listed property may not be deducted under IRC §274(d), unless the employee substantiates by adequate records, or by sufficient evidence corroborating the employee's own statement: (1) the amount of the expenses; (2) the time and place of the expenses; (3) the business purpose of the expenses; and (4) the business relationship to the employee of the persons involved in the expenses. In addition, employees must document their personal use of the property, and the employer must include such use in the employee's income.

In the information letter, the IRS acknowledges the difficulty in documenting business cell phone use. The IRS is considering various changes to the cell phone substantiation requirements. There is currently legislation in Congress that would remove cell phones from the definition of listed property and allow employers to utilize a de minimus personal use policy.

The IRS is also considering possible regulatory changes that would provide a more streamlined substantiation process for cell phones.

Tax man is coming soon

House Subcommittee Passes IRS Funding Bill

The House Appropriations Financial Services Subcommittee this week passed a bill that would appropriate $11.4 billion to IRS for FY 2009.

The bill would grant IRS budget authority to spend $5.1 billion on enforcement, $2.2 on taxpayer services, and $3.8 billion on operations.

The total is about $40 million more than the president's request for the agency. The bill will next be considered by the full House Appropriations Committee before it goes to the House floor.

Closing the Tax Gap: An estimated $290 billion in taxes owed go unpaid every year. The IRS Oversight Board noted in a recent report that “the tax gap is an injustice to compliant taxpayers who ultimately are bearing the financial burden of those who do not pay what they owe, whether intentionally or not.”
• Enforcement: $5.1 billion, $337 million above 2008 and matching the President’s request, to catch tax cheats through audits, collection efforts, and technology improvements.

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As you can see from the above, over $5,000,000,000 (Five Billion), allocated for IRS enforcement. Enforcement will encompass aggressive collection efforts for collecting back taxes, and additional tax audits to ensure compliance and catch tax cheats.

So, if you owe the IRS, contact us today to resolve your tax matter. Don't let the IRS punish you, you could settle your tax debt for less than you owe.

IRS increases mileage rate

Business standard mileage rate increases for last half of 2008 - other rates also rise

Mike Habib, EA

IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase 8¢ from 50.5¢ to 58.5¢ per mile for business travel from July 1, 2008 to Dec. 31, 2008 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 8¢ for the last half of 2008 from 19¢ to 27¢ per mile.

Observation: IRS's increase in the business standard mileage rate is undoubtedly a result of recent pressure brought to bear on IRS to take action to relieve taxpayers suffering from skyrocketing gas prices (see Newsstand e-mail 6/18/08). On June 11, 2008, Senator Norm Coleman (R-MN) sent a letter to IRS Commissioner Shulman, requesting that IRS increase the 2008 standard mileage rates to better reflect the high cost of travel. Coleman noted that in the past, in 2005, IRS raised the standard mileage rates for the last four months of the year, rather than waiting until year-end, due to a large increase in gas prices. Earlier, on June 6, 2008, National Treasury Employees Union (NTEU) President Colleen Kelley also wrote to Commissioner Shulman, on behalf of federal government employees, asking him to consider making a mid-year adjustment to the 2008 standard mileage rates.

Observation: The plight of taxpayers suffering from ever increasing gas prices has not been ignored by legislators. On May 19, 2008, Sen. Charles Schumer (D-NY) introduced a bill in the Senate, S. 3032, the “Reimburse Our American Drivers (ROAD) Act of 2008,” that would temporarily increase the standard mileage rate to 70¢ per mile on travel for business, medical, and moving expense-related purposes. Federal employees would also be allowed to use this rate. The rate would be in effect during all of 2008. The legislation has been referred to the Senate Finance Committee for consideration.

Observation: As the gas prices at the pump continue to rise at a record breaking pace, it is questionable whether the additional 8¢ per mile will provide significant relief to taxpayers, or turn out to be a matter of too little too late.

Background. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2007-70, Sec. 5.04) IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an automobile.

Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased. (Rev Proc 2007-70, Sec. 9.01) Additionally, an employee's personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.

A separate rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction. (Rev Proc 2007-70, Sec. 7.02) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that's not adjusted for inflation. (Rev Proc 2007-70, Sec. 7.01)

When the new rates are effective. The revised standard mileage rates in Ann. 2008-63 apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2008, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2008; and (2) with respect to transportation expenses paid or incurred by the employee on or after July 1, 2008.

However, the standard mileage rates in Rev Proc 2007-70, 2007-50 IRB 1162, continue to apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes before July 1, 2008, and to mileage allowances paid: (1) to an employee before July 1, 2008, or (2) with respect to transportation expenses paid or incurred by the employee before July 1, 2008. All other provisions of Rev Proc 2007-70 remain in effect. (Ann. 2008-63)

SFR - Substitute for return

IRS may prepare substitute returns in worker classification cases
Chief Counsel Advice 200822026

A Chief Counsel Advice (CCA) has concluded that, in employment tax cases where worker classification issues are present, revenue officers have authority under Code Sec. 6020(b) to prepare employment tax returns, but the requirements of Code Sec. 7436 must be met before assessment.

Background. Where there is an actual controversy involving a determination by IRS that one or more individuals performing services for the taxpayer are employees as part of an examination, Code Sec. 7436 gives the Tax Court jurisdiction to determine certain “worker classification issues” (i.e., the proper amount of the additions to tax, additional amounts, and penalties that relate to the employment tax with respect to determinations of worker classification and whether the taxpayer is entitled to relief under § 530 of the Revenue Act of 1978). To meet Code Sec. 7436 's requirements, certain procedures must be followed before assessment of employment taxes. They are spelled out in Notice 2002-5, 2002-1 CB 320. For example, Notice 2002-5 provides generally that a taxpayer will first receive a “30-day” letter listing the proposed employment tax adjustments to be made and describing the taxpayer's right either to agree to the proposed adjustments or to protest the proposed adjustments to the IRS's Appeals function (Appeals) within 30 days of the date of the letter.

If the taxpayer does not respond to the “30-day” letter by agreeing to the proposed adjustments or by filing a protest to Appeals, the taxpayer will receive a Notice of Determination of Worker Classification (NDWC). The taxpayer may also receive the NDWC if the taxpayer files a protest with Appeals and the worker classification issues are not settled in Appeals. As indicated in Notice 2002-5, under Code Sec. 7436(d)(1), the mailing of the NDWC suspends the period of limitations for assessment of taxes attributable to the worker classification issues for the 90-day period during which the taxpayer can bring suit and precludes IRS from assessing the taxes identified in the NDWC before the expiration of the 90-day period during which the taxpayer may file a timely Tax Court petition.

If IRS erroneously makes an assessment of taxes attributable to the worker classification issues without first either issuing a NDWC or obtaining a waiver of restrictions on assessment from the taxpayer, the taxpayer is entitled to an automatic abatement of the assessment. However, under Notice 2002-5, once any procedural defects are corrected, IRS may reassess the employment taxes to the same extent as if the abated assessment had not occurred.

The amount of any tax imposed by the Code is to be assessed within 3 years after the return was filed, subject to certain specified exceptions. (Code Sec. 6501(a))

Under Code Sec. 6020(b), if a taxpayer fails to file a return when required, IRS may prepare a return based on its own knowledge and on information it obtains through testimony or other means. The failure-to-pay penalty under Code Sec. 6651(a)(2) applies to the amount of tax shown on the return, including, under Code Sec. 6651(g)(2) , any amount shown on a substitute return prepared by IRS. Absent the existence of a return under Code Sec. 6020(b), the Code Sec. 6651(a)(2) penalty doesn't apply to a nonfiler. [For discussion of recently issued regs on substitute returns, see Federal Taxes Weekly Alert 02/14/2008]

Facts. The Chief Counsel was asked to review a memorandum which addressed the issue of whether a revenue officer has authority under Code Sec. 6020(b) to prepare employment tax returns on behalf of taxpayers who fail to file such returns in a case in which worker classification issues are present and where the revenue officer did not refer the case to the Employment Tax Program as required under the Internal Revenue Manual (IRM).

For the years at issue, the taxpayer took the position that certain workers were independent contractors for federal tax purposes. However, for prior years, the taxpayer had treated the workers as employees. After reviewing the facts of the case, the revenue officer determined that the workers should have been treated as employees and prepared Substitute for Returns (SFRs) under Code Sec. 6020(b).

The taxpayer objected to the preparation of the SFRs and requested an appeal. The appeals officer concluded that the worker classification issue was undeveloped and that “the revenue officer did not have the authority to prepare Forms 941 under Code Sec. 6020(b) procedures because the IRM requires the issue to be referred to the Employment Tax Program,” and recommended the government concede the case.

Analysis. The CCA observed that the taxpayer failed to file an employment tax return and did not submit evidence to establish that no employment tax return was due. The revenue officer determined that some of the taxpayer's workers were employees and that an employment tax return should have been filed. The revenue officer prepared returns under Code Sec. 6020(b).

The CCA said that, because the revenue officer failed to meet Code Sec. 7436 's requirements, an assessment of employment taxes based on the Code Sec. 6020(b) return prepared by him is improper. However, the CCA said that the facts do not indicate that the government is required to concede the case. The CCA said that, under Notice 2002-5 , once the procedural defects are corrected and Code Sec. 7436 's requirements are met, employment taxes may be assessed.

Tax relief for Peace Corps

Tax relief for Peace Corps volunteers and employees in the Heroes Earnings Assistance and Relief Tax Act of 2008

The recently enacted “Heroes Earnings Assistance and Relief Tax Act of 2008” (the 2008 Heroes Act) contains a wide-ranging package of tax cuts for military personnel and veterans. In addition, a provision in the 2008 Heroes Act will potentially enable more Peace Corps employees and volunteers to qualify for the homesale exclusion on the sale of their principal home. Here are the details of the new provision affecting Peace Corps volunteers.

An individual taxpayer may exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for the exclusion, the taxpayer must have owned and used the residence as a principal residence for at least two of the five years ending on the sale or exchange. A taxpayer who fails to meet these requirements by reason of a change of place of employment, health, or, to the extent provided under regulations, unforeseen circumstances is able to exclude an amount equal to the fraction of the $250,000/$500,000 that is equal to the fraction of the two years that the ownership and use requirements are met.

There are special rules relating to members of the uniformed services, members of the Foreign Service of the United States, and employees of the intelligence community that allow for an option to suspend the five-year test period for ownership and use during any period these individuals or their spouses serve on qualified official extended duty. This means that they may be able to meet the two-year use test even if, because of their service, they did not actually live in the home for at least the required two years during the five-year period ending on the date of sale. The five-year period can't be extended by more than ten years.

Under the 2008 Heroes Act, a new rule is created for Peace Corps volunteers and certain employees similar to the rules that already apply to the uniformed services, Foreign Service, and intelligence community. Under this new rule, which is effective for tax years beginning after December 31, 2007, an individual may elect to suspend for a maximum of ten years the five-year test period for ownership and use during certain periods that the employee or volunteer is serving outside the U.S.. If the election is made, the five-year period ending on the date of the sale or exchange of a principal residence does not include the period up to ten years during which the taxpayer or the taxpayer's spouse is serving as a Peace Corp volunteer or employee.

For example, let's say that Betty bought and moved into a home in 2002. She lived in it as her main home for two and one-half years. For the next four years, she did not live in it because she was serving outside the United States as a Peace Corps volunteer. She then sells the home at a gain in 2008. To meet the use test, Betty chooses to suspend the five-year test period for the four years she was serving in the Peace Corps. This means she can disregard those four years. Therefore, Betty's five-year test period consists of the five years before she went on qualified official extended duty in the Peace Corps. She meets the ownership and use test because she owned and lived in the home for two and one-half years during the testing period.

I hope this information is helpful. If you would like more details about this provision or any other aspect of the new law, please do not hesitate to contact us.

Tax Problems: Type of Tax Problems and how to resolve them

Tax Problem Solver – Why You Need Professional Help

Tax problems come in different forms; IRS tax problems, State tax problems, and Sales tax problems. Tax authorities are constantly increasing their tax enforcement efforts through tax collection and tax audit.

When taxpayers receive the dreaded tax notice that their tax return or their business is going to be audited and examined, the first thing they should do is seek professional tax advice. Same thing when taxpayers receive collection letters threatening levying and garnishing their wages or paychecks, or the tax levy letter for their bank account, taxpayers should seek professional tax advice to resolve their tax problems.

The most common options to resolve your tax problems are:

• Full Payment: paying the amount on the tax notice and avoiding the confrontation with the taxing authority. Most of the time, this option is not the best option for the taxpayer to resolve their tax problem, as often the tax bill is inaccurate.
• Pay The Correct Tax Only: paying the actual amount of taxes if you can afford it is usually a good solution to your tax problem. This will entail working with the taxing authority to abate the penalty assessed. The success of penalty abatement is based on reasonable cause and not willful neglect.
• Installment Agreement: paying the tax amount through an installment agreement is a common way to resolve your tax problem. You should seek professional tax advice, as the taxing authority will usually request a large monthly payment, while professional tax representatives will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.
• Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer’s Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

No matter which option is correct to resolve your tax problems, usually there are more than one viable option, it is essential that the taxpayer comply with the tax law going forward. That is, all tax returns are filed timely; all estimated income taxes and payroll deposits must be paid timely.

An experienced tax professional who specializes in tax representation would be the best person to have in your corner when the IRS, the State, or the Sales Tax Agency contacts you.

The most surprising fact of all after plumbing the depths of what to do when the IRS contacts you regarding a tax problem is how shallow the well really is. With the lull in activity on the IRS tax audit and collection front, there are relatively few pronounced tax-experts. The $345 billion dollar tax gap remains fascinating to the US Congress and the IRS. It is a high profile item!

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection are on the rise, and is expected to continue for many years to come!

So, do you have a tax problem yourself? Do yourself a favor and contact us today to assist you in resolving your tax problem. We resolve IRS tax collection and or audit problems, we resolve State tax audit and collection problems, and we resolve Sales tax problems.

If You Missed the Tax Filing Deadline, There is Help Available

You missed the tax deadline April 15th, so now what?

Mike Habib, EA

myIRSTaxRelief.com

Although the IRS has received a record number of returns this year, there are still thousands of people who did not file tax returns on April 15^th. The reasons for this are numerous, but the IRS research shows that often people do not file in years that their status changes, for instance the death of a spouse or a divorce. Emotional or financial hardship reasons may also cause a person not to file. And then there are some folks who have simply procrastinated. Whatever your reason is, if you did not file your taxes by April 15th, you should stop putting it off and file your tax returns as soon as possible - even if you are late.

Sure, if you file late, you might be missing out on the economic stimulus tax refund check, but the reasons for filing are more compelling, and often less painful than ignoring your obligation.

Here are some things you should consider:

1. You could lose your refund. There is no penalty for failure to file if you are due a refund; however, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.
2. You won’t receive your Earned Income Tax Credit (EITC). Even if you are not otherwise required to file a tax return, you must file in order to receive this credit. The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.
3. A statute of limitations applies to refunds and credits. After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayment of estimated or withholding taxes, to other tax years that are underpaid. It is also worth noting that the statute of limitations for the IRS to assess and collect any outstanding balance does not begin until a return has been filed. Or put another way, there is no statute of limitations for assessing and collecting the tax if no return has been filed.
4. A “Failure to File” penalty may be assessed when you miss the tax filing deadline; the sooner you file, the more likely you are to be able to negotiate or decrease this penalty.

Regardless of your reason for not filing, file your tax return as soon as possible. You can contact a tax professional or the IRS for help with filing delinquent returns.

I personally specialize in helping individuals and businesses who are unable to fully pay their taxes, either back taxes, or due to current or late filing. If you can not pay your taxes, do not let this prevent you from filing as tax settlement options may be available. For more details contact us as quick as possible.

For more information on how to file a tax return for a prior year, visit our website at http://www.myirstaxrelief.com/irs-tax-help-services.html

If you are experiencing tax collection issues, CLICK HERE FOR HELP.

If you received a tax audit letter, CLICK HERE FOR HELP.

State Property Tax Credits - Tax Problem Resolution

Memo explains how state property tax credits are taxed and reported - Chief Counsel Advice 200814022

Mike Habib, EA

myIRSTaxRelief.com

In Chief Counsel Advice, IRS has explained the proper federal income tax treatment of certain state property tax credits and the extent to which the state must provide information reports about the credits to IRS under Code Sec. 6041 or Code Sec. 6050E.

Background on tax benefit rule. In general, a taxpayer who receives a refund of state taxes previously deducted on a prior year's federal income tax return must include the refund in gross income in the year received to the extent of any federal income tax benefit, unless all or part of the income is excluded under Code Sec. 111. A taxpayer who receives a refund of state taxes that were not previously deducted on a prior year's federal income tax return is not required to include the refund in gross income in the year received. (Rev Rul 93-75, 1993-2 CB 63)

Facts. State X real property taxes are imposed on a calendar year period and become due Date 1 of the following year. Taxpayers receive a discount if they pay their real property taxes by Date 3.

State X mobile home taxes are imposed on a calendar year period and become due Date 2 of the same year. Taxpayers receive a discount if they pay their mobile home taxes by Date 3.

State Statute A provides for a homestead income tax credit for individuals during Year 1 and Year 2. The credit is equal to 10% of the real property taxes or mobile home taxes that were levied against an individual's homestead, became due during the tax year, and were paid anytime before filing the income tax return claiming the credit (including a timely filed amended return). If the credit exceeds an individual's state income tax liability, the taxpayer can carry forward the unused credit for up to five years. Alternatively, he can request that the state tax commissioner issue a certificate for the unused portion of the credit. The certificate can be used against any of the taxpayer's real property tax or mobile home tax liabilities that become due during the tax year following the year for which the taxpayer claimed the credit. The counties in State X will treat the receipt of a certificate as a payment when it is transferred to them. The counties will have the authority to implement a system that applies the certificate to the following year's liability or (at the county's option) also permits a cash refund if a taxpayer has already paid the real property tax or mobile home tax liability that becomes due during the income tax taxable year following the year for which the taxpayer claimed the credit. This election to carry forward or receive a certificate is irrevocable.

State Statute B provides for a commercial property income tax credit for individuals and corporations during tax years Year 1 and Year 2. The amount of the credit is equal to 10% of the real property taxes or mobile home taxes that were levied against a taxpayer's commercial property, became due during the tax year, and were paid anytime before filing the income tax return claiming the credit (including a timely filed amended return). If the credit exceeds a taxpayer's income tax liability, the taxpayer can carry forward the unused credit for up to five years but there is no option to receive a certificate for the unused portion of the State Statute B credit.

Federal taxable income is used as a starting point in calculating State X income tax for corporations as well as individuals, and there is no add back if a taxpayer claims the Statute A or B credit and takes a deduction on the federal return for real property taxes or mobile home taxes paid or accrued. Consequently, the State Statute B credit is in addition to a deduction for state income tax purposes.

Proper tax treatment of State Statute A credit. The CCA concluded that the following general tax treatment applies when the State Statute A credit exceeds an individual's state income tax liability:

• the credit carryforward should be treated as a reduction in the taxpayer's state income tax liability in the carryforward years and
• the use of a certificate to timely satisfy a real property tax or mobile home tax liability should be treated as a reduction in the taxpayer's real property tax or mobile home tax liability.

Each of these reductions affects the amount deductible under Code Sec. 164(a). Additionally, in a county that permits a refund if a taxpayer has already paid the real property tax or mobile home tax liability that becomes due during the tax year following the year for which the taxpayer claimed the credit, such a refund would be subject to the general rules concerning the tax benefit rule, as discussed above, for taxpayers using the cash method who receive the refund in a year after the real property tax or mobile home tax liability was paid. If the real property tax or mobile home tax refund occurs during the same tax year those taxes were paid, the refund reduces the amount otherwise deductible under Code Sec. 164 by a taxpayer using the cash method.

Proper tax treatment of State Statute B credit. The CCA observed that the State Statute B credit can affect only a taxpayer's state income tax liability for the year the credit is claimed or for a carryforward year. Accordingly, this credit should be treated as a reduction in a taxpayer's state income tax liability. This affects the amount deductible under Code Sec. 164(a)(3).

Information reporting. Code Sec. 6050E requires information reporting for state and local income tax refunds. Form 1099-G is used for this purpose. The CCA said that, in the case of State Statute A, if a taxpayer uses the credit against his state income tax liability for the year the credit is claimed, and receives a refund of state income tax for that year, the amount of the refund must be reported by the state refund officer on Form 1099-G. A copy of the Form 1099-G must be sent to the taxpayer. (Code Sec. 6050E(b)) However, the refund officer need not furnish this statement to the taxpayer if the refund officer verifies that the taxpayer did not claim itemized deductions for federal income tax purposes. (Reg. § 1.6050E-1(k))

If the credit is carried forward and applied to reduce state income tax liability in subsequent years, any state income tax refunds in those subsequent years will be subject to Code Sec. 6050E reporting.

The use of a certificate to pay, reduce or obtain a refund of real property or mobile home tax is outside of Code Sec. 6050E, as it is not a state income tax refund. Instead, any information reporting for a certificate would be based on Code Sec. 6041, which requires information reporting for payments of $600 or more made in the course of a trade or business for rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income. If the refund is reportable under Code Sec. 6041, the amount reported would be shown on a Form 1099-MISC, in box 3 “Other income.”

Reg. § 1.6041-1(b)(1) and Reg. § 1.6041-1(i) provide that payments made by a state or a political subdivision are subject to this reporting requirement. Payments are only reportable under Code Sec. 6041 to the extent they constitute fixed or determinable income. Under Reg. § 1.6041-1(c), income is fixed when it is to be paid in amounts definitely predetermined. Income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained. A taxpayer's use of a certificate to timely satisfy real property or mobile home tax is treated as a reduction in the tax liability and not as income. Therefore, there is no required reporting under Code Sec. 6041 as there is no fixed or determinable income. If, however, the county permits a refund based on the application of the certificate, there may be income if the taxpayer previously deducted these taxes, based on the tax benefit rule. In that case, the refund must be reported on Form 1099-MISC to the extent it is income. The county does not have a reporting obligation if it cannot determine the amount that is fixed or determinable income.

In the case of State Statute B, a taxpayer can only use the credit to reduce its state income tax liability for the year the credit is claimed or a carryforward year. Any state income tax refund received by individual taxpayers must be reported on Form 1099-G, under Code Sec. 6050E, regardless of whether all or part of the refund does not constitute income. Code Sec. 6050E does not apply to state income tax refunds issued to corporations.

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IRS Tax Penalty - How to abate and avoid penalties

Avoiding IRS Tax Penalties and the Tax Gap

Mike Habib, EA
myIRSTaxRelief.com

IRS — The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion.

If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.

Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).

This fact sheet is the 22nd in the Tax Gap series. It provides additional guidance to taxpayers regarding civil penalties and the consequences for understating income and overstating expenses.

Estimated Tax-Related Penalties

Employees have taxes withheld from their paychecks by their employer. When you have income that is not subject to withholding you may have to make estimated tax payments during the year.

This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount being withheld from your salary, pension, or other income is not enough to pay your tax liability.

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may have to pay a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Penalties for filing or paying taxes late

The most common penalties are for filing late or paying taxes late.

Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).

If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return.

Paying tax late: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

Combined penalties: For any month both the penalty for filing late and the penalty for paying late apply, the penalty for filing late is reduced by the penalty for paying late for that month, unless the minimum penalty for filing late is charged.

Accuracy Related Penalties

The two most common accuracy related penalties are the "substantial understatement" penalty and the "negligence or disregard of the rules or regulations" penalty. These penalties are calculated as a flat 20 percent of the net understatement of tax.

Penalty for substantial understatement

You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000 for individuals. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10 percent (or if greater, $10,000) or $10,000,000.

You may avoid the substantial understatement penalty if you have substantial authority for your tax treatment of the item or through adequate disclosure. To avoid the substantial understatement penalty by adequate disclosure, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position.

To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged. This means that the position must be more than just arguable. There must be some authority supporting the position.

Penalty for negligence and disregard of the rules and regulations

"Negligence" includes (but is not limited to) any failure to:

* make a reasonable attempt to comply with the internal revenue laws

* exercise ordinary and reasonable care in preparation of a tax return or

* keep adequate books and records or to substantiate items properly

This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.

Civil Fraud penalty

If there is any underpayment of tax on your return due to fraud, a penalty of 75 percent of the underpayment due to fraud will be added to your tax. The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.

Negligence or ignorance of the law does not constitute fraud.

Typically, IRS examiners who find strong evidence of fraud will refer the case to the Internal Revenue Service Criminal Investigation Division for possible criminal prosecution. Keep in mind that both civil sanctions and criminal prosecution may be imposed.

Frivolous Tax Return penalty

You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. If you jointly file a frivolous tax return with your spouse, both you and your spouse each may have to pay a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.

You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.

This penalty is added to any other penalty provided by law.

Penalty for bounced checks

If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.

The bottom line is that you must report all your income, file your return and pay your tax by the due date to avoid interest and penalty charges.

For more information about IRS notices and bills, refer to Publication 594 (PDF), Understanding the Collection Process. More information about penalty and interest charges is contained in Chapter 1, Filing Information, of Publication 17, Your Federal Income Tax.

If you are an individual or a business and been assessed by the IRS tax penalties and wish to abate these penalties, contact us as quick as possible.

As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

Estimated tax payments - IRS Problem Resolution

New, changed and expired provisions affect 2008 individual estimated tax

Mike Habib, EA
MyIRSTaxRelief.com

Apr. 15, 2008 is the due date for affected calendar year taxpayers to make their first installment of 2008 estimated tax. There aren't any drastic changes in the estimated tax rules themselves for 2008. However, there are a number of new, changed and expiring provisions that will affect some individuals' estimated tax computations for 2008. This article provides a brief overview of the estimated tax rules for individuals and looks at the changes that may impact 2008 estimated taxes.

Who needs to pay estimated tax. Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or face a penalty. In addition, taxpayers who do not elect voluntary withholding on unemployment compensation and the taxable part of social security payments also may have to pay estimated tax on those items or face a penalty. (Code Sec. 6654)

When and how much to pay. For 2008 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by Apr. 15, 2008, June 16, 2008, Sept. 15, 2008 and Jan. 15, 2009 to avoid an underpayment penalty. (Code Sec. 6654(c))

The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2008 return or 100% of the tax shown on the 2007 return even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2007 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2008 tax or 110% of his 2007 tax. The prior year exception does not apply for a taxpayer who did not file a 2007 return or filed a 2007 return that did not cover 12 months. (Code Sec. 6654(d))

Other exceptions to penalty. There's no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Estimated tax does not have to be paid for 2008 if the taxpayer was a U.S. citizen or resident alien for all of 2007 and had no tax liability for the full 12-month 2007 tax year. (Code Sec. 6654(e))

Annualized method. A taxpayer who, after Mar. 31, 2008, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer's income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2008 tax return, to indicate to IRS how he has computed his payments, even if no penalty is owed. (Code Sec. 6654(d)(2))

Farmers and fishermen. Special estimated tax rules apply to farmers and fishermen.
New items for 2008. A taxpayer should use his 2007 return as a starting point for figuring his 2008 estimated tax. He should determine whether he will benefit by any of the following new provisions:

• Forgiveness of mortgage debt. For debt discharged on or after Jan. 1, 2007 and before Jan. 1, 2010, taxpayers generally may exclude up to $2 million of mortgage debt forgiveness on their principal residence.
  

Observation: This technically is not new for 2008 as it also applied for 2007. Presumably, IRS included it as a new item on Form 1040–ES for 2008 because is was enacted in late 2007 and not reflected on the original version of the Form 1040–ES for 2007.

• Tax relief for volunteer responders. An income tax exclusion applies for qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services). The exclusion applies for the 2008 through 2010 tax years.
  
• Homesale exclusion liberalized for surviving spouse. Before a late 2007 law change, the up-to-$500,000 exclusion was available only if a husband and wife filed a joint return for the year of sale. Thus, if the home was sold in a year after the year of a spouse's death—when a joint return would no longer be filed—the surviving spouse could only get a maximum homesale exclusion of $250,000. A new law provides relief for sales and exchanges after Dec. 31, 2007—it allows a surviving spouse to qualify for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after the spouse's death, provided the requirements for the $500,000 exclusion were met immediately before the spouse's death and the survivor has not remarried as of the date of the sale.
  
• Capital gain tax rate reduced. As discussed in greater detail in Federal Taxes Weekly Alert 1/17/2008, beginning this year and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate (last year, a 5% rate applied to such income).
• Kiddie tax broadened. For 2008 (technically for tax years beginning after May 17, 2007), a 2006 tax law expanded the kiddie tax to apply to children age 18, and children over age 18 but under age 24 who are full-time students—if their earned income doesn't exceed one-half of the amount of their support.

Observation: The 2006 tax law did not change the kiddie tax rules for children who are under age 18. Rather, it expanded the kiddie tax to apply where:

... the child turns age 18, or turns age 19-23 if a full-time student, before the close of the tax year;
... the child's earned income for the tax year doesn't exceed one-half of his or her support;
... the child has more than the inflation-adjusted prescribed amount of unearned income (i.e., $1,800 for 2008);
... the child has at least one living parent at the close of the tax year; and
... the child doesn't file a joint return for the tax year. [See Federal Taxes Weekly Alert 6/7/2007 for details]

• Itemized deduction phaseout reduced. A higher-income taxpayer's itemized deductions (other than those for medical expenses, investment interest, nonbusiness casualty and theft losses, and gambling losses) are reduced if his adjusted gross income (AGI) exceeds an inflation-adjusted amount. His itemized deductions generally are reduced by the lesser of (1) 3% of the excess of adjusted gross income over the applicable amount, or (2) 80% of the itemized deductions otherwise allowable for the tax year. For 2008, the phaseout begins at $159,950 of AGI ($79,975 for marrieds filing separately). However, under a 2001 tax law change that applies for the first time in 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular reduction computation. [See Federal Taxes Weekly Alert 1/14/2008 for details]
• Personal exemption phaseout reduced. The personal exemption amount of a taxpayer whose AGI exceeds an inflation-indexed threshold amount is reduced by an applicable percentage. This applicable percentage is 2% for each $2,500 (or fraction thereof) by which the AGI of a taxpayer (other than a married taxpayer filing separately) exceeds the appropriate threshold amount. For married persons filing separately, the applicable percentage is 2% for each $1,250 (or fraction of that amount) by which his AGI exceeds the threshold amount. The applicable percentage can't exceed 100%. The inflation-adjusted threshold amounts for 2008 are $239,950 (joint returns and surviving spouses), $199,950 (head of household), $159,950 (unmarried individuals), and $119,975 (married persons filing separately). However, under a 2001 law change that applies for the first time in 2008, a taxpayer will lose only 1/3 of the amount he would otherwise lose under the regular phase-out computation.
  
• Mortgage insurance deduction extended. Mortgage insurance premiums continue to be deductible after 2007. Originally, this deduction was available only for 2007. It now applies through 2010.
  

Changed provisions. In calculating 2008 estimated tax, individuals also should consider the following changed provisions:

• Increased standard deductions. The basic and additional standard amounts have increased for most categories of taxpayers for 2008.
  
• IRA deduction. An taxpayer may be able to take an IRA deduction if covered by a retirement plan and the taxpayer's 2007 modified AGI is less than $63,000 ($105,00 if married filing jointly or qualifying widow(er)).
  
• IRA contribution limit increased. In general, an individual who isn't an active participant in certain employer-sponsored retirement plans, and whose spouse isn't an active participant, may make an annual deductible cash contribution to an IRA up to the lesser of: (1) $5,000 (increased from $4,000 for 2007), plus an additional $1,000 for those age 50 or older, or (2) 100% of the compensation that's includible in his gross income for that year. If the individual (or his spouse) is an active plan participant, the deduction phases out over a specified dollar range of MAGI.
• Standard mileage rates. The 2008 mileage rates for a taxpayer's use of his vehicle are 50 1/2¢ per business mile, 19¢ per mile to get medical care or make a job related move, and 14¢ per mile for charitable use (the latter figure is unchanged).
  
• Tax breaks for adoption. The maximum adoption credit has increased to $11,650, as has the maximum adoption exclusion.
  
• Earned income credit. The maximum credit is higher, and the AGI-based phaseout figures are revised.
  
• Savers credit. The income limits have increased for the retirement savers credit.
  

Expired tax benefits. The following tax changes for 2008 involve tax provisions that expired at the end of 2007 but may be reinstated by Congress.

• Credits reduced by AMT calculation. Personal tax credits (other than the adoption credit, the child tax credit and the credit for elective deferrals and IRA contributions) can't exceed the excess of regular tax liability over tentative minimum tax.

Observation: This credit limit may reduce a taxpayer's personal credits even if he has no AMT liability.

• Decreased AMT exemption amount. In 2008, the AMT exemption amount will decrease to $33,750 for unmarried individuals, $45,000 for marrieds filing jointly or qualifying surviving spouses, and $22,500 for marrieds filing separately. For 2007, the AMT exemption amounts were $44,350, $66,250, and $33,125, respectively.

Observation: Although there's a high probability that Congress will once again “patch” the AMT problem, taxpayers must nonetheless make their estimated tax payments as if this relief will not materialize.

• Educator expenses. The above-the-line deduction for educator expenses doesn't apply for post-2007 tax years.
• Tuition and fees deduction. The above-the-line deduction for higher-education expenses isn't available for tax years beginning after 2007.
• D.C. first-time homebuyer credit. This credit does not apply to homes purchased after 2007.
• Option to claim state & local sales tax as itemized deduction instead of deducting state & local income tax. This option is no longer available for tax years beginning after 2007.
• Tax-free distributions from IRAs for charitable purposes. The special rule for IRA distributions to charities has expired. Under this rule, which applied for distributions in tax years beginning in 2006 and 2007, an exclusion from gross income, not to exceed $100,000, is allowed for otherwise taxable IRA distributions by taxpayers age 70 1/2 and older from a traditional or Roth IRA that are qualified charitable distributions.
• Election to include nontaxable combat pay as earned income for purposes of the earned income tax credit. For tax years beginning after 2007, taxpayers no longer may elect to treat combat pay as earned income for purposes of the earned income credit.
• Penalty-free withdrawals for individuals called to active duty. A provision giving early withdrawal penalty relief for active duty reservists has expired. Under this rule, the Code Sec. 72(t) 10% early withdrawal penalty tax does not apply to a distribution from an IRA (or attributable to elective deferrals under a Code Sec. 401(k) plan, Code Sec. 403(b) annuity, or certain similar arrangements) that's (1) made to reservists ordered or called to active duty after Sept. 11, 2001, and before Dec. 31, 2007, for a period of more than 179 days or for an indefinite period, and (2) made during the period beginning on the date of the order or call to duty and ending at the close of the active duty period.
• Credit for nonbusiness energy property. For property placed in service after 2007, a taxpayer can no longer claim a lifetime nonrefundable credit of up to $500 for making qualifying energy saving improvements to his home (only $200 for qualifying window expenditures).
• Research credit. The research credit does not apply for amounts paid or incurred after 2007.
• Indian employment credit. The Indian employment credit does not apply for tax years beginning after 2007.

Observation: The changed and expired items described above are those that IRS mentions in the instructions to Form 1040–ES for 2008. There are many other items that have changed for 2008 as a result of inflation adjustments.


If you are self-employed, sole-proprietor, or a small business and need tax resolution from estimated tax payments, or any tax problem, you can contact us HERE. If you are being examined through an audit, we can represent you and advocate your position contact us HERE.

Trucker Tax Relief - Trucker Tax Resolution Service

Truckers Tax Relief - Are you a truck driver with tax problems?

If you're a truck driver and owe the IRS, you're better off resolving your tax debt now. As you know, tax problems do not go away by themselves! Stop your IRS wage garnishment today, stop your IRS bank levy today, and release your IRS tax lien today.

As you can see from the statement below by Mr. Douglas H. Shulman, the new IRS Commissioner, he will first concentrate on Enforcement, then secondly its Service! Are you saying where is the kinder and gentler IRS?

Contact us today to resolve your tax problems.

Statement of Commissioner Douglas H. Shulman

I want to extend my thanks to the members of the Senate and the Senate Finance Committee, especially Chairman Baucus and Senator Grassley. I also want to thank President Bush for nominating me and Treasury Secretary Paulson for his support.

The Internal Revenue Service touches virtually every adult, every business and every non-profit organization in America. It is an honor to assume the leadership of this critical agency. I recognize the great responsibility I have been given and will work to ensure that the IRS is fair, impartial and respects the rights of all taxpayers.

As Commissioner, I will concentrate on both enforcement and service. For the majority of Americans who pay their taxes willingly and on time, there must be clear guidance, accessible education and outstanding service. Our aim should be to make it as easy as possible for citizens to pay the correct amount of taxes in the most efficient and least burdensome manner possible.

For taxpayers who intentionally evade paying taxes, there must be rigorous enforcement programs.

I am looking forward to working with the dedicated and talented IRS workforce, along with the broader tax community and important stakeholders to continue to build an efficient, effective and respected IRS.

Contact us today to resolve your tax problems.

Don't compromise on your representation! We represent truckers and truck drivers before the IRS and any taxing authority.

Mike Habib, EA

As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent truckers and truck drivers in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

Dependent deductions tax problem

Tax breaks for qualifying relatives are limited - what you should know
Internal Legal Memorandum 200812024

Mike Habib, EA
myIRSTaxRelief.com

An Internal Legal Memorandum (ILM) explains that various tax breaks are not allowed for qualifying relatives. Specifically, the ILM concludes that, apart from a dependency exemption, a taxpayer's qualifying relative may not qualify him for the earned income credit, head of household filing status, or the child tax credit, but in limited circumstances may qualify the taxpayer for the child and dependent care credit.

Background. A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.” (Code Sec. 151(c))

A person qualifies as the taxpayer's dependent if the person is the taxpayer's qualifying child or qualifying relative. (Code Sec. 152(a)) The terms “qualifying child” and “qualifying relative” were added to Code Sec. 152 by the Working Families Tax Relief Act of 2004 (WFTRA), effective for tax years beginning after 2004. WFTRA established a uniform definition of a “qualifying child” for determining whether a taxpayer may claim certain child-related tax benefits. It established the term “qualifying relative” to identify individuals (other than a qualifying child) for whom a dependency exemption deduction may be allowed.

A “qualifying child” of a taxpayer is an individual who: (A) bears a certain relationship to the taxpayer, (B) has the same principal place of abode as the taxpayer for more than one-half of the tax year, (C) meets certain age requirements, and (D) has not provided over one-half of his or her own support for the calendar year. (Code Sec. 152(c)(1))

A “qualifying relative” is an individual: (A) who bears a specified relationship to the taxpayer (Code Sec. 152(d)(1)(A)); (B) whose gross income for the calendar year in which that tax year begins is less than the exemption amount (Code Sec. 152(d)(1)(B)); (C) with respect to whom the taxpayer provides over one-half of his or her support for the calendar year in which that tax year begins (Code Sec. 152(d)(1)(C)); and (D) who isn't a qualifying child of that taxpayer or of any other taxpayer for any tax year that begins in the calendar year in which that tax year begins. (Code Sec. 152(d)(1)(D))

Observation: An individual need not be technically related to a person to qualify as the person's qualifying relative. That's because, the specified relationships include in-laws and an individual who, for the tax year of the taxpayer, has as such individual's principal place of abode the home of the taxpayer and is a member of the taxpayer's household. (Code Sec. 152(d)(2))

Notice 2008-5, 2008-2 IRB, provides guidance on individuals who may be qualifying relatives of a taxpayer under Code Sec. 152(d). Specifically, it clarifies that, solely for purposes of Code Sec. 152(d)(1)(D), an individual is not a qualifying child of “any other taxpayer” if the individual's parent (or other person with respect to whom the individual is defined as a qualifying child) is not required by Code Sec. 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an income tax return solely to obtain a refund of withheld income taxes. Notice 2008-5 clarifies that a taxpayer may claim a dependency exemption deduction for an unrelated child of an unrelated individual who lived with the taxpayer as a member of the taxpayer's household for the entire year.

Illustration: Andrew supports as members of his household for the tax year an unrelated friend, Betty, and her 3-year-old child, Carole. Betty has no gross income, is not required by Code Sec. 6012 to file an income tax return, and does not file an income tax return for the tax year. Accordingly, because Betty does not have a filing requirement and did not file an income tax return, Carole is not treated as a qualifying child of Betty or any other taxpayer, and Andrew may claim both Betty and Carole as his qualifying relatives, provided all other requirements of Code Sec. 151 and Code Sec. 152 are met. (Notice 2008-5)

Earned income credit. An eligible individual may be allowed an earned income credit under Code Sec. 32 . In general, an eligible individual is (i) any individual who has a qualifying child for the tax year, or (ii) any other individual who does not have a qualifying child for the tax year, if certain requirements are met, such as age and residency, and that the individual is not a dependent of someone else. The ILM says that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 , may not use that individual for purposes of claiming the earned income credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.

Head of household filing status. Under Code Sec. 2(b)(1), an individual is a head of a household if, and only if, he is not married at the close of his tax year, is not a surviving spouse, and either (1) maintains as his home a household which constitutes for more than one-half of the tax year the principal place of abode, as a member of such household, (i) a qualifying child of the individual, or (ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction under Code Sec. 151 for the tax year, or (2) maintains a household which constitutes for such tax year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the tax year for such father or mother under Code Sec. 151. A taxpayer cannot be considered a head of a household by reason of an individual who would not be a dependent for the tax year but for (i) Code Sec. 152(d)(2)(H) or (ii) Code Sec. 152(d)(3), relating to multiple support agreements. Thus, the ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 because that individual was a member of the taxpayer's household, but who does not have a specified familial relationship to the individual, may not claim head of household filing status.

Child tax credit. Under Code Sec. 24(a), a taxpayer may be allowed a credit of $1,000 for each qualifying child of the taxpayer. The ILM concludes that a taxpayer who may claim an individual as his or her qualifying relative under Notice 2008-5 may not use that individual for purposes of claiming the child tax credit because the credit requires that the dependent be a qualifying child, not a qualifying relative, of the taxpayer.

Observation: The ILM does not point out that an individual can be a taxpayer's qualifying child for child tax credit purposes without necessarily being the taxpayer's actual child. That's because, for this purpose, a qualifying child is defined to include a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of these relatives. (Code Sec. 26(c)(1), Code Sec. 152(c)(2))

Dependent care credit. A taxpayer with one or more qualifying individuals may be allowed a dependent care credit under Code Sec. 21. A “qualifying individual” is (1) a dependent of the taxpayer (as defined in Code Sec. 152(a)(1) who has not attained age 13, (2) a dependent of the taxpayer (as defined in Code Sec. 152 determined without regard to Code Sec. 152(b)(1), Code Sec. 152(b)(2), and Code Sec. 152(d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the year, or (3) the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than half of the tax year. The ILM states that Code Sec. 152(a)(1) provides that a dependent is a qualifying child, and as a result, the dependent care credit is limited to taxpayers with one or more qualifying children under the age of 13. A taxpayer who may claim an individual as his or her qualifying relative may not claim the dependent care credit, unless that qualifying relative is physically or mentally disabled.

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2004 Unfiled tax returns Back Taxes Past Due Tax Return

IRS Has $1.2 Billion for People Who Have Not Filed a 2004 Tax Return

Mike Habib, EA

MyIRSTaxRelief.com

IRS-2008-46, March 19, 2008

IRS WASHINGTON — Unclaimed refunds totaling approximately $1.2 billion are awaiting about 1.3 million people who failed to file a federal income tax return for 2004, the Internal Revenue Service announced today. However, to collect the money, a return for 2004 must be filed with an IRS office no later than Tuesday, April 15, 2008.

Those due a refund who did not file a 2004 tax return could collect even more money by also filing a 2007 tax return to claim the economic stimulus payment. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of qualifying income and file a 2007 federal tax return. Millions of retirees, disabled veterans and low-wage workers who usually are exempt from filing a tax return must do so this year in order to receive the stimulus payment. Eligible people will receive up to $600 ($1,200 for married couples), and parents will receive an additional $300 for each eligible child younger than 17.

The IRS estimates that half of those who could claim refunds for tax year 2004 would receive more than $552. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. Some taxpayers may also be eligible for the refundable Earned Income Tax Credit.

In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2004 returns, the window closes on April 15, 2008. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

“Time is getting short for claiming the tax refund you may be entitled to,” said acting IRS Commissioner Linda E. Stiff. “But you can’t get it unless you file the tax return. Don't take a chance on losing your tax refund. And this year, remember that you need to file a 2007 tax return in order to receive an economic stimulus payment.”

The IRS reminds taxpayers seeking a 2004 refund that their checks will be held if they have not filed tax returns for 2005 or 2006. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2004. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Although eligible taxpayers may get a refund when their EITC is more than what they owe in tax, those who file returns more than three years late would be able only to apply it toward the taxes they owe (if any). They would not be able to receive a refund if the credit exceeded their tax.

Generally, unmarried individuals qualified for the EITC if in 2004 they earned less than $34,458 and had more than one qualifying child living with them, earned less than $30,338 with one qualifying child, or earned less than $11,490 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

Credit card debt triggers tax problems - know your options

Did you know that forgiven credit card debt triggered taxable income

Mike Habib, EA
myIRSTaxRelief.com

A new Tax Court case illustrates how a taxpayer generally has taxable income when a credit card company agrees to accept a reduced payment in settlement of his or her account.

Background. A solvent debtor usually realizes income from the discharge of a debt. (Code Sec. 61(a)(12)) Debtors who are insolvent, in bankruptcy, or (in certain cases) farmers and noncorporate debtors whose debt is qualified real property business indebtedness do not recognize income on a cancellation of a debt. (Code Sec. 108(a)) Instead, they must reduce their loss or tax credit carryovers or the basis in their assets. (Code Sec. 108(b)) These reductions can cause the debtor's taxes to increase in future years.

In addition, cancellations of up to $2 million of mortgage debt on an individual taxpayer's main home in 2007 through 2009 are excluded from income, but the taxpayer's basis in the home must be reduced. (Code Sec. 108(a)(1)(E), Code Sec. 108(h))

The amount of COD income where indebtedness from a credit card account is discharged is the difference between the entire amount due on the account—including interest, balance transfers, credit card charges, checks, operation charges, and penalties—and the amount paid for the discharge. If no consideration is paid for the discharge, the amount of COD income is equal to the entire amount due on the account.

Code Sec. 108(e)(5) provides an exception to Code Sec. 61(a)(12) where the buyer of property negotiates with the seller/creditor for a discharge of all or part of the purchase money indebtedness. Commonly such a discharge reflects a decline in the value of the property. The resulting discharge of indebtedness is characterized not as taxable income but in effect as a retroactive reduction of the purchase price.

Facts. Ancil Payne used his credit card with MBNA America Bank to pay hospital bills and receive cash advances during periods of unemployment. By Apr. 26, 2004, he accumulated $21,407 of debt on the card. Later in 2004, Mr. Payne and MBNA entered into an agreement whereby MBNA agreed to accept $4,592 as a full settlement of the account balance of $21,270, payable in installments over 4 months. Mr. Payne made the necessary payments, and MBNA issued him a Form 1099-C, Cancellation of Debt, reporting $16,678 of discharge of debt income.

On his 2004 joint return, he and his wife did not report any debt discharge income. Instead, they attached a statement to their return which disclosed that they received a Form 1099-C from MBNA that reported discharge of debt income of $16,678. The statement also explained that they believed the amount disclosed on the Form 1099-C was not subject to income tax.

IRS determined a deficiency for the Paynes' failure to report debt discharge income. The couple petitioned the Tax Court for a redetermination of the deficiency.

Failed argument. Before the Tax Court, the Paynes contended that their settlement with MBNA did not result in the discharge of indebtedness but was rather a retroactive reduction of the rate of interest charged by MBNA and thus a reduction of the “purchase price” of the loans under Code Sec. 108(e)(5). The Paynes argued that the lending of money in a generic credit card transaction constitutes the sale of property under Code Sec. 108(e)(5).

The Tax Court said that the Paynes were mistaken. It stressed that MBNA effectively lent them money to be used for health care costs and general living expenses. The only relationship between the parties was that of debtor and creditor, and thus the Tax Court held that Code Sec. 108(e)(5) did not apply.

Observation: Many individuals may be in a similar situation of needing a credit card workout. While getting the bank to agree to a big reduction in the debt is obviously a plus, as shown in this case, the debt discharge can trigger income. For some, however, the debt discharge income may not have practical tax consequences. For example, if the discharge occurs during a period of unemployment when the individual has little or no income from other sources, the individual effectively may owe little or no tax on it. While there probably is not much latitude to time a settlement, to the extent possible, individuals should try to arrange it during periods when the income from the discharge won't have severe tax consequences.