Friday, November 28, 2008

Tax Resolution – State First, Federal Second

Many times I have come across taxpayers who have gone several years without filing their tax returns, both state and federal. Usually the IRS (federal) is the first to contact the taxpayer about the problem. I always advise the taxpayer, after learning they are unfiled for both the federal and the state, to get the state returns filed first and work our a plan of resolution with the state, then file the federal returns and work out a plan with the feds (the IRS) next. The reasoning on this is very sound.

By taking this approach the taxpayer is able to get a plan of resolution in place with the state first. When we go to negotiate with the IRS it is much easier to work out a payment plan with them that includes the payment already being made to the state. If the feds (the IRS) are done first and then we go to the state the individual states are not very flexible and will usually not be very agreeable to a reasonable plan. When consulting with a professional tax resolution consultant take this sound reasoning under advisement. You would do well to do so.

A Word On Amended Tax Returns

Before I even begin the first thing I am going to say is this…beware! Amending a tax return is okay if you are amending it to include income you left off for whatever reason. It’s also okay to amend a return to include deductions you forgot to list completely the first time around. This is where I would say BEWARE.

Whenever the IRS receives an amended return with a lot of deductions that was not listed on the original return the look at the amended return very closely. The statistical probability of the return getting audited is much higher than just an ordinary return. Too many times in the past the IRS found situations where taxpayers filed their return, was hit with a substantial penalty and then tried to rectify the problem after the fact in the form of an amended return.

Don’t get me wrong. It is okay to file an amended return just make sure you have all of the supporting documentation to justify the expenses you are claiming. Many taxpayers have found themselves in need of the services of a professional tax resolution firm as a result of getting audited after filing an amended return and subsequently getting hit with a huge tax bill. Just remember…have your documentation to support whatever deductions you make!

Dividend Income Is Reportable

Many employers have stock purchase plans and encourage employees to purchase stock in the company they work for. Some company plans allow for the employee to choose between accepting a cash payout for the dividends or having the dividends re-invested to purchase more shares of stock. If an employee chooses the latter then this must be reported as income.

Sometimes a company will allow an employee to purchase shares below market value. In this case the shareholder must report as income the fair market value of the additional stock on the dividend payment date. If the plan allows the shareholder to invest more cash to buy shares of stock at a price less than fair market value then the shareholder must report as dividend income the difference between the cash invested and the fair market value of the stock purchased.

This can become a sticky area when there are lots of purchases when the stock fluctuates wildly. It would be a good idea to have a professional tax preparer determine exactly what must and what must not be reported.

You Need To Report It!

Way back in time before money was as trustworthy as it is today as a medium of exchange people used to barter. According to Wikipedia, “Barter is a type of trade in which goods or services are directly exchanged for other goods and/or services, without the use of money. It can be bilateral or multilateral, and usually exists parallel to monetary systems in most developed countries, though to a very limited extent. Barter usually replaces money as the method of exchange in times of monetary crisis, when the currency is unstable and devalued by hyperinflation.”

People still barter today despite the fact that we have a highly developed monetary system. For example, you have a plumber who is highly skilled at what he does and you have a mortgage banker who owns a beachfront property. The mortgage banker has an extensive, not to mention expensive, plumbing problem so he calls the plumber. The plumber comes out, works a couple of days, and fixes the problem and then hands the mortgage banker a bill for $7,150.

The mortgage banker, short on money, says to the plumber, “Hey, I have a beach home I usually rent for $7,500 for the whole week. I’ll let you have the place at no cost if you will accept my offer as payment in full for the $7,150 I owe you, deal?” “Deal.” the plumber replies. Well guess what? They both need to report the dollar value of the benefit they received as income! Sometimes seemingly simple little “oversights” like these can lead to tax problems requiring the services of a tax professional. Be careful and don’t forget…you need to report it!

Electronic Paying

Much is said about eFiling, filing your federal tax returns electronically, but how often do you hear about ePaying, paying your federal taxes electronically. The IRS has made it easy to file and also easy to pay thru an online system called EFTPS, which stands for Electronic Federal Tax Payment System. This system may work well for individuals who have an installment agreement with the IRS to re-pay a federal tax debt and would really work will for any business owner who is the person responsible for paying the company’s payroll taxes.

The system is quick and convenient. Enrollment is easy as well. All that is required is simply calling the EFTPS customer service number at 800-555-4477 and speak directly with a representative. You will need to give them your name, social security number, spouse’s social security number, mailing address, contact phone number and banking information complete with account number and routing number. Once you get set up in the system you will be notified what your PIN number is and to call to establish your password and then your ready to access the system. Give it a try, I’m sure you’ll love it!

Friday, November 21, 2008

IRS Installment Agreements

Taxpayers have lots of questions regarding installment agreements with the IRS. One question that comes up quite frequently concerns whether or not the taxpayer can roll a new tax year’s liability in with the pre-existing installment agreement. The only way this can be done successfully is to completely re-negotiate the installment agreement with the IRS. Whenever the IRS sets up an installment agreement with a taxpayer the agreement calls for the taxpayer to file all future returns and pay future taxes on time. If not, this alone will default thee agreement.
If the current agreement with the IRS is defaulted then the taxpayer goes right back into the collection cycle and may face liens and levies once again. Another point to consider is if the liability from the new tax year when added to the prior balance causes the total liability to go over $25,000 the an extensive negotiation with the IRS must take place. The best way to handle a situation like this is to have a professional tax resolution firm handle it.

Educational Tax Credits

The tax code has a provision whereby a taxpayer may claim a Hope credit up to $1,650 for qualified tuition and any related expenses paid by himself, his or her spouse and any dependent required for enrollment at any accredited college, university, or some other accredited postsecondary educational institution and can only be claimed for two taxable years for each eligible student.

For a student to be eligible they must hot have completed the first two years of postsecondary education and must be enrolled in a program that leads to a degree or so other for of educational credential. They also must be taking at least one-half of the normal full-time workload for their course of study for at least one period starting at the first of the calendar year and must not have been convicted of a felony related to the possession or distribution of a controlled substance.
The maximum amount that can be claimed is $1,650 per eligible student. This translates into a substantial tax savings for the taxpayer! Does your tax preparer know about this valuable tax credit?

A Stroke Of Genius

The other day I overheard a conversation that I found to be incredible. I overheard an astute businessman talking about the stimulus package the U.S government recently handed out to millions of taxpayers. I have wondered why the government did this. Anyone who has been living for more than 6 minutes knows that nothing in this life is free (except God’s love). Why then would the government give out billions of dollars for “free?” This topic came up in conversation the other day and one person said, “I believe that the stimulus package was a stroke of genius on behalf of the IRS (the U.S. Treasury Department).”

This person went on to explain that there were many taxpayers who had not filed their tax returns in many years. One stipulation of the stimulus package was that in order for a taxpayer to receive it they had to file their income tax returns. When many taxpayers did not receive their stimulus checks they called the IRS to check on it. After gathering all the necessary information on the taxpayer the IRS would then seek to collect on the unfiled taxpayers according to the man I overheard speaking. This seemed to make sense to me.
My interpretation of all of this was that the government used the stimulus package to uncover millions and even billions of more dollars owed to the IRS and the IRS would then begin the process of collecting on these individuals. Maybe this was the original intent. One thing is for sure, there seems to have been a large number of people calling our company in an effort to get back into compliance with the IRS.

IRS Penalty Waiver

Dealing with the IRS most always is a difficult and challenging thing. Often times clients want to know if penalties and interest can be waived on their IRS tax debt. For the vast majority the answer to this question is “No.” If I was a taxpayer and had fallen behind on getting my taxes filed I would ask the IRS to abate (remove) the penalties from the first tax year I fell behind. Knowing what I know after working in the tax resolution business I know the IRS has the ability to do this. The stipulation is that you must have a history of compliance (filing on time) prior to this. You have to ask for it however.
As for the other unfiled years that follow it is highly unlikely that the IRS will willingly remove the penalties for those years unless the taxpayer had a condition that prevented them from filing such as a hardship, act of God, was the victim of a financial crime or relied on a tax professional to get their tax matters under control, etc., in which case it may be best to contact a professional tax resolution firm.

Thursday, November 20, 2008

Nonresident Alien Filing Requirement

The United States has many nonresident aliens all of whom are required to file an income tax return if the fall under certain categories. If a nonresident alien worked or was considered to have worked in a trade or business during the 2007 tax year (in the United States) they must file a tax return if their income didn’t come a business conducted in the U.S. Additionally the nonresident alien must not have had income from any U.S. sources or the nonresident alien income is exempt from income tax.

If a nonresident alien had a tax liability that was not satisfied by the tax withholding where the withholding should have taken place and was not engaged in a trade or business within the U.S. then they must file a tax return. More can be learned about some of the other provisions that would require a nonresident alien to file a tax return by going to the IRS website.

Thursday, November 13, 2008

Filing Status Part V – Qualifying Widow (er) with Dependent Child (Q/W)

If a spouse dies in a given year the taxpayer may file married filing jointly and qualifying widow (er) with a dependent child, if eligible, in the following two years if the taxpayer meets the following conditions. They must be entitled to file a joint return with a spouse for the year the spouse died and did not remarry before the end of the tax year.

They must have a child, stepchild, or adopted child who qualifies as a dependent. This must not include a foster child. Additionally the taxpayer must have paid for more than half of the cost of keeping up a primary place of residence for the taxpayer and the child for the entire year with the exception of temporary absences. Many of the rules regarding filing status are complex and ambiguous. It is advisable to consult a tax professional if faced with some of the more complex filing statuses.

Filing Status Part IV – Head of Household (H/H)

A taxpayer desiring to file as head of household must meet several requirements. First, they must be unmarried or considered unmarried as of the last day of the year in which they are filing. A taxpayer must have paid for more than half of the cost of maintaining a dwelling that for more than half of the year was the main residence of the taxpayer and either a qualifying child or qualifying relative. It is important to note that a dependent can qualify only one taxpayer to use the head of household filing status for any given year.

If a parent doesn’t live with the taxpayer and the taxpayer claims the parent as an exemption, the taxpayer may still file as head of household provided the taxpayer pays more than half of the cost of keeping up the dwelling that was the main residence for the parent. This would also apply if the parent lived in a rest home.

If a taxpayer and his or her qualifying child are temporarily absent from the home due to circumstances beyond their control like an illness, business, vacation military service or education purposes the taxpayer still may file head of household. A professional tax preparer can give the best advice if any of these situations are present.

Filing Status Part III – Married Filing Separately (MFS)

Married couples may choose to file married filing separately (MFS). If so then special rules apply. If one spouse itemizes the other must also. Interest paid may not be deducted on a student loan. In most cases the taxpayer cannot take child and dependent care credit for expenses incurred, likewise the earned income credit cannot be taken. If Series EE U.S. Savings Bonds were used for higher education expenses the taxpayer may not exclude and of the interest income.

The taxpayer may not take credit for the elderly or disabled and may have to include more Social Security benefits received and cannot roll over any amounts from a traditional IRA or a Roth IRA if the taxpayer lived with a spouse at any time during the tax year.

The IRS code further stipulates a taxpayer may not take education credits, credit for adoption expenses and may have a smaller child tax credit than if the taxpayer filed jointly. Furthermore any capital loss deduction is limited to $1,500 instead of $3,000 if filing a joint return. If a taxpayer files a joint return then they cannot file a separate return for that year after the due date of that return. Professional tax preparers can be very beneficial when considering filing married filing separately.

Filing Status Part II - Married Filing Jointly (MFJ)

If a taxpayer is married on the last day of the year he or she is considered married according to the Internal Revenue Code. This means married and living together in a common law marriage that is recognized by the state in which the couple resides or in the state where such marriage began. They must be married and living together as husband and wife. It is permissible to be married and living apart, but not legally separated by operation of law such as a divorce decree or separate maintenance. A taxpayer is also considered married if they are under a divorce decree that has not been finalized.

A taxpayer is considered married for the whole year if their spouse died during the year. IRS code has several stipulations regarding filing status with the death of a spouse. For more information on this subject refer to IRS Publication 17.

When filing jointly both spouses must include all income, exemptions, and deductions and use the same accounting period. If either spouse is a non-resident alien at any time during the year a joint return cannot be filed. In the event of a divorce, the IRS code stipulated that both spouses may be held liable, both jointly and individually, for any tax, penalties and interest due on a joint return that was filed before the divorce no matter what the divorce decree states.

Filing Status Part I – Single (S)

Filing status is a subject of confusion for many taxpayers. This is one area that can get a taxpayer into trouble if not addressed correctly. For a more detailed look at how the IRS views the different filing statuses you may want to reference IRS publication 17. Therefore I am writing a 5-part blog, which will cover all the different types of filing statuses, which are:

Single (S)
Married Filing Jointly (MFJ)
Married Filing Separately (MFS)
Head of Household (H/H)
Qualifying Widow (er) With Dependent Child (Q/W)

We will begin by looking at the first filing status, single (S). Under IRS rules a taxpayer is considered single (S) if he or she is unmarried or legally separated from a spouse by divorce or separate maintenance. The taxpayer also must not qualify for any other type of filing status. The taxpayer is considered married for the entire year if they are married on the last day of the year and is unmarried or legally separated from a spouse under a divorce decree or separate maintenance.

Thursday, November 6, 2008

Non-Deductible Taxes

Taxpayers are often confused about the deductibility of taxes. Which taxes can be deducted and which can’t are some of the questions frequently asked. Generally the following taxes are considered non-deductible under current tax laws:
Fines and penalties
Estate or inheritance taxes
Transfer taxes
Federal excise taxes
Federal income taxes
Trash or pickup fees
Homeowner’s association fees
Rent increase due to higher real estate taxes
Social Security and other employment taxes for household workers
Employee contribution to private or voluntary disability plans
Taxes for local benefits (i.e. property improvements)
Gift taxes

Hopefully this list will help taxpayers make the determination as to the best action to take when making the decision as to listing a specific tax as a deduction. Taxpayers are encouraged to take full advantage of every provision in the tax code to ensure they do not overpay their tax obligation. Likewise taxpayers face big fines and penalties if non-deductible taxes are listed and are subsequently disallowed. If you do have a tax problem related to an audit you should call a tax professional.

Tax Deductible Taxes

Taxpayers are often confused about the deductibility of taxes. What can be deducted and what can’t are some of the questions frequently asked. Generally the following taxes are considered deductible under current tax laws:
State and local income taxes or general sales tax (but not both)
Occupational taxes
Taxes on income producing property
Tenant’s share of real estate taxes paid by co-ops
Foreign real estate taxes
Taxes that are expenses of business or producing income
State or local real estate taxes
Employee contribution to state disability fund or state unemployment fund
State income tax
Foreign income taxes
State or local personal property taxes that is:
1. Charged on personal property,
2. Based only on the value of the personal property, and
3. Charged on a yearly basis, even if collected more or less than once a year.
Hopefully this list will help make the determination as to the best action to take when considering listing a specific tax as a deduction. Taxpayers are encouraged to take full advantage of every provision in the tax code to ensure they do not overpay their tax obligation.