Our Taxing Times

EFTPS Changes

A little change could save an IRS notice later.

Today I was setting up an EFTPS (Electronic Federal Tax Payment System) payment and there was a special notice on the landing page. Beginning November 15, 2012, the EFTPS will no longer set default dates when a taxpayer schedules a payment.

EFTPS is an online payment center which allows taxpayers to schedule tax payments for their business or themselves and have the money debited from their account on the desired date. For example, a taxpayer who needs to make quarterly estimates to prepay their Federal tax can set up all four payments at one time to be withdrawn on that quarter’s due date. Besides the convenience of setting payments in advance, EFTPS gives you an instant acknowledgement that the payment has been accepted and provides a history of the payments made. I don’t know how many times the history has helped me help a client.

When I set up the payment today, the screen was set to the direct the payment into the current tax period. Right now that is December 2012. If I had been scheduling a payment for another time period, I would have to override the date. The same thing happens when I set a payment date. The system defaults to the next business day. If I want to schedule the payment for a different date, the onscreen date needs to be overridden.

Taxpayers have told the IRS that that can be confusing. I can see their point. It’s easy to confuse dates especially when the quarter has just changed or you need to make a payment for a past quarter or year. It’s easy to accept the default without understanding that it’s not correct for the payment you are setting up. I’m sure there will be some who won’t like the change but I’d rather have to set the tax period or date than to deal with cleaning up a mistake later.

Besides the changes to set the payment date and payment period, EFTPS will be adding a calendar feature to the payment history to help taxpayers target the date range they are searching for.

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Stoning Glass Houses - Again

This is a post I wrote last year. Based on Gov. Romney’s recent remarks, I thought it should be brought back.

Talk about tax reform is everywhere. "Taxes aren't fair!" and "need to go". And key to the arguments of the Tea Party, other reformers and pot stirrers everywhere is the Tax Policy Center's report that in 2011, about 47% of all taxpayers paid no Federal income tax. That has a lot of taxpayers mad because what they heard and has been repeated is that 47% didn't pay Federal income any tax. And in order to fuel the anti-tax fire and win elections, the anger has been shifted from the tax code to pointing fingers at classes and types of people. "He didn't pay any taxes!" That's not fair! Get a rope! "Those People" should be stoned!

Before you throw anything, I have a question. Do you really know who you are stoning?

Are you sure that you aren't in that 47%? Do you really know what tax you paid and not just what your refund or balance due was? Before you start hollering about the tax credits "those people" used to pay no tax, check your return. Did you take advantage of those credits too? How much would you be paying in tax without that credit? Are you living in a glass tax house?

So now you're sure that you really did pay some federal income tax, but before you pick up that stone to throw at those awful people who paid no taxes, I would suggest you check your target. You could be aiming at your children or grandchildren or parent. There is that nice young man who picks up your trash, or the teacher's aide in your son's classe, or your favorite greeter at Wal-Mart. It could also be your boss or the owner of a business. If you want to take out your tax frustrations on the 47%, it's only fair to include everyone who benefited not just the ones you don't like.

Look at the facts. That Tax Policy Center report covered Federal income tax only. That 47% still paid into Social Security and Medicare, paid sales taxes, local property taxes and in most cases paid state income taxes. And the report found taxpayers in every income level and filing status who didn't pay any Federal income tax. Most of those taxpayers simply took advantage of current tax laws and legally paid no tax.

We need Federal tax reform. What we don't need to do is target taxpayers who are taking advantage of deductions and credits we don't qualify for. Let's face it; if you could qualify you would be using those same credits and deductions. Put your frustration and anger to solving the tax code problem and not throwing stones.

FYI-The link to the Tax Policy Center includes a nice pie chart that breaks down the credits and deductions being used to reduce taxes for the 47%.

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Whistleblowing Taxes

Bradley Birkenfeld was a banker at UBS. That is until he spent some time in prison for helping a client evade income tax. But he’ll be even more famous for the $104 million he will be receiving from the IRS as part of the Whistleblower program. It’s the largest award that has been paid.

Mr. Birkenfeld provided the IRS with detailed info about how UBS helped Americans evade taxes. UBS paid $780 million to avoid criminal prosecution and gave the IRS account information on 4,700 of their American clients. It could be said that Birkenfeld’s actions led a major change in the Swiss banking system and resulted in 14,000 taxpayers taking advantage of the IRS’s tax amnesty program. That’s why he’s getting $104 million.

The IRS Whistleblower Office was established in 2006 under the Tax Relief and Health Care Act of 2006. It takes reports from individuals who spot a tax problem. The Whistleblower’s Office will investigate credible tips and if the IRS recovers money, the tipster could receive between 15 and 30% of the recovered tax. The recovered tax, penalties and interest must be over $2 million for the year and if the taxpayer is an individual they must have income of over $200,000 for the year.

If you think you have a tax cheat to report, you will need to fill out Form 211 (Application for Award for Original Information.) And if you do get an award, it will be subject to income tax (and withholding) like any other income.

IR 2007-201

NY Times Birkenfeld story.

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Drought, Farms and Taxes

Ag Secretary Tom Vilsack has added 218 counties in 12 states to the list of counties classified as drought disaster zones. A current Department of Agriculture report says that half of all US counties have drought disaster designation.  Of course, Kansas is one of them. In 2011, this area had 53 days with the temperatures over 100 degrees and so far this year we’ve had 26 and the forecast for the next few days is still in triple digits. (Even when it drops below 100,  the forecast is still showing high 90s.) The two years of 2011 and 2012 have set a new record for most 100 degree days in back to back years.

Of course, this means that the crops are dying in the field and farmers have to buy feed to supplement grazing. And, in some cases they’re trucking in water for livestock and crops.

To be honest, I expect that I won’t see a farm with a profit next tax season. Farming is hard enough in a good year; a disaster year can kill a family farm. And there’s not much the tax code can do to help a farmer. A farmer can elect to defer the income from their crop insurance proceeds. Or if they sell off extra livestock because of drought conditions they can defer the gain on those sales. Both elections require a special statement with details of the special circumstance. If the losses are great enough, a net operating loss could be created. A farm NOL is allowed to be carried back for 5 years. If the farmer has had a few good years, this could bring in refunds from those year of the income tax paid (SE tax doesn’t qualify.) Finally, this year’s drought might actually help in a future good year if the farmer qualifies for income averaging.

If you live or farm in a drought area, talk to your tax pro about these options. And, who knows, Congress might think of a new program to help in this disaster.

Drought Map.

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Education and Taxes

It’s back to school time and time to talk taxes.

First, let’s look at sales taxes. This weekend 10 states will have sales tax holidays on selected items that a parent with a back to school list might be purchasing. The actual exempt items and their costs vary by state so check the rules for your state. Taxgirl has put together all the relevant info along with links. She also mentions several other sales tax holidays later in the month. Unfortunately, Kansas isn’t having a sales tax holiday but both Missouri and Oklahoma are.  Who knows, if it cools a little this weekend, I might slip over the border and look for some new shoes for tax school.

Next up are income taxes. Specifically, I want to talk about records and receipts for your back-to-school expenses. Nope I’m not talking about that cute dress or awesome backpack you bought for the first day of school (hopefully with no sales tax.). I want to talk about college expenses; tuition, fees, books, supplies and room and board. (And in some cases K-12 expenses.) And it doesn’t matter if the student is a young person going full time or a parent picking up a class or going back part time, you should to keep records of what you spend for your education and what you receive in the way of grants and scholarships.
Congress has created several tax programs to help parents and/or students with college expenses. There are credits like the American Educational Opportunity Credit and Lifetime Learning Credits, the Higher Education Tuition Deduction, educational IRAs and the Qualified Tuition Program (QTP). All of them have different qualifications and cover different expenses. And I’m not going to cover them right now. I want to get you thinking about keeping track of school expenses and income while you’re spending the money. The basic ideas apply to most and should get you set come tax time. Then we can figure out which program you qualify for.

Now a word of warning, some of these programs were allowed to expire at the end of 2011 and several others will expire at the end of 2012. Right now, we don’t know what Congress will do when they decide to work. They could reinstate programs, let them die, or come up with all new education programs. No matter what they do, the burden of proving you qualify for the programs rest with you and you need to keep records.
It doesn’t matter if you might qualify for a credit or deduction or need to show that withdrawals are for educational expenses, you need to be proactive about keeping records. Don’t rely on the 1098T that the college will send out. Schools have gotten more accurate completing the 1098T but they can be misleading.
What do you need to keep?

• Receipts for books, supplies needed for school and tuition and fee payments. Don’t rely on credit card statements, keep the receipt. Right now this can include a computer (but not school tee shirts or beer.)
• Receipts from textbook buy back and other returns.
• Amounts for scholarships, grants and student loans even if the school is handling the money. (Actually, especially if the school is handling the money.)
• What money is being pulled out of educational IRAs and QTPs.
• If money is coming from Ed IRAs and QTPs, room and board needs to be tracked too.
• If there is more than one student, keep expenses for each separate.
• Most schools have account info online and that can be helpful but don’t rely on it. It may not have everything and you still need the receipts for bookstore purchases.
• And teachers, don’t forget your classroom supplies receipts (hopefully this will be back.)

These records will allow me (or your tax preparer) to accurately calculate the different educations programs and how they affect your taxes and use which program is best for your situation. Believe me; it’s better to put the info aside as you get it than to try to find it in February. Especially if you need your taxes prepared ASAP because you forgot the FASFA deadline.

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Tax Return Transcript

I’m hearing from clients who need tax return transcripts for loans and student financial aid. I guess that some lenders and schools have realized that a tax return can be faked up with tax prep software and want something from the IRS. A tax return transcript is not a copy of the taxpayer’s tax return. It’s an IRS list of what is on the return you originally filed. (You can get a copy of the return but it will take a while and there is a serious fee involved.)

There are 5 ways to get a tax return transcript from the IRS. All will require the taxpayer’s Social Security Number, Date of Birth, street address and the zip code. The street address the IRS wants is what they have on file. That is generally what was on the last return filed unless you have filed a change of address with the service. If you filed a joint return, you will want to use the SSN and date of birth for the first person listed on the return.

• Online – You can request a transcript from the IRS website. It will be sent to you at the address they have on file for you. In what I was able to access, there was no way to tell the IRS which year you were wanting.
• By Phone - 800-908-9946 and follow the prompts to enter the info they request. Again, the transcript will be sent to you.
• IRS2Go – This smart phone app allows you to request a tax return or tax account transcript to be sent to your address on file. It does let you specify which year you want sent.
• Form 4506T-(EZ) – There are actually 2 forms you can use, the 4506T and the EZ version. Each will let you order a transcript for the current year and the previous 3 years. The 4506T(EZ) can mailed or faxed to the IRS. This form also allows you to authorize the IRS to send the transcript to a third party like a mortgage company or have the transcript mailed to you.
• Tax Pro – With a Power of Attorney, Form 2848, a tax pro can request the transcript for you. This might be the fastest option if e-Services can be used to process the Form 2848.

To be honest, I’ve never gotten the IRS2Go to work for me but I know people who have used it. And the online program didn’t like my address even though it was the same as on the last return I filed. But it might be having a problem since I have an extension and haven’t filed a 2011 return yet.

With all the tax return fraud, I think we will be seeing more requests for tax return transcripts. It’s good that the IRS is giving taxpayers a number of options to get the info. Hopefully, they will work out ways to take late returns and address changes into consideration. And, maybe they can come up with a way to get the transcript other than by mail or through a tax pro.

Sample tax return transcript (download)

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Learned a Couple of Things

I love when I find a tax article that points out an idea that I hadn’t thought about before. I really like it when that same article gives me more than one thinking point.

CCHGroup.com recently posted an article about a couple who lost their dependency exemptions and credits that went with them because their children were not US citizens. The taxpayers, living in Israel at the time, believed that since one parent was an US citizen and that made the children eligible to become citizens, they qualified as citizens. The Tax Court disagreed (L.M. Carlebach, 139 TC No. 1, Dec. 59,127). The court said the children had to have US citizenship in any year they are claimed as dependents. The right to be a citizen doesn’t make the kids citizens for the dependent exemptions.

While the article outlined the penalties added to the couple’s new balance due, they mentioned the taxpayers were also hit with a failure to file penalties. The returns in question were filed late without any extensions filed. But since the returns originally had refunds, they weren’t subject to a late filing penalty at that time. But when the taxpayers lost the dependent exemptions and credits, the refunds became balance dues and subject to late filing penalties. The fact that they thought they were due refunds didn’t show the IRS and TC that they had “establish(ed) reasonable cause or the absence of willful neglect” which would allow the late filing penalties to be waived.

While I probably won’t see too many clients with the dependent citizen problem, I do see clients who won’t file an extension because they are sure they will have a refund. It might not be a bad idea to remind them that can change later. An extension might not solve the problem but it wouldn’t hurt.

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Medicare B and the Self-Employed

When you’re self-employed, filing a Schedule C or F with your 1040 or as partner in a partnership or qualified S-corporation employee, you have the ability to take health insurance premiums as an adjustment to income. Most taxpayers have to include their out of pocket health insurance premiums with their other medical expenses on the Schedule A. These expenses are first limited by 7.5% of the adjusted gross income and then what are above this “floor” are added to the other itemized deductions. The total of these deductions are compares to the return’s standard deduction and generally the taxpayer takes the higher amount. Medicare premiums have always qualified as a medical expense on the Schedule A.

A self-employed taxpayer has another option to deduct their health insurance as long as the insurance is bought under the business name or, in the case of the sole proprietor, under their name. But before 2010, they could not include the Medicare B premiums which are deducted from their Social Security. In 2010, the IRS changed the 1040 instructions and Pub 535 to allow Medicare B but they didn’t provide any explanation as to why the change.

The Office of the Chief Counsel has now clarified their position in CCA 201228037. The argument against Medicare B was that it wasn’t a plan established under a trade or business. It’s a Federal program not the taxpayer’s insurance. But the Chief Counsel has ruled that Medicare B is a qualified insurance under Sec 162(l) and qualifies for the Self-Employed Health Insurance (SEHI) deduction. Medicare D (the drug plan) has always qualified for the special deduction.

Talk to your tax pro to see if you meet the qualifications for the SEHI. You can amend any open tax years to take advantage of the new rules.

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Special Tax Exempt Reinstatement Program

Under the Pension Protection Act of 2006, all tax exempt organizations have to file an annual information return with the IRS. (Previously, a return was only required if the organization had gross income of $25,000 for the year.) For 2011, organizations with a gross income under $50,000 a year just needed to file the 990-N (electronic postcard.) Everyone else files one of the other 990 returns. If any group doesn’t file a return for 3 consecutive years, the IRS will pull their tax exempt status.

Until the end of the year, the IRS will allow small organizations who have lost their tax exempt status for failing to file for 2007, 2008 and 2009 tax years to apply for reinstatement under special criteria:

• The organization wasn’t required to file a form 990 prior to 2007.
• In 2007, 2008 and 2009, their gross income was less than $25,000 and they qualified to use the 990-N electronic postcard.
• Finally, the organization applies for reinstatement before the end of the year (12/31/12).

An organization wishing to take advantage of the program needs to file either Form 1023 (for 501(c)(3) status) or Form 1024 (everyone else) by Dec. 31, 2012. Notice 2011-43 should be written on the top of the 1023/1024 and on the envelope used to mail the application. They will also need to include a special statement with the request. The statement is included in Notice 2011-43. The organization will also qualify for a reduced application fee of $100 which should be included with the paperwork. If they qualify for reinstatement, the group will be issued a new determination letter.

The tax exempt status of an organization that qualifies for reinstatement under this program will be retroactively reinstated to the date it was revoked. The date of the new determination letter also restarts the 3 consecutive year requirement for filing returns. For example, an organization that lost their tax exempt status for not filing 2007, 2008 and 2009 gets it reinstated on August 1, 2012 won’t have to worry about losing their status again for not filing 2008, 2009 and 2010 (3 consecutive years.) But if they don’t file for 2012, 2013 and 2014 they would again lose their status. If an organization doesn’t take advantage of this program and applies later they will have to pay the full fee and show reasonable cause why they didn’t file the missing years.

All the detail of the program are in Notice 2011-43.

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IRS Notice - Tax Pro

Yesterday I made suggestions about what to do  if you receive a notice from the IRS and decide to handle it yourself. Today I want to make a few suggestions if you are using a tax pro. Since each tax pro is different, these are the things I want from you and what you can expect from me.

• This is not something I can handle over the phone from the start. Specifically, I need to see the notice. So please bring/fax/send the letter to me. Then we can talk on the phone.
• Bring/send me the whole notice. Remember the IRS used both sides of the page so make sure you get it all.
• I understand procrastination so bring me in the letters you ignored. In many cases, those will have the info I need not the last one you got.
• If I didn’t prepare the return in question, I will need a copy of the return as filed and any amended returns submitted.
• Until I’m sure of the scope of the issue, be careful of what you tell me. It may not be covered under client confidentiality if the IRS asks about it.
• This is your problem, not mine. I will help you as much as I can but I expect you to take it seriously. Get me the info and documents I request ASAP. I will not chase you down to get what I need to respond to the notice. Remember there are time constraints and deadlines.
• If I’m handling the notice for you, let me handle it. It will confuse everyone if you try to “help” by contacting the IRS too. If you’ve tried to resolve the issue yourself, please let me know what you’ve already done.
• Don’t expect me to lie for you.
• This is not a quick process. Expect to wait for weeks/months to get a response from the IRS. Calling me every other day will not get a faster resolution.
• If I can’t handle the problem, I will tell you so that you can find someone else. There are issues that will need a tax attorney or I can’t handle the work in the time frame necessary.

An IRS notice is serious but a tax pro can help you solve the problem. But you have to realize that you have to do your part by getting documentation to them and letting them do their job.

 

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