Our Taxing Times

Finalized ITIN Rules

Earlier this year, the IRS announced interim rules for issuing ITINs (Individual Taxpayer Identification Numbers). This is the number used on tax return for people who can’t qualify for a Social Security numbers. For example, the spouse and children of a taxpayers who has a work only SSN. The temporary rules made it harder to get an ITIN by requiring that the original documentation or copies certified by the issuing agency be submitted with the application. Until then, the applicant could use notarized copies of the original documents.

This rule has been made permanent with IR-2012-98. However; understanding that being without the original documents while an application is being processed can be an issue, the IRS will be allowing Certified Acceptance Agents (CAA) to certify they have authenticated the documents so that papers such as passports don’t have to be mailed to the IRS. One exception to these rules concerns the documentation for dependent children. These documents will still have to accompany the application. CAAs will now have to be someone who is also covered by Circular 230 (EA, CPA, RTRP…) and they will be required to take formal forensic training to help identify legitimate documents. The IRS will also step up their oversight and compliance activities with CAAs.

Beside submitting ITIN applications directly to the IRS or using a CAA, the IRS is planning on using some Taxpayer Assistance Centers, the US Tax Attaches in several countries, and VITA and Low-Income Taxpayer Clinics which have CAAs to validate supporting documentation. The policy put into place last month for foreign students to be certified through the Student Exchange Visitors Program will continue.

The new program will go into effect January 1, 2013 to meet the high demand of the tax filing season. Documentation changes will not apply to spouses and dependents of US military personal and nonresident aliens who need an ITIN to claim tax treaty benefits.

The biggest change to the program will be that ITINs will now expire after 5 years. The Taxpayer will be able to renew their ITIN before it expires. The IRS is also looking at a way to keep the information on the ITIN holder updated or to deactivate the number as necessary. The IRS sees this program as an ongoing process and they invite taxpayers to submit comments and suggestion by e-mail to ITINprogramoffice@irs.gov.

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EITC Checklist Expanded

For the 2012 filing season, the IRS has added another page to the Earned Income Credit Checklist (Form 8867). This is the form tax pros complete to document their due diligence when a taxpayer’s return includes the Earned Income Credit. The form, in one form or another, has been around for over 10 year but last year the IRS started requiring the form be included with any return requesting EITC.  

The Earned Income Tax Credit (EITC) is a refundable credit targeted at low income families. It was enacted in 1975 to offset the social security taxes taxpayers with children paid through withholding. At that time, the credit was 10% of wages up to $4000. But in 1986, the credit was seriously expanded. There have been several more expansions of the credit. Today, EITC is available to taxpayers with and without children and on 2011 returns the maximum credit is $5700. In 2009, the IRS processed 27.4 million tax returns and paid $60.4 billion in claims. 23 states have their own variations of the credit.

EITC is a good program and helps a lot of families. Unfortunately, it is a fraud magnet. According to TIGTA’s May 2011 report to the House Ways and Means committee (download), The IRS estimates between 23% and 28% of the EITC payments are improper. In 2009, this resulted in $11 to $13 billion in improper payments. As part of a program to reduce the bad EITC claims, the IRS has begun to put more pressure on the tax professional community. If a paid preparer doesn’t do adequate due diligence to make sure a client does qualify for EITC, they could face a $500 fine for each client they qualify but shouldn’t have.

The current form 8867 not only acts like a check list for each EITC qualification but now asks about what documentation was provided and what follow up questions the tax preparer asked. For example, one new question ask if the tiebreaker rules were explained when the qualifying child could be claimed by more than one taxpayer. The new page wants to know what documentation, if any, the preparer saw to verify EITC issues like residency, business income and child disability.

My concern is a possible change in IRS interpretation. Preparers have always been told that we aren’t responsible to audit the records taxpayers bring in to us. We need to ask questions and make sure we understand how the documentation was put together. If something seems wonky, ask more questions and document what we find. The new EITC questions could make it easier for the IRS to pull out returns to investigate further not because there is concern that the EITC on that return is fraudulent but because a box wasn’t checked. A box that is not required to be checked.

Last year, I created an interview form for EITC that not only makes sure I ask about everything but gives me a place to write questions, responses and notes about the EITC interview. And since most of my EITC clients have been with me for years, I’m not worried about the credit being questioned unless the auditor doesn’t understand the purpose of Form 8867 is to aid the preparer in doing their EITC due diligence. The form is not a pre-audit of the taxpayer. If a preparer is preparing fraudulent EITC claims, they will have no problem with lying on Form 8867. Investigate good EITC claims because of nothing more than what is on the Form 8867, and more good preparers will stop doing EITC because of the hassle involved. How many of their clients will end up with a bad preparer?

 

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IRS and Sandy

The IRS has released information on a variety of programs to help the victims of Hurricane Sandy.

If you have created a charity to benefit hurricane victims, you will still have to complete Form 1023 to apply for tax-exempt status but the IRS will expedite processing. All you have to do is write “Disaster Relief, Hurricane Sandy on the top of the form. If you have already mailed your application, you can fax a request with the same heading and the organization’s name, EIN, contact name and phone number to 513-263-4554. If you are still thinking about starting a charity organization for Sandy, check you Pub. 3833 – Disaster Relief: Providing Assistance through Charitable Organization.

The IRS has also temporarily suspended the rules for low income housing. Owners can rent to Sandy victims who don’t meet the income guideline or just need temporary housing. There is no mention, at this time, how long the suspension will be in effect.

To encourage employers and employees to donate leave time to qualified charities for disaster relief, the IRS will allow these types of contributions to be deductible by employers but not included in the employee’s W-2. Say a taxpayer donates one day of vacation from their paid leave bank, the employer gives the cash equivalent for that day to an eligible charity for the employee. The employer can still deduct the money as wages but not include it as compensation on the employee’s W-2. Of course, the employee can’t include the cost of that day’s wages as a charitable contribution since it wasn’t treated as income.

The IRS has a webpage for all the tax changes for Hurricane Sandy.

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Work Opportunity Tax Credit

The Work Opportunity Tax Credit was established in the VOW to Hire Heroes Act of 2011 as an incentive for employers to hire qualified military veterans. It’s set to expire on Dec 31, 2012 unless Congress does something to change that in the next few weeks.

But employers can still take advantage of the program as long as the veteran starts working before the end of the year. They then have 28 days to submit Form 8850, Pre-Screening Notice and Certification Request with their state workforce agency.

The maximum tax credit is $9,600 for businesses that are for profit and $6,240 for non-profit businesses. The amount of the credit depends on how long the vet was unemployed before being hired, the number of hours they are working, their 1^st year wages and if the veteran is disabled. All the details can be found on the US Dept. of Labor website or check www.irs.gov and search for “WOTC”

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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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