Our Taxing Times

First Time Penalty Abatement

You’ve been a good taxpayer. For years your returns have all been filed on time and your balance dues have been timely paid. Then you have a bad year and you end up with a failure to file or a failure to pay penalty. Before you pay the penalty you might want to check and see if the IRS will waive (abate) the penalty.

The IRS will abate a penalty for many reasons; if the taxpayer has reasonable cause for having the penalty, there may be waivers set by law, the IRS may have made a mistake or you might qualify for an administrative waiver. But you have to ask for the waiver especially the First Time Abatement.

The First Time Abatement (FTA) is an administrative waiver that the IRS doesn’t publicize too much. (Don’t believe me? Try running a search for the program on IRS.gov.) A TIGTA report found that in 2010 1.65 million taxpayers qualified for the program but only 8.8% of them actually received the waiver. FTA is available for individuals and business. For individuals, the program can abate the failure to file and failure to pay penalties for one tax year. Businesses can also use the FTA for the file and pay penalties as well as late filing penalties. They can also request FTA for one quarter’s failure to deposit (payroll). FTA is not available on Estate and Gift Tax return. Nor will the program abate the estimated tax or accuracy penalties.

To qualify for FTA, the taxpayer must have been compliant for at least 3 years. That means all their returns have to have been filed and they didn’t have any significant penalty, except the estimated tax penalty, during that 3 years. FTA can be requested by phone or in writing but it has to be requested. The IRS won’t volunteer the information.

For more info, check out Jim Buttonow’s cpa2biz.com article on FTA.

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Do Overs

Do Overs.

How often as children playing with friends have we called out for the chance to do our turn over again. Maybe we’ll get a better result this time. It’s frustrating that as adults we can’t do over events. But with our income taxes, we have a chance to do over our tax return.

When a taxpayer needs to change the return they originally filed, they can do just that on form 1040X. An amended return can be filed for income or expenses which were omitted on the original return, to change filing status or dependents or to take advantage of missed credits. An amended return might also be used to respond to an IRS notice.

No matter the reason, the procedure is the same. Form 1040X is used to report the changes. The first page has three columns. The left column shows what was on the return the taxpayer originally filed. The center column documents the changes being made. The right hand column shows the corrected figures. On the second page, there is an area to list name and SSN for any dependents being added to the return and a place to explain what changes are being made.

The 1040X can be a little tricky so a few suggestions.

• Make sure you have a copy of the original return saved before you start making changes. Once you have completed the amended return, save that return separately.
• If the amended return shows a refund, it has to be for an open year or you won’t get they money. You have 3 years from the tax return’s due date or 2 years from when the tax was paid to request a refund.
• If you end up owing on the 1040X, don’t be tempted to hold off filing the 1040X to see if the IRS catches the error. Waiting for the IRS to contact you could mean higher interest and penalties.
• Prepare one 1040X for each year and mail them separately.
• This might be a good time to get a tax pro to help you. If you choose to do it yourself, take it slow and follow the instructions. It might be easier to do a 1040 return incorporating the changes first. That way you have the information you need for the left and right column and can easily calculate the adjustment column.
• While you don’t need to send a full copy of revised return, you do need to send a copy of the supporting documents and forms for you changes. For example, if you forgot to take advantage of the education credits on your original return complete Form 8863 and include that form with your amended return.
• Amended returns still have to be mailed in to the IRS. They also take longer to process because they aren’t electronically filed. Give the IRS at least 6 to 8 weeks. New this year is the ability to track any amended return for this year or the last 3 years by using the “Where’s My Amended Return?” on the IRS website or by calling 866-464-2050. You’ll need the primary Social Security Number (1^st one on the return), the date of birth for that person and their zip code.
• Don’t forget to amend your state returns. The IRS and the state revenue departments compare notes about what each has on file. Again, take it slow as you prepare the return. Each state has their own format and many require a different form for resident amended returns as to non-resident amended returns. Also, check to see what documentation your state wants sent with the amended return. Generally, they want a full copy of the amended return you sent to the IRS.

You can get a do over on your tax return if you need to make changes to a return that has already been filed. Use a 1040X and don’t forget you state return too.

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Return Is Done but you Owe.

It happens, you owe the IRS. What do you do? You can add a check or money order to your paper filed return (Please copy the money order and keep the stub safe.) If you e-filed your return, you should have been given a voucher to mail with your payment. And do put your SSN on the check/MO. You can also pay your balance due with a credit/debit card. The IRS has a list of credit card processors on their web site. A word of warning, you will be charged a processing fee by the processor. Many tax software programs will allow you to set up a debit from your bank account through the program. You can schedule the date you want the money to come out. But check to see what fees they might be adding to your balance due.

What if you can’t pay your balance due? First, file your return. This stops the failure to file penalty. The IRS has an installment payment program that allows you to stretch out your payments. You can use their online payment agreement to apply for it. You can do it online if you owe less than $50,000 in tax, penalties and interest. Not comfortable with the online process? You can file form 9465. Either way, you will see an application fee added to your balance. The fee will depend on how you chose to pay (the IRS prefers direct debit and cuts the fee if you chose that option) and you may qualify for the low income fee. As you set the monthly payment amount, remember that interest and penalties will continue to build so you want to pay off your balance as soon as you can.  If you think you can pay your balance due off in a few months (2 to 4), you can work out a short term plan. The advantage is that there is no fee and the interest and penalties can be lower. This plan is online too.

One warning – you are not setting up a revolving tax payment plan. As part of the installment agreements you sign, you agree to pay off any future balance dues until the installment agreement is paid off.  So, if you set up an installment agreement for your 2012 balance due and come April 2014 you owe again on your 2013 taxes, you have to pay off that balance due in full or lose the installment agreement.

The IRS wants your money and they’ve given us a lot of ways to pay them. No matter which you choose, file your taxes on time and save yourself that penalty.

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Catching Up On the News

Half over or half left, it depends on your point of view. Tax season is at the half way mark. I’m still working away on returns so this post is a collection of little notices and news items.

It looks like the remainder of IRS forms will be released to be filed next week. The IRS is doing live testing of the forms and my software company (Drake) will now allow returns with those forms to be uploaded to them and they will send them in when the IRS allows.

The IRS is reporting problems returns with Earned Income Tax Credit. They now require Form 8867 to be included with returns completed by paid preparers but they were receiving incomplete forms. When that happened, the IRS would hold the return and send the taxpayer a notice requesting the missing information. The Service has stopped holding the returns and are catching up the back returns. But if you receive the letter, you should still respond and get the IRS the info they are requesting.

The IRS is expanding the Voluntary Classification Settlement Program. This program allows employers to move employees they have treated as independent contractors to employee status. For all the details, please see Announcement 2012-45 and 2012-46. Employers have until June 30, 2013 to apply.

The IRS did not send out reminder letters to taxpayers who took advantage of the first version of the First Time HomeBuyer’s Credit and are now repaying the advance they received. It has put a FTHBC look up tool on their website so that taxpayers can check the status of their payback.

“Where’s My Refund” is a problem again this year. This year the IRS took a more conservative approach and did not give target dates. As a result, the online tool was swamped with taxpayers checking on their refund. The Service asked that taxpayers limit their checking to once a day (it’s only updated once a day) to cut down on the traffic. But now it seems that there are issues of the amounts being deposited not matching what the IRS say will be deposited. If this happens to you, give the IRS a little time to get a letter to you explaining why they changed the refund. If that doesn’t answer your questions, than you’ll have to call the IRS at the number on the “Where’s my Refund” response page.

The IRS is saying that the mandatory furlough caused by Congress’s failure to deal with the sequestration will not affect the tax season. They will hold off until after the filing season is over on April 15^th.

Back to returns.

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OIC Calculator

The IRS has a new tool that will let taxpayers check to see if they are eligible for an Offer in Compromise (OIC) and get a preliminary offer amount if they do qualify..

The Offer in Compromise program allows taxpayers to make a counter offer to pay their IRS debt. This isn’t a “pennies on the dollar” program like you see on late night TV. A taxpayer can qualify to pay a reduced amount by showing that they really can’t pay the full amount or if they can show that there is a real question that they owe the money. Most taxpayers take advantage of the OIC because they believe that they can’t pay the debt.

The OIC application process requires the taxpayer to complete an extensive financial report listing all assets, living expenses and debts. Too often, they spend hours filling out the form to discover that they don’t qualify for the program. The new online tool will allow the taxpayer check if they qualify before they fill out the form.

I haven’t had a chance to try the program yet so please let me know how it does.

FYI - THe OIC Tool Link has been updated.

OIC Tool

IRS OIC FAQs

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Low Cost Tax Preparation Options

Don’t want or can’t pay a tax pro to do your tax return? You have some options.

There are a stack of commercial programs and online sites to choose from that will help you prepare your income taxes. Most walk you through the process with questions to get the info needed to file your return. And if your income is under $57,000 for 2012 you might be able to use the IRS Free File. The Free File Alliance was started years ago to help lower income taxpayers prepare and file their federal taxes. The IRS has convinced a bunch of tax software companies and online tax service companies to offer free tax preparation and return filing for Federal returns for households under $57,000 in income. You access Free File through the IRS website. The free part of free file actually only applies to the Federal return. You could be charged for any state returns you need completed. Check the fine print.

If you are a tax do-it-yourselfer and want to electronically file your return, the IRS has fillable tax forms. These forms act like a paper form and you fill in the blanks. They will do limited mathematical calculations and can be e-filed when you have the return finished. There are also complete instructions for the program. As for state returns, check on your state’s website for online filing options. Many states, like Kansas, give taxpayers the ability to file their state return online for free.

If the idea of preparing your own taxes causes you to panic but you really can’t afford to pay a preparer, there is volunteer tax help available to you. The IRS certified programs are VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly).  Vita will help households with less than $51,000 in income and TCE is for taxpayers who are 60 or older. Besides tax preparation, the programs can e-file your returns. There are also specialized services for the military and their family. To find a location near you, the IRS has a search program and more info about the program.

There are a bunch of options available for taxpayers who need some help preparing their tax returns but don’t want to pay a tax pro. Check what options they offer and what hours they are open. One of these programs might work for you.

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Happy EITC Awareness Day!

Who said; “The Earned Income Tax Credit is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”?

Today (1/25/13) is Earned Income Credit Awareness Day. So in honor of the program, here is a little information. 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 2012 returns the maximum credit is $5891. 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 based on earned income. This is moneys from wages and self-employment income. If you charted EITC benefits vs. earned income, it would look like a flat top pyramid. As income increases, the amount of the credit also rises until the top refund amount is reach. Then here is a plateau before the refund begins back down to no credit. Actually, there are 8 charts. Two are for taxpayers without children; one for married and one for unmarried taxpayers. Three more charts are for married taxpayers with one, two or three (or more) children. The final three charts are for unmarried taxpayers with one, two or three (or more) children. Besides having to decide which chart to use, qualified taxpayer also need to look up both their earned income and their Adjusted Gross Income (AGI) on that chart. Their EITC is the lower of the two numbers. One of the disadvantages of EITC is the complexity.

Complexity is a big issue with EITC. Before deciding which chart to use, the taxpayer needs to decide if they qualify to take the credit. That is daunting. As a tax pro, I have to do Due Diligence on potential EITC clients to make sure they qualify. I have to check age, residence, relationship, foreign income, investment income, and potential conflicts with other taxpayers. This has to be documented on Form 8867 and sent in with the tax return. I also have to keep copies on any documentation the taxpayer brings in with them. The new due diligence requirements have forced many tax pro to stop doing returns with EITC.

There is also a real belief that the IRS should not be handling the credit. That it’s a social program and the tax code should be for tax administration. A social service agency would do better at screening EITC beneficiaries than relying on tax pros or taxpayers to do that. The IRS estimates about 25% of the claims it sees are incorrect or fraudulent. On the other hand is concern that it would reduce the number of taxpayers who would take advantage of a social service program out of pride. Let’s face it, for many people “welfare” is a dirty work.

But is the credit worth the problems with it? According to Alice Lieberman, of The University of Kansas School of Social Welfare as quoted in the Topeka Capital Journal.

"The Earned Income Tax Credit is the most effective anti-poverty program in the United States," Lieberman said. "It both encourages and rewards work by allowing low-income workers to recoup money that otherwise would have gone to taxes. And since low-income people are more likely to spend their income than to save it out of necessity, it is also an economic stimulus."

Also from the Capital Journal, a 2005 National Bureau of Economic Research study found the federal program raises employment by making low-wage jobs more attractive.

“(The EITC) successfully meets its explicit goal of encouraging low-income parents to go to work by, in effect, lowering their tax rate and providing a financial bonus for that work effort,” the study found. “It has been especially effective in encouraging single parents, particularly women, to obtain employment.”

As a tax practitioner, I like the EITC (and I know many preparers who don’t). The due diligence is time consuming and it can be difficult to explain why a taxpayer doesn’t qualify or why their credit is less than a prior year. But I’ve seen the benefits. My client base included many hard working people who have low paying jobs. The EITC they receive is used to pay for unexpected expenses and as a cushion right before payday. It keeps them in their homes. I think it’s one of the better things Congress has done. So I don’t mind the extra work if helps reduce fraud and keep the credit for the good people who need it.

The quote that started this post was from Ronald Reagan.

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Farmer (and Fisherman) Relief

With the delay in filing some IRS forms, most notably Form 4562 for depreciation, many tax pros and taxpayers have been concerned about how this will affect qualified farmers and fishermen. These taxpayers have the option to make estimated payment like any self-employed taxpayers. However, they also have the option to file their tax return and pay all of the balance due by March 1^st and avoid the underpayment of estimate tax penalty. But since some forms will not be available before the middle of February at the earliest, the IRS will allow farmers and fisherman to file when the forms become available and not face the penalty.

Because of the delays, farmers and fishermen who had at least 2/3rds of their income from farming and fishing in 2011 or 2012 will have until April 15^th to file their return and pay any balance due. Form 2210-F must be completed and attached to the return (paper or electronic). Besides their name and SSN, the taxpayer only needs to check the waiver box (Part 1, Box A). The rest of the form is left blank.

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Red Forms

Okay, IRS, I’ve worked very hard to get all my clients who should issue 1099’s to do that. Now I want something from you. I want the red forms to go away. Please get your systems set up to accept laser printed 1096s and your copy of 1099s.

Every January, I have a bunch of clients who bring in their 1099s for me to do. Most just need one or two 1099s and the cover 1096. And in preparation, I order blank forms from you in the fall. But I still spend a lot of time and waste a lot of forms to get those silly red forms to print correctly. And it doesn’t help that the forms you send are only 8 inches wide. It seems that if you want the red forms used you could at least make them fit a printer tray for 8.5 in. paper.

So how about it? Start taking laser printed 1099s and 1096s like Social Security does with W-2s. It might save you time too. I know how hard to read some of those forms are now when the taxpayer or preparer doesn’t take the time to adjust the forms properly. I have a bunch in my shredder right now.

Down with Red Forms.

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New Office in Home Rate

Under the guise of tax simplification, the IRS has provided an alternative to the current office in home deduction available to qualified employees and self-employed taxpayers. The Office in Home (OIH) deduction requires the taxpayer to have a dedicated space which is used only for the business. This rule hasn’t changed. You can read all the requirements on the IRS’s Office in Home page.

The new rules announced in Revenue Procedure 2013-13 will allow taxpayers to choose between a flat $5 a square foot deduction, capped at 300 square feet ($1500) and the traditional calculation starting on 2013 returns. Currently, the taxpayer is allowed to take a percentage, based on the ratio of office space to the total home space, of the expenses of maintaining the home. These expenses could include mortgage interest, taxes, insurance, utilities, rent, and repairs. If the home is owned, the taxpayer also takes a depreciation deduction for the space. Any expenses which are also deductible on the Schedule A (Itemized deductions) are pro-rated between the forms. It’s a complicated calculation and a set rate could be a good thing.

But the taxpayer or their tax pro needs to check both ways at least for the first year. It might not be advantages for someone with higher expenses or larger business areas. I could see where the traditional calculation would be better for a day care provider which uses a larger space. I also want to see the actual instructions for calculation the deduction because I have some questions?

First, what happens to the carry forward? Currently the OIH deduction is limited to the business income. It can’t put the business into a loss so once the business is at $0 income/loss any OIH deduction which is left over is carried forward to the next year. Will the new rate be allowed to carry forward?  I hope so but that cuts down on the simplified record keeping of the new rate.

Next, how will day care hours affect the use of the flat rate? In-home day cares not only use the square footage of the home used for business in their OIH calculation but they also modify that percentage based on their hours of operation. It’s not unusual for a day care to use 90% of the home. If they’re open 12 hours a day seven days a week, they will be able to take 45% of their home expenses for OIH. Will the new flat rate also have to be modified?

My other concern is the double dipping for some taxpayers who use the new flat rate. As mentioned earlier, the OIH deduction includes some of the same deductions as on the Schedule A. However, under the current system, the OIH percentage of those deductions is allocated first and the remainder is carried to the Schedule A. But under the flat rate, the taxpayer can use the OIH rate and take all their personal deductions on the Schedule A. Since the flat rate theoretically includes the mortgage interest, home taxes, and casualty losses in the $5 a square foot, the taxpayer would be using more than what they paid for those expenses. It might not be a big problem but it makes it important to check both rates to see which is better for the taxpayer.

The new Office in Home flat rate starts for 2013. That gives the IRS a chance for feedback and to create the actual procedures for implementing the optional method. If you are interested in commenting, the Revenue Procedure 2013-13 notice has all the info you need to do that.

Anthony answers some of my questions in the comments. Thank you Anthony!

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