Feb 28, 2008

Filing an Extension on your tax return- is it null and void?

Many often think that filing an extension releaves you from paying until the extension is expired- i.e. October 15th, 2008. However, this is not true. In fact, if you do not properly estimate your taxes on the Form 4868, Application for Automatic Extension of Time to File, the IRS can declare your extension null an void. You must be reasonable in estimating the tax liability on line 4 of the Form 4868.

How does the IRS challenge the validity of the extension?? Usually under audit. If your return is selected for examination, the IRS will make a determination of ALL penalties including whether the extension is valid or not.

Normally this will not be an issue if the tax paid up to the date of the extension and with the extension (i.e. all payments before April 15th- the due date of the return) is 90% of the total of the tax that is on the return when it is eventually filed before October 15th. This is also true of the failure to pay penalty- if you have paid 90% before 4/15 - you will be considered to have "reasonable cause" for the non-assertion of the failure to pay penalty.

If you have impending tax debt on your 2007 tax return, it is best to consult a professional who can both advise you on your return and the tax debt resolution that will follow. Knowing your options and challenges is imperative in reducing your total liability and avoiding enforced collections.

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Feb 27, 2008

Q & A: Timing of Stimulus Rebate Check Mailing

QUESTION: Rumor has it the 2008 tax rebate checks will be mailed out according to the last 4 digits of your social security number. Is this true?

ANSWER: The IRS has not issued any news regarding the order by which the stimulus tax rebates will be mailed out. The first checks are scheduled to be put in the mail to taxpayers in early May. There should be a news release in the coming weeks giving guidance on the timing and order of disbursement of rebate checks. Visit the IRS web site at http://www.irs.gov/ to view the latest news concerning the rebate program.

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Feb 26, 2008

Finding 2007 Tax Forms

QUESTION: My mother has not filed an income tax return for several years. However, because of the the "Stimulus Payment" this year, I understand that if she files a 1040A form for 2007 she would be eligible for this rebate. I have searched the sites on my computer and the only form that I have been able to print is an example form. Could you please let me know where I can find a 1040A form that I can fill out for my mother?

ANSWER: The Form 1040A along with most all of the 2007 IRS tax forms can be downloaded from the IRS web site at http://www.irs.gov/. Go to this site, click on the link to "Forms and Publications" and you can access hundreds of IRS forms, even forms from prior years. Happy forms hunting!

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Limitation on IRS Collections

QUESTION: On my 1997 tax return, I forgot to include one Form 1099 and received a refund. Later a notice from the IRS was sent adjusting my return and telling me how much tax I owe. When does the collection period begin--from the date the return was filed or the date the notice was sent?

ANSWER: The IRS collection period begins on the date the adjusted tax amount was assessed. That is, if this adjustment was assessed to you on 8/15/1999, the collection period for the total balance owed will end on 8/15/2009. Be aware that if you filed the 1997 return jointly with your husband, the IRS will attempt collection of the balance due from both of you until the end of the collection period.

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The Economic Stimulus Rebate

QUESTION: My mother-in-law and her husband file every year by TurboTax. This year they will owe the IRS. However, TurboTax will not know about the tax rebate to deduct the rebate from their balance. How should they go about paying their liability and how will the IRS apply the rebate? Is it as simple as them paying their balance and then receiving a rebate later (for whatever amount it may be) once their return is filed and processed?

ANSWER: Great question. The rebate has no bearing on the tax balance due or refund due on this year's return. Rather, once the return has been processed the rebate amount ($1,200 if filing a joint return) will be processed and mailed to them. When they file their 2008 return, the amount received as a rebate is to be incorporated in the return. But this amount is not taxable income for 2008 nor will it reduce a potential refund or increase tax owed on the return.

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Feb 20, 2008

2008 Tax Rebate: Filing a tax return is a must

The 2008 tax rebate is triggered from filing a 2007 tax return. However, some taxpayers do not have to file a return due to not meeting the income thresholds. If taxpayers follow the normal course of non-filing (as they are legally justified in doing), they will disqualify themselves from receiving the 2008 tax rebate (i.e. the stimulus package).

To alleviate this and to put taxpayers on notice, the IRS has put out press releases and has developed a special Form 1040A for those who do not need to file except for the ability to receive the tax rebate. It is important that the taxpayer write "Stimulus Payment" across the front of the return in order to notify the IRS of the filing of the return for tax rebate purposes.

This is especially intended to give those individuals who recieve Social Security benefits the ability to "apply" for the rebate by filing the return.

You will see a full out press assault on the IRS requiring seniors, who have only social security income, to file tax returns in order to receive this rebate. The federal government through the IRS and the Social Security Administration has access to all Forms SSA-1099 to see the returns filed and the amount of benefits paid. It seems that they could do a better effort in offering the seniors the ability to receive these benefits without having to go through the arduous process.

The IRS has reached out to seniors to offer their free filing services known as the VITA program and the TCE Program. You will need to call the IRS at 1-800-829-1040 to find a VITA/TCE site that will file your taxes for free.

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Feb 19, 2008

Should I e-file my tax return? Hmmmmm....

There are two schools of thought here as to whether you should file your tax return electronically: yes it is great- I get my refund faster! or heck no, why would I give the IRS all of my information!

Some factors to consider:

1. Filing electronically gives the IRS immediate use of your data. The IRS takes about 6-8 weeks to "post" your return to their master file. Filing electronically gives the IRS about 10 days to post the return. The time for the IRS to audit your return is 3 years from the due date of the return or date filed, whichever is later. Filing the return by paper decreases the time for the IRS to review the return and select it for examination. At the very least, it would put pressure on them with other priorities in mind to make an audit decision. The same could be said about filing early- yes you get the refund faster, however, the IRS has more time to consider the return.
2. Filing electronically gives the IRS your entire return to review via their master file database. Filing by paper only allows the IRS to key critical items on your tax return. If you do not believe me on this fact, pull a return transcript on a paper filed return and compare it to the return you actually filed. You will notice significant differences especially if you made disclosures on your paper return.
3. A paper return can have documentation attached that may preclude an examination. If you file by paper, you are given the opportunity to attach disclosures of your position. For example, if you have an enormous amount of charitable deductions and you have the required documentation, you may attach it so as to provide substantiation for any potential audit. The IRS classification specialist who selects the return for examination or the downstream examiner must consider these facts attached. With so many returns to examine with great potential for adjustment, the IRS Agent will take heed of the disclosures and consider the cost/benefit in an examination of a return that appears to have the proof of the deduction already attached to the return.
4. The IRS has sped up payment of refunds. In fact, if they are substantially late in paying a refund, they must pay interest on the refund. Hence, the difference in a paper filed or an e-filed return refund is negliglible- the maximum of 6 weeks delay. If you direct deposit, the difference in time is more likely to be around 2-3 weeks.

Having spent my time around the IRS, I can tell you what some insiders say: why does anyone file their return electronically other than to get their refund a little quicker?

The civic respopnsibility to lower the government's cost in filing your return electronically is only reason I would file electronically. Otherwise, inviting, in any manner, an audit is not prudent.

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Form W-4: What if I fill it out incorrectly?

Most employers allow you the opportunity (if they don't - they should!) to change your federal and state income tax withholding (federal is "FITW") routinely. Many fill out their Form W-4 based on their filing status and number of dependents (i.e. married with 2 children will fill out the Form W-4 with "Married" and "4" exemptions). This is generally correct and will closely approximate the amount of tax you will need to have withheld at the end of the year to not owe taxes.

However, if you have significant income that is not subject to withholding (i.e. pension income, investment income, etc.) or are underwithheld on your wages, you may have a tax debt at the end of the year. If you do this consistently, year after year, owe at the end of the year, and do not immediately resolve the matter by paying the taxes with the return filed, the IRS may fix your FITW and your Form W-4 for you via a lock-in letter.

The lock-in letter is a letter that the IRS sends to your employer insructing them to change your Form W-4 to the maximum withholding rates of "Single" with "0" dependents. This will significantly decrease your paycheck as a significant sum of your pay will be withheld and sent to the IRS.

The only manner to change the Form W-4 and employer's instructions to withhold at the maximum rate is to get permission from the IRS (the instructions are on the Letter 2080 sent by the IRS).

More importantly, if you get to the point of a lock-in letter, you most likely owe tax debt and need a professional to resolve your tax matters.

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Foreclosure- Debt Forgiveness- will it cause more foreclosures?

Normally, a foreclosure of your primary residence can have some serious tax effects. Depending on your financial details, the debt forgiven on foreclosure of your primary residence can be fully or partially included in your taxable income. However, recent tax law changes have opened a temporary loophole to the taxation of debt forgiveness on a foreclosure on your primary residence.

However, in order to benefit from the recent legislative changes to the taxability of debt forgiveness on your primary residence, a taxpayer will need to foreclose on their primary residence and have the debt forgiven in 2007, 2008 or 2009.

One wonders if this will cause more foreclosures?? The tax benefits and loophole created by Congress and signed by the President leaves a limited time to capture these benefits. If I was contemplating foreclosure, this tax relief may push me over the edge to go into foreclosure.

This is another example of a tax law change that may not have been well thought out before it passed. Time will only tell.

If you have tax debt associated with a home forclosure or any type of debt forgiveness, consider contacting a tax professional for advice on how to proceed.

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The Tax Rebate for 2008- the details

The IRS has done a great job of synthesizing the recently passed tax rebate into a Q&A that everyone can follow. In short, it can be summarized as follows:

1. You need to file a tax return for 2007 to receive the benefit of the tax rebate. Even those who do not normally have to file
2. It is a maximum of $600 per individual, $1200 if married filing jointly, and $300 for each child that is a qualifying child with a social security number
3. The rebate phases out for adjusted gross income over $75,000 for individuals and $150,000 for couples filing jointly
4. The IRS will automatically send you your rebate via the method you select on your 2007 tax return (i.e. by mail or direct deposit)
5. The IRS will start sending the rebates at the end of May, 2008
6. If you owe tax debt, the IRS will keep the rebate to pay your taxes.

Remember, file early and accurately and the rebate will come faster.

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Feb 18, 2008

Qualifying Relative as a Dependent?

QUESTION: My 96 yr old grandmother takes care of her 68 yr old old son. She spends about 90% of her pension supporting him, he has lived with her for ~20 years, he only gets a disability pension from the army of $850/month, and he hasn't had a job in 30 years.
1. Is he qualified to be declared a dependent? 2. If he is qualified, is she required to have some sort of legal paper like a power of attorney?

ANSWER: There are four tests to determine the ability to claim someone as a qualifying relative. Let's examine if your situation survives the four tests:
1) Relationship test > Since the son is living in the same home with his mother and is member of her household, this test is passed.
2) Gross Income test > The son's disability pension is excluded from the income test. Thus, since his annual income is under $3,400 (for 2007), this test is passed.
3) Dependency test > The son must not be able to be claimed by any other taxpayer as a dependent. It appears that this test is passed.
4) Support test > As long as the mother pays more than half of the son's total financial support for the tax year, factoring in the $850/month disability benefit, this test should be passed. This test appears to be the most crucial in your case. The mother must provide more than $850/month toward the total financial support of the son.
To answer your second question, no power of attorney is needed. However, evidence of financial support (such as cancelled checks, store receipts, etc.) is suggested in the event the IRS ever questions the validity of the dependency deduction.

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Feb 14, 2008

Installment Agreement with the IRS

QUESTION: Does an installment plan extend the 10 year collection statute? I currently have an installment plan for 1998 taxes which went in force last year. Will the statute apply at the end of this year 2008?

ANSWER: The 10 year statutory collection period begins on the date that the tax balance owed is assessed (not when the tax was originally due). The tax is assessed generally upon the processing of your return by the IRS. That means that if your 1998 tax return was received and processed on March 31, 1999, for example, then the statute would expire on March 31, 2009. However, if you filed your 1998 tax return late, let's say in 2000 for this example, once again the statute begins on the date of assessment, and the 10 years would end in 2010.

An installment agreement does not extend this 10 year period. There are other events, such as bankruptcy, filing for an offer in compromise, or due process hearings that, by IRS law, do extend statute expiration dates. Also, installment agreements may or may not pay off the balance you owe. Most agreements will full pay your liability within the 10 year period. But there are partial payment installment agreements that, even though monthly payments are made, do not full pay the liability within the statute period. The 10 year statute may actually end before the remaining balance is paid off. If that happens then the debt falls off.

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Feb 13, 2008

Reporting Mortgage Interest--As the Lender

QUESTION: I lent my daughter and son in-law money in the form of a second mortgage. At the end of the year, I sent them a statement showing the amount of interest paid, the amount of principal paid and the remaining balance. My understanding is that I am not required to file a 1098. Do I need to provide any additional information to them?

Second question: How and where do I report the interest income I am receiving from the loan?

ANSWER: You did exactly the correct thing in providing them with a written statement of interest paid for the year. No Form 1098 is required in this circumstance. On your daughter and son-in-law's tax return, they will have report the interest paid to you on Schedule A and list your name, address, social security number, and amount of interest paid in lieu of receiving a Form 1098.
As for your question about reporting the interest income received, you will report that amount on Schedule B of your tax return under Interest Income.

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Qualifying Child and/or Qualifying Relative

QUESTION: My question is about whether there are earning limits for claiming an exemption for a "qualified child" who has been disabled for most of the past year and has lived with us for most of the year. We feel that we should be able to claim this child but can't figure out if it would be allowed.

ANSWER: There are 4 tests for claiming a "qualifying child". They are:
1) Must be a son, daughter, stepson, stepdaughter, or descendant of such child; or a brother, sister, stepbrother, stepsister, or descendant of such relative,
2) Must be less than 19 years old by the end of the tax year or a full-time student less than 24 years old by the end of the year,
3) Must live in taxpayer's principal residence for at least half of the tax year,
4) Must not provide more than half of their own financial support for the tax year.

There are also 4 tests for claiming a "qualifying relative". They are:
1) Must bear some relationship to taxpayer, have the same residence and be a member of taxpayer's household,
2) Must have less than $3,400 (for 2007) of gross income for the tax year, not including Social Security or disability benefits,
3) Must not furnish over half of their own financial support for the tax year,
4) Cannot be a qualifying child of the taxpayer.

For more information on claiming dependents, see IRS Publication 17, Your Federal Income Tax. This can be found online at www.irs.gov.

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Feb 12, 2008

Economic Stimulus "Advance"

QUESTION: This is about the checks that the IRS is sending out to "help stimulate the economy". I have a defaulted student loan for which any money that is due myself and my spouse gets automatically taken to pay. Any time that has happened in the past (we are retired and have not had to pay taxes yet due to our low income and massive money loss in 2000), my spouse has filed an "Injured Spouse Allocation", Form 8379. I just downloaded the updated version of this form and now notice it is only for refunds from the actual tax return. Is this also the form to use to get his portion of this money?

ANSWER: Retirees and veterans who received at least $3,000 of Social Security or Veterans benefits in 2007 but do not have to pay any income taxes will receive a check for $300. If your spouse falls below the $3,000 threshold, no check will be issued.
The stimulus package checks are tentatively set to be mailed out to taxpayers beginning in May 2008. Visit the IRS website at www.irs.gov for updated details concerning this program.

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Feb 11, 2008

Santa and the IRS - the first irsmind.com film


This is the first irsmind.com film spoofing Santa getting audited by an IRS Revenue Agent and then getting the full collection enforcement by an IRS Revenue Officer. This is truly hilarious. An Oscar nomination to several acting in this film!!!

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Another irsmind.com film: "Any Given Tax Season" - Al Pacino

This is a hilarious parody of "Any Given Sunday" - "Six Inches in front of your face!" speech by Al Pacino as through a group of IRS Collection Revenue Officers. We've also provided the actual scene. Watch them in whichever order you prefer.

We hope you enjoy- thanks to all of the actors.

And now the actual scene... (contains profanity)


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Retirement Plans and Form W-2

QUESTION: I have a question about my son's Income Tax Return. He was recently deployed to Afghanistan and left me Power of Attorney for all his taxes, etc. My question is about the taxable wages and retirement plan. He enlisted as PFC and is now SPC 101st AB Div; for simplicity let's say his Taxable Wages in Box 1 is $19,000 and the Soc Sec wages is $18,000 (box 3). The retirement box is checked but I have no paperwork regarding this. My son was not aware that he had a retirement plan. I am guessing that he contributed $1000 to this plan? How do I proceed with his tax return? It would otherwise be a simple return, if not for this one item.

ANSWER: On the W-2 form, the Retirement Plan box is checked to indicate that an employee is covered by a qualified retirement plan sponsored by the employer (in this case the armed forces). A checked box does not necessarily mean the employee has contributed to a retirement plan. Generally, employee contributions to company retirement plans are listed in Box 12 of the W-2 form. If this is the case, be sure to complete Form 8880, Credit for Qualified Retirement Savings Contributions. In many instances, a tax credit may be taken on Form 1040 for a portion of employee contributions made during the tax year.

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Feb 10, 2008

Identity Theft and Taxes: the finale- Prevention

In a previous blog entry, I stated that "an ounce of prevention beats a pound of cure" does not help when you find out about identity theft in your taxes some 12-18 months after it happens. However, it does help to have a ID Theft solution that will notify you of uses of your social security number in other areas. Also, it helps to have the phone numbers and areas you need to contact at a moments notice.

Identity theft can be a low-tech crime. Hence, there are many simple, non-technical prevention techniques. Shredding importing documents, monitoring and limiting your paper mail, password stealing, and other "dumpster diving" methods can all be achieved with a change in your document protection procedures.

However, identity theft is also an increasingly a high-tech crime with use of data files and internet theft. This requires limiting the use of your private information, namely your social security number in tax debt issues, for others to see. Do not provide your SSN to anyone on-line. Phishing sites are common and can look like legitimate sites. Obviously, never to tell anyone your password is must.

Use a credit monitoring service (all three credit agencies)- they will notify you of uses of your credit. If you credit is compromised, please note, you should pull the IRS records of your Forms W-2s and 1099s reported to see if there are any inconsistencies. If there are, you will need to be proactive and fix the problem with the IRS.

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Identity Theft and your taxes: Part 4 of 4: What to do!!

What to do if you have an identity theft tax issue

- Contact the IRS immediately- the contact information on your audit letter or CP 2000 will tell you who to contact
- Get a copy of what has been reported to the IRS under your social security number (i.e. your “IRP document”)
- Review the document for discrepancies and contact the employers/contractors/payors for a correction to their Forms- make sure they notify the IRS
- If you cannot get the payor to correct the form, show proof that this income could not be yours: bank statements, police report, proof of identity theft in other areas (credit cards, etc.), and affidavits from your employer stating where you worked- and the timesheets
- Consider changing your social security number if the SSA permits
- Contact the Federal Trade Commission and file a complaint, use this as evidence for your tax problem
- Report the tax fraud to the IRS immediately after you have discovered it

Ultimately, you may want to contact a tax professional that knows how to work within the IRS system to resolve your problem. Resolving tax disputes is a time-consuming process that can cause a lot of pain and suffering- especially if you do not anticipate what could happen to you.

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Identity Theft and your taxes: Part 3 of 4- how to fix it..

Identity Theft and tax debt: How can you fix it

In short, fixing tax debt from identity theft requires a proactive approach and proof by documentation. When you are a victim of identity theft, filing a police report is a necessity. Most people do not file a police report as it becomes the bank or the credit card company’s responsibility for the signature of its client- thus, they remove the erroneous charges or stolen funds. Documenting the incident and retaining these documents is also a must.

However, as stated, the tax problem may come much later and there is not such a direct link- the IRS will conclude that the income is yours absent proof otherwise. Ultimately, after much pain, proof and persistence, the IRS most likely will see it your way. However, in the meantime, there will be painstaking damage in the forms of potential tax liens,levies, and adverse credit reporting.

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Identity Theft and your taxes: Part 2 of 4- the problem emerges...

How the tax problem emerges

It starts when you file your taxes with all of your information- Forms W-2, Forms 1099, and other income items and deductions. However, unknown to you, someone else has your social security number and the payments to them are reported as YOUR income. The IRS will match your tax return with all of the information statements they have received (the IRS calls it their “IRP” file for “Information Returns Processing”). This will not happen instantaneously. The IRS usually takes about 12-18 months to accumulate this data, scrub it for items they wish to match against identifying numbers, and send out discrepancy letters (referred to as “CP 2000” letters) via its “Automated Underreporter Unit” or “AUR”. Last year alone the IRS assessed over $14.9 billion in AUR discrepancies.

It is probably one of the only times that you will wish for a face-to-face IRS audit. This is due largely because the IRS relies on the IRP program. It essentially becomes your word against theirs and you start playing private detective to clear up the mess. In the time that you are cleaning up the mess, ignoring the IRS is not an option. After the CP 2000 letter, the IRS will most likely assess you and start collecting on the tax in about 6 months after the letter. After the assessment, you are faced with an uphill battle of removing the assessment while the IRS has the right to file tax liens and levy your wages and bank accounts.

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Identity Theft and your taxes- Part 1 of 4

Identity theft is the #1 fraud concern in the United States today. Identity theft can cause a myriad of problems that show up immediately- bank accounts emptied, checks returned non-sufficient funds, illegitimate credit card charges, credit report problems, and many others. However, one item that may not show up for years, but last for years, is identity theft and your taxes.

Each year, all of your Forms W-2, 1099, and other tax documents are accumulated by the IRS under your social security number. What happens if someone acquires and uses your social security number and starts filing taxes or, even worse, reporting it as their social security number to employers or contractors?: tax problems for years.

Most of the IRS answers to this problem are in the form of prevention, not resolution. In fact, they report that your tax problem is the longest lasting problem in identity theft. The “ounce of prevention” cliché does not help when the problem is there.

This is a four part series that will discuss the details of identity theft and your taxes. If at any time you believe this to be a problem for you, please consult a tax professional that knows how to deal with this problem through the IRS.

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Feb 7, 2008

Private Mortgage Insurance "PMI" - Changes in the tax law again

Private mortgage insurance (or "PMI" as many refer to it on their mortgage and escrow statements) effects many Americans who cannot afford to get an 80/20 debt ratio on their homes. If you do not have 20% equity and no other "piggyback" loan opportunity- you most likely will have PMI.

According to the Mortgage Insurance Companies of America ("MICA"), the cost of private mortgage insurance for a 30-year loan on a median-priced home of about $224,500 ranges from $50 to $100 per month.

In light of the continual (and what appears to be never ending) sub-prime mortgage mess, Congress and President Bush have continued the allowance of the deductibility of PMI as an itemized deduction (reported on Schedule A of your Form 1040). Bear in mind, there are several details:

MICA expects this to effect 2.6 million people in 2007 for a savings of about $350 a year for each eligible participant.

However, Congress does not expect this sub-prime mortgage mess to last forever- hence, neither will the deduction- it expires at the end of 2010.

Please vist a competent tax professional for advice on all tax preparation and tax debt matters. The laws change so frequently (the tax code appears to change as frequently as Bernanke changes the Federal Reserve rate) that you must be a tax professional to keep up with it.

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Feb 1, 2008

Pass-Through of Income Tax Liability

QUESTION: My husband's father and step-mother owe the IRS thousands of dollars for back taxes. We were wondering if they die before this is paid off will it be passed onto us.
I don't know if this matters, but they live in Washington State. We live in Georgia.

ANSWER: Thanks for your question. Although we are not qualified to speak on individual state matters, we can let you know that the overdue taxes owed to the IRS at their deaths are subject to an estate tax lien. Any unsecured assets may be attached for collection of back taxes. Also, the IRS does have the right to issue a "transferree assessment" to the deceased couple's heirs. To receive a more detailed answer to your question, we suggest you consult a estate tax attorney in your area.

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State of Virginia Tax Information

QUESTION: My wife just got a letter yesterday from a collection agency in California for income taxes they say she owes from 1991. Thats over 16 years ago. Can they really do that after 16 years? There is no way she or for that fact anyone can prove them wrong. Do you know anything about Virginia tax law or perhaps you could direct me to information or someone that could help. I'm 59 and she is 54 we're not kids and we don't have the resources to get help. Anything you could provide would be appreciated. We live in West Virginia.

ANSWER: Thanks for your question! Generally, the state of California has 20 years from the date the tax is assessed (that is, when the return is filed) to collect. So it sounds like your wife's liability is still subject to collection efforts. Log onto www.ftb.ca.gov to find out more information on this and other California tax matters.
For good information about state of Virginia taxes, visit www.tax.virginia.gov. This is the best source for information. You can also visit or call your local Department of Taxation office for help.

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