Mar 27, 2008

Q & A: Work Study Grants as Income

QUESTION: Part of the funding for my campus job last year came from a federal work-study grant while the rest of it was covered by the department I worked for. Since the work-study money came from the government, is it taxable? The sources of funding weren't broken down at all in the W-2 I received from the university and when I entered this information into the tax software I was using, I didn't see any place to put in information about work-study grants. Do you have any insights on this?

ANSWER: Work-study grants are considered exempt income if the following conditions are met:
1. You are a candidate for a degree at an educational institution,
2. Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction, and
3. The amounts received are not a payment for your services.
The grant amount should not be included on your W-2. The W-2 form should represent only your earnings from the institution for services rendered.


Q & A: Stimulus Rebate for Dependent Parent

QUESTION: My question is my mother is living with me & my husband. We have been taking care of her for the past couple of years and was able to claim her as a dependent on our taxes when we filed. Will she still be counted as our dependent on this tax rebate? Or does she have to file for the rebate check?

ANSWER: Great question and one many taxpayers are wondering about. In order to claim a dependent for purposes of the stimulus tax rebate, the dependent must be under 17 years of age as of 12/31/07. So your mother will have to file a tax return for 2007 to claim the rebate. Taxpayers who normally have no tax filing requirement may be eligible to receive a payment of $300 if they have at least $3,000 in qualifying income. Qualifying income includes any combination of earned income, nontaxable combat pay and certain benefits from Social Security, Veterans Affairs and Railroad Retirement. Visit the IRS web site at to read the most updated information concerning the stimulus rebate.


Mar 19, 2008

Q & A: Filing Prior Year Returns For Refunds

QUESTION: I have owned a home since 2001. I am completely disabled and judgment proof and have not filed my income taxes due to my disability. Now that I am feeling better and more capable of filing tax returns, I am told that I can file a number of years back if I have all the forms (which I do.)
How many years back can I go and file retroactively so as to recover at least the interest expense I have paid to my mortgage company as well as to the income withheld from my long-term disability check provided by my last employer in 1991?
Can you help in explaining to me which direction I should proceed or if I even should considering filing at all because I have not filed at all of these years?

ANSWER: Generally, you may claim a refund only within three years from the time the tax was paid or withheld from wages. Under your circumstances, it appears you are able to file a return to claim refunds for taxes you paid in 2006 and 2007. There is an exception to this statute of limitations where if a taxpayer is deemed to be financially disabled the refund claim period can be extended. A taxpayer must have a medically determinable mental or physical impairment that has or can be expected to last for a continuous period of one year or more and renders the person unable to manage personal financial affairs. Be aware that this exception does not apply if a taxpayer's spouse or other person is authorized to act on behalf of the individual in financial matters.


Q & A: Filing a Return For Receiving Rebate

QUESTION: I heard some information that someone does not need to actually file taxes for 2007, and that there is a form to fill out to still get the tax rebate without filing taxes. Is that correct? I heard that this form is available at the library and other places (probably same places as tax forms).

ANSWER: You must file a 2007 tax return to receive the stimulus payment even if you normally do not have to file a return. The return is the basis used by the IRS to determine if you are eligible for the rebate. You are correct in that federal tax forms are available at libraries and post offices as well as local IRS walk-in offices.
Technically, there is no deadline for filing a return just to be eligible for the tax rebate. But the earlier a return is filed the sooner the rebate payment will be issued. If you file a return by October 15, the IRS can process the return and issue the payment before the end of the year.


Mar 18, 2008

Q & A: Settling IRS Debts and Your Home

QUESTION: Is it possible to settle tax debt to the IRS without giving up your home?

ANSWER: You may establish various payment arrangements to pay your tax debt with the IRS. Regarding your residence, the IRS may not seize any real property used by you as a residence to satisfy a tax liability (including penalties and interest) of $5,000 or less. In any case, seizure of your principal residence cannot occur unless by written approval of a federal district court judge or magistrate. Be advised, however, that a lien may be recorded by the IRS to protect its interests until the tax debt is paid in full.


Q & A: Claiming the Earned Income Tax Credit

QUESTION: What if you can't supply to requested documentation for the EITC examination process? Can you just call and let them know? And have them process your return without a dependent?

ANSWER: In order to claim the Earned Income Tax Credit, taxpayers must provide valid Social Security numbers (or Taxpayer Identification numbers) for all eligible dependents. Failure to provide the required documentation causes a "mathematical error" on the tax return submitted. Processing of the return is halted and the taxpayer is given an opportunity to correct the problem. If the problem isn't resolved, the dependents are disallowed on the tax return and it is processed accordingly.
Additionally, a married person living apart from a spouse need not file a joint tax return to claim the EITC. Taxpayers with qualifying children should file Form EIC with Forms 1040 or 1040A. Taxpayers with no qualifying children can use Form 1040EZ to determine if they are eligible to claim some EITC.


Q & A: Single Member LLC

QUESTION: My husband and I just formed a LLC for our rental properties. Can we be considered a "single-member LLC" since we file our taxes jointly?
We have no employees (not even ourselves), but we filed for an EIN to open a bank account. The IRS sent a notice that we will need to file a 1065 next year for the business. I looked at Form 8832, but it doesn't address a married couple.
We were initially told that we could still just file the 1040 and Schedule E as we have for the last several years, but then our lawyer said we will have to file as a partnership.
I know if we are a "single member LLC", we can still file the joint 1040 with Sch. E and not have to do the partnership return. I would prefer to be a considered disregarded entity for tax purposes to keep our tax filings as simple as possible.

ANSWER: When a married couple owns a partnership or LLC, they are can be considered as "one" taxpayer for filing purposes. So you are correct in that you can file as a single-member LLC for tax purposes and use Schedule E as part of your 1040 return. Form 8832 is utilized to allow a LLC to elect to be taxed as a Subchapter S corporation. Generally, real estate related businesses are better suited to be taxed as LLCs rather than S corporations. You should consult with your tax advisor to determine the best option.


Q & A: Filing Requirement for Singles

QUESTION: Does everyone have to file an income tax return ? What is the threshold for singles?

ANSWER: For 2007, a single individual must file a tax return if gross income is at least $8,750. An individual 65 years of age or older must file if gross income is at least $10,050. Other thresholds for filing a return are:
Married Individual, filing separate.....$3,400
Married Couple, joint return.....$17,500
Married Couple, joint return, one spouse 65 or older.....$18,550
Married Couple, joint return, both spouses 65 or older.....$19,600
Head of Household.....$11,250
Head of Household, 65 or older.....$12,550
Qualifying Widow(er), surviving spouse.....$14,100
Qualifying Widow(er), surviving spouse, 65 older.....$15,150

If you are self-employed, you must file a tax return if your gross income from self-employment is greater than $400.
Another point to remember is if your gross income falls below the above thresholds but you have had federal and/or state income tax withheld from your paycheck, you must file a return to receive any refunds due to you.


Mar 13, 2008

The Mortgage Mess Not getting better: Tax Policy Broken?

I have been reading about how the mortgage mess is not being solved by the current mortgage relief plan and I keep referring back to the blog entry on this website after the tax relief package for foreclsoures was passed.

Bush passed a relief package for 2007-2009 for home foreclosures and forgiveness of indebtedness income. What is the effect of giving an economic incentive to foreclose?? naturally, more foreclosures....

You have to begin to wonder if the tax rebate package has the same lack of thought. There are many critics on whether the rebate will actually stimulate the economy. I have heard many state that the funds will be used to pay off debt- and will be funded by more debt (i.e. government bonds purchased by overseas investors).

In any event, the many foreclosures are going to creat many tax debt questions. The maze of tax complexity just is another addition to the mortgage mess.


Mar 5, 2008

Got an IRS Letter in the mail- don't worry it is for the 2008 tax rebate

The IRS is sending letters to about 130 million or so taxpayers to remind them to file (and file early) this year in order to get the 2008 tax stimulus rebate. Remember, you must file in order to receive the rebate. These letters are going out to those who filed a tax return last year. Also, there is discussion that the Social Security Administration will be sending letters to recipients of social security to urge them to file to get the rebate.

Often, people ignore the IRS letters in perceiving that any news from the IRS is bad news. However, in this case it is just a reminder- in any case, ignoring any IRS letter can be bad for your financial health. Not responding to an IRS letter can mean additional assessments or enforced collection activity.

If you have any questions about your IRS correspondence, you should consult a tax professional that is familar with IRS correspondence, its meaning and the intent of the letter. This professional can help you anticipate what will happen next and the actions to take to avoid additional tax or enforced collections.


IRS Audit Realities

The reality in an IRS audit is that most do not walk out without an additional tax liability. In fact, 2006 statistics show that an individual owes almost $18.000 a year more if they are examined by a Field Revenue Agent. If an individual is examined by mail, the average additiona tax bill, per year, is almost $8,000.

If your income is above $100,000, the average Field examination will get the IRS over $54,000 in additional tax!

Your chances of getting examined vary by income level but, overall, are about 1 in 200.

If you are under examination by the IRS, the worst action to take is no action. Hire a tax professional who is competent in resolving IRS disputes and solve your problem pro-actively.


IRS Audits - should I be concerned?

The IRS has many ways to examine you including (in order of their intrusiveness and severity):

1. Correspondence Audits= mail audits including underreporter audits (i.e. CP2000 letter), substitute for return (i.e. "SFR"- where the IRS files a return for you), and specific item audits (by a Tax Auditor, Tax Examiner, Compliance Officer or other similar name) on a filed return (timely or late filed)
2. Office Audits- usually conducted by a Tax Examiner or Tax Auditor or other similar titled individual- this is usually limited to a small income probe (maybe one indirect method of income verification- i.e. a bank deposit analysis) and verification of one to three deductions.
3. Field Examination- this is an examination by a Revenue Agent on an individual, a business or a combination of both

The biggest difference is that item #1 and #2 above is the IRS examining the tax return; item #3- the Field Examination is not an examination of your tax return- it is an examination of the TAXPAYER.

All three examinations are serious. However, I have rarely seen correspondence and office audits lead to criminal investigations. However, the goal of the Revenue Agent is to ultimately have a "fraud referral."

If you are under examination or your return needs review for any potential examination, you should consult a competent tax professional. IRS Audits are serious- especially if the person calling or at the bottom of the letter is titled "Revenue Agent."


How long can the IRS audit my tax return?

This is a question I get often and the answer is simple and complex. The real question is what is the "assessment statute expiration date" or "ASED".

First, if you file your tax return on or before April 15th, the IRS has three years (normally) from April 15th to audit you. Normally means that you do not have a substantial omission of income (i.e. 25% or more) or you have not committed tax fraud. If you have a material omission of income, the statute to "assess" additional tax or ASED is 6 years from the date the tax return was filed or the due date of the return, whichever is later. If your return is fraudulent, then their is no ASED.

An example of a normal ASED is:

2007 return filed on March 10, 2008

  • Last day for the IRS to assess additional tax: April 15, 2011
  • If you have omitted more than 25% of your income: April 15, 2014
  • If your return is fraudulent: there is no ASED

However, for the 2007 tax year, when will the IRS examine me: under the above example, probably within 16 months after the filing of the return. This is due to the fact that the IRS will not extend the ASED to the 6-year or fraudulent unlimited ASED date without an audit. An IRS Revenue Agent must make the determination of whether the 6-year ASED or fraudulent return applies. Furthermore, the Internal Revenue Manual and the IRS Agent is not likely to open an examination if it is close to the end of the ASED. Actually, the IRM states that a Revenue Agent needs managerial approval to open an examination that has less than 1 year left on the ASED. If a Revenue Agent and their Group Manager allows the ASED to expire then there is serious implications to the Agent and his Manager. In fact, they could lose their job as they have not protected the Government's interests: a priority for any Agent and Manager.

Hence, in the above example, unless the IRS has begun criminal investigation, you are generally safe from examination on April 15th, 2010. If an exam starts after that date, the Agent must have alot of information and a good reason for auditing you.

In any event, an examination, and especially a Field audit by a Revenue Agent, is a serious matter and it should only be handled with a Tax Professional.


Owe Tax Debt? The IRS wants more of your personal information!

The IRS has recently changed the information it needs for those who owe tax debts. When you owe a tax debt and you are not able to pay the tax in full in 120 days, the IRS wants information to justify why you cannot pay the entire amount. The information you file is a financial statement known as the "Collection Information Statement." It is an IRS Form 433A if you are an individual (now for an individual with a sole proprietorship also) and a Form 433B if you are a business.

In short, it has many changes but an overall theme: more information to the IRS. I believe this is also an effort to get an e-filing of the form (if you notice it is formatted to allow checks into the validity and completion of the data). Intrusive information such as driver's license number, e-commerce sources (PayPal, etc.), merchant accounts (i.e. if you accept American Express, VISA, etc.), your living whereabouts if you lived overseas in the last ten years, detailed asset information, and more are being requested.

Also, the emphasis of this form as a legal document, signed under penalties of perjury, is highlighted. Remember, this is a disclosure to the IRS and subject to civil and criminal penalties if it is incorrect.

Before you go about resolving your tax debt, you should consider a professional in dealing with the IRS. A professional can help you steer through the levy and collection enforcement maze and to the best possible resolution.


Under the cloak of night (and filing season)- the IRS changes their collection standards!

For the second time in 5 months the IRS has changed the allowable living expense standards that it uses to determine how much you can pay on your tax debt. Due to increased costs in many areas, the IRS has changed these standards in the middle of filing season. The last change to these standards took the IRS over 2 years to implement.

The last change on October 1, 2007, came with waited anticpation and press. This change had no similar fanfare. The only press release on payments to your tax debt was for the ability to pay them on-line.

However, the allowable living expense standards have changed. Some highlights of these changes are:

1. Slight increase to Food, Clothing and miscellaneous expenses as well as housing and utilities
2. Car payment increase from $478 to $489 per allowed vehicle
3. Out of pocket medical expense standard for those under 65 increased from $54 to $57
4. Transportation expenses allowed increased for each area and 6 cities were deleted from having "special" increased allowances

For the most part, the expenses allowed are more than in the past. The IRS probably did not propose any fanfare as it will mean less payments and more collection alternatives available. If you believe you are getting the same treatment from the IRS, you may need a professional that is current with their rules and procedures.


Mar 4, 2008

Q & A: Rebate and Dependent Children

QUESTION: In the event that you are over 18 years old and your parents still claim you on their tax return, I've read that they will not benefit from the tax rebate because you have to be 17 or younger to be a qualifying child. Does being over 18 years old and filing taxes in 2007 qualify for the tax rebate even if your parents claim you?

ANSWER: Under the rules of the stimulus rebate plan, only children who are under 17 years of age at December 31, 2007 qualify the parents for an additional $300 rebate. No additional rebate is available for any children over 16 years old.
To answer your second question, even if you can be claimed on your parents tax return for 2007, if you are over 16 years old and have at least $3,000 of earned income for 2007 you are eligible for a $300 rebate. The key point is that you must file a 2007 return to verify your eligibility for the rebate.


Mar 2, 2008

2008 Tax Rebate- you better have your return correct

The speed to file early this year is being induced by the tax rebate stimulus package. You must file a return in order to get the rebate that is due come in May of 2008. However, about 8% of taxpayers will not file by April 15th due to many reasons- including not having all of their tax information.

A fallout of this is that some people need to file an extension to properly gather their information needed to file their return. The IRS accumulates all information statements on social security numbers and employer identification numbers by the end of May each year. This information is used to compare against the income reported on the tax return. If you have filed without reporting all of your income, you will need to catch it early (within 12 months as this is the usual time frame that the IRS matches your information returns with your tax return) to file an amended return or the IRS will send you an Under-reporter Letter (CP2000).

Missing your return information because you file early can leave you with substantial penalties (i.e. an accuracy penalty of 20% of the tax due). To avoid this penalty, you may want to check your return against the IRS records around the end of the summer or early fall after you file. Do not let the tax rebate payment make you prematurely file your return before you know it is ready. After all, the maximum rebate may not be equal to the amount of penalties that you would have if you failed to report all of your income.

If you need a professional to compare your return with the IRS records (i.e. a "Tax Match" service), please contact a tax pro that has an IRS e-services account or knows how to properly pull IRS IRP data to compare your returns.


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