Jun 27, 2008

Your Personal Information And The IRS

Internal Revenue Service privacy rules are generally pretty specific. Those rules prohibit disclosure of your personal tax return information to anyone other than you unless you have authorized the release of this information or have given written approval for a Power of Attorney to act on your behalf. This disclosure includes sharing of information with one of your children, your lawyer, a mortgage company, or anyone else.
This is a strict law and was enacted to protect your privacy and prohibit any unauthorized use of your personal tax information. If you decide to have someone to represent you in a Power of Attorney capacity, this is normally done by completing Form 2848, Power of Attorney and Declaration of Representative. If using this form, the authorization should be specific as to tax information, applicable years, who the information will be disclosed to, who is disclosing the information, and must be signed by you. A general authorization to disclose financial information may not be specific enough, so be sure to spell out the exact tax information to be released.
Be aware that once you grant written authority for someone to receive your confidential tax information, that they will use the information only for the purpose needed. Also, the authority you grant through the use of Form 2848 remains valid until you revoke it in writing. For more details, visit the IRS at www.irs.gov.


Jun 24, 2008

Willful Failure to File?? Remember Al Capone???

So if you think not filing your tax return is a good idea, think again. One of the earliest and most famous non-filers, Al Capone, tried this and it was a slam dunk (he underreported income in 1924-1927 and did not file for 1928 and 1929- interestingly, the first counts were felonies and the last two are misdemeanors).

Now, you are probably not as notorious as Al Capone, but the IRS is coming after you. The 2001 IRS "Tax Gap" study specifically cited non-filings as a serious non-compliance area that the IRS will aggressively pursue. In fact, the IRS estimates that its automated non-filing program produces a 14:1 return on investment- an area worth investing by any agency. The IRS estimates that it will secure 90,000 returns this year alone based on its "refund-hold" non-filing initiatives. One wonders if the "tax stimulus" incentive was not a ploy to pull out non-filers.

In fact, the IRS has almost 4 million taxpayer delinquency investigations ongoing. In 2006, they assessed over $23 billion on these delinquent return activity.

What is the penalty for filing late? Answer: civil penalties are up to 22.5 % (with failure to pay it is 25% in total as the FTP penalty adds .5% per month for the five months the FTF penalty is assessed. The penalty is assessed only if there is a balanced owed on a return. However, if the IRS files for you (i.e. a "Substitute for Return" or "SFR")- you will be assessed based on the worst possible scenario: the least advantageous filing status, all income without deductions, and only yourself as a dependent. Most times, this leaves you with a tax debt - one the IRS will collect on without remorse.

If you have unfiled returns, the best method is the proactive one - filing before you are asked to follow - or worse yet - "enforced" to file. Willful failure to file is a criminal offense - subject to the maximum 1 year in prison per violation (section 7203 of the Internal Revenue Code). Ask Wesley Snipes - he knows about it.

If you have unfiled tax returns, consult a professional - and file them accurately and IMMEDIATELY. Do not end up like Willie Mays Hayes - "Runs like Hayes, goes to jail like Capone."


Jun 21, 2008

Q&A: IRAs and the Offer in Compromise

Question: Will the IRS ever accept an OIC when there are sufficient funds in the taxpayers IRA to pay the debt although reducing the IRA would cause the retired taxpayer hardship? I guess I am referring to the concept of Effective Tax Relief. Do they actually do that in real practice?

Although it is possible to make an argument for Effective Tax Administration ("ETA"), it is not likely the IRS will accept this argument (see the blog entry). In fact, there is recent evidence to show that the IRS has accepted as few as "1" ETA offers in a single year.

The ultimate question for you is how does this determine your collectability and do you have any unusual circumstances that would warrant an ETA (i.e. medical, etc.). The IRS will allow you do consider the tax effects of distribution from an IRA to determine collectability but ultimately it is your monthly disposable income that they can collect over the course of the collection statute plus the net realizable equity in your assets.

Ultimately, you need to consider all options. This will take into account collection statutes, assets, liabilities, your income and expenses, extraordinary circumstances and other mitigating factors.

As a public policy, the IRS is pre-disposed to allowing OICs and not considering IRA assets. Their reasoning is that the IRA balance was built on the non-payment of taxes- a subsidy that the government would not want to discourage.


Jun 19, 2008

Higher Education Tax Credits

There are two different education tax credits available to individuals and families, the Hope Credit and the Lifetime Learning Credit.

The Hope Credit is available to the student who is a freshman or sophomore as of the first school day of the year. The credit is based on the amount of tuition paid. Generally, the cost of books and room and board do not affect the credit. This credit is equal to 100% of the first $1,100 of tuition paid plus 50% of the next $1,100 of tuition for a maximum credit of $1,650 per year. It usually results in a larger tax benefit than the Lifetime Learning Credit but has some limitations.

The credit may generally only be taken in two tax years per qualifying student. The student must be at least a half-time student. He or she also must be pursuing a degree or certificate program. It could be a 4-year traditional degree or shorter certification program such as licensed nursing, cosmetology, or even truck driving. The student must not have been convicted of a drug-related felony.

If the student is a dependent child, it is the parent claiming the exemption who will receive the benefit of the credit regardless of who actually paid the tuition. This is a particularly important factor when divorced parents decide who will be paying the college tuition of their children. For example, if one parent is paying the tuition but the dependent child is being claimed by the other parent, it is the parent who claims the child who will be eligible for the credit, not the one paying the tuition.

The Lifetime Learning Credit is available to anyone who is broadening his or her horizons through education that could improve current job skills or prepare for a new occupation. The credit is allowed whether you are taking one class or a full course load. The credit is based on the tuition paid, just like the Hope Credit. This credit is equal to 20% of the tuition paid with a maximum credit of $2,000 per year. If you are pursuing a 4-year degree, two years of the Hope Credit followed by an unlimited number of years of the Lifetime Learning Credit will provide a little extra help in paying those college bills.

Both credits have an income limitation when qualifying for the credit. Classes must be taken at an accredited institution. Generally, any educational institution eligible to offer federal financial aid will qualify. When determining the appropriate credit, the tuition must be reduced by scholarships, GI bill, and other non-taxable grants.


Goverment Continues Typical Operation-SNAFU

Well, our wonderful government continues to operate in typical fashion-SNAFU.

What I am writing about in this post is nothing new about our highly efficient and performance driven government. But considering the tough economic period we are in, that has resulted in an increase in the cost of living in all aspects and subsequently increased IRS enforcement to help pay for our government's obligations, this is icing on the cake...

In an article that I was recently reading in the News of the Weird 6/15/2008, normally my source of quick stress relieving humor, I learned that our government is awarding contracts and grants to people and business who actually owe the IRS!

Here is what the brief article stated:

"The Government Accountability Office revealed in April that more than 60,000 of the federal government's contractors owe a total of about $7.7 billion in unpaid federal taxes, and that health care providers who take Medicare payments owe an additional $1 billion in late taxes. One unnamed company owes $10 million in back taxes, yet the Pentagon did $1 million worth of business with it. (One activist on tax issues pointed out that firms might find it easy to win low-bid contracts if they don't have the tax expense that their competitors have.) [USA Today, 4-24-08] "

Continuing with the FUBAR reference in our most recent article on IRSmind.com, this is simply outrageous. You would think that some diligence would be used when considering who is awarded these lucrative contracts.

In one particular case, a business that provided Health-care-related services for Departments of Veterans Affairs and Health and Human Services owed over $18 million in back payroll taxes which covered over 80 tax periods! This business was consistently provided federal payments of over $100,000 while the owner of the business purchased multi-million dollar properties, multiple luxury automobiles and owned many residential and commercial properties valued in the tens of millions of dollars.

Unfortunately, the GAO study does not provide any information as to whether the IRS enforced any collection of these taxes, but it does provide safeguards and policy changes to remove and prevent these business from receiving federal payments and/or awarded contracts in the future.

Situation Normal: All F%*ked Up!


Jun 17, 2008

Swiss Bank Account Unknown to the IRS...I don't think so...

--At least if you are going to comply with the IRS and the Department of Treasury rules for foreign bank accounts.

According to the Treasury Department, if you have more than $10,000 in a foreign bank account, you must disclose this account (yes, the countries with "bank secrecy" protection also) on the Treasury Form TD F 90-22.1. This is an annual filing requirement (called Foreign Bank Account Registration or "FBAR") due on June 30th of the following year. A foreign bank account consists of any account they have a financial interest in or signature authority or other authority over any financial accounts, including bank, securities or other types of financial accounts, in a foreign country. The IRS publishes its "annual reminder" in the middle of every June (or thereabouts) for the filing requirement.

Interestingly enough, the IRS has you send this to the same place that it accumulates the Currency Transaction Reports ("CTR"s - and Form 8300 that are filed when you have a cash transaction of $10,000 or more). The IRS has an interest in your funds overseas and the penalties for not reporting these are severe: Civil and criminal penalties for non-compliance with the FBAR filing requirements are severe. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. And to make matters worse, civil and criminal penalties may be imposed together. The IRS believes there is substantial non-compliance in this area as they have highlight an 85% increase in the number of registrations since the inception of the program in 2000.

What comes to mind about missing your filing requirement here is not the acronym the IRS uses for this registration: FBAR; but the acronym that the military uses for a very bad situation: FUBAR!!

In any event, non-compliance, close and continual surveillance, and the ultimate resentful indignation of the IRS requires competent representation. Representation must include the internal knowledge of how the IRS operates to be able to identify the risks of non-compliance.


Jun 6, 2008

How many back returns do I need to file?

What is filing compliance for the IRS? Traditionally, filing compliance was the last six years returns (as of 6/6/2008- this will be the years 2002-2007). The IRS established this as a policy statement in 2006 although they do not publish this policy to the public. The IRS reserves the right, with proper internal approval, to waive the 6-year compliance policy (and they regularly do this when you want a tax abatement program such as an Offer in Compromise, penalty abatement and/or audit reconsideration).

We have blogged on this topic in the past stating that this policy is established due to the inability to the IRS to detect/check your old income reporting items (i.e. IRP- Forms W-2, 1099, etc. filed under your SSN) past 6 years. We also stated that when the IRS enables the IRP data to go past the last six years, compliance will be increased to the number of years that the IRS has data.

Well, that time is soon approaching. The IRS has recently uploaded the last 10 years of IRP data. The IRS has not changed the 6 year policy yet, but look for it. Now the IRS has the ability to measure your last 10 years of income via the IRP system. They are no longer limited by their internal, real-time limits.

If you have unfiled tax returns, you will need an unique professional that has experience in old years to pull prior years IRP and to be able to complete the returns to the satisfaction of the IRS (remember, now they will be able to review for accuracy). Your local tax preparer is generally not the answer unless they keep old years software and are able to meander through the IRS maze.


Jun 2, 2008

Keeping up with your Business Expenses

One element that is most common among those that are self employed is a lack of understanding when it comes to business expenses. It seems that most self employed individuals are unaware that they need to not only keep some type of account ledger to track and prove expenses, but also that they need to have a separate business account from their own individual one.

Not only does the IRS frown on using the same bank account for individual use and business use, which they consider "co-mingling funds", it also makes you more susceptible to assessment, should you ever be audited. The proper way of handling business expenses can be found at the IRS.gov website or you can click on the link above.

Here are a few tips to keep in mind to help manage and keep record of your business expenses.
1. Open and keep separate business accounts and personal accounts
2. Only use the business account for business expenses- if you are going to pay yourself, write a check from the business account- state what it is for in the memo section and deposit it in your personal account. Don't just transfer the funds from one account to another.
3. Keep and document cancelled checks and receipts

For those that have a hard time managing their business expenses, especially for those that are independent contractors, there are several businesses that will manage this for you for a nominal fee. One of the best that I have found is http://www.mbopartners.com/.


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