Apr 30, 2008

120-day extension to full pay?? Not always..

In the IRS press release on April 7th of this year they stated that one option you may get to resolve your tax debt is a "short-term payment extension of 120 days." For those in the IRS it is historically referred to as a "120 day to full pay." However, this is not an "automatic." You will need to negotiate it if you debt is over $10,000.


The IRS offers the "Online Payment Arrangement" option to get an extension to full pay. It also allows you to enter into an Installment Agreement. However, the extension can only be granted once and the OPA is not an effective manner to achieve this result. There are multiple levels in the on-line process that defaults you out of the agreement.

The IRS has not published any successful usage of the OPA. More importantly, I would like to see the rationale on why this method was unsuccessful. Experience shows that most would not qualify for compliance reasons (i.e. unfiled returns).

If you need an extension to pay and this is a low amount and you are in compliance, by all means, try the OPA. If you situation is more complicated, then you will need an experienced tax professional.

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Apr 29, 2008

Tax Rebate Stimulus Payment- the IRS is pulling the tax debtors out...

It seems that the tax rebate has been finding individuals who owe tax debt. If you file for a stimulus tax rebate payment and you owe tax debt, you will NOT get your refund. In fact, you may get a letter of the additional balances owed.

Furthermore, if you have not filed, the IRS may hold the tax rebate payment in lieu of unfiled returns. The IRS can freeze all refunds in the case of unfiled returns.

In the case of a frozen refund for unfiled returns (unfiled return investigations are known as "TDI"s or "Taxpayer Deliquency Investigations"), the taxpayer will receive a form letter known as a "CP 88" or a "Letter 2825C".

This TDI can go to an Automated Substitute for Return Unit or out to the IRS field office for an open investigation or audit. In fact, many taxpayers will start realizing this week that they should have, but did not, get their tax rebate.

If you do not receive your tax rebate and you believe the IRS has "frozen" it for some reason- you may have some TDI or tax debt issues. If you do, you may need a professional to guide you through the maze of IRS complexity to solve your problem.

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Apr 28, 2008

The IRS Error Rate- 9%- Do you trust them???

The biggest misnomer in taxes: "I am with the IRS and I am here to help you." The IRS tries its best to be a customer service organization but unfortunately it fails miserably. This is due to the fact that the agency is predisposed to enforcement in all areas, including the Taxpayer Advocate's Office (the "TAO" which is touted as being an "independent" area in the IRS to undue agency red tape and hardships.

In fact, the IRS does not hire from the outside for its TAO staff. Hence, it has no external pressure to fix its own errors. A recent study by the IRS of its own error rate shows the IRS phone answer error rate is 9%!! This is down from the numerous other GAO studies of other years (anywhere from 21 to 25%). What is more disturbing is that the IRS blames it on a complex tax code. Also, there is a clear disparity with Customer Satisfaction- which by Practitioners is measured at 85% and for Accounts Management (adjustments to returns) is 68%. The IRS has its own policing of its error rate and customer satisfaction- what the discrepancy? The IRS can determine if it made the error- but customer satisfaction is done by survey (I have been asked to give them!)- something sounds not to accurate here..... Also, independent customer satisfaction of the private debt collection has much higher customer satisfaction than internal IRS employees (maybe because the IRS employees are predisposed to enforcement).

I find all of these contradictions to be preposterous. Having represented clients on both examination and collection issues, the IRS has no push-back on getting the correct answer. They self-perpetuate their culture and have no serious emphasis on getting it "right." This is because no good IRS employee is the employee that does not bring enforcement. This is eveident in the disparity between customer service and accuracy.

Just a perspective in gluing the facts together. If you need perspective on your tax situation and you need a straight answer- you will need to contact a competent tax professional that knows how the IRS operates- or you may become one of the many dissatisfied customers of the IRS if you go it alone.

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Apr 24, 2008

Q & A: Another IRA Contribution Question

QUESTION: I retired due to a neuro-degenerative illness in 2002. I receive long-term disability benefits from my previous employer as well as Social Security disability. The disability policy benefits are classified as third-party sick pay and I receive a W-2 for the benefit each year. The disability benefit is taxed like regular income. My wife works full time and contributes to her employer's 401(k) plan. She'll fully fund a Roth IRA this year as well. We file our taxes as married/joint and have an AGI of about $140K. I'm under 50; my wife is over 50. I'm trying to determine if I qualify to open a traditional IRA. It's difficult to determine if my disability benefit is considered "compensation" under the IRS guidance (Pub 590). If so, it looks like I might be able to open a spousal IRA. Any thoughts here?

ANSWER: The deductibility of traditional IRA contributions is limited. For a couple filing a married joint tax return for 2007, the deduction is phased out entirely when modified AGI reaches $103,000. For purposes of calculating modified AGI, your Social Security benefits are deducted from this total. But the long-term disability benefits are included in the modified AGI amount. So it appears as though you will not qualify for a traditional IRA contribution. We would suggest that you consider making a Roth IRA contribution. Although it is not deductible on your current year tax return, you can take tax-free distributions from this account provided funds have been held in the account for a 5 year period.

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Apr 18, 2008

Q & A: Alabama Tax Refund Grabbed By IRS?

QUESTION: If you owe the IRS money and currently making installment payments and you get a refund on Alabama State tax return, do you get the refund or do they apply it to the federal taxes owed?

ANSWER: Great question. According to the Alabama Department of Revenue, Alabama income tax refunds are not currently subject to seizure by the IRS to pay down federal tax liability. Many states do have this arrangement with the IRS, but Alabama is not included. But there are rumblings in the Alabama state legislature to change the law and allow the IRS to take refunds for past due taxes. Maybe it's time to write your state legislator!

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Apr 11, 2008

Q & A: IRA Contribution Deductibility

QUESTION: I switched jobs last year on January 16th. My previous company had a 401k plan and I contributed $76 to my 401k during that sole pay period for last year with that company. My new company does not have any retirement plan options. I opened an IRA hoping to offset some income but I'm learning that with box 13 checked on a W-2 form I can hardly contribute anything to an IRA to lessen my tax burden. So even though for 25 pay periods I was not eligible for a company provided retirement account, because I had one paycheck with a 401k contribution I can't contribute the full amount towards an IRA? Is there no sliding scale for time?

ANSWER: Unfortunately, you are subject to IRA contributions limits under this scenario. You are considered to be an active participant of an employers retirement plan if either 1) the employer makes any contributions or 2) the participant makes any elective contributions for the year. If you are filing single and an active participant, any Traditional IRA contributions begin to phase-out when modified adjusted gross income (AGI) reaches $52,000 and entirely phased-out when modified AGI reaches $62,000. For joint filers, the phase-out begins at $83,000 and is completely phased-out at $103,000.
Modified AGI is defined as Adjusted Gross Income adjusted for the following:
1) Social Security and/or Railroad Retirement benefits
2) any disallowed passive activity losses
3) deduction for qualified tuition expense and student loan interest
4) deduction for IRA contributions
5) foreign earned income and housing exclusion

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Q & A: Student Loan Interest Deduction

QUESTION: Our adult daughter earned about $4600 in 2007. We supported her and paid a lot of medical expenses for her which I know we can deduct with ours. Can we also get a credit for her student loan interest that we paid for her in 2007 (about $1100)? She met the criteria for the qualified student when the loan was made. It was made through the dept. of education since transferred to a private agent. We did not deduct it on her tax return since she did not pay it.

ANSWER: Yes, you are eligible to deduct your daughter's student loan interest on your tax return. Be aware that the credit is reduced if your modified adjusted gross income (AGI) exceeds $110,000 ($55,000 if filing single) and is completely phased out when modified AGI is $140,000 ($70,000 if filing single).

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Apr 9, 2008

Q & A: Support Test for Dependent Children

QUESTION: I'm having trouble with the worksheet to determine if my 21-year-old daughter can still be claimed as my dependent. She's a full-time student and lives with me, but also works full-time and has a good salary. We seem to be very close to the 50/50 situation. The worksheet is clear enough, but I don't know what items to include. What might be "other" expenses or support? If I provide a car for her full-time use, how does that figure in? What sort of expenses might I be forgetting in the calculation of total expenses?

ANSWER: You raise commonly asked questions here. Generally, the expense categories for determining support are:
1) the child's share of household expenses
2) the child's total clothing expenses
3) the child's total education expenses
4) the child's total medical and dental expenses not covered by insurance
5) the child's total travel and recreation expenses
6) other related expenses
If you paid for at least 50% of the total cost for these items, you should be able to claim your daughter on your tax return. In your example, a car that you provide used primarily by her for necessary travel should count toward the total support amount. We suggest that you visit the IRS web site at www.irs.gov and download Publication 17, Your Federal Income Tax, to find more information regarding dependency tests for children.

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Apr 2, 2008

Q & A: Exceptions to 10% Penalty on Early Withdrawals

QUESTION: In March of 2007 I became totally disabled at the age of 54. I am receiving Long Term Disability from my employer which was reduced by the amount of Social Security I began receiving in late 2007. To make ends meet, my wife and I withdrew all of our 401K funds and although taxes were taken out of the early withdrawal it appears that we will still owe a 10% penalty on the early distribution. Is there any tax relief for early withdrawal of a 401K plan if disability was involved for the purpose of the withdrawal?

ANSWER: There is good news and not-so-good news here. Unfortunately, disability is not one of the exceptions to the taxation of qualified retirement plan distributions. The taxable distribution amount may be reduced by the following:
1) after-tax contributions made to the plan by the plan participant
2) any repayments of loans from the plan that were included the plan participant's gross income
3) the current actuarial value of any annuity contract that was included in the plan participant's distribution.
In contrast, you are exempt from the 10% early-withdrawal penalty on the distribution. Exceptions to the 10% penalty are made for distributions:
1) upon death or disability of the participant,
2) after separation of service that are part of a series of substantially equal periodic payments over the life of the participant,
3) after the participant's separation of service, provided the participant had reached the age of 55,
4) to a non-participant under a qualified domestic relations order,
5) not exceeding deductible medical expenses,
6) of ESOPs of dividends on employer securities,
7) made on account of the IRS's levy against the participant's account,
8) qualified hurricane distributions, and
9) qualified reservist distributions.

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Apr 1, 2008

Q & A: Need a Copy of Form SSA-1099?

QUESTION: An elderly friend of mine had not filed any income tax forms for years because her only income is Social Security. Of course, she now wants her tax rebate and must file but did not retain her tax related paperwork. How does she obtain another copy of this paperwork and what must she then do to claim her rebate?

ANSWER: The form you are referring to is Form SSA-1099, Social Security Benefit Statement for 2007. A replacement copy of this form may be obtained either by calling the Social Security Administration at 1-800-772-1213 or going online at http://www.ssa.gov/. Be sure to have identification handy when contacting the SSA.
After obtaining a copy of the benefit statement, simply file Form 1040A to be qualified to receive the stimulus rebate. This form is available at many post offices and libraries or can be downloaded from the IRS web site at http://www.irs.gov/.

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Q & A: Filing Status As Head of Household

QUESTION: I am single. My adult niece has lived with me for 3 years. She does not pay rent and I provide the home and board for her. She is employed. Can I file as head of household because I provide more than 50% of her support?

ANSWER: You cannot claim Head of Household status using your niece unless she has earned income of less then $3,400 for 2007. This rule is valid even though you provided her household support for the year. Head of Household status is available for a taxpayer who maintains a household for a qualifying child or another person who can be claimed as a dependent. The earned income limitation is often the barrier to claiming certain family members as dependents.

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