May 25, 2008

Q & A: Claiming a Child As Qualifying Relative

QUESTION: Does a 20 year old child who has had no income for the year due to some emotional issues, whose parents have supported 100% (shelter, food, clothing, and medical care), but is living in an apartment (again, paid for by parents) qualify as a dependent? Must the child physically live in the same household to qualify? Thank you!

ANSWER: According to the IRS Code Sec. 152(d), the child qualifies to be claimed as a dependent by the parents. A "qualifying relative" is defined by satisfying the following four tests:
1) the individual must be a relative by blood or by marriage, or an individual that for the tax year has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.
2) the individual must have less than $3,400 in gross income for the calendar year ($3,500 in 2008)
3) over 50% of the individuals total financial support for the calendar year must have been furnished by the taxpayer
4) the individual can not be a qualifying child of any taxpayer for the tax year (as defined by the qualifying child dependency rules)
Be aware that there appear to be "fine lines" here regarding whether or not dependents can be claimed. We suggest you consult your professional tax advisor or visit the IRS web site at for greater clarification.


Q & A: Underwithheld Payroll Taxes

QUESTION: My employer failed to withhold income tax, etc. from another employee (because of a mistake). The employer paid the IRS but wants to consider collecting from my co-worker. Publication 15 (2008), page 29, says reimbursement is between the employer and the co-worker but the sentence I can't understand reads as follows: "Underwithheld income tax must be recovered from the employee on or before the last days of the calendar year."
My question is, WHICH calendar year, the one we're in (2008) or the one in which the taxes were due (2007). I can't find an answer on the internet but your blog makes me think you could tell me how to find out. I would appreciate any help I can get.

ANSWER: The payroll taxes in question must be recovered from the employee by the end of the calendar year for which the underwithholding occurred. In this situation, it would be the 2007 calendar year. Additionally, the employer is responsible for paying the correct amount of withholding taxes to the IRS even though the insufficient amount was taken from the employee's paycheck.
Your reference to IRS Publication 15, Employer's Tax Guide (and commonly known as Circular E), prompts us to recommend it as a great resource for employers and employees alike. It can be viewed and downloaded from the IRS web site at


Q & A: IRS And the Income Matching System

QUESTION: I, unfortunately, had worked for a person who is dishonest and is capable of committing fraud. I am somewhat worried that this person might have used my social security # and/or tax ID #, and 1099 forms might have been generated and filed about 5 years ago. You wrote that "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"). 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." Since the year I am concerned about is more than 5 years ago and I did not receive a letter from the IRS which I should have received within 12-18 months if a fraud did not occur, am I correct in thinking that there is nothing to worry about?

ANSWER: Thanks for the question. It appears that you are OK as the matching is done and scrubbed before 2 years after you file. The IRS only maintains the IRP data for the six past filed years (i.e. currently 2002-2007). The IRS takes the "IRP" document off line around this time each year (i.e. they just took the 2001 off-line).
The only way to be sure is to pull the IRS IRP data under your SSN for that year and compare it to your tax return. I can assist you if you like with that "tax match".
Otherwise, you appear to be OK given that it was 5 years ago.


May 22, 2008

Q & A: Stimulus Rebate Offset Legal??

QUESTION: What is the authority granted to the IRS which allows them to take a federally mandated rebate if you owe the IRS money on previous years taxes?

ANSWER: The Economic Stimulus Act of 2008 includes a provision that states if a taxpayer owes balances from a prior tax year, then any rebate the taxpayer is eligible for will be applied to the past due balance. More proof that it's hard to escape the long arm of the IRS!


Q & A: Tax Return Extensions

QUESTION: I know a single member LLC does not have to file a separate tax return. If I'm filing an extension, do I need to file a separate extension for my single member LLC or just the individual tax return extension?

ANSWER: Single member LLC's normally file tax returns by using Schedule C as part of the Form 1040 package. Non single member LLC's use Form 1065, U.S. Return of Partnership Income.


Q & A: More Stimulus Rebate Chatter

QUESTION: Have 2 questions:
1) I used Turbo Tax and they took their fees from my refund via their bank. Then my refund was direct deposited to my bank. My Social Security Number ends in 44. So do I have to wait for a check in June or will I get a direct deposit on 5/9?
2) For the first time in my life I could not pay my state income tax due of $163. I had thought I'd get my tax rebate direct deposit on 5/9 and then pay the state tax. If the IRS is going to send me a check, will they take the $163 from my rebate? I'm afraid to pay my state taxes now because the Federal would deduct this from my rebate and I'll end up paying twice. Any ideas?

ANSWER: 1) If you chose to have your federal tax refund direct deposited to your bank account, your stimulus rebate will also be sent via direct deposit. Based on your SSN, the IRS will transfer the rebate to your bank on May 9. Taxpayers who received their tax return refunds by check will also receive their rebate by check.
2) Any offset programs the IRS has with state governments generally relate to past due taxes or other court ordered obligations. Since your state tax balance of $163 is for your current year tax return, the IRS will not deduct this amount from your stimulus rebate.


Incorrect Economic Stimulus Checks

We recently received quite a few emails from readers who have already received their stimulus checks, and they were saying that their tax rebate amount was inaccurate. We found this article on Apparently, a few factors comibined to cause an error that led to omitting the $300 credit that people can receive for each eligible child younger than 17. The article also includes a broad description of the IRS's plan of action to correct the issue.


Q & A: Iowa Statute of Limitations

QUESTION: I am trying to find out the statute of limitations for Iowa income taxes. Do you know what it is or where I would go to find out?

ANSWER: The state of Iowa can collect on income tax liability for a period of 10 years from the date of assessment. If a tax lien is filed, it will extend the collection statute at 10-year intervals. Visit the Iowa Department of Revenue website to access more information about Iowa tax regulations.


Thanks to You For The Rebate Comments

All of us here at appreciate the many comments received concerning the incorrect blog post about children and eligibility for the stimulus rebate. The correct answer on qualifying for the rebate if you are over 16 years old as of 12/31/07 is that no payment will be made if any of these situations apply:

1) You do not file a 2007 tax return.
2) Your qualifying income is less than $3,000 and income tax liability is $0.
3) You can be claimed as a dependent on someone else's tax return (whether or not actually claimed on the return) i.e. child or full-time student.
4) You do not have a valid social security number.
5) You are a non-resident alien.

Thanks again to our astute readers for keeping us focused on providing a high level of content. We enjoy receiving all of your questions and comments to us.


Q & A: More on Rebate Issues for Children

QUESTION: My husband and I got the stimulus rebate for the amount of $1200. Great. We have a 20 year old daughter who we did not receive any money for because she is over the age of 16. I understand that, although she certainly cost us plenty (college). I expected that she would receive the individual payment of $600 because she made over $3000 and filed a tax return. Here is the catch-22: She does not qualify for a rebate because we claim her as a dependent. Huh? We don't get any money for a dependent child; but she can't get a rebate as an individual taxpayer. Can you decode this?

ANSWER: This issue has been a popular source of questions (and comments) from our readers. Under the IRS rules, if an individual was eligible to be claimed on someone else's 2007 tax return, no stimulus rebate will be made. This includes a full-time student who could be claimed on the parent's return. This issue is addressed on the IRS web site at There is a good "Frequently Asked Questions" page that attempts to "decode" various tricky scenarios for taxpayers.


Q & A: Non-Profits Subject to IRS Levy?

QUESTION: Does a non-profit child welfare organization have assets that are protected from IRS levy? If so, what are the typical protected assets of non-profit groups?

ANSWER: A non-profit (and I assume in this case, a tax exempt organization under section 501(c)(3)) organization is subject to the same levy as a for-profit corporation. However, because it is a non-profit, I assume again that the only tax is "payroll taxes." A portion of payroll taxes are "trust fund" taxes that can be assessed against the responsible parties (i.e. officers, check signers, knowledgeable board members) personally for collection of the liability. Non-profits are not protected (nor are their responsible parties) from assessment, collection and ultimately levy.
If the tax is other than payroll, then I would need to know what other taxes are assessed, i.e. penalties for late filing, unrelated business income tax, etc. Depending on the type of tax will determine the plan for resolving the matter. In any event, a tax-exempt organization is subject to the same collection efforts and levy as a for-profit.A non-profit (and I assume in this case, a tax exempt organization under section 501(c)(3)) organization is subject to the same levy as a for-profit corporation. However, because it is a non-profit, I assume again that the only tax is "payroll taxes." A portion of payroll taxes are "trust fund" taxes that can be assessed against the responsible parties (i.e. officers, check signers, knowledgeable board members) personally for collection of the liability. Non-profits are not protected (nor are their responsible parties) from assessment, collection and ultimately levy.
If the tax is other than payroll, then I would need to know what other taxes are assessed, i.e. penalties for late filing, unrelated business income tax, etc. Depending on the type of tax will determine the plan for resolving the matter. In any event, a tax-exempt organization is subject to the same collection efforts and levy as a for-profit.


Q & A: Shortchanged on Tax Rebate Part Deux

QUESTION: My husband and I received our rebate exactly when the schedule said we would. However it was just for the two of us. Our three children were not represented in the amount of the rebate. Will there be a second direct deposit date for qualifying children?

ANSWER: This question was just recently posed to us. Our opinion is that if you claimed the children on your 2007 tax return and none of them had reached the age of 17 as of December 31, 2007, the $300 rebate per child should apply. We have researched this issue and have no knowledge of the rule being changed. If you feel that you deserve the rebate for your children, you can contact the IRS at 1-800-829-1040 for assistance.


May 21, 2008

Q & A: Installment Agreement Deferment

QUESTION: I have an installment agreement set up with the IRS and was recently laid off from my employer. Will the IRS allow me to defer payments until I secure another job? If so, what is the process to facilitate that request?
In addition, will I still receive a stimulus payment or will that be automatically applied to the debt I owe them?

ANSWER: Great questions. The IRS will not allow you to defer payments on your agreement based solely on losing your job. But if you are unemployed and have no sources of income, you can contact the IRS at 1-800-829-7650. Explain your situation to them and request to be put into a Currently Non-Collectible Status. If this status is approved, it will allow you some relief from installment payments until you find employment and are able to continue payments.
Your stimulus rebate will be withheld by the IRS and applied to your outstanding tax liability.


Q & A: Shortchanged on Tax Rebate

QUESTION: I received our tax rebate today for $1200. I am married filing jointly with two minor children. I was told that we were supposed to get an additional $300 each for minor children with social security numbers. Please help.

ANSWER: Generally, you are eligible for the additional $300 per child if you have claimed them as dependents on your 2007 tax return and neither of them have reached the age of 17 as of December 31, 2007. If you feel that you should have received the rebate for your children, you can contact the IRS at 1-800-829-1040. Many stimulus rebate answers can be found on the IRS web site at


Q & A: SSI Settlement Subject to Collections?

QUESTION: My husband owes the IRS $7000.00. He has a social security settlement pending. Can the IRS withhold from his SSI settlement?

ANSWER: The IRS can place a levy on Social Security benefits for up to 15% of the benefit. This is normally done only after other collection action has been exhausted. If your husband has received Form L-1058, Final Notice of Intent To Levy, he must respond to this notice within about 45 days or face the risk of levy action that can include his SSI settlement.
Another option available to him that would avoid the risk of having a levy issued against his settlement is for him to contact the IRS at 1-800-829-7650 and request an Installment Agreement to full pay his tax liability over a 60 month period. Setting up this agreement would cease any further collection action.


May 7, 2008

Q & A: Digging Up Old Records

QUESTION: Hoping to find someone with experience in this situation. My client filed a 1040 for the year 2000 and made a substantial payment with the return. As a result of a strange sequence of events I won't go into, we recently filed amended returns for this entity all the way back to 1997. The IRS is now saying that they have no record of the 2000 return or the related payment, and that we need to provide a copy of the return and a cancelled check. The copy of the return is no problem. The cancelled check….of course our client doesn't have that handy and I can only imagine how long it will take their bank to dig this up (at $10 per hour). The IRS rep said a bank statement won't suffice. Any other suggestions?

ANSWER: It may be prudent to research the amount of the payment to see if the IRS posted it to another year. This would require asking the IRS to look for the exact amount of the payment in past balance due years. The IRS master file with command code "TXMOD" will pull any active or prior active years that the IRS should search. The client may have had a balance due in these prior years that they applied the payment and, because it is off the radar for collection, they did not research.
In any event, if this does not occur, the obvious question is where did the check post. Without the check, it may be futile. I suggest researching all of the other IRS modules as the IRS cashes most all of the checks-- where it applies the check is where the research comes.
Hope this helps you. Provide more updates so we can walk through this together.


May 6, 2008

Q & A: Adjusting Your W-4 Wihholding Allowances

QUESTION: I am married with two children and I believe on my W-4 filed at work I checked Married, 3. So did my husband. I want to avoid owing too much at the end of the year and would like to get a refund. We were advised to change our allowances on the W-4 from Married, 3 to Married, 1, so we can have more money withheld. So in that case do you also advise to change to Married, 1?

ANSWER: If your intent is to have a refund on your 2008 tax return, then you are making the correct decision. For payroll withholding purposes, the more allowances you claim during the year results in less federal withholding tax withheld. This will result in reducing your tax refund or increasing your tax due on the tax return. Conversely, if you claim less allowances during the year, the result will be a lower amount of tax due or a larger tax refund on your tax return.


Q & A: Stimulus Rebates at 18 Years Old?

QUESTION: I am 18 years old and made over $3,000 this past year. My parents could and did claim me as a dependent. Judging from everything I've read, that means I don't get any rebate. However, since I'm over 17, my parents couldn't get anything for me. I received a letter from the IRS saying I was eligible. So does this mean I'm getting something or are the 18-20 year olds getting screwed over?

ANSWER: You are eligible for the $300 rebate check since your earned income was over $3,000 for 2007. Dependent children who reached the age of 17 during 2007 are not considered eligible for the additional $300 rebate for taxpayers that otherwise could claim them on the 2007 tax return.


Q & A: More On The Stimulus Rebate

QUESTION: I have received my 2008 tax rebate already....but from what I've been hearing mine was short. I had $413 direct deposited to my bank. However, I heard that it was supposed to be $600. My girlfriend who's my same age, files the same form and makes about the exact same yearly income as me, got an even $600. I was just wondering what makes the difference in our case. All the research I've done states that i would be expecting a $600 check like everyone else. Do you have any idea on if this was a possible error or, if not, how they figure the amount in more detail? Or if there anyone that I could contact to find out, and if it was wrong, could it be corrected? Any information would be a big help and greatly appreciated.

ANSWER: There are a couple of reasons why your rebate check was less than the "advertised" amount of $600. One reason is that if your total tax liability on your 1040 return for 2007 was less than $600, the rebate you will receive will equal the amount of the tax liability. The IRS rationale on this is that if you didn't have at least $600 in tax liability for 2007 than you merit a rebate that only equals the liability, nothing more. A second reason could be if you had any balance due from a prior tax year on your record with the IRS. If any unpaid tax liability exists for any tax year, the IRS will apply the stimulus rebate to the unpaid balance.
If you believe your rebate is for the incorrect amount, we recommend you either consult your tax advisor or call the IRS at 1-800-829-1040.


"Pennies on the Dollar"- I don't think so....

Nothing irks me more than the "pennies on the dollar" ads on TV that state that I can get your tax debt lowered. Anyone who provides a "predetermined" conclusion about your personal finances and your tax debt is a fraud.

What these ads are referring to (as I have blogged in the past) is the IRS Offer in Compromise program. This is a highly technical and detailed financial review that cannot be "predetermined" based on a few facts. In fact, as I have stated in past blog entries, there are many options available to you. The Offer may not be the best option. In fact, filing an Offer can put you in a worse situation.

For example, if you owe $100,000 to the IRS and you have net equity in assets of $50,000 but no monthly disposable income ("MDI"- determined by IRS allowable living standards)- the IRS will want all of your net equity to resolve the tax debt. This means applying for an Offer (and if you are young, professional, and/or own your own business the chances of getting the Offer decrease substantially) will cost you the $150 fee, 20% of the Offer amount ($10,000 in this case with the application- this is not refundable), and the time in extending the collection statute of limitations (the IRS has 10 years to collect and is not going to be put at harm for filing an Offer- hence, it extends the time period to collect PLUS 30 days). The alternative, a currently not collectible status, will defer the payment to the IRS without going out of pocket any funds and will not extend the collection statutes. Furthermore, you will not have to go through the intrusive financial investigation called for in an Offer.

I say this because only 26% of the Offers submitted actually get accepted (this is also an artificially high statistic as the IRS pre-screens out many offers before they are actually received- the GAO states the accepted amount is closer to 21%).

If you do not qualify for the waiver of the $150 fee and 20% down payment (due to income being below the 250% poverty standard set by the Department of Health and Human Services), then you will need to look carefully to determine if you should even consider filing an Offer. Most should consider other options and consult an experienced tax professional for what other options are available.

Do not fall for these TV scams. "Pennies on the Dollar" violates the basic economic principle: "There is no such thing as a free lunch." If you want some help or want to know your options, just ask an experienced professional who will tell you the truth. After all, the truth will emerge in the end.


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