David Kirkpatrick

August 4, 2010

Looking way ahead …

Filed under: Business, Politics — Tags: , , , , — David Kirkpatrick @ 6:28 pm

… all the way to next year’s tax season. Here’s some tips on using an offer in compromise on your total tax bill from the IRS. This is a tough, tough year and it doesn’t hurt to begin reviewing your options this early.

From the AICPA link:

In these economic times, more taxpayers are not able to fully pay their federal income taxes when due. There are several methods that may be used to pay tax liabilities in this situation, one of which is an offer in compromise (OIC).

Sec. 7122 permits the IRS to compromise a tax liability on one of the following grounds:

  • Doubt as to liability;
  • Doubt as to collectability; or
  • To promote effective tax administration because either collection of the full amount would cause economic hardship for the taxpayer or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

May 5, 2010

IRS offering open house May 15 for small business and individuals

The facts straight from the source:

Open House on Saturday May 15 to Help Small Businesses, Individuals Solve Tax Problems

IR-2010-55, May 3, 2010

WASHINGTON — The Internal Revenue Service will host a special nationwide Open House on Saturday May 15 to help small businesses and individuals solve tax problems.

Approximately 200 IRS offices, at least one in every state, will be open May 15 from 9 a.m. to 2 p.m. local time. IRS staff will be available on site or by telephone to help taxpayers work through their problems and walk out with solutions.

“Our goal is to resolve issues on the spot so small businesses and individuals can put any issues they have with the IRS behind them,” IRS Commissioner Doug Shulman said. “If you have a problem filing or paying your taxes or resolving a tough tax issue, we encourage you to come in and work with us.”

IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues. At a previous IRS Open House on March 27, approximately two-thirds of taxpayers requested and received assistance with payments and notices.

So, for example, a taxpayer who cannot pay a tax balance due can discuss with an IRS professional whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.

At the March 27 Open House, 88 percent of the taxpayers who came in for help had their issues resolved the same day.

Locations for the May 15 Open House are listed here.

The Open House on May 15 is the first of three events scheduled through the end of June. The next two are planned for Saturday June 5 and Saturday June 26. Details regarding those events will be available soon.

April 15, 2010

Tax day is here

Filed under: Business, Politics — Tags: , , , — David Kirkpatrick @ 2:32 pm

Hope you’ve already taken care of the unpleasant chore of federal income taxes. If you want to see some frazzled people, head to the largest post office branch in your city or town between around 10 p.m. and midnight to see all those very last minute filers. Of course with electronic filing that little bit of yearly Americana is probably heading toward extinction.

March 25, 2010

IRS “open house” for tax help this Saturday

News straight from the source:

More than 180 Local IRS Offices Open this Saturday to Help Taxpayers

IR-2010-36, March 24, 2010

WASHINGTON — The IRS announced today that Internal Revenue Service offices will be open, nationwide, on Saturday, March 27 from 9 a.m. to 2 p.m., local time to help taxpayers. The location of participating offices is listed on IRS.gov.

“We are holding these special open houses to give taxpayers who are struggling in these difficult economic times more opportunity to work directly with IRS employees to resolve their tax issues,” said IRS Commissioner Doug Shulman.  “We will host more than 180 open houses this Saturday.”

During the expanded open-house hours on Saturday, taxpayers will be able to address economic hardship issues, make payment arrangements or get help claiming any of the special tax breaks in last year’s American Recovery and Reinvestment Act, including the:

  • Homebuyer tax credit – a refundable credit equal to 10 percent of the purchase price up to a maximum of $8,000 ($4,000 if married filing separately). A first-time homebuyer is an individual who, with his or her spouse if married, has not owned any other principal residence for three years prior to the date of purchase of the new principal residence for which the credit is being claimed.
  • American Opportunity Credit — a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
  • Making Work Pay credit — In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.
  • Expanded Earned Income Tax Credit – there is now a new tax classification for EITC recipients who have three or more children and a higher credit amount – up to $5,657

In addition to IRS help, community organizations partner with the IRS. Volunteer Income Tax Assistance (VITA) programs assist people who earned $49,000 or less and Tax Counseling for the Elderly (TCE) programs assist individuals 60 and over with their 2009 income tax return preparation and electronic filing.   Many of these sites have Saturday hours while others offer assistance at various times during the week.  To locate the partner sites in this area call 1-800-906-9887.

In addition to the open houses this Saturday, the IRS will open many of its offices on three additional Saturdays in the spring and early summer.

March 17, 2010

The IRS’ “dirty dozen” scams for 2010

Filed under: Business, Politics — Tags: , , , , — David Kirkpatrick @ 5:17 pm

News you can, and should, use from the IRS.

The release:

Beware of IRS’ 2010 “Dirty Dozen” Tax Scams

IR-2010-32, March 16, 2010

WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.

“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

Return Preparer Fraud

Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.

Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009.

Hiding Income Offshore

The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.

Phishing

Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: phishing@irs.gov.

Filing False or Misleading Forms

The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099 Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.

Nontaxable Social Security Benefits with Exaggerated Withholding Credit

The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

Abusive Retirement Plans

The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

Disguised Corporate Ownership

Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.
Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts.  While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Fuel Tax Credit Scams

The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

January 25, 2010

An idea that’s almost too simple

Filed under: Business, Politics — Tags: , , , — David Kirkpatrick @ 8:31 pm

Tax forms pre-filled with the information the IRS has on your taxpayer ID.

From the link:

Requiring taxpayers to file returns without being told what the government already knows makes as much sense “as if Visa sent customers a blank piece of paper, requiring that they assemble their receipts, list their purchases — and pay a fine if they forget one,” said Joseph Bankman, a professor at the Stanford Law School.

Many developed countries now offer taxpayers a return containing all information collected by the taxing authority — to “get the ball rolling by telling you what it knows,” Mr. Bankman says.

It’s a stunningly reasonable idea. When you prepare your return, why can’t you first download whatever data the Internal Revenue Service has received about you and, if your return is simple, learn what the I.R.S.’s calculation of your taxes would be? You’d have the chance to check whether the information was accurate, correct it as needed and add any pertinent details — that you’re newly married, for example, or have a new child — before sending it. Far better to discover problems early with the I.R.S., whose say matters more than third-party software’s best guess.

January 11, 2010

Taxes and the self-employed

As a freelance writer for many years I’ve been dealing with the ins-and-outs of filing taxes through the Schedule C self-employment form. With the state of the economy many more taxpayers are newly minted self-employers and get to wrestle with all the tax implications that status brings. Here’s a nice, quick overview of self-employment and federal income tax with some strategic advice thrown in for good measure.

My best advice? Obtain the services of a certified CPA, preferably an individual you can sit down with sometime in the next six weeks or so — do not wait until the last minute — to discuss your particular situation and how to take advantage of every tax opportunity available to you. After trying both ways (on my own or with tax software, and using a professional) the amount spent on CPA services is almost always easily covered by the saving the professional finds with your return.

I’m getting this post up this early in the year because if your employment status changed last year there is no time to procrastinate or delay getting everything in order well in advance of the ides of April.

From the link:

It used to be that the vast majority of people worked in staff jobs.

But in a tough economy, the number of independent contractors, temps, part-timers, and freelancers expands.

If you become a contingent worker, you’ll need to rethink your taxes. For someone used to being on staff, “It’s a mindset shift,” says Eddie Gershman, a partner in Deloitte Tax’s private client group. The common perception is that you’ll pay more tax if you work for yourself, since you’ll cover the employer portion of Social Security and Medicare taxes. While you will be on the hook for that self-employment tax, the tax advantages to working for yourself can soften the blow. Here’s how to get the most out of deductions:

October 2, 2009

Is a value-added tax coming?

Filed under: Business, Politics — Tags: , , , , — David Kirkpatrick @ 3:40 pm

I sure hope not.

From the link:

President Obama has been steadfast in his pledge that he won’t raise taxes on those making less than $250,000. But that doesn’t mean only high-income households will be subject to higher taxes.

An increasing number of influential Democrats and fiscal-policy experts have signaled that lawmakers will have to get a handle on the deficit. And they recommend seriously considering the creation of a value-added tax (VAT) on top of the federal income tax.

That could mean more money out of everyone’s pockets when buying virtually anything — sweaters, school books, furniture, pottery classes, dinners out.

A VAT is tax on consumption similar to a national sales tax. But it’s not just paid at the cash register. It’s levied at every stage of production. So all businesses involved in making a product or performing a service would pay a VAT. And then the end-user — such as the retail customer — ponies up as well.

September 1, 2009

IRS to use mortgage data to track down cheaters

The IRS has really been stepping up enforcement over the last couple of years. Sometimes (rarely really) you get the warm and fuzzy IRS, other times you get the buzzsaw.

I do agree with the point made below on the odd timing of this potential tax cheat catching tool.

From the link:

The Internal Revenue Service might scrutinize mortgage interest data more closely to help catch tax cheats, after prompting from an IRS auditor.

The tax collector said it will study whether it should make greater use of mortgage interest data provided to the IRS by banks, to target audits against individuals who do not file tax returns, according to a letter released Monday by the Treasury Inspector General for Tax Administration.

However, a stepped-up IRS focus on homeowners whose reported income falls below their mortgage interest obligations could attract criticism at a time when many have fallen behind on mortgage payments.

August 21, 2009

Watch out for correspondence audits from the IRS

I’d like to see some legislation taking this ability away from the IRS. Too many problems, to many moving parts, not enough personal interaction and very clearly not enough protection for the taxpayer.

From the link:

A new report from the Treasury Inspector General for Tax Administration lends support to growing complaints about the Internal Revenue Service’s big audit-by-mail program.

The IRS has increasingly relied on these correspondence audits, focused on one or two narrow issues, to maintain its audit coverage of normal taxpayers as its auditor corps has shrunk. Taxpayers are sent a letter that, for example, says their charitable or un-reimbursed employee business deductions will be denied and a certain amount of extra taxes assessed unless they provide acceptable documentation supporting the deductions within 30 days.

But the TIGTA report concludes that the correspondence audit results reported by the IRS are “inaccurate and overstated” and that there are operational problems with the program, including significant mail processing delays. These delays can cause taxpayers who respond with documentation within the required time to be assessed extra taxes because their responses don’t get to the right IRS employee in time. Eventually, they may be able to get those taxes abated through an “audit reconsideration,” but the average time to conclude one of those is 159 days, TIGTA estimates.

August 20, 2009

Food for taxation thought

An interesting study out of the University of Michigan on the federal income tax and how that tax burden is spread out by region and size of your home town or city.

The release:

City dwellers bear disproportionate federal tax burden

Live in an expensive city? Think you pay too much in federal taxes? If so, a study in the current issue of the Journal of Political Economy finds that you’re exactly right.

According to David Albouy, a University of Michigan economist, workers in expensive cities in the Northeast, Great Lakes and Pacific regions bear a disproportionate share of the federal tax burden, effectively paying 27 percent more in federal income taxes than workers with similar skills in a small city or rural area.

Why the disparity? Workers in cities are generally paid higher wages than similarly skilled workers in smaller towns, so they’re taxed at higher rates. That may sound fair, until one considers the higher cost of living in cities, which means those higher wages don’t provide any extra buying power. The federal income tax system doesn’t account for cost of living. So the effect is that workers in expensive cities like New York, Los Angeles and Chicago pay more in taxes even though their real income is essentially the same as workers in smaller, cheaper places.

The extra burden wouldn’t be so excessive if more federal tax dollars were returned to urban areas in the form of higher federal spending. But according to Albouy’s research, that’s not the case. His data show that more federal dollars are actually spent in rural areas, despite the fact that cities send far more cash to Washington. The net effect of all this is a transfer of $269 million from workers in high-cost areas to workers in lower cost rural areas in 2008 alone.

Over the long haul, Albouy says, the larger tax burden causes workers to flee large urban centers in the Northeast and settle in less expensive places in the South. So to some extent, it may have been the federal tax system that put the rust on the rust belt.

Detroit is a perfect example of a city that gets the short end of the stick.

“With its high wage levels, Detroit was, until recently, contributing far more in federal revenues per capita than most other places for over one hundred years,” Albouy said. The recent federal bailout to Detroit automakers “is peanuts relative to the extra billions the city has poured into Washington over the 20th Century.”

One expensive area that escapes the higher burden is Hawaii. Costs in Hawaiian cities are high, but wages remain low because people are willing to accept lower pay to live by the beach. As a result, Hawaiians aren’t pounded by taxes the way New Yorkers are. But it also means that “powerhouse cities like New York indirectly subsidize people to live in really nice locations like Hawaii,” Albouy said.

Albouy’s analysis adds new empirical weight to a debate that started in the 1970s with the late New York Senator Daniel Patrick Moynihan. Moynihan commissioned a series of reports that showed the Northeast and Midwest sent far more money to Washington than it got back. Albouy’s research is the first to provide an estimate of how much more individual workers in cities pay.

Albouy says that city folk shouldn’t expect relief from this system anytime soon.

“Highly taxed areas tend to be in large cities inside of populous states, which have low Congressional representation per capita, making the prospect of reform daunting,” he writes.

 

###

 

David Albouy, “The Unequal Geographic Burden of Federal Taxation,” Journal of Political Economy 117:4, August 2009.

One of the oldest and most prestigious journals in economics, the Journal of Political Economy has since 1892 presented significant research and scholarship in economic theory and practice. The journal aims to publish highly selective, widely cited articles of current relevance that will have a long-term impact on economics research.

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