IRS Mind

Foreign Bank Accounts- The Lichtenstein Bank Scandal

noreply@blogger.com (The Tax Fabian) — Fri, 18 Jul 2008 14:32:00 +0000

This is going to be an interesting story to follow over the next several months, but let me give you a little bit of back ground first before I explain why this will be interesting to follow.

Heinrick Kieber, a former computer technician for the Bank of Liechtenstein has come forward with the names of US citizens who had set up secret accounts there. Yesterday he testified via video, from an undisclosed location, before the Senate's Permanent Subcommittee on Investigations, during which he likely disclosed the names of the account holders. Thus exposing them to the scrutinizing of the IRS and the banks alleged efforts to help the wealthy Americans to hide their money from the IRS.

"Liechtenstein's veil of secrecy was pierced five years ago when the disgruntled technician, Kieber, downloaded the names of foreign citizens connected to the secret
accounts. Kieber reportedly sold three CD's full of names and data to tax
authorities to 12 countries including Germany, Great Britain, France, Italy and
the United States. "(Day of Reckoning? Super Rich Tax Cheats Outed by Bank
Clerk; By BRIAN ROSS and RHONDA SCHWARTZJuly 15, 2008 )

According to the IRS,

" If you own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account, then you may be required to report the account yearly to the
Internal Revenue Service. Under the Bank Secrecy Act, each United States person
must file a Report of Foreign Bank and Financial Accounts (FBAR), if
The person has financial interest in, signature authority or other authority over
one or more accounts in a foreign country, and The value of the account
exceeds $10,000 at any time during the calendar year.
A United States person is not prohibited from owning foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial
accounts to circumvent United States law. Investigators use FBARs to help
identify or trace funds used for illicit purposes or to identify unreported
income maintained or generated abroad. "

Congress passed the Bank Secrecy Act in 1970 to fight money laundering in the US and to help prevent the wealthy from using foreign banks as tax havens. The IRS can impose heavy penalties for those who fail to disclose these accounts and transactions, which can be up to 50% of the account balance at the time of the violation and penalties can be assessed as high as $10,000 per each violation.

What the most interesting thing about this story is going to be who is on this list and what the IRS will do to those people. I am sure that those who know they are on the list are currently using every bit of leverage, power and political favors to minimise their exposure not only to the public but the prying eyes of the IRS auditors. It will be interesting to see the outcome of this one over the next coming months!

Tax whores....they are ruining the neighborhood...

noreply@blogger.com (Jim) — Thu, 17 Jul 2008 01:58:00 +0000

I am often puzzled by the prostitution that is now predominant in the Tax Resolution Industry. A prostitute or someone that engages in general prostitution sells themselves for an unworthy use. In this industry there are many who do.

This is a disgrace considering that there are many ethical players in this industry. The whores are ruining the neighborhood and removing the ability for ethical players who are very proficient in resolution.

You have three choices in dealing with your tax debt problems:

1. Represent yourself before the IRS and negotiate a resolution
2. Do nothing and let the IRS take enforcement
3. Hire a professional to resolve your problems

There are pros and cons to each except choice #2- doing nothing will only cause you to look over your shoulder forever. Also, the IRS will eventually take your money without asking. Choice # 1 - resolving your problems on your own- may be penny wise but dollar foolish if you do not know all of your options and how to apply them to your personal financial situation.

Choice and option #3- if you are considering hiring a professional- and I believe this is a wise idea- requires that you look at all of the following factors at a minimum:

1. What is the firm's experience in resolving tax debt issues? (is there ex-IRS personnel that can get through the bureaucratic mess of the IRS)
2. How long do they take in doing their resolution? (you will need specifics)
3. Is the firm that you hire going to consider all of your options?? (not just the popular ones that the "whores" are pimping- i.e. the "Pennies on the Dollar" abuses)
4. Do they hold themselves to any industry standards of excellence? (what are their affiliations?)
5. Are they making unrealistic, long shot promises?? (are they promising something that sounds too good to be true)

If the firm you are considering is giving you a conclusion without doing all of the due diligence- look out....because resolving your tax problems requires extensive discovery (yes, similar to an attorney), analysis, and a consideration of every option.

I am all for kicking the whores out of the neighborhood....so that the ethical providers can do what they do best: resolve their client's tax problems and provide them peace of mind for their financial future.

Levy on Independent Contracts

noreply@blogger.com (The Tax Fabian) — Mon, 14 Jul 2008 16:42:00 +0000

I recently received this question from a potential client ...

"I've received an IRS levy for one of my 1099 Independent Contractors. There is no money due the contractor today, but there will most likely be a commission due in 30 days. How do I treat future commissions?"
This is a great question and the IRS's Internal Revenue Manual is
a bit vague on this topic, however what the IRM does state is this...
Accounts receivable, notes receivable, and other debts owed to a taxpayer may be levied upon. Accounts receivable are assets representing money due to a taxpayer for products and services provided on credit.
Example: monies owed to the taxpayer by clients, customers,
patients, insurance companies, rental income, funds processed by credit card companies
Consider issuing a summons to the taxpayer's bank for deposited items to obtain information on possible accounts receivable on which to levy.
A note receivable is a certain amount loaned to another that is owed and payable at a certain time to the holder of the promissory note.
Example:money loaned to a customer, employee, or officer of the
company. A notice of levy reaches future payments, only if the taxpayer
already has a right to them.
If receivables can be sold, consider seizing and selling them.
This doesn't give a very good answer to the question, however what is typically assumed is that the levy only affects funds that are due to the taxpayer at the time the levy is received. If the taxpayer is not currently due any funds then the levy does not attach to anything and can be returned to the service with an acknowledgment that the taxpayer is not currently due any funds.
This however is not always the case as the levy could be a continuous levy. If the levy is continuous then it attaches to any current and future funds due to the tax payer. The only way to tell is to review the form 668 (Notice of Levy) and if in the top left corner of the form has a (c) next to the 668, then the levy is continuous and the taxpayer needs to seek immediate representation.

What does an IRS Collections person return on investment?

noreply@blogger.com (Jim) — Thu, 10 Jul 2008 06:21:00 +0000

It is increasing more and more...according to the latest Report to Congress by the IRS' Taxpayer Advocate Office. In prior reports, the ROI on an Automated Collection System ("ACS") employee was estimated at 13:1 - now it is estimated at 20:1!!

To supplement the Tax Fabian's blog entry on how many IRS Collection personnel would it take to recoup $42 million, I offer these statistics from the IRS that will return the $42 million of ill-spending:

The average annual ACS employee compensation package: $75,000 (on average)
With a 20:1 ROI- the ACS Representative would annually collect (gross): $1,500,000
Number of ACS Representatives to recoup the $42 million in one year: exactly 28

The IRS put in its budget for the past year, funding for 175 additional ACS representatives. By my math, that is a little over 5 more of those idiotic and reduntant letters.

In fairness to the IRS, it was Congress and its politicos (the Treasury Secretary) that mandated the letter. The IRS is a superb collector of tax as it has superpowers of collection: the right to seize property (i.e. a levy) without a judgement. The only requirement is the due process set forth in the Internal Revenue Code. With powers like that, no wonder they have a 20:1 ROI.

If you feel comfortable about going up against this Goliath of a collector, find a David that knows where to aim.

The $42 Million Dollar "Heads Up"

noreply@blogger.com (The Tax Fabian) — Mon, 07 Jul 2008 22:22:00 +0000

One thing is for sure, our government is consistent in its brilliance or lack there of.

On July 1st of last week I received a letter from the IRS informing me that my Economic Stimulus check would arrive no later than July 5th. While I was relieved to know that the check was now on it's way, I was a bit dumbfounded that the IRS would send me a letter just to inform me of this, especially this late and especially since there was already an abundant amount of information available to the public to inform someone like me of when to expect the check.

What is even more shocking, is what this "heads up" cost the US taxpayer. I bet $42 Million didn't come to mind! That's right, according to the Associated Press article "Dear Taxpayer: This Letter Cost you $42 Million" , the IRS shelled out $42 million dollars to send out letters informing people they would receive their stimulus check in the next few days. Brilliant!
I wonder how many Revenue Officers or Revenue Agents could have been hired with $42,000,000?

There is at least one senator who shares the same view according to the articles.

"There are countless better uses for $42 million than a self-congratulatory mailer that gives the president a pat on the back for an idea that wasn't even his," Sen. Charles Schumer said Friday, arguing the IRS could more effectively spend the money to catch tax cheats."

The Truth on E-filing and the IRS: A mandate to come??

noreply@blogger.com (Jim) — Thu, 03 Jul 2008 12:18:00 +0000

In 2007, there were over 235 million tax returns filed. Obviously, for cost measures and efficiency, the IRS wants as many of them to be e-filed as possible. The target set by the IRS is to have 80% of all Forms 1040 e-filed before 2007. At 59.7%, the IRS has clearly not met the expectations of Congress.

Hence, what are the proposals that are on the table: mandates for e-filing

The IRS' Electronic Tax Administration Advisory Committee ("ETAAC") has recently come out with its 2008 Annual Report to Congress that suggests and re-suggests some mandates that may be forthcoming:

1. A requirement that all tax preparers file taxpayer returns electronically if they have more than 50 returns prepared each year (e-filing is not currently a requirement for a tax preparer)
2. Increasing the number of employers that need to file Forms W-2 in an electronic manner to the IRS (currently the requirement to file electronically is for businesses with more than 250 employees)
3. Testing and licensing all Tax Preparers who are not essentially CPAs, attorneys, or enrolled agents to insure that electronic filings are done by competent professionals (presently anyone can be a paid preparer without qualification or training)

The emphasis on mandates on the practitioner is consistent with the IRS "deputizing" the tax professional for compliance risks. Congress has mandated that the tax preparer disclose "questionable positions" on a tax return or face stiff penalties.

All of these items are pushing to a modernized IRS. The "Modern IRS" has the taxpayer doing its adminstrative work Because more than half of all returns are filed by tax professionals, the work will be done by these preparers. To take this a step further, the errors will be owned by the preparer also.

The IRS wants to bury its archaic computer systems for a more modern system that can consolidate all information into a centralized source: The Customer Account Data Engine ("CADE"). This new system will allow the IRS to look across its traditional lines of communciation with one contact. It will consolidate individual and business accounts, notices, examination and collection efforts. In fact, 30 million accounts have been processed into CADE this year.

In short, the legacy system that the IRS uses is proposed to be off-line by 2012 according to the ETAAC. The IRS cannot do this without mandates- 60% compliance is about all they can get voluntarily. The IRS realizes that this will be done by tax professional.

This tax professional must meet their standards. This standard is simple: an honest, trained preparer who will stand by their returns. Choose this person wisely for years to come for the IRS sees this person as the key to scaling their e-file and compliance risks for the future.

More on the Economic Stimulus Rebate

noreply@blogger.com (Cecil) — Thu, 03 Jul 2008 04:18:00 +0000

The time period for mailing the 2008 Stimulus Rebate to eligible taxpayers who filed 2007 tax returns by April 15 is soon to come to an end. The IRS schedule for mailing the final rebates is mid-July. If you have filed your 2007 return since 4/15, you will receive your rebate check some time after the tax return has been processed. Also, as long as you file a return by the October 15 filing deadline for extensions, you should receive the rebate check by December 31.

If you are wondering (and crossing your fingers) when your check is scheduled to be mailed by the IRS, go to the IRS web site http://www.irs.gov. There you will see the link to the Stimulus Rebate Payment Center. At that page, you will find an underlined link for Where's My Stimulus Payment? Click this link and go to the Where's My Stimulus Payment? page. On this page, click a similarly named underlined link. At this page, simply enter the required information from your 2007 tax return and, voila!, the scheduled date for receipt of your check should be given. If there is a problem with your rebate, there should be telephone number referenced that you call to resolve the problem issue.

Capital Gains Tax Rates.....Still Attractive

noreply@blogger.com (Cecil) — Thu, 03 Jul 2008 03:57:00 +0000

Capital gains tax rates have really been very attractive since 2001. For example, the maximum capital gains rate is normally 15% unless you are in the 15% income tax bracket. If your tax bracket is 15% or less, the maximum capital gains rate is 5%. For tax year 2008, the 5% rate actually decreases to 0%! This reduced rate will continue through tax year 2010. If you have flexible income, now may be the time to choose to sell appreciated property to take advantage of this very special rate.
As the tax law now stands, after 2010 the capital gains rates are scheduled to return to the 20%/10% rates that were in effect before 2001. Remember also that dividend income will be taxed at ordinary income rates rather than capital gains rates after 2010. So now is the time to for proper planning to achieve the maximum benefit from property sales utilizing these lower rates.

Your Personal Information And The IRS

noreply@blogger.com (Cecil) — Fri, 27 Jun 2008 04:31:00 +0000

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.

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

noreply@blogger.com (Jim) — Wed, 25 Jun 2008 00:31:00 +0000

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 off ense - 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."

Q&A: IRAs and the Offer in Compromise

noreply@blogger.com (Jim) — Sat, 21 Jun 2008 23:14:00 +0000

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?

Answer: 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.

Higher Education Tax Credits

noreply@blogger.com (Cecil) — Thu, 19 Jun 2008 14:07:00 +0000

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

noreply@blogger.com (The Tax Fabian) — Thu, 19 Jun 2008 11:40:00 +0000

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!

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

noreply@blogger.com (Jim) — Wed, 18 Jun 2008 00:53:00 +0000

--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.

A New Mind on the Team

noreply@blogger.com (IRS Mind Admin) — Fri, 13 Jun 2008 15:37:00 +0000

We at IRS Mind are proud to welcome our newest IRS tax expert to the team. Tal Sneed is a sales manager for Effectur, the tax resolution industry's most reputable firm. He was previously the most successful tax consultant in Effectur's company history and was promoted to sales manager a year ago. While he has a decorated sales history in tax resolution, Tal has graciously offered to share his wealth of IRS collections knowledge to you for free on IRS Mind.

His first post covered some important advice to help self-employed individuals keep up with business expenses. Look for Tal to contribute lots of useful tips on dealing with IRS collections and, more importantly, how to prevent big tax problems from occurring. Tal will be writing as "The Tax Fabian."

How many back returns do I need to file?

noreply@blogger.com (Jim) — Fri, 06 Jun 2008 16:52:00 +0000

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.

Keeping up with your Business Expenses

noreply@blogger.com (The Tax Fabian) — Mon, 02 Jun 2008 19:02:00 +0000

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/.

Q & A: Claiming a Child As Qualifying Relative

noreply@blogger.com (Jim) — Sun, 25 May 2008 20:52:00 +0000

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 http://www.irs.gov for greater clarification.

Q & A: Underwithheld Payroll Taxes

noreply@blogger.com (Jim) — Sun, 25 May 2008 20:23:00 +0000

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 http://www.irs.gov.

Q & A: IRS And the Income Matching System

noreply@blogger.com (Jim) — Sun, 25 May 2008 20:09:00 +0000

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.

Q & A: Stimulus Rebate Offset Legal??

noreply@blogger.com (Jim) — Fri, 23 May 2008 03:22:00 +0000

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

noreply@blogger.com (Jim) — Fri, 23 May 2008 03:08:00 +0000

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

noreply@blogger.com (Jim) — Fri, 23 May 2008 02:52:00 +0000

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

noreply@blogger.com (Jim) — Thu, 22 May 2008 22:23:00 +0000

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 MSNBC.com. 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

noreply@blogger.com (Jim) — Thu, 22 May 2008 22:14:00 +0000

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.