from www.irs.gov
Honda Hybrids Still Qualify for Tax Credit
IR-2007-151, August 28, 2007
WASHINGTON — The Internal Revenue Service announced that purchasers of American Honda Motor Company, Inc., qualified vehicles may continue to claim the Alternative Motor Vehicle Credit.
The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Honda sold 6,518 qualifying vehicles to retail dealers in the quarter ending June 30 2007. This brings the cumulative number of qualified Honda hybrid vehicles sold as of June 30, 2007, to 58,872.
The credit amount and make and model of qualified vehicles sold are:
Honda Accord Hybrid Model Year 2005 $650
Honda Accord Hybrid, Model Year 2007 $1,300
Honda Accord Hybrid Navi Model Year 2007 $1,300
Honda Civic Hybrid Model Year 2007 $2,100
Original purchasers of these vehicles may claim the full amount of the credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
Wednesday, August 29, 2007
Monday, August 27, 2007
IRS Warns Taxpayers of New E-mail Scams
from www.irs.gov
IRS Warns Taxpayers of New E-mail Scams
Updated Aug. 24, 2007 — The Internal Revenue Service today warned taxpayers of a new phishing scam, in which an e-mail purporting to come from the IRS advises taxpayers they can receive $80 by filling out an online customer satisfaction survey. The IRS urges taxpayers to ignore this solicitation and not provide any requested information. The IRS does not initiate contact with taxpayers through e-mail.
Updated June 19, 2007 — In another recent scam, consumers have received a "Tax Avoidance Investigation" e-mail claiming to come from the IRS' "Fraud Department" in which the recipient is asked to complete an "investigation form," for which there is a link contained in the e-mail, because of possible fraud that the recipient committed. It is believed that clicking on the link may activate a Trojan Horse.
IR-2007-109, May 31, 2007WASHINGTON — The Internal Revenue Service today alerted taxpayers to the latest versions of an e-mail scam intended to fool people into believing they are under investigation by the agency’s Criminal Investigation division.The e-mail purporting to be from IRS Criminal Investigation falsely states that the person is under a criminal probe for submitting a false tax return to the California Franchise Tax Board. The e-mail seeks to entice people to click on a link or open an attachment to learn more information about the complaint against them. The IRS warned people that the e-mail link and attachment is a Trojan Horse that can take over the person’s computer hard drive and allow someone to have remote access to the computer.The IRS urged people not to click the link in the e-mail or open the attachment.Similar e-mail variations suggest a customer has filed a complaint against a company and the IRS can act as an arbitrator. The latest versions appear aimed at business taxpayers as well as individual taxpayers.The IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.“Everyone should beware of these scam artists,” said Kevin M. Brown, Acting IRS Commissioner. “Always exercise caution when you receive unsolicited e-mails or e-mails from senders you don’t know.”Recipients of questionable e-mails claiming to come from the IRS should not open any attachments or click on any links contained in the e-mails. Instead, they should forward the e-mails to phishing@irs.gov (follow the instructions).The IRS also sees other e-mail scams that involve tricking victims into revealing private personal and financial information over the Internet, a practice that is known as “phishing” for information.The IRS and the Treasury Inspector General for Tax Administration work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported.Since the establishment of the mail box last year, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations by TIGTA have identified host sites in at least 27 different countries, as well as in the United States.Other fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS Web site and ask for bank account numbers. Another widespread e-mail tells taxpayers the IRS is holding a refund (often $63.80) for them and seeks financial account information. Still another email claims the IRS’s ‘anti-fraud commission’ is investigating their tax returns.Related Item:
Suspicious e-Mails and Identity Theft
IRS Warns Taxpayers of New E-mail Scams
Updated Aug. 24, 2007 — The Internal Revenue Service today warned taxpayers of a new phishing scam, in which an e-mail purporting to come from the IRS advises taxpayers they can receive $80 by filling out an online customer satisfaction survey. The IRS urges taxpayers to ignore this solicitation and not provide any requested information. The IRS does not initiate contact with taxpayers through e-mail.
Updated June 19, 2007 — In another recent scam, consumers have received a "Tax Avoidance Investigation" e-mail claiming to come from the IRS' "Fraud Department" in which the recipient is asked to complete an "investigation form," for which there is a link contained in the e-mail, because of possible fraud that the recipient committed. It is believed that clicking on the link may activate a Trojan Horse.
IR-2007-109, May 31, 2007WASHINGTON — The Internal Revenue Service today alerted taxpayers to the latest versions of an e-mail scam intended to fool people into believing they are under investigation by the agency’s Criminal Investigation division.The e-mail purporting to be from IRS Criminal Investigation falsely states that the person is under a criminal probe for submitting a false tax return to the California Franchise Tax Board. The e-mail seeks to entice people to click on a link or open an attachment to learn more information about the complaint against them. The IRS warned people that the e-mail link and attachment is a Trojan Horse that can take over the person’s computer hard drive and allow someone to have remote access to the computer.The IRS urged people not to click the link in the e-mail or open the attachment.Similar e-mail variations suggest a customer has filed a complaint against a company and the IRS can act as an arbitrator. The latest versions appear aimed at business taxpayers as well as individual taxpayers.The IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.“Everyone should beware of these scam artists,” said Kevin M. Brown, Acting IRS Commissioner. “Always exercise caution when you receive unsolicited e-mails or e-mails from senders you don’t know.”Recipients of questionable e-mails claiming to come from the IRS should not open any attachments or click on any links contained in the e-mails. Instead, they should forward the e-mails to phishing@irs.gov (follow the instructions).The IRS also sees other e-mail scams that involve tricking victims into revealing private personal and financial information over the Internet, a practice that is known as “phishing” for information.The IRS and the Treasury Inspector General for Tax Administration work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported.Since the establishment of the mail box last year, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations by TIGTA have identified host sites in at least 27 different countries, as well as in the United States.Other fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS Web site and ask for bank account numbers. Another widespread e-mail tells taxpayers the IRS is holding a refund (often $63.80) for them and seeks financial account information. Still another email claims the IRS’s ‘anti-fraud commission’ is investigating their tax returns.Related Item:
Suspicious e-Mails and Identity Theft
Nissan Hybrid Qualifies for Tax Credit
from www.irs.gov
Nissan Hybrid Still Qualifies for Tax Credit
IR-2007-147, August 23, 2007
WASHINGTON — The Internal Revenue Service announced that purchasers of qualified Nissan North America Inc. vehicles may continue to claim the Alternative Motor Vehicle Credit.
The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Nissan sold 3,128 qualifying vehicles to retail dealers in the quarter ending June 30, 2007. This brings the total number of qualified hybrid vehicles sold to 5,222.
The allowable credit amount for the 2007 Altima Hybrid — Nissan’s only certified hybrid vehicle — is $2,350.
Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter
Nissan Hybrid Still Qualifies for Tax Credit
IR-2007-147, August 23, 2007
WASHINGTON — The Internal Revenue Service announced that purchasers of qualified Nissan North America Inc. vehicles may continue to claim the Alternative Motor Vehicle Credit.
The announcement comes after the IRS concluded its quarterly review of the number of hybrid vehicles sold. Nissan sold 3,128 qualifying vehicles to retail dealers in the quarter ending June 30, 2007. This brings the total number of qualified hybrid vehicles sold to 5,222.
The allowable credit amount for the 2007 Altima Hybrid — Nissan’s only certified hybrid vehicle — is $2,350.
Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter
Sunday, August 26, 2007
Foreclosure and Taxes
from www.nytimes.com
Published: August 24, 2007
To forgive is divine, except when the thing being forgiven is debt. Then, it’s taxable.
The taxability of forgiven debt is set to become a pressing issue as more homeowners fall behind on their mortgages and face foreclosure. As Geraldine Fabrikant reported in The Times this week, some foreclosed homeowners face a double whammy. First they lose their homes; then they get billed for taxes on the amount of debt that was presumably wiped away in the foreclosure.
In principle, there is nothing wrong with taxing defaulted debtors on the part of their mortgage that goes uncollected. The law rightly provides that when a borrower fails to repay, the unpaid balance becomes taxable income. Nor is the problem with the Internal Revenue Service. When the I.R.S. sends tax bills to foreclosed borrowers, it is using information provided by lenders.
Nevertheless, problems are rife. One of the biggest occurs when lenders misreport forgiven-debt data to the I.R.S. In general, a lender must report the difference between the mortgage balance and the house’s fair market value at the time of foreclosure. But some lenders fail to keep track of recent home appraisals or the ultimate sales prices of foreclosed properties. Instead, they may compute the forgiven debt using an interim distress price that’s slapped on a foreclosed house before it’s resold, say $1. The result is a huge — and hugely erroneous — tax liability.
For foreclosed borrowers hit with unexpected tax bills, figuring out if they have been wrongly charged can be an insurmountable burden. They generally need to pay for expert tax advice and may struggle to extract the necessary information from faceless lenders. They’re also subject to the unavoidable stress that comes with having a problem with the I.R.S. If a borrower isn’t up to the challenges, the result could be payment of taxes that aren’t owed, or nonpayment of taxes that have been assessed — either of which could be ruinous for people who are trying to rebound from foreclosure.
Congress needs to pay attention. Lawmakers held hearings this year that exposed the reckless and predatory lending behind many of today’s foreclosures, but they have yet to provide any substantial assistance to imperiled homeowners. This lack of urgency stands in stark contrast to the swift government response to mortgage-related woes on Wall Street.
A typical excuse for delay is that legislators must proceed carefully to avoid unintended consequences. But the help that is most needed now is for overwhelmed state, local and nonprofit agencies that counsel beleaguered homeowners on how to renegotiate loans and how to get free or low-cost advice on tax and legal issues. There is no reason for Congress to delay on this.
Published: August 24, 2007
To forgive is divine, except when the thing being forgiven is debt. Then, it’s taxable.
The taxability of forgiven debt is set to become a pressing issue as more homeowners fall behind on their mortgages and face foreclosure. As Geraldine Fabrikant reported in The Times this week, some foreclosed homeowners face a double whammy. First they lose their homes; then they get billed for taxes on the amount of debt that was presumably wiped away in the foreclosure.
In principle, there is nothing wrong with taxing defaulted debtors on the part of their mortgage that goes uncollected. The law rightly provides that when a borrower fails to repay, the unpaid balance becomes taxable income. Nor is the problem with the Internal Revenue Service. When the I.R.S. sends tax bills to foreclosed borrowers, it is using information provided by lenders.
Nevertheless, problems are rife. One of the biggest occurs when lenders misreport forgiven-debt data to the I.R.S. In general, a lender must report the difference between the mortgage balance and the house’s fair market value at the time of foreclosure. But some lenders fail to keep track of recent home appraisals or the ultimate sales prices of foreclosed properties. Instead, they may compute the forgiven debt using an interim distress price that’s slapped on a foreclosed house before it’s resold, say $1. The result is a huge — and hugely erroneous — tax liability.
For foreclosed borrowers hit with unexpected tax bills, figuring out if they have been wrongly charged can be an insurmountable burden. They generally need to pay for expert tax advice and may struggle to extract the necessary information from faceless lenders. They’re also subject to the unavoidable stress that comes with having a problem with the I.R.S. If a borrower isn’t up to the challenges, the result could be payment of taxes that aren’t owed, or nonpayment of taxes that have been assessed — either of which could be ruinous for people who are trying to rebound from foreclosure.
Congress needs to pay attention. Lawmakers held hearings this year that exposed the reckless and predatory lending behind many of today’s foreclosures, but they have yet to provide any substantial assistance to imperiled homeowners. This lack of urgency stands in stark contrast to the swift government response to mortgage-related woes on Wall Street.
A typical excuse for delay is that legislators must proceed carefully to avoid unintended consequences. But the help that is most needed now is for overwhelmed state, local and nonprofit agencies that counsel beleaguered homeowners on how to renegotiate loans and how to get free or low-cost advice on tax and legal issues. There is no reason for Congress to delay on this.
Friday, August 24, 2007
Foreclosures and Taxes
from www.bankrate.com
Double whammy: Foreclosure and taxesFriday August 24, 6:00 am ET Kay Bell
If you thought a bank foreclosure ended the financial miseries associated with your former home, think again. You could soon be hearing from the IRS about taxes due in connection with the residence you no longer own.
"You can walk away from the big house payment, but not from the potential tax implications," says John W. Roth, senior tax analyst at CCH in Riverwoods, Ill. "And if you couldn't afford the mortgage, you probably can't afford the taxes."
As the lending crisis continues to shake out, more homeowners, particularly those who used creative mortgages to buy their houses, could be in this predicament. Even long-time homeowners who refinanced their properties based on increased value when the real estate market was hot could find themselves in tax trouble if they lose their properties to the bank.
The issue is complicated by many factors. There are, of course, the financial problems that have led to the foreclosure process. Add to that the loan terms (some of which employed those creative mortgage products), the housing market in your area and, of course, federal tax laws, and you've got a recipe for financial disaster.
Forgiven but not forgottenIn many cases, the tax problem associated with a foreclosure arises from a seemingly benevolent move -- the lender forgives some of the loan. This happens when a lender and a borrower negotiate a reduction in loan amount. It also happens when the lender forecloses on the property and sells it for less than the outstanding mortgage.
In both instances, the difference for which the borrower is no longer responsible is usually considered cancellation of debt, or COD income. It also is called discharge of indebtedness income or discharge of debt. Regardless of the name, under the tax code, it's all taxable income. The tax on COD is calculated at ordinary rates, which range from 10 percent to 35 percent depending upon your income.
"What the tax law essentially does is treat the foreclosure as a sale by the debtor, the owner of the property, with the proceeds being paid to the lender," says Frederick M. Stein, RIA senior analyst from Thomson Tax & Accounting. "And any debt owed above and beyond those proceeds is cancellation of indebtedness income."
That's why financially struggling homeowners who are considering turning over the house keys to the bank should think twice. While sending the lender "jingle mail," a term coined to describe the sound of a key-containing envelope, will get you out from under the burden of the monthly house payment, it won't prevent a tax bill in your mailbox.
"People who advise you to walk away talk about payment consequences, not the tax consequences," says Stein. "If they owe $50,000 and $10,000 is forgiven, they think of it as a gift. It may be a gift from the lender, but not from the IRS."
Roth adds, "The IRS is far more tenacious than most banks. Their responsibility is to collect the tax on the income you have."
The type of mortgage mattersJust how much and what type of tax the IRS expects after a foreclosure depends in large part on whether the loan is of the recourse or nonrecourse variety.
With a recourse loan, the debtor is personally liable for the debt. In a foreclosure, it means if the property sale proceeds are not enough to cover the outstanding mortgage, the debtor must pay the difference. This includes interest that accrues during the foreclosure process.
A nonrecourse debt, however, is secured by the loan collateral. If money from sale of the property doesn't cover the outstanding debt, the lender has no legal ability to get the additional funds from the debtor.
"In nonrecourse situations, you have a house, the mortgage and the market value of whatever the bank can sell it for and put toward the outstanding loan," says Ted Lanzaro, CPA and owner of his own accounting firm in Shelton, Conn. "If the house is worth $100,000 and there is a $110,000 loan on it, the bank in a nonrecourse situation cannot go after the borrower for that $10,000 difference."
Cancellation of debt income and its tax implications typically come into play with recourse loans. If the house's fair market sales price is less than the unpaid mortgage and the lender forgives the remaining mortgage debt, that amount is taxable income at ordinary tax rates.
With either type of mortgage, a foreclosed-upon homeowner could end up owing capital gains taxes without ever receiving any money from the foreclosure sale.
A sale is a sale is a sale"Foreclosure is not a sale in normal terms, but it is still treated under tax code as a sale," says Stephen Trenholm, CPA, MST (master's degree in taxation) and tax manager at Rucci Bardaro & Barrett in Boston. "The outstanding balance of the mortgage is compared to the basis in house. If that produces a gain, it's a taxable gain. If it's a nonrecourse mortgage, it's a capital gain."
That's right. Even though you aren't selling the house and the bank is, the IRS views the transaction as if you were the seller. That means you could owe taxes on the sale. The bad news comes directly from the IRS, via Publication 544:"If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender ... You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized."Those calculations also take into consideration any cancellation of debt income and the type of mortgage.
So yes, you could indeed pay tax on the money that was used to pay back the mortgage even though you don't get any of it.
Let's assume the example homeowner mentioned earlier has nonrecourse mortgage debt of $110,000 and an adjusted basis of $20,000 in the home, which has a fair market value of $100,000. The owner has no ordinary tax liability for that $10,000 difference in his debt and the home's value. But when a nonrecourse mortgage is foreclosed and that debt is greater than the home's value, the property is treated for tax purposes as if it were sold for the balance of the mortgage.
That means this homeowner would have a $90,000 difference between the mortgage debt and his basis ($110,000 less $20,000) and that $90,000 is taxable capital gain from the "sale or other disposition" of the home. So even though the foreclosed-upon owner didn't get any cash from the transaction, he still owes taxes on what is known as phantom income. The only good news is that the taxes are collected at the lower 15 percent (or 5 percent for lower-income taxpayers) capital gains rate.
If that same homeowner's mortgage was recourse debt and his lender canceled the $10,000 difference between the outstanding loan and the home's fair market value, the foreclosed-upon owner would owe higher, ordinary taxes on that forgiven 10 grand. In addition, his capital gains bill would be based on $80,000 -- the property's fair market value of $100,000 less his $20,000 adjusted basis.
For some struggling homeowners, the taxes on forgiven debt or phantom income are all too real.
"If it's $10,000, that's a relatively small spread; $2,000 to $2,500 in federal and state taxes," says Lanzaro. "But it's not just the working man having this problem. Everybody's getting in over their head these days.
"If you have a $700,000 mortgage and the bank can only get $500,000 in a foreclosure sale, now you're talking about some tax liability."
And don't think the IRS won't find out. The agency has a mechanism to catch foreclosure sales. The lender is supposed to issue a 1099-C to alert the former homeowner and IRS of the canceled debt and, in certain cases, the market value of the foreclosed property.
"Some people are moving and the 1099 has trouble catching up," says Gary Garwitz, tax partner with BKD LLP in Springfield, Mo. "If you're in that situation and had a mortgage you didn't pay off, make sure they get that 1099."
The IRS definitely will get its copy and expect the associated taxes. If they're not paid, penalties and interest will be added.
Home-sale exclusion opportunityThere is one bit of good news for our hypothetical homeowner and others dealing with foreclosure-induced taxes. You can get out from under at least part of the IRS bill if you meet the homeownership tax-exclusion rules.
This popular tax break allows a single homeowner who sells his property under more favorable circumstances to exclude up $250,000 profit from taxes; the exclusion is $500,000 for married couples filing jointly.
The exclusion also applies in foreclosures. As long as the "seller," in this case the foreclosed-upon owner, lived in the home as his principal residence for two of the last five years, he also can avoid taxes on any capital gain profit, phantom or real.
Bankruptcy and insolvency solutionsTwo other circumstances offer tax relief in foreclosures, but both could cause other financial problems.
If a homeowner can show he's insolvent before the discharge of the mortgage and turnover of the property, as well as afterward, any proceeds are not taxed. However, says Trenholm, "insolvency is a little tricky. There's no strict definition of what assets (go in the calculation), but for the most part, a lot of people caught in the real estate crunch can establish that condition."
The other option is bankruptcy.
"Forgiveness debts, in these cases, are not taxed," says Roth. "They don't want the bank chasing them down, which is why many times people going through foreclosure also go through bankruptcy."
However, filing for bankruptcy has its own set of considerations. "New bankruptcy rules don't give (filers) a lot of relief," says William S. Bost, a member of the Raleigh, N.C.-based law firm Ragsdale Liggett PLLC. "If you have a job and are making money, the new bankruptcy rules don't give you a whole lot of help. It gives you some time, but I don't think that's necessarily the way to go.
"It used to be like going to church, you walk in and walk out absolved, but it's not like that anymore," says Bost. "Now, it's not worth the pain you pay the rest of your life."
One thing lending and tax experts all agree on: If you're facing foreclosure, take action as soon as you realize you're in trouble. And get professional help to determine exactly what your personal tax labiality might be in the transaction.
Lanzaro has two other recommendations: "The best advice is, don't buy a house you can't afford, and don't get an adjustable-rate mortgage."
Other optionsIf you're stuck with more house than you can pay for, there are a couple of options in addition to foreclosure. Either is likely to reduce the stress of this terrible time and probably will do a little less damage to your credit report.
Each, however, still has tax and other potential long-term financial implications.
Short sale: This real-estate transaction has become popular among homeowners who are having problems making payments on a mortgage that is more than their house is worth. Rather than waiting for the bank to foreclose, the owner works with the lender to complete a sale of the home for less than the loan balance.
"You have a property you're just trying to get out from under," says Paul Haarman, vice president of Renaissance Mortgage in Salem, N.H. "Everybody is all lined up at the table and the buyer buys the property and the lender agrees to the price. You have a $250,000 debt, the bank nets only $220,000 and that $30,000 is written as a foreclosure shortage."
A short sale keeps a foreclosure from showing up in your credit record, but the shortfall will appear there as a delinquent loan. It's not as bad as a foreclosure, but, says Bost, "It's on the credit report and, as a (future) borrower and consumer, it will haunt you."
Deed-in-lieu of foreclosure: In this case, says Trenholm, the homeowner basically says to the lender, "I want to save you some time, some money. How about I just turn over the property?"
This way the foreclosure process is avoided, which will help the borrower, because it won't show up on a credit record. However, it could still show up on a credit report as forgiven debt.
This process has "pretty much the same tax consequences as a foreclosure," says Trenholm. Because you are being relieved of the indebtedness on the property, for tax purposes it's still considered sale of the property.
"All it does is make it a little bit easier to go through the process," he says.
Tax liabilities remainThe argument for short sales and deeds-in-lieu is that they are beneficial to strapped borrowers. From a tax and financial perspective, however, they don't really matter.
"All of these situations are basically the same," says Stein. "The mechanics and timing may be a little different, but essentially in all of them at some point a lender is saying to the borrower you don't have to pay the rest of what you owe. When he tells the borrower that, that's cancellation of indebtedness income."
"The only benefit," says Bost, "is the 'It's over' factor."
Double whammy: Foreclosure and taxesFriday August 24, 6:00 am ET Kay Bell
If you thought a bank foreclosure ended the financial miseries associated with your former home, think again. You could soon be hearing from the IRS about taxes due in connection with the residence you no longer own.
"You can walk away from the big house payment, but not from the potential tax implications," says John W. Roth, senior tax analyst at CCH in Riverwoods, Ill. "And if you couldn't afford the mortgage, you probably can't afford the taxes."
As the lending crisis continues to shake out, more homeowners, particularly those who used creative mortgages to buy their houses, could be in this predicament. Even long-time homeowners who refinanced their properties based on increased value when the real estate market was hot could find themselves in tax trouble if they lose their properties to the bank.
The issue is complicated by many factors. There are, of course, the financial problems that have led to the foreclosure process. Add to that the loan terms (some of which employed those creative mortgage products), the housing market in your area and, of course, federal tax laws, and you've got a recipe for financial disaster.
Forgiven but not forgottenIn many cases, the tax problem associated with a foreclosure arises from a seemingly benevolent move -- the lender forgives some of the loan. This happens when a lender and a borrower negotiate a reduction in loan amount. It also happens when the lender forecloses on the property and sells it for less than the outstanding mortgage.
In both instances, the difference for which the borrower is no longer responsible is usually considered cancellation of debt, or COD income. It also is called discharge of indebtedness income or discharge of debt. Regardless of the name, under the tax code, it's all taxable income. The tax on COD is calculated at ordinary rates, which range from 10 percent to 35 percent depending upon your income.
"What the tax law essentially does is treat the foreclosure as a sale by the debtor, the owner of the property, with the proceeds being paid to the lender," says Frederick M. Stein, RIA senior analyst from Thomson Tax & Accounting. "And any debt owed above and beyond those proceeds is cancellation of indebtedness income."
That's why financially struggling homeowners who are considering turning over the house keys to the bank should think twice. While sending the lender "jingle mail," a term coined to describe the sound of a key-containing envelope, will get you out from under the burden of the monthly house payment, it won't prevent a tax bill in your mailbox.
"People who advise you to walk away talk about payment consequences, not the tax consequences," says Stein. "If they owe $50,000 and $10,000 is forgiven, they think of it as a gift. It may be a gift from the lender, but not from the IRS."
Roth adds, "The IRS is far more tenacious than most banks. Their responsibility is to collect the tax on the income you have."
The type of mortgage mattersJust how much and what type of tax the IRS expects after a foreclosure depends in large part on whether the loan is of the recourse or nonrecourse variety.
With a recourse loan, the debtor is personally liable for the debt. In a foreclosure, it means if the property sale proceeds are not enough to cover the outstanding mortgage, the debtor must pay the difference. This includes interest that accrues during the foreclosure process.
A nonrecourse debt, however, is secured by the loan collateral. If money from sale of the property doesn't cover the outstanding debt, the lender has no legal ability to get the additional funds from the debtor.
"In nonrecourse situations, you have a house, the mortgage and the market value of whatever the bank can sell it for and put toward the outstanding loan," says Ted Lanzaro, CPA and owner of his own accounting firm in Shelton, Conn. "If the house is worth $100,000 and there is a $110,000 loan on it, the bank in a nonrecourse situation cannot go after the borrower for that $10,000 difference."
Cancellation of debt income and its tax implications typically come into play with recourse loans. If the house's fair market sales price is less than the unpaid mortgage and the lender forgives the remaining mortgage debt, that amount is taxable income at ordinary tax rates.
With either type of mortgage, a foreclosed-upon homeowner could end up owing capital gains taxes without ever receiving any money from the foreclosure sale.
A sale is a sale is a sale"Foreclosure is not a sale in normal terms, but it is still treated under tax code as a sale," says Stephen Trenholm, CPA, MST (master's degree in taxation) and tax manager at Rucci Bardaro & Barrett in Boston. "The outstanding balance of the mortgage is compared to the basis in house. If that produces a gain, it's a taxable gain. If it's a nonrecourse mortgage, it's a capital gain."
That's right. Even though you aren't selling the house and the bank is, the IRS views the transaction as if you were the seller. That means you could owe taxes on the sale. The bad news comes directly from the IRS, via Publication 544:"If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender ... You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized."Those calculations also take into consideration any cancellation of debt income and the type of mortgage.
So yes, you could indeed pay tax on the money that was used to pay back the mortgage even though you don't get any of it.
Let's assume the example homeowner mentioned earlier has nonrecourse mortgage debt of $110,000 and an adjusted basis of $20,000 in the home, which has a fair market value of $100,000. The owner has no ordinary tax liability for that $10,000 difference in his debt and the home's value. But when a nonrecourse mortgage is foreclosed and that debt is greater than the home's value, the property is treated for tax purposes as if it were sold for the balance of the mortgage.
That means this homeowner would have a $90,000 difference between the mortgage debt and his basis ($110,000 less $20,000) and that $90,000 is taxable capital gain from the "sale or other disposition" of the home. So even though the foreclosed-upon owner didn't get any cash from the transaction, he still owes taxes on what is known as phantom income. The only good news is that the taxes are collected at the lower 15 percent (or 5 percent for lower-income taxpayers) capital gains rate.
If that same homeowner's mortgage was recourse debt and his lender canceled the $10,000 difference between the outstanding loan and the home's fair market value, the foreclosed-upon owner would owe higher, ordinary taxes on that forgiven 10 grand. In addition, his capital gains bill would be based on $80,000 -- the property's fair market value of $100,000 less his $20,000 adjusted basis.
For some struggling homeowners, the taxes on forgiven debt or phantom income are all too real.
"If it's $10,000, that's a relatively small spread; $2,000 to $2,500 in federal and state taxes," says Lanzaro. "But it's not just the working man having this problem. Everybody's getting in over their head these days.
"If you have a $700,000 mortgage and the bank can only get $500,000 in a foreclosure sale, now you're talking about some tax liability."
And don't think the IRS won't find out. The agency has a mechanism to catch foreclosure sales. The lender is supposed to issue a 1099-C to alert the former homeowner and IRS of the canceled debt and, in certain cases, the market value of the foreclosed property.
"Some people are moving and the 1099 has trouble catching up," says Gary Garwitz, tax partner with BKD LLP in Springfield, Mo. "If you're in that situation and had a mortgage you didn't pay off, make sure they get that 1099."
The IRS definitely will get its copy and expect the associated taxes. If they're not paid, penalties and interest will be added.
Home-sale exclusion opportunityThere is one bit of good news for our hypothetical homeowner and others dealing with foreclosure-induced taxes. You can get out from under at least part of the IRS bill if you meet the homeownership tax-exclusion rules.
This popular tax break allows a single homeowner who sells his property under more favorable circumstances to exclude up $250,000 profit from taxes; the exclusion is $500,000 for married couples filing jointly.
The exclusion also applies in foreclosures. As long as the "seller," in this case the foreclosed-upon owner, lived in the home as his principal residence for two of the last five years, he also can avoid taxes on any capital gain profit, phantom or real.
Bankruptcy and insolvency solutionsTwo other circumstances offer tax relief in foreclosures, but both could cause other financial problems.
If a homeowner can show he's insolvent before the discharge of the mortgage and turnover of the property, as well as afterward, any proceeds are not taxed. However, says Trenholm, "insolvency is a little tricky. There's no strict definition of what assets (go in the calculation), but for the most part, a lot of people caught in the real estate crunch can establish that condition."
The other option is bankruptcy.
"Forgiveness debts, in these cases, are not taxed," says Roth. "They don't want the bank chasing them down, which is why many times people going through foreclosure also go through bankruptcy."
However, filing for bankruptcy has its own set of considerations. "New bankruptcy rules don't give (filers) a lot of relief," says William S. Bost, a member of the Raleigh, N.C.-based law firm Ragsdale Liggett PLLC. "If you have a job and are making money, the new bankruptcy rules don't give you a whole lot of help. It gives you some time, but I don't think that's necessarily the way to go.
"It used to be like going to church, you walk in and walk out absolved, but it's not like that anymore," says Bost. "Now, it's not worth the pain you pay the rest of your life."
One thing lending and tax experts all agree on: If you're facing foreclosure, take action as soon as you realize you're in trouble. And get professional help to determine exactly what your personal tax labiality might be in the transaction.
Lanzaro has two other recommendations: "The best advice is, don't buy a house you can't afford, and don't get an adjustable-rate mortgage."
Other optionsIf you're stuck with more house than you can pay for, there are a couple of options in addition to foreclosure. Either is likely to reduce the stress of this terrible time and probably will do a little less damage to your credit report.
Each, however, still has tax and other potential long-term financial implications.
Short sale: This real-estate transaction has become popular among homeowners who are having problems making payments on a mortgage that is more than their house is worth. Rather than waiting for the bank to foreclose, the owner works with the lender to complete a sale of the home for less than the loan balance.
"You have a property you're just trying to get out from under," says Paul Haarman, vice president of Renaissance Mortgage in Salem, N.H. "Everybody is all lined up at the table and the buyer buys the property and the lender agrees to the price. You have a $250,000 debt, the bank nets only $220,000 and that $30,000 is written as a foreclosure shortage."
A short sale keeps a foreclosure from showing up in your credit record, but the shortfall will appear there as a delinquent loan. It's not as bad as a foreclosure, but, says Bost, "It's on the credit report and, as a (future) borrower and consumer, it will haunt you."
Deed-in-lieu of foreclosure: In this case, says Trenholm, the homeowner basically says to the lender, "I want to save you some time, some money. How about I just turn over the property?"
This way the foreclosure process is avoided, which will help the borrower, because it won't show up on a credit record. However, it could still show up on a credit report as forgiven debt.
This process has "pretty much the same tax consequences as a foreclosure," says Trenholm. Because you are being relieved of the indebtedness on the property, for tax purposes it's still considered sale of the property.
"All it does is make it a little bit easier to go through the process," he says.
Tax liabilities remainThe argument for short sales and deeds-in-lieu is that they are beneficial to strapped borrowers. From a tax and financial perspective, however, they don't really matter.
"All of these situations are basically the same," says Stein. "The mechanics and timing may be a little different, but essentially in all of them at some point a lender is saying to the borrower you don't have to pay the rest of what you owe. When he tells the borrower that, that's cancellation of indebtedness income."
"The only benefit," says Bost, "is the 'It's over' factor."
Sept. 17th Deadline for Filing Calendar Year Filers of Corporate Returns
from www.irs.gov
Corporate Use of e-File Up as Deadline Approaches
IR-2007-146, August 23, 2007WASHINGTON — As the Sept. 17 deadline approaches for calendar year filers of corporate returns who filed for extensions, the IRS urges certain corporate filers to be aware of their obligation to file electronically.“We have seen significant increases in the number of electronically filed corporate returns,” said LMSB Commissioner Deborah M. Nolan. “Many large and mid-size corporations are required to e-file, but many more corporations are e-filing voluntarily. Software and e-filing support services have become readily available to all corporations that want to transition their tax filing from paper to electronic.”This is the first year that certain “mid-size” corporations, those with assets between $10 million and $50 million, are required to electronically file their Forms 1120 or 1120S. As a result, about 12,000 mid-size corporations have successfully made the transition from filing paper returns to filing electronic returns so far this year.The requirement to e-file now covers all corporations with assets over $10 million that file 250 or more returns, such as Forms W-2 and 1099, annually. Last year, the requirement started for certain “large” corporations, those with assets over $50 million. About 15,000 large corporations e-filed last year. So far this year, 8,000 large corporations have e-filed. The IRS expects that, as in past years, many large and mid-size corporations will file in early September to meet the Sept. 17 extended filing deadline.Although small corporations, those with assets less than $10 million, are not required to e-file, almost 625,000 have done so this year so far, compared to about 400,000 at this time last year.“E-filing continues to bring efficiencies to the IRS by making data quickly available to identify issues that need resolution,” said Elvin Hedgpeth, Director, Treaty Administration and International Coordination, who is responsible for the electronic filing of large and mid-size corporations. “Many corporations are seeing the long range advantages of incorporating their tax filing into the electronic data environment that includes their tax and financial accounting.” The growth in the area of corporate e-filing is the result of collaboration with corporate practitioner and technology stakeholder groups ensuring that systems were established to meet their e-filing needs and requirements.
Corporate Use of e-File Up as Deadline Approaches
IR-2007-146, August 23, 2007WASHINGTON — As the Sept. 17 deadline approaches for calendar year filers of corporate returns who filed for extensions, the IRS urges certain corporate filers to be aware of their obligation to file electronically.“We have seen significant increases in the number of electronically filed corporate returns,” said LMSB Commissioner Deborah M. Nolan. “Many large and mid-size corporations are required to e-file, but many more corporations are e-filing voluntarily. Software and e-filing support services have become readily available to all corporations that want to transition their tax filing from paper to electronic.”This is the first year that certain “mid-size” corporations, those with assets between $10 million and $50 million, are required to electronically file their Forms 1120 or 1120S. As a result, about 12,000 mid-size corporations have successfully made the transition from filing paper returns to filing electronic returns so far this year.The requirement to e-file now covers all corporations with assets over $10 million that file 250 or more returns, such as Forms W-2 and 1099, annually. Last year, the requirement started for certain “large” corporations, those with assets over $50 million. About 15,000 large corporations e-filed last year. So far this year, 8,000 large corporations have e-filed. The IRS expects that, as in past years, many large and mid-size corporations will file in early September to meet the Sept. 17 extended filing deadline.Although small corporations, those with assets less than $10 million, are not required to e-file, almost 625,000 have done so this year so far, compared to about 400,000 at this time last year.“E-filing continues to bring efficiencies to the IRS by making data quickly available to identify issues that need resolution,” said Elvin Hedgpeth, Director, Treaty Administration and International Coordination, who is responsible for the electronic filing of large and mid-size corporations. “Many corporations are seeing the long range advantages of incorporating their tax filing into the electronic data environment that includes their tax and financial accounting.” The growth in the area of corporate e-filing is the result of collaboration with corporate practitioner and technology stakeholder groups ensuring that systems were established to meet their e-filing needs and requirements.
Thursday, August 23, 2007
IRS OKs changes to 403 (b) Plans
from www.yahoo.com
By EILEEN ALT POWELL, AP Business Writer Wed Aug 22, 7:30 PM ET
NEW YORK - Teachers, health care professionals, museum curators and others who work for nonprofit employers will soon see changes in their retirement plans. The Internal Revenue Service in July approved the first major overhaul of the 403(b) plans in more than four decades, with the aim of giving employers more oversight of the savings programs.
"It's pretty clear that the government has done a lot to accomplish its stated goal in the regulations of moving 403(b) arrangements more closely to the qualified plan model," attorney Mark E. Griffin of the Davis & Harman LLP law firm in Washington, D.C. told a recent conference. That means that after the changes are fully implemented by January 2009, the 403(b) plans will look a lot more like the 401(k) plans for workers in private industry.
Both of the retirement plans take their names from sections of the tax code and both allow workers to set aside pretax money that grows tax-deferred until it's withdrawn in retirement. This year the contribution limit is $15,500 for most workers, with an additional $5,000 for those 50 and older. In some cases, nonprofit employers offer matching contributions as private companies do.
Balances in the accounts have grown significantly as Americans have been encouraged to save more for their retirement.
Workers in the nonprofit sector currently have about $680 billion in their accounts, while balances in 401(k)s are nearly $2.7 trillion, according to the Investment Company Institute, a Washington-based trade association.
Much of the 403(b) money traditionally has been invested in fixed and variable annuities, which are contracts sold by insurance companies that are designed to provide payments at specific intervals in retirement. A growing number of large institutions such as hospitals and colleges have been making mutual funds more available to their workers in recent years.
Evan Giller, general counsel for institutional client services with the TIAA-CREF retirement company in New York, said the biggest change for many nonprofit employers is that they'll have to develop a written plan document by Jan. 1, 2009, rather than relying on the insurance companies' annuity contracts or mutual fund custodial account documents.
"This is important from the consumer's point of view," he said. "It's not just the fact of having a plan document but the regulations put emphasis — and responsibility — on the employer to make sure the provisions of that plan document are enforced."
Giller said the IRS was concerned that in the past, there often was little oversight of workers who took loans from their plans or made hardship withdrawals, sometimes without regard to limits or penalties.
A number of companies like TIAA-CREF are preparing to help nonprofit employers deal with plan documents and other new record-keeping requirements, including insurers such as the Lincoln Financial Group and American International Group Inc. as well as the Fidelity and Vanguard fund companies.
Another change, which will occur this fall, involves transfers. In the past, savers could move their 403(b) assets among annuity or custodial accounts without penalty. Many workers used this to shift their money into lower-cost mutual funds.
Starting Sept. 25, such transfers will be allowed only to companies that have signed agreements with the employer.
Dan Otter, a former teacher who operates the educational Web site http://www.403bwise.com, believes this will hurt some savers.
He said many 403(b) savers currently have "terrible choices of investments at work," with some offering only annuities with high fees and surrender charges. The current transfer system has allowed some of these savers to put their money instead into mutual funds or other low-cost investments, giving them a higher yield.
"A lot of people are angry they're going to lose this option," he said. "They could lose their escape clause."
On the other hand, Otter endorses the provision in the new rules on so-called universal availability, which requires companies to make sure retirement savings opportunities are offered to more workers, including visiting professors and some other employees who were excluded in the past.
"People will have to be told annually of eligibility," Otter said. "Now a lot of employees aren't told, like secretaries and drivers. They overhear things or find out only accidentally that they can participate."
By EILEEN ALT POWELL, AP Business Writer Wed Aug 22, 7:30 PM ET
NEW YORK - Teachers, health care professionals, museum curators and others who work for nonprofit employers will soon see changes in their retirement plans. The Internal Revenue Service in July approved the first major overhaul of the 403(b) plans in more than four decades, with the aim of giving employers more oversight of the savings programs.
"It's pretty clear that the government has done a lot to accomplish its stated goal in the regulations of moving 403(b) arrangements more closely to the qualified plan model," attorney Mark E. Griffin of the Davis & Harman LLP law firm in Washington, D.C. told a recent conference. That means that after the changes are fully implemented by January 2009, the 403(b) plans will look a lot more like the 401(k) plans for workers in private industry.
Both of the retirement plans take their names from sections of the tax code and both allow workers to set aside pretax money that grows tax-deferred until it's withdrawn in retirement. This year the contribution limit is $15,500 for most workers, with an additional $5,000 for those 50 and older. In some cases, nonprofit employers offer matching contributions as private companies do.
Balances in the accounts have grown significantly as Americans have been encouraged to save more for their retirement.
Workers in the nonprofit sector currently have about $680 billion in their accounts, while balances in 401(k)s are nearly $2.7 trillion, according to the Investment Company Institute, a Washington-based trade association.
Much of the 403(b) money traditionally has been invested in fixed and variable annuities, which are contracts sold by insurance companies that are designed to provide payments at specific intervals in retirement. A growing number of large institutions such as hospitals and colleges have been making mutual funds more available to their workers in recent years.
Evan Giller, general counsel for institutional client services with the TIAA-CREF retirement company in New York, said the biggest change for many nonprofit employers is that they'll have to develop a written plan document by Jan. 1, 2009, rather than relying on the insurance companies' annuity contracts or mutual fund custodial account documents.
"This is important from the consumer's point of view," he said. "It's not just the fact of having a plan document but the regulations put emphasis — and responsibility — on the employer to make sure the provisions of that plan document are enforced."
Giller said the IRS was concerned that in the past, there often was little oversight of workers who took loans from their plans or made hardship withdrawals, sometimes without regard to limits or penalties.
A number of companies like TIAA-CREF are preparing to help nonprofit employers deal with plan documents and other new record-keeping requirements, including insurers such as the Lincoln Financial Group and American International Group Inc. as well as the Fidelity and Vanguard fund companies.
Another change, which will occur this fall, involves transfers. In the past, savers could move their 403(b) assets among annuity or custodial accounts without penalty. Many workers used this to shift their money into lower-cost mutual funds.
Starting Sept. 25, such transfers will be allowed only to companies that have signed agreements with the employer.
Dan Otter, a former teacher who operates the educational Web site http://www.403bwise.com, believes this will hurt some savers.
He said many 403(b) savers currently have "terrible choices of investments at work," with some offering only annuities with high fees and surrender charges. The current transfer system has allowed some of these savers to put their money instead into mutual funds or other low-cost investments, giving them a higher yield.
"A lot of people are angry they're going to lose this option," he said. "They could lose their escape clause."
On the other hand, Otter endorses the provision in the new rules on so-called universal availability, which requires companies to make sure retirement savings opportunities are offered to more workers, including visiting professors and some other employees who were excluded in the past.
"People will have to be told annually of eligibility," Otter said. "Now a lot of employees aren't told, like secretaries and drivers. They overhear things or find out only accidentally that they can participate."
Tuesday, August 21, 2007
Phone Customers Can Still Request Excise Tax Refund, IRS Says
from www.irs.gov
Phone Customers Can Still Request Excise Tax Refund, IRS Says
IR-2007-144, Aug. 21, 2007
WASHINGTON — Telephone customers can still request this year’s one-time excise tax refund, according to the Internal Revenue Service.
Most phone customers, including most cell-phone users, qualify for the refund. The refund covers the three-percent tax paid on long-distance and bundled service. It can add $30 to $60 — or even more — onto a taxpayer’s refund. So far this year, 92.1 million taxpayers, 71.6 percent of all individual tax return filers, have requested telephone tax refunds totaling $4 billion.
Eligible phone customers can request the refund on their 2006 income-tax return. This includes those who haven’t filed yet or those who obtained a tax-filing extension earlier this year.
People who don’t need to file a regular income-tax return can use a special short form — Form 1040EZ-T— to request the refund. Individuals with low income, including many senior citizens, may qualify to use this special form.
The government stopped collecting the long-distance excise tax last August after several federal court decisions held that the tax does not apply to long-distance service as it is billed today. The tax continues to apply to local-only phone service.
Federal officials also authorized a one-time refund of the three-percent tax collected on long-distance or bundled service billed after Feb. 28, 2003, and before Aug. 1, 2006. Bundled service is local and long-distance service provided under a plan that does not separately list the charge for local service.
Bundled service includes, for example, phone plans that provide both local and long-distance service for either a flat monthly fee or a charge that varies with the time for which the service is used. It is the type of service provided by many cell-phone companies.
If you paid the tax and haven’t filed yet, here are some tips to help you figure the refund correctly and get it quickly:
Consider using the standard-refund amount. About 99 percent of returns requesting the telephone-tax refund are choosing the standard amount. Though the standard amount is optional, it is easy to figure and approximates the eligible amount for most telephone customers. You only have to fill out one line on your return, and you don’t need to present proof to the IRS. The standard amount, ranging from $30 to $60, is based on the number of exemptions you can claim on your return. If you can be claimed as a dependent on someone else’s return, you cannot use the standard amount.
If you paid more than the standard amount, you may figure your refund using the actual amount of tax shown on your phone bills and other records. Base your refund request on the three-percent federal tax paid, not the total phone bill. Do not count tax paid on local-only service. You must have the phone bills or other records adequate to support the amount you are requesting. These documents should not be sent along with the refund request but should be retained in case the IRS questions the amount requested.
If you’re not sure whether you paid the tax, check the portion of your telephone bill that relates to long-distance or bundled service. Service providers use a number of different terms to identify the tax. Phrases to look for include: English-language phone bills -- Federal, Federal Excise 3%, FederalExcise @ 3%, Federal Excise Tax, Federal Tax, Fed Excise Tax and FET; Spanish-language phone bills -- Impuesto Indirecto Federal and Impuesto federal.Typically, this federal tax amount is not combined with any other tax or surcharge on a customer's bill. In other words, it is normally shown as a separate line item.
Do not file duplicate requests. If you file a regular income-tax return, do not file Form 1040EZ-T. Designed exclusively for requesting the telephone-tax refund, this simple form is for people who don’t need to file a regular income-tax return. If you want to take advantage of the retirement savers credit or earned income tax credit for low and moderate income workers, the child tax credit or other tax breaks, file a regular return and include your telephone-tax refund request on that return.
If you already filed your return but failed to request the telephone-tax refund, you can file an amended return using Form 1040X. This form, available on IRS.gov, cannot be e-filed; it must be filed on paper. To avoid delaying a refund request, mail your completed Form 1040X at least three weeks after you filed your original return (if it was e-filed) or at least eight weeks later (if filed on paper).
File electronically. Electronic-filing software flags often overlooked tax breaks, such as the telephone-tax refund, and helps you figure them accurately and report them properly. If you use a professional tax preparer, ask that person to e-file your return.
E-file for free. If your income is $52,000 or less, use the Free File link on IRS.gov to connect to a private-sector company offering free e-file services.
Choose direct deposit. Whether you file electronically or on paper, you can get your refund at least a week sooner by having it deposited directly into your checking or savings account.
Stay away from tax preparers who falsely claim that many, if not most, phone customers can get hundreds of dollars or more back under this program.
Use the Telephone Excise Tax Refund section on the front page of IRS.gov. Here, you can download forms, find answers to frequently-asked questions and link to participating Free File partners.
Subscribe to IRS Newswire
Phone Customers Can Still Request Excise Tax Refund, IRS Says
IR-2007-144, Aug. 21, 2007
WASHINGTON — Telephone customers can still request this year’s one-time excise tax refund, according to the Internal Revenue Service.
Most phone customers, including most cell-phone users, qualify for the refund. The refund covers the three-percent tax paid on long-distance and bundled service. It can add $30 to $60 — or even more — onto a taxpayer’s refund. So far this year, 92.1 million taxpayers, 71.6 percent of all individual tax return filers, have requested telephone tax refunds totaling $4 billion.
Eligible phone customers can request the refund on their 2006 income-tax return. This includes those who haven’t filed yet or those who obtained a tax-filing extension earlier this year.
People who don’t need to file a regular income-tax return can use a special short form — Form 1040EZ-T— to request the refund. Individuals with low income, including many senior citizens, may qualify to use this special form.
The government stopped collecting the long-distance excise tax last August after several federal court decisions held that the tax does not apply to long-distance service as it is billed today. The tax continues to apply to local-only phone service.
Federal officials also authorized a one-time refund of the three-percent tax collected on long-distance or bundled service billed after Feb. 28, 2003, and before Aug. 1, 2006. Bundled service is local and long-distance service provided under a plan that does not separately list the charge for local service.
Bundled service includes, for example, phone plans that provide both local and long-distance service for either a flat monthly fee or a charge that varies with the time for which the service is used. It is the type of service provided by many cell-phone companies.
If you paid the tax and haven’t filed yet, here are some tips to help you figure the refund correctly and get it quickly:
Consider using the standard-refund amount. About 99 percent of returns requesting the telephone-tax refund are choosing the standard amount. Though the standard amount is optional, it is easy to figure and approximates the eligible amount for most telephone customers. You only have to fill out one line on your return, and you don’t need to present proof to the IRS. The standard amount, ranging from $30 to $60, is based on the number of exemptions you can claim on your return. If you can be claimed as a dependent on someone else’s return, you cannot use the standard amount.
If you paid more than the standard amount, you may figure your refund using the actual amount of tax shown on your phone bills and other records. Base your refund request on the three-percent federal tax paid, not the total phone bill. Do not count tax paid on local-only service. You must have the phone bills or other records adequate to support the amount you are requesting. These documents should not be sent along with the refund request but should be retained in case the IRS questions the amount requested.
If you’re not sure whether you paid the tax, check the portion of your telephone bill that relates to long-distance or bundled service. Service providers use a number of different terms to identify the tax. Phrases to look for include: English-language phone bills -- Federal, Federal Excise 3%, FederalExcise @ 3%, Federal Excise Tax, Federal Tax, Fed Excise Tax and FET; Spanish-language phone bills -- Impuesto Indirecto Federal and Impuesto federal.Typically, this federal tax amount is not combined with any other tax or surcharge on a customer's bill. In other words, it is normally shown as a separate line item.
Do not file duplicate requests. If you file a regular income-tax return, do not file Form 1040EZ-T. Designed exclusively for requesting the telephone-tax refund, this simple form is for people who don’t need to file a regular income-tax return. If you want to take advantage of the retirement savers credit or earned income tax credit for low and moderate income workers, the child tax credit or other tax breaks, file a regular return and include your telephone-tax refund request on that return.
If you already filed your return but failed to request the telephone-tax refund, you can file an amended return using Form 1040X. This form, available on IRS.gov, cannot be e-filed; it must be filed on paper. To avoid delaying a refund request, mail your completed Form 1040X at least three weeks after you filed your original return (if it was e-filed) or at least eight weeks later (if filed on paper).
File electronically. Electronic-filing software flags often overlooked tax breaks, such as the telephone-tax refund, and helps you figure them accurately and report them properly. If you use a professional tax preparer, ask that person to e-file your return.
E-file for free. If your income is $52,000 or less, use the Free File link on IRS.gov to connect to a private-sector company offering free e-file services.
Choose direct deposit. Whether you file electronically or on paper, you can get your refund at least a week sooner by having it deposited directly into your checking or savings account.
Stay away from tax preparers who falsely claim that many, if not most, phone customers can get hundreds of dollars or more back under this program.
Use the Telephone Excise Tax Refund section on the front page of IRS.gov. Here, you can download forms, find answers to frequently-asked questions and link to participating Free File partners.
Subscribe to IRS Newswire
Avoid These Costly Investment Blunders
from www.morningstar.com
Morningstar.comAvoid These Costly Investment BlundersThursday August 16, 7:00 am ET By Sue Stevens, CFA, CFP, CPA
Buying a fund or a stock is relatively easy. It's the selling part that can get complicated.
With the stock market roaring up and down (and mostly down, lately) hundreds of points in a day, you may find yourself thinking about cashing in on some of your gains. Or perhaps you're thinking about locking in a loss on a holding because you want to be able to reduce the effect of capital gains elsewhere in your portfolio.
But before you pull the trigger and sell, you'd better know where you stand with both realized and unrealized gains and losses. Realized gains and losses reflect the selling you've already done for the year to date. Unrealized gains and losses reflect how a security you still hold has changed since you bought it. For example, if a stock has appreciated but you haven't sold, you have an unrealized gain in it. If you know where you stand with realized gains and losses, you can use that information to determine if you want to sell some of your current securities with either a gain or a loss.
For example, if you find you have substantial realized gains so far this year, you may only want to focus on selling securities that you're holding at a loss. If you have loss carryforwards on your tax return (see Schedule D), you may want to net those out by selling some securities that have appreciated strongly, thereby reducing the capital gains tax you'll owe on those appreciated securities.
What Is Cost Basis?The "cost basis" is the original purchase price of an asset plus any reinvested dividends and capital gains.
If you ignore reinvested dividends and capital gains, you'll end up paying tax on those shares twice. And you don't want to pay more tax than you have to.
Want a simple solution to this dilemma? Don't have your brokerage or mutual fund company reinvest the capital gains and dividends. You can direct them to put those payments directly into your money market account. Then later you can decide just where you want that additional money to go. It's certainly simpler than hunting down all reinvested capital gains and dividend payments.
Some brokerages keep track of the cost basis for you. Look at your statement to see if it reflects "cost." Even if it doesn't, you may want to give your brokerage a call to see if they can send you that information, or you may be able to retrieve it online. Some companies have that information but don't make it available unless you specifically ask.
Calculating Cost Basis The IRS allows you to use one of four methods when calculating your mutual fund's basis. You'll need to think about this decision before you actually sell anything. Your choice will affect how you treat sales in the future.
* Average cost (single category): Most people (and brokerages) use this method. You add up all of your purchases of the security, including reinvested dividends and capital gains, and divide by the total number of shares you own. To determine whether your gains/losses are short-term or long-term, you assume the oldest shares are sold first. Once you use this method to calculate the cost basis of shares you've sold, you must continue to use this method for the rest of the shares you sell in the future.* Average cost (double category): This is similar to the above method, but first you sort your shares into two categories: those in which your gains and losses are short-term and those in which you have a long-term gain or loss. Then you add up the purchases in each category and divide by the number of shares in each category.* Specific-share identification: This method is a little trickier, but it can also save you money. You specifically tell the brokerage which shares you want to sell and use the cost basis of those specific shares. For example, you may have bought shares of XYZ company five years ago when prices were higher--let's say $15 per share. Then later you bought more shares when the price was lower--say $5 per share. If you specifically tell your brokerage firm to sell the shares that you purchased at $15 and you sell them at $16, you only have to pay tax on the $1 per share of capital gain. If you specified the shares with a $5 cost basis, you'd owe tax on $11 per share. * FIFO (first-in, first-out): If you don't specify a method for calculating your basis, the IRS will assume you're using FIFO. This method assumes that when you sell some of your shares, they are the first shares you bought. If those shares have a lower cost basis, you'll end up owing more in capital gains tax (and vice versa).
When calculating cost basis on stocks, the average cost basis may not be used.
Figuring Out How Much You OweTo find out how much income tax you'll owe, you subtract your basis from the fair market value of the security when you sell it. If you held the security longer than one year, you'll have either a long-term capital gain (if you sold it for more than your basis) or a long-term capital loss (if you sold it for less than your basis). If you held the security for less than one year, instead of long-term gains or losses, you'll have short-term gains or losses.
You can net out capital gains and losses against each other.You can then use as much as $3,000 of capital losses in any one year to offset ordinary income on your tax return. Unused losses can be carried forward indefinitely to future years.
If someone has gifted you securities, you retain their cost basis. That means the donor needs to tell you what that basis is. Then going forward you need to keep track of additional purchases and reinvested dividends and reinvested capital gains. When you eventually sell the investment and calculate your basis, you start with the donor's basis and add to it any additional purchases and reinvested amounts. For more on this topic, see IRS Publication 551 at www.irs.gov.
Why Basis Is ImportantThe higher your basis, the less you pay in taxes. It's that simple, but record-keeping for this purpose is anything but simple. Ideally, the day you buy a stock or fund, you should start a notebook or spreadsheet entry that documents your purchase. Then you would add to your records as you purchased more or reinvested dividends and capital gains.
If you're like many people, you've thrown out old statements and have no idea about reinvested amounts. There are a couple of ways to recreate these records:
* Take a look at each tax return you've filed since you had the investment. Reinvested dividends and capital gains will be on Schedules B and D. However, many brokerage firms just lump together all your dividends and capital gains for tax purposes. If that's the case, you'll just see something like "Schwab" listed, not each individual security. And for basis purposes, you need to break it out by individual security. * Contact each brokerage firm and request year-end statements for as long as you've had the investment. They should show both purchase amounts and reinvested amounts.
Going forward, basis may become even more important. In 2010, the step-up in basis at death will be modified. ("Step-up in basis" means that the person who inherits an asset doesn't also inherit the deceased individual's cost basis; instead, the new owner's basis in that asset "steps up" to its current market value.) In 2010, a general basis increase will be allowed up to $1.3 million. Spouses will be allowed an additional $3 million of stepped-up basis.
Let's look at an example: Joe dies in 2010 and leaves securities valued at $2 million to his only son, Peter. Let's say Joe's basis is $500,000. Peter will be able to step up the basis on $1.3 million of his inheritance. But the other $700,000 will retain his father's basis. (This is just like the gifting rules for basis that I touched on above.) Then Peter will need to track his additional purchases and reinvested dividends and capital gains until he sells the securities.
Accurate record-keeping is essential. Estates may take much longer to settle if basis needs to be recreated. Holding securities until death to take advantage of the step-up in basis may no longer be a viable strategy. So be forewarned: If you don't have accurate basis records, bite the bullet and find a way to build these records. If you don't, the price could be heavy: paying tax more than once on reinvested dividends and capital gains or creating problems for your heirs by delaying the settlement of your estate.
IRS Publications If you want more information on investments and taxes, the following IRS publications may help. (You'll need Adobe Acrobat to view or print out the PDF files.)
Publication 544: Sales and Other Disposition of AssetsPublication 550: Investment Income and ExpensesPublication 551: Basis of AssetsPublication 564: Mutual Fund Distributions
A version of this article appeared March 9, 2006.
Morningstar Premium Members get access to over 3,900 Stock and Fund Analyst Reports, Analyst Picks, and award-winning portfolio tools. Learn More.
Morningstar.comAvoid These Costly Investment BlundersThursday August 16, 7:00 am ET By Sue Stevens, CFA, CFP, CPA
Buying a fund or a stock is relatively easy. It's the selling part that can get complicated.
With the stock market roaring up and down (and mostly down, lately) hundreds of points in a day, you may find yourself thinking about cashing in on some of your gains. Or perhaps you're thinking about locking in a loss on a holding because you want to be able to reduce the effect of capital gains elsewhere in your portfolio.
But before you pull the trigger and sell, you'd better know where you stand with both realized and unrealized gains and losses. Realized gains and losses reflect the selling you've already done for the year to date. Unrealized gains and losses reflect how a security you still hold has changed since you bought it. For example, if a stock has appreciated but you haven't sold, you have an unrealized gain in it. If you know where you stand with realized gains and losses, you can use that information to determine if you want to sell some of your current securities with either a gain or a loss.
For example, if you find you have substantial realized gains so far this year, you may only want to focus on selling securities that you're holding at a loss. If you have loss carryforwards on your tax return (see Schedule D), you may want to net those out by selling some securities that have appreciated strongly, thereby reducing the capital gains tax you'll owe on those appreciated securities.
What Is Cost Basis?The "cost basis" is the original purchase price of an asset plus any reinvested dividends and capital gains.
If you ignore reinvested dividends and capital gains, you'll end up paying tax on those shares twice. And you don't want to pay more tax than you have to.
Want a simple solution to this dilemma? Don't have your brokerage or mutual fund company reinvest the capital gains and dividends. You can direct them to put those payments directly into your money market account. Then later you can decide just where you want that additional money to go. It's certainly simpler than hunting down all reinvested capital gains and dividend payments.
Some brokerages keep track of the cost basis for you. Look at your statement to see if it reflects "cost." Even if it doesn't, you may want to give your brokerage a call to see if they can send you that information, or you may be able to retrieve it online. Some companies have that information but don't make it available unless you specifically ask.
Calculating Cost Basis The IRS allows you to use one of four methods when calculating your mutual fund's basis. You'll need to think about this decision before you actually sell anything. Your choice will affect how you treat sales in the future.
* Average cost (single category): Most people (and brokerages) use this method. You add up all of your purchases of the security, including reinvested dividends and capital gains, and divide by the total number of shares you own. To determine whether your gains/losses are short-term or long-term, you assume the oldest shares are sold first. Once you use this method to calculate the cost basis of shares you've sold, you must continue to use this method for the rest of the shares you sell in the future.* Average cost (double category): This is similar to the above method, but first you sort your shares into two categories: those in which your gains and losses are short-term and those in which you have a long-term gain or loss. Then you add up the purchases in each category and divide by the number of shares in each category.* Specific-share identification: This method is a little trickier, but it can also save you money. You specifically tell the brokerage which shares you want to sell and use the cost basis of those specific shares. For example, you may have bought shares of XYZ company five years ago when prices were higher--let's say $15 per share. Then later you bought more shares when the price was lower--say $5 per share. If you specifically tell your brokerage firm to sell the shares that you purchased at $15 and you sell them at $16, you only have to pay tax on the $1 per share of capital gain. If you specified the shares with a $5 cost basis, you'd owe tax on $11 per share. * FIFO (first-in, first-out): If you don't specify a method for calculating your basis, the IRS will assume you're using FIFO. This method assumes that when you sell some of your shares, they are the first shares you bought. If those shares have a lower cost basis, you'll end up owing more in capital gains tax (and vice versa).
When calculating cost basis on stocks, the average cost basis may not be used.
Figuring Out How Much You OweTo find out how much income tax you'll owe, you subtract your basis from the fair market value of the security when you sell it. If you held the security longer than one year, you'll have either a long-term capital gain (if you sold it for more than your basis) or a long-term capital loss (if you sold it for less than your basis). If you held the security for less than one year, instead of long-term gains or losses, you'll have short-term gains or losses.
You can net out capital gains and losses against each other.You can then use as much as $3,000 of capital losses in any one year to offset ordinary income on your tax return. Unused losses can be carried forward indefinitely to future years.
If someone has gifted you securities, you retain their cost basis. That means the donor needs to tell you what that basis is. Then going forward you need to keep track of additional purchases and reinvested dividends and reinvested capital gains. When you eventually sell the investment and calculate your basis, you start with the donor's basis and add to it any additional purchases and reinvested amounts. For more on this topic, see IRS Publication 551 at www.irs.gov.
Why Basis Is ImportantThe higher your basis, the less you pay in taxes. It's that simple, but record-keeping for this purpose is anything but simple. Ideally, the day you buy a stock or fund, you should start a notebook or spreadsheet entry that documents your purchase. Then you would add to your records as you purchased more or reinvested dividends and capital gains.
If you're like many people, you've thrown out old statements and have no idea about reinvested amounts. There are a couple of ways to recreate these records:
* Take a look at each tax return you've filed since you had the investment. Reinvested dividends and capital gains will be on Schedules B and D. However, many brokerage firms just lump together all your dividends and capital gains for tax purposes. If that's the case, you'll just see something like "Schwab" listed, not each individual security. And for basis purposes, you need to break it out by individual security. * Contact each brokerage firm and request year-end statements for as long as you've had the investment. They should show both purchase amounts and reinvested amounts.
Going forward, basis may become even more important. In 2010, the step-up in basis at death will be modified. ("Step-up in basis" means that the person who inherits an asset doesn't also inherit the deceased individual's cost basis; instead, the new owner's basis in that asset "steps up" to its current market value.) In 2010, a general basis increase will be allowed up to $1.3 million. Spouses will be allowed an additional $3 million of stepped-up basis.
Let's look at an example: Joe dies in 2010 and leaves securities valued at $2 million to his only son, Peter. Let's say Joe's basis is $500,000. Peter will be able to step up the basis on $1.3 million of his inheritance. But the other $700,000 will retain his father's basis. (This is just like the gifting rules for basis that I touched on above.) Then Peter will need to track his additional purchases and reinvested dividends and capital gains until he sells the securities.
Accurate record-keeping is essential. Estates may take much longer to settle if basis needs to be recreated. Holding securities until death to take advantage of the step-up in basis may no longer be a viable strategy. So be forewarned: If you don't have accurate basis records, bite the bullet and find a way to build these records. If you don't, the price could be heavy: paying tax more than once on reinvested dividends and capital gains or creating problems for your heirs by delaying the settlement of your estate.
IRS Publications If you want more information on investments and taxes, the following IRS publications may help. (You'll need Adobe Acrobat to view or print out the PDF files.)
Publication 544: Sales and Other Disposition of AssetsPublication 550: Investment Income and ExpensesPublication 551: Basis of AssetsPublication 564: Mutual Fund Distributions
A version of this article appeared March 9, 2006.
Morningstar Premium Members get access to over 3,900 Stock and Fund Analyst Reports, Analyst Picks, and award-winning portfolio tools. Learn More.
Monday, August 20, 2007
Capital Gains on House Lots Divided
from www.yahoo.finance.com
Bankrate.com Divided lot limits tax breakFriday August 17, 6:00 am ET George Saenz
Dear Tax Talk:We purchased a house on a large parcel 13 years ago. We have just completed a "lot split," dividing the property approximately in half. We wish to sell the lot with no dwelling on it and pay off most of our mortgage on the other half. Would we have to pay capital gains tax? If so, at what rate?-- DaphneDear Daphne,You only want to sell the vacant lot. However, the law requires that you sell it all to get a break from the capital gains tax.
A married couple that sells their principal residence that they have owned and lived in for two of the last five years does not have to pay tax on the first $500,000 in gain. The regulations consider adjacent vacant land as part of your principal residence, qualifying for the exclusion if sold within two years before or after the main home is sold. If the main home is not sold within this time frame, the gain on the vacant land is subject to the 15 percent long-term capital gains tax rate.
In order to calculate the taxable gain on the land sale, you have to allocate your original cost of the property 13 years ago to the house and land. Of the original cost of the land, you have to allocate between the portion you're selling and the portion remaining with your home.
Suppose the home originally cost you $100,000 and at that time the land and the house were roughly equal in value, so that you allocate $50,000 of the cost to the land. Now in 2007, you're selling the vacant lot for $150,000 and you estimate half of the original land is being sold, so that your cost in the half is $25,000. You'll have to pay capital gains of 15 percent on the $125,000 in gain.
If you sold your home and the vacant land for up to $600,000, you wouldn't owe any tax, but then you wouldn't have your home either. Alternatively, you can build a new main home on the vacant land and sell your old dwelling and qualify for the exclusion.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Bankrate.com Divided lot limits tax breakFriday August 17, 6:00 am ET George Saenz
Dear Tax Talk:We purchased a house on a large parcel 13 years ago. We have just completed a "lot split," dividing the property approximately in half. We wish to sell the lot with no dwelling on it and pay off most of our mortgage on the other half. Would we have to pay capital gains tax? If so, at what rate?-- DaphneDear Daphne,You only want to sell the vacant lot. However, the law requires that you sell it all to get a break from the capital gains tax.
A married couple that sells their principal residence that they have owned and lived in for two of the last five years does not have to pay tax on the first $500,000 in gain. The regulations consider adjacent vacant land as part of your principal residence, qualifying for the exclusion if sold within two years before or after the main home is sold. If the main home is not sold within this time frame, the gain on the vacant land is subject to the 15 percent long-term capital gains tax rate.
In order to calculate the taxable gain on the land sale, you have to allocate your original cost of the property 13 years ago to the house and land. Of the original cost of the land, you have to allocate between the portion you're selling and the portion remaining with your home.
Suppose the home originally cost you $100,000 and at that time the land and the house were roughly equal in value, so that you allocate $50,000 of the cost to the land. Now in 2007, you're selling the vacant lot for $150,000 and you estimate half of the original land is being sold, so that your cost in the half is $25,000. You'll have to pay capital gains of 15 percent on the $125,000 in gain.
If you sold your home and the vacant land for up to $600,000, you wouldn't owe any tax, but then you wouldn't have your home either. Alternatively, you can build a new main home on the vacant land and sell your old dwelling and qualify for the exclusion.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Saturday, August 18, 2007
Maximize Vacation Home Tax Benefits
from www.biz.yahoo.com
Investor's Business DailySweet Summer Shelter: Maximize Vacation-Home Tax BenefitsThursday August 16, 7:00 pm ET Jeff Schnepper
Opportunities to buy a vacation home abound, now that the worst housing slump in 16 years has put buyers in control of the market.
Need extra impetus to find the perfect weekend retreat? Consider that the Internal Revenue Service can subsidize plenty of ownership costs, if you structure your purchase right.
Sluggish sales mean house-hunters get a wide selection and room to negotiate prices. New home sales are 22.3% below a year ago, and existing home sales are off 11.4%.
Add some sophisticated tax planning to good timing and you can take a big cut out of the cost of owning a second home, says South New Jersey Realtor James Buividas.
"People don't plan to fail; they fail to plan," he said.
Here are ways to find savings.
Slash your effective APR. Interest paid to buy or substantially improve a second home can be deductible. If you use the place personally (the greater of 14 days or 10% of the time it's leased out), you'll keep the deduction from being slammed by the Alternative Minimum Tax (AMT), which hits so many middle and upper-income taxpayers.
What can deducting interest save on your federal income tax return? If you're in the 35% tax bracket, it's as if a 6.75% loan drops to 4.39%.
One caveat is the cap: Generally, you can deduct qualified residence interest on just $1 million of acquisition debt and $100,000 of home equity debt, on up to two homes.
Another caveat is that the AMT bars deducting home equity interest unless what's borrowed goes to buy or substantially improve a home. That's the case even if your normal tax computation allows the deduction.
Take tax off your taxes. Real estate taxes paid are allowable deductions no matter how many properties you own. Just keep in mind that taxes listed among your itemized deductions, including taxes on a vacation home, increase your exposure to the AMT, which seeks to limit the savings from some expense and income treatments.
You get such deductions under your normal tax calculation. But they're added back for the AMT computation. The end result: You still get a deduction, but it's minimized if you owe additional tax under the AMT.
Here's how it works: Say your marginal tax bracket is 35% and you have listed a $10,000 deduction for real estate tax paid. But then you refigure what you owe according to AMT rules.
For that calculation, the $10,000 gets thrown back into the income pot to be taxed at a maximum AMT rate of 28%. Absent the AMT, your deduction would've saved you $3,500, but the AMT adds back in a tax of $2,800. It makes your actual savings just the difference between the two: $700.
Get unreportable income. How you use your vacation home can impact your taxes. You can rent it out up to 14 days each calendar year without having to report the income on your tax return. Of course, you don't get to deduct your rental expenses for the time period, such as a share of your insurance, utilities, maintenance, supplies, repairs and the like.
Be careful. If you rent the place out for a 15th day, all the income becomes subject to taxation.
Congress put the 14-day provision in the tax code decades ago, so that taxpayers who rent out homes short-term wouldn't have to allocate home expenses over the time.
Renting out the place for a couple weeks can be an especially winning proposition for owners of vacation homes near big event venues. Consider that Miami has hosted nine Super Bowls and will see its 10th in three years.
Mastic Beach, N.Y., financial planner Paul Malagoli suggests taking this to the next level.
"Rent your vacation home to your corporation and suck out dollars on a tax-free basis," he said. "If your corporation rents the vacation home for business purposes, say a board of directors meeting each month, then the payment of rent is not only tax-free to you, but deductible by the corporation."
You can strategize even more. If you have a subchapter S corporation, income and expenses are passed through to you. So, if you rent to your sub-S corporation, not only are the dollars paid tax-free, but they become deductible on your tax return. That's because the payments for the corporation's business purposes reduce any corporate income passed through to you.
Take money out of one pocket and put it in another, and what do you have? No income on one side and a deduction on the other.
Avoid tax on a property sale. Before you buy a vacation home, consider the long view: How and when might you sell it? Unless the home is your principal residence for two of the five years leading up to your sale, you'll be hit with capital gains on all appreciation when you sell.
Or you can get creative. RBC Dain Rauscher financial consultant Steve Leightman suggests converting the home into an investment property.
"Rent the house for a year and then sell it using a Section 1031 exchange to upgrade to a bigger place," he said.
A section 1031 exchange lets you sell one investment property and defer the capital gains if you put the proceeds into another. You'll have to rent out that new property, too, to qualify for the tax deferral. But after renting the property out for a year, you can convert it back to personal use. There's still no tax until you sell.
Here's a another nifty idea. Just move into the house when you retire. Sell your old principal residence and exclude as much as $250,000 in capital gains ($500,000 on a joint return). Enjoy your new place the rest of your life.
Your heirs will get a stepped-up basis to fair market value at your death. So all of the gain, even on the original sale of that first vacation property, escapes income taxes.
House Ways and Means Committee member Pete Stark, D-Calif., once remarked, "It'd take a genius to invest in real estate and pay taxes."
Perhaps he then took off for his vacation home.
Schnepper is a New Jersey lawyer and CPA, personal finance columnist and the author of several books on tax strategies.
Investor's Business DailySweet Summer Shelter: Maximize Vacation-Home Tax BenefitsThursday August 16, 7:00 pm ET Jeff Schnepper
Opportunities to buy a vacation home abound, now that the worst housing slump in 16 years has put buyers in control of the market.
Need extra impetus to find the perfect weekend retreat? Consider that the Internal Revenue Service can subsidize plenty of ownership costs, if you structure your purchase right.
Sluggish sales mean house-hunters get a wide selection and room to negotiate prices. New home sales are 22.3% below a year ago, and existing home sales are off 11.4%.
Add some sophisticated tax planning to good timing and you can take a big cut out of the cost of owning a second home, says South New Jersey Realtor James Buividas.
"People don't plan to fail; they fail to plan," he said.
Here are ways to find savings.
Slash your effective APR. Interest paid to buy or substantially improve a second home can be deductible. If you use the place personally (the greater of 14 days or 10% of the time it's leased out), you'll keep the deduction from being slammed by the Alternative Minimum Tax (AMT), which hits so many middle and upper-income taxpayers.
What can deducting interest save on your federal income tax return? If you're in the 35% tax bracket, it's as if a 6.75% loan drops to 4.39%.
One caveat is the cap: Generally, you can deduct qualified residence interest on just $1 million of acquisition debt and $100,000 of home equity debt, on up to two homes.
Another caveat is that the AMT bars deducting home equity interest unless what's borrowed goes to buy or substantially improve a home. That's the case even if your normal tax computation allows the deduction.
Take tax off your taxes. Real estate taxes paid are allowable deductions no matter how many properties you own. Just keep in mind that taxes listed among your itemized deductions, including taxes on a vacation home, increase your exposure to the AMT, which seeks to limit the savings from some expense and income treatments.
You get such deductions under your normal tax calculation. But they're added back for the AMT computation. The end result: You still get a deduction, but it's minimized if you owe additional tax under the AMT.
Here's how it works: Say your marginal tax bracket is 35% and you have listed a $10,000 deduction for real estate tax paid. But then you refigure what you owe according to AMT rules.
For that calculation, the $10,000 gets thrown back into the income pot to be taxed at a maximum AMT rate of 28%. Absent the AMT, your deduction would've saved you $3,500, but the AMT adds back in a tax of $2,800. It makes your actual savings just the difference between the two: $700.
Get unreportable income. How you use your vacation home can impact your taxes. You can rent it out up to 14 days each calendar year without having to report the income on your tax return. Of course, you don't get to deduct your rental expenses for the time period, such as a share of your insurance, utilities, maintenance, supplies, repairs and the like.
Be careful. If you rent the place out for a 15th day, all the income becomes subject to taxation.
Congress put the 14-day provision in the tax code decades ago, so that taxpayers who rent out homes short-term wouldn't have to allocate home expenses over the time.
Renting out the place for a couple weeks can be an especially winning proposition for owners of vacation homes near big event venues. Consider that Miami has hosted nine Super Bowls and will see its 10th in three years.
Mastic Beach, N.Y., financial planner Paul Malagoli suggests taking this to the next level.
"Rent your vacation home to your corporation and suck out dollars on a tax-free basis," he said. "If your corporation rents the vacation home for business purposes, say a board of directors meeting each month, then the payment of rent is not only tax-free to you, but deductible by the corporation."
You can strategize even more. If you have a subchapter S corporation, income and expenses are passed through to you. So, if you rent to your sub-S corporation, not only are the dollars paid tax-free, but they become deductible on your tax return. That's because the payments for the corporation's business purposes reduce any corporate income passed through to you.
Take money out of one pocket and put it in another, and what do you have? No income on one side and a deduction on the other.
Avoid tax on a property sale. Before you buy a vacation home, consider the long view: How and when might you sell it? Unless the home is your principal residence for two of the five years leading up to your sale, you'll be hit with capital gains on all appreciation when you sell.
Or you can get creative. RBC Dain Rauscher financial consultant Steve Leightman suggests converting the home into an investment property.
"Rent the house for a year and then sell it using a Section 1031 exchange to upgrade to a bigger place," he said.
A section 1031 exchange lets you sell one investment property and defer the capital gains if you put the proceeds into another. You'll have to rent out that new property, too, to qualify for the tax deferral. But after renting the property out for a year, you can convert it back to personal use. There's still no tax until you sell.
Here's a another nifty idea. Just move into the house when you retire. Sell your old principal residence and exclude as much as $250,000 in capital gains ($500,000 on a joint return). Enjoy your new place the rest of your life.
Your heirs will get a stepped-up basis to fair market value at your death. So all of the gain, even on the original sale of that first vacation property, escapes income taxes.
House Ways and Means Committee member Pete Stark, D-Calif., once remarked, "It'd take a genius to invest in real estate and pay taxes."
Perhaps he then took off for his vacation home.
Schnepper is a New Jersey lawyer and CPA, personal finance columnist and the author of several books on tax strategies.
Friday, August 17, 2007
Barry Bonds' Home Run Ball
from www.naea.org
Barry Bonds' Home Run Ball While the sports world is abuzz about the value of the 756th home run baseball Barry Bonds hit last Tuesday, the tax world is thinking about, well, the tax implications for the ball's owner. NAEA member Russ Fox opined on his blog that the ball is covered by the price of the game ticket, and therefore is not taxable immediately. However, according to a Wall Street Journal column written by Tom Herman, some experts, such as Temple Law School Professor Alice Abreu, believe the ball is instantly taxable income because it is "accession to wealth." There appears to be uniform agreement that tax will be owed when the ball is sold, but more questions arise regarding the classification of income, rate, and cost basis. Don't expect any answers from the IRS; Chief Counsel (and Tribe fan) Don Korb begged Herman not to ask him
Barry Bonds' Home Run Ball While the sports world is abuzz about the value of the 756th home run baseball Barry Bonds hit last Tuesday, the tax world is thinking about, well, the tax implications for the ball's owner. NAEA member Russ Fox opined on his blog that the ball is covered by the price of the game ticket, and therefore is not taxable immediately. However, according to a Wall Street Journal column written by Tom Herman, some experts, such as Temple Law School Professor Alice Abreu, believe the ball is instantly taxable income because it is "accession to wealth." There appears to be uniform agreement that tax will be owed when the ball is sold, but more questions arise regarding the classification of income, rate, and cost basis. Don't expect any answers from the IRS; Chief Counsel (and Tribe fan) Don Korb begged Herman not to ask him
Thursday, August 16, 2007
Tax Implications on a Family Loan
from http://www.bankrate.com/
Bankrate.comTax implications of a family loanThursday August 16, 6:00 am ET George Saenz
Dear Tax Talk:I am taking out a business loan with my dad. What should the interest rate be on the loan to avoid it being considered a gift?--BrendaDear Brenda,Most dads don't demand that interest be paid, but your Uncle Sam does.
When a loan does not call for adequate interest, the law requires that the interest be imputed at the applicable federal rate (AFR). The AFR is an interest rate tied to Treasury bill rates and published by the IRS monthly. AFRs are published for short-, mid- and long-term loans, for loans maturing in three, nine or more years, respectively. A loan payable on demand is treated as a short-term borrowing. The rules generally do not apply to any loan that is $10,000 or less. Special rules apply to gift loans of less than $100,000, so that interest may not be imputed.
The AFR can be found on the IRS Web site by searching keyword AFR. Use the AFR for the month of the loan and the applicable compounding rate. The July short-term rate for annual compounding is 4.97 percent. If your loan with dad calls for an interest rate equal to or higher than that, there are no gift implications.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Bankrate.comTax implications of a family loanThursday August 16, 6:00 am ET George Saenz
Dear Tax Talk:I am taking out a business loan with my dad. What should the interest rate be on the loan to avoid it being considered a gift?--BrendaDear Brenda,Most dads don't demand that interest be paid, but your Uncle Sam does.
When a loan does not call for adequate interest, the law requires that the interest be imputed at the applicable federal rate (AFR). The AFR is an interest rate tied to Treasury bill rates and published by the IRS monthly. AFRs are published for short-, mid- and long-term loans, for loans maturing in three, nine or more years, respectively. A loan payable on demand is treated as a short-term borrowing. The rules generally do not apply to any loan that is $10,000 or less. Special rules apply to gift loans of less than $100,000, so that interest may not be imputed.
The AFR can be found on the IRS Web site by searching keyword AFR. Use the AFR for the month of the loan and the applicable compounding rate. The July short-term rate for annual compounding is 4.97 percent. If your loan with dad calls for an interest rate equal to or higher than that, there are no gift implications.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
Beating the Clock on Refunds
from www.cpa2biz.com
Beating the Clock on Refunds
Three court cases provide guidance on when to claim tax refunds.
April 2007from Journal of Accountancy
Most taxpayers know when to file their annual tax return. But they may be less sure of how much time they have to claim a refund. Three decisions last year may help clarify the rules.
In the first, Wachovia Bank (Wachovia Bank v. U.S., 98 AFTR2d 2006-5111 (CA-11)) was trustee for the George C. Nunamann Trust, which was created in 1984 and became a charitable trust in 1991. Although Wachovia was then no longer obligated to file returns or pay taxes, it mistakenly continued to do so through 2001. In 2003, Wachovia realized its error and filed for refunds for 1997 and 1998 totaling more than $111,000. Citing the three-year statute of limitations in IRC section 6511(a), the IRS denied the claims. A district court granted summary judgment for Wachovia. The IRS appealed (see “Tax Matters,” JofA, December 2006).
In the second case, home-products company Electrolux (Electrolux Holdings, Inc. v. U.S., 97 AFTR2d 2006-3123) claimed a special exception to section 6511(a) in subsection (d)(2)(A), which allows refunds arising from a net capital loss carryback that are claimed within three years from the time for filing a return for the tax year in which the loss occurred. Electrolux’s former parent company, White Consolidated Industries Inc. (WCI), had sustained a $53.8 million capital loss in 1994. WCI carried the loss back to 1993 and forward through 1998. In 1999, the IRS allowed refunds stemming from all the years except 1995, saying that WCI’s Dec. 31, 1999, amended return was too late by 31/2 months. Electrolux, as successor-in-interest to WCI, sought a refund of more than $1.45 million for 1995 and filed a complaint in the U.S. Court of Federal Claims.In the third case, Richard Stevens (Richard O. Stevens v. U.S., 98 AFTR2d 2006-5184) was named executor of the Gloria S. Keesey Stevens estate. In November 1998, he filed a request for an extension of time to file a return and included a payment of $162,109. He was given until May 16, 1999. Before the extended due date and several times after it, Stevens called the IRS and requested further extensions, noting that the estate was entitled to a significant refund. He was told he could extend the due date. On July 30, 2002, he filed the return, requesting a refund of $65,481. The refund was denied as being past the due date. Stevens filed an action in the U.S. District Court for Northern California.
Results. Against Wachovia and Electrolux but for Stevens.
Wachovia argued that it came under the general six-year statute of limitations for civil actions against the United States in 28 U.S.C. § 2401, outside the tax code. The Eleventh Circuit Court of Appeals said the three-year limit of section 6511(a) applied instead, interpreting “in respect of which tax the taxpayer is required to file a return” to mean a tax return generally.
In Electrolux, the court held that the special rule applied only to the carryback years, not a carryforward one. In Stevens, the court held that Stevens’ telephone conversations were informal but valid requests and he was entitled to the refund.
These cases underscore that refund claims filed beyond the prescribed deadlines will be narrowly construed. The one exception is informal extension requests, although taxpayers must be able to prove they made them.
This article was prepared by Edward J. Schnee, CPA, Ph.D. for the Journal of Accountancy. Mr. Schnee is a Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa. His views as expressed in this article do not necessarily reflect the views of the AICPA or Journal of Accountancy.
Beating the Clock on Refunds
Three court cases provide guidance on when to claim tax refunds.
April 2007from Journal of Accountancy
Most taxpayers know when to file their annual tax return. But they may be less sure of how much time they have to claim a refund. Three decisions last year may help clarify the rules.
In the first, Wachovia Bank (Wachovia Bank v. U.S., 98 AFTR2d 2006-5111 (CA-11)) was trustee for the George C. Nunamann Trust, which was created in 1984 and became a charitable trust in 1991. Although Wachovia was then no longer obligated to file returns or pay taxes, it mistakenly continued to do so through 2001. In 2003, Wachovia realized its error and filed for refunds for 1997 and 1998 totaling more than $111,000. Citing the three-year statute of limitations in IRC section 6511(a), the IRS denied the claims. A district court granted summary judgment for Wachovia. The IRS appealed (see “Tax Matters,” JofA, December 2006).
In the second case, home-products company Electrolux (Electrolux Holdings, Inc. v. U.S., 97 AFTR2d 2006-3123) claimed a special exception to section 6511(a) in subsection (d)(2)(A), which allows refunds arising from a net capital loss carryback that are claimed within three years from the time for filing a return for the tax year in which the loss occurred. Electrolux’s former parent company, White Consolidated Industries Inc. (WCI), had sustained a $53.8 million capital loss in 1994. WCI carried the loss back to 1993 and forward through 1998. In 1999, the IRS allowed refunds stemming from all the years except 1995, saying that WCI’s Dec. 31, 1999, amended return was too late by 31/2 months. Electrolux, as successor-in-interest to WCI, sought a refund of more than $1.45 million for 1995 and filed a complaint in the U.S. Court of Federal Claims.In the third case, Richard Stevens (Richard O. Stevens v. U.S., 98 AFTR2d 2006-5184) was named executor of the Gloria S. Keesey Stevens estate. In November 1998, he filed a request for an extension of time to file a return and included a payment of $162,109. He was given until May 16, 1999. Before the extended due date and several times after it, Stevens called the IRS and requested further extensions, noting that the estate was entitled to a significant refund. He was told he could extend the due date. On July 30, 2002, he filed the return, requesting a refund of $65,481. The refund was denied as being past the due date. Stevens filed an action in the U.S. District Court for Northern California.
Results. Against Wachovia and Electrolux but for Stevens.
Wachovia argued that it came under the general six-year statute of limitations for civil actions against the United States in 28 U.S.C. § 2401, outside the tax code. The Eleventh Circuit Court of Appeals said the three-year limit of section 6511(a) applied instead, interpreting “in respect of which tax the taxpayer is required to file a return” to mean a tax return generally.
In Electrolux, the court held that the special rule applied only to the carryback years, not a carryforward one. In Stevens, the court held that Stevens’ telephone conversations were informal but valid requests and he was entitled to the refund.
These cases underscore that refund claims filed beyond the prescribed deadlines will be narrowly construed. The one exception is informal extension requests, although taxpayers must be able to prove they made them.
This article was prepared by Edward J. Schnee, CPA, Ph.D. for the Journal of Accountancy. Mr. Schnee is a Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa. His views as expressed in this article do not necessarily reflect the views of the AICPA or Journal of Accountancy.
Wednesday, August 15, 2007
1031 Exchanges and the IRS
We at Tax Advocacy, LLC have been involved in a number of 1031 issues. If you should have any questions, you can contact us for additional information at www.taxadvocacyllc.com.
from www.havenexchange.com
IRS 1031 Exchange - 1031 Reverse Exchange
IRS Ruling Clarifies Use of Tenancy-in-Common Interests in 1031 Exchanges
By Ronald L. Raitz, CCIM
The Internal Revenue Service has released Revenue Procedure 2002-22 earlier this year, which addresses the use of fractional ownership interests, commonly known as "tenancy-in-common" or "TIC" interests, as replacement property in 1031 tax-deferred exchanges.The potential advantages of using TIC interests to complete a 1031 exchange are numerous. These fractional interests make it much easier to identify suitable replacement property within 45 days, provide the chance to own a share of institutional-grade property which might otherwise have been too expensive, and allow an investor with a limited amount of dollars to diversify into multiple properties.
1031 Exchange Information
Under Section 1031, investors in real property may defer gain recognition on a sale by exchanging it for like-kind property and meeting a number of specific requirements. In order to achieve total tax deferral, the cost of the replacement property must be equal to or greater than the net sales price of the property being sold, and all the proceeds must be used.Further, the investor must identify suitable replacement property within 45 days of the relinquished property sale. Finally, the investor must take title to the property he ultimately buys in the same manner in which he gives title to the property he sells. This title requirement prevents investors from buying into larger and potentially more attractive properties when they have to buy shares or partnership interests to complete the acquisition.
Security
Prior to the new ruling, tax professionals were wary of fractional interests as replacement properties because the IRS might consider the investor's interest to be in a partnership, rather than in real property, effectively invalidating the exchange. (Section 1031 stipulates that shares of stock and partnership interests are not qualified property.)In response to the need for high-quality replacement property in a range of prices, a niche group of companies began offering TIC interests to complete 1031 exchanges. To satisfy the title requirements, investors receive a deed for a percentage interest in the property, rather than a share of a partnership. The new guidelines also open the door for investors who want to structure fractional interests in a desirable replacement property on their own, rather than through a sponsored program. A summary of the New Guidelines Rev. Proc. 2002-22 provides guidance on the use of fractional interests as replacement properties in 1031 exchanges. Although the IRS did not provide safe harbor status for these investments, the ruling outlines 15 minimum standards that TIC interests must meet in order to be considered as potential replacement property. The highlights include:
the number of tenants-in-common cannot exceed 35;
the sponsor of the interests may own the property (or an interest therein) for only six months before 100 percent of the interests are sold;
any decision that has material or economic impact on the property or to its owners must be approved unanimously by the owners; and
any management agreements must be renewable annually and must provide for market rate compensation.
For the complete listing of requirements, visit the IRS Web site at www.irs.gov. Investors should seek private letter rulings on specific offerings for more concrete assurance that a certain program qualifies under the ruling.
Careful Review is Required
While TIC programs are in their infancy, tax professionals and other investment advisors should review any program being considered carefully. Because all programs are different and may have been structured before the release of Rev. Proc. 2002-22, careful due diligence is essential.Whether for groups sponsoring fractional interests or creative investors looking to pool resources into a larger property, the new IRS guidelines are good news for the investors who want to enjoy the many benefits of a 1031 exchange.
About the Author Ron Raitz, CCIM, is the president of Real Estate Exchange Services Inc. of Marietta, Ga. He serves on the board of directors of the Federation of Exchange Accomodators (FEA). He may be reached at 770/579-1155, ext. 10 or by e-mail at rees1031@mindspring.com.February/ March 2003 VOL. 48, No. 2
from www.havenexchange.com
IRS 1031 Exchange - 1031 Reverse Exchange
IRS Ruling Clarifies Use of Tenancy-in-Common Interests in 1031 Exchanges
By Ronald L. Raitz, CCIM
The Internal Revenue Service has released Revenue Procedure 2002-22 earlier this year, which addresses the use of fractional ownership interests, commonly known as "tenancy-in-common" or "TIC" interests, as replacement property in 1031 tax-deferred exchanges.The potential advantages of using TIC interests to complete a 1031 exchange are numerous. These fractional interests make it much easier to identify suitable replacement property within 45 days, provide the chance to own a share of institutional-grade property which might otherwise have been too expensive, and allow an investor with a limited amount of dollars to diversify into multiple properties.
1031 Exchange Information
Under Section 1031, investors in real property may defer gain recognition on a sale by exchanging it for like-kind property and meeting a number of specific requirements. In order to achieve total tax deferral, the cost of the replacement property must be equal to or greater than the net sales price of the property being sold, and all the proceeds must be used.Further, the investor must identify suitable replacement property within 45 days of the relinquished property sale. Finally, the investor must take title to the property he ultimately buys in the same manner in which he gives title to the property he sells. This title requirement prevents investors from buying into larger and potentially more attractive properties when they have to buy shares or partnership interests to complete the acquisition.
Security
Prior to the new ruling, tax professionals were wary of fractional interests as replacement properties because the IRS might consider the investor's interest to be in a partnership, rather than in real property, effectively invalidating the exchange. (Section 1031 stipulates that shares of stock and partnership interests are not qualified property.)In response to the need for high-quality replacement property in a range of prices, a niche group of companies began offering TIC interests to complete 1031 exchanges. To satisfy the title requirements, investors receive a deed for a percentage interest in the property, rather than a share of a partnership. The new guidelines also open the door for investors who want to structure fractional interests in a desirable replacement property on their own, rather than through a sponsored program. A summary of the New Guidelines Rev. Proc. 2002-22 provides guidance on the use of fractional interests as replacement properties in 1031 exchanges. Although the IRS did not provide safe harbor status for these investments, the ruling outlines 15 minimum standards that TIC interests must meet in order to be considered as potential replacement property. The highlights include:
the number of tenants-in-common cannot exceed 35;
the sponsor of the interests may own the property (or an interest therein) for only six months before 100 percent of the interests are sold;
any decision that has material or economic impact on the property or to its owners must be approved unanimously by the owners; and
any management agreements must be renewable annually and must provide for market rate compensation.
For the complete listing of requirements, visit the IRS Web site at www.irs.gov. Investors should seek private letter rulings on specific offerings for more concrete assurance that a certain program qualifies under the ruling.
Careful Review is Required
While TIC programs are in their infancy, tax professionals and other investment advisors should review any program being considered carefully. Because all programs are different and may have been structured before the release of Rev. Proc. 2002-22, careful due diligence is essential.Whether for groups sponsoring fractional interests or creative investors looking to pool resources into a larger property, the new IRS guidelines are good news for the investors who want to enjoy the many benefits of a 1031 exchange.
About the Author Ron Raitz, CCIM, is the president of Real Estate Exchange Services Inc. of Marietta, Ga. He serves on the board of directors of the Federation of Exchange Accomodators (FEA). He may be reached at 770/579-1155, ext. 10 or by e-mail at rees1031@mindspring.com.February/ March 2003 VOL. 48, No. 2
Tuesday, August 14, 2007
Former MLB Star Sued for Back Taxes by the IRS
from the associated press via www.yahoo/finance.com
APFormer MLB Star Sued for Back TaxesTuesday August 14, 9:41 am ET
Government Sues Troubled Baseball Star Darryl Strawberry for Back Taxes
WEST PALM BEACH, Fla. (AP) -- Darryl Strawberry is having more legal trouble.
The government has filed a lawsuit against the troubled baseball star, seeking to collect nearly a half-million dollars in unpaid taxes.
The complaint filed here Friday was years in the making. Strawberry was indicted in 1994 on federal tax evasion charges and pleaded guilty the following year.
He was sentenced to six months home confinement and ordered to repay $350,000 in taxes.
In all, with penalties and interest, the government said Strawberry owes $481,656.86 as of May 31.
A Justice Department spokesman said he could not comment on why the lawsuit was being filed so long after Strawberry's indictment or whether the former baseball player had previously paid any of the back taxes he owed.
No attorney was listed for Strawberry in court filings and calls to several lawyers who previously represented him were not returned.
The IRS and federal prosecutors investigated Strawberry in 1994 for failing to report hundreds of thousands of dollars in income from autographs and memorabilia. He was indicted along with his agent Eric Goldschmidt later that year.
Strawberry, an eight-time All-Star and member of two World Series winners, has also battled drug addiction and cancer. He served 11 months in prison in 2002-03 for violating probation on cocaine possession charges.
APFormer MLB Star Sued for Back TaxesTuesday August 14, 9:41 am ET
Government Sues Troubled Baseball Star Darryl Strawberry for Back Taxes
WEST PALM BEACH, Fla. (AP) -- Darryl Strawberry is having more legal trouble.
The government has filed a lawsuit against the troubled baseball star, seeking to collect nearly a half-million dollars in unpaid taxes.
The complaint filed here Friday was years in the making. Strawberry was indicted in 1994 on federal tax evasion charges and pleaded guilty the following year.
He was sentenced to six months home confinement and ordered to repay $350,000 in taxes.
In all, with penalties and interest, the government said Strawberry owes $481,656.86 as of May 31.
A Justice Department spokesman said he could not comment on why the lawsuit was being filed so long after Strawberry's indictment or whether the former baseball player had previously paid any of the back taxes he owed.
No attorney was listed for Strawberry in court filings and calls to several lawyers who previously represented him were not returned.
The IRS and federal prosecutors investigated Strawberry in 1994 for failing to report hundreds of thousands of dollars in income from autographs and memorabilia. He was indicted along with his agent Eric Goldschmidt later that year.
Strawberry, an eight-time All-Star and member of two World Series winners, has also battled drug addiction and cancer. He served 11 months in prison in 2002-03 for violating probation on cocaine possession charges.
Treasury, IRS Issue Guidance on Transactions of Interest
from www.irs.gov
Treasury, IRS Issue Guidance on Transactions of Interest
IR-2007-143, Aug. 14, 2007
WASHINGTON — The Treasury Department and the Internal Revenue Service today issued two notices that identify as transactions of interest certain transactions involving “toggling” grantor trusts and certain transactions involving contributions of a successor member interest in a limited liability company.
Recently released final regulations about the disclosure of reportable transactions include the new transaction of interest category as one of the reportable transactions subject to disclosure.
"These are the first two transactions of interest we have published under the new regulatory scheme," said IRS Chief Counsel Don Korb. "Hopefully, the notices released today will give taxpayers and practitioners a better idea of the types of transactions that we will be identifying as transactions of interest in the future."
“Toggling” grantor trust transactions are utilized by grantors of these trusts in an attempt to avoid recognizing gain or to claim a tax loss greater than any actual economic loss by purportedly terminating and then reestablishing the grantor status of the trust. These grantor trust transactions usually occur within a short period of time (typically within 30 days).
Transactions involving contributions of a successor member interest are utilized by persons to claim charitable contributions that may be excessive. These transactions arise when a taxpayer acquires a successor member interest, directly or indirectly, in real property, transfers the interest to a tax-exempt organization, and claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid for the interest.
In designating both transactions as transactions of interest, Treasury and the IRS believe both transactions have the potential for abuse, but lack sufficient information to determine whether the transactions should be identified specifically as tax avoidance transactions. Treasury and the IRS may take one or more future actions, including designating the transactions as listed transactions, or providing a new category of reportable transaction.
The notices also alert persons involved with these transactions of interest to certain responsibilities that may arise from their involvement.
Treasury, IRS Issue Guidance on Transactions of Interest
IR-2007-143, Aug. 14, 2007
WASHINGTON — The Treasury Department and the Internal Revenue Service today issued two notices that identify as transactions of interest certain transactions involving “toggling” grantor trusts and certain transactions involving contributions of a successor member interest in a limited liability company.
Recently released final regulations about the disclosure of reportable transactions include the new transaction of interest category as one of the reportable transactions subject to disclosure.
"These are the first two transactions of interest we have published under the new regulatory scheme," said IRS Chief Counsel Don Korb. "Hopefully, the notices released today will give taxpayers and practitioners a better idea of the types of transactions that we will be identifying as transactions of interest in the future."
“Toggling” grantor trust transactions are utilized by grantors of these trusts in an attempt to avoid recognizing gain or to claim a tax loss greater than any actual economic loss by purportedly terminating and then reestablishing the grantor status of the trust. These grantor trust transactions usually occur within a short period of time (typically within 30 days).
Transactions involving contributions of a successor member interest are utilized by persons to claim charitable contributions that may be excessive. These transactions arise when a taxpayer acquires a successor member interest, directly or indirectly, in real property, transfers the interest to a tax-exempt organization, and claims a charitable contribution deduction that is significantly higher than the amount that the taxpayer paid for the interest.
In designating both transactions as transactions of interest, Treasury and the IRS believe both transactions have the potential for abuse, but lack sufficient information to determine whether the transactions should be identified specifically as tax avoidance transactions. Treasury and the IRS may take one or more future actions, including designating the transactions as listed transactions, or providing a new category of reportable transaction.
The notices also alert persons involved with these transactions of interest to certain responsibilities that may arise from their involvement.
Monday, August 13, 2007
Federal Tax Liens Filing and Releases
We at Tax Advocacy, LLC are experts in securing the release of Federal Tax Liens. Contact us at http://www.taxadvocacyllc.com/ for further assistance. The following is from the Internal Revenue Manual and provides an explanation of the filing of the Federal Tax Lien.
from www.irs.gov
Notice of Federal Tax Lien
Liens give us a legal claim to your property as security or payment for your tax debt. A Notice of Federal Tax Lien may be filed only after:
We assess the liability;
We send you a Notice and Demand for Payment - a bill that tells you how much you owe in taxes; and
You neglect or refuse to fully pay the debt within 10 days after we notify you about it.
Once these requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that we have a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate.
The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business).
Caution!Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card, or sign a lease. Therefore it is important that you work to resolve your tax liability as quickly as possible, before lien filing becomes necessary.Releasing a Lien
We will issue a Release of the Notice of Federal Tax Lien:
Within 30 days after you satisfy the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
Within 30 days after we accept a bond that you submit, guaranteeing payment of the debt.
In addition, you must pay all fees that a state or other jurisdiction charges to file and release the lien. These fees will be added to the amount you owe. Refer to Publication 1450 (PDF), Request for Release of Federal Tax Lien.
Usually 10 years after a tax is assessed, a lien releases automatically if we have not filed it again. If we knowingly or negligently do not release a Notice of Federal Tax Lien when it should be released, you may sue the federal government, but not IRS employees, for damages.Payoff Amount
The full amount of your lien will remain a matter of public record until it is paid in full, including all accruals and additions. However, at any time you may request an updated lien payoff amount to show the remaining balance due by calling the toll-free customer service telephone number at 1-800-913-6050. An IRS employee will issue you a letter with the current amount that must be paid before we release the Notice of Federal Tax Lien.Applying for a Discharge of a Federal Tax Lien
If you are giving up ownership of property, such as when you sell your home, you may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If you're selling your primary residence, you may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply. Refer to Publication 783 (PDF), Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien.Making the IRS Lien Secondary to Another Lien
In some cases, a federal tax lien can be made secondary to another lien. That process is called subordination. Refer to Publication 784 (PDF), How to Prepare Application for Certificate of Subordination of Federal Tax Lien.Withdrawing Liens
By law, a filed notice of tax lien can be withdrawn if:
The notice was filed too soon or not according to IRS procedures,
You entered into an installment agreement to pay the debt on the notice of lien (unless the agreement provides otherwise),
Withdrawal will speed collecting the tax, or
Withdrawal would be in your best interest (as determined by the Taxpayer Advocate), and in the best interest of the government.
We will give you a copy of the withdrawal, and if you write to us, we will send a copy to other institutions you name.Lien Inquiries
If you have questions regarding basic lien inquiries such as routine lien releases and lien payoff amounts, contact the Centralized Lien Unit by calling the toll free telephone number (1-800-913-6050).
When faced with a complex lien issue, consider contacting the Collection Technical Services (TS) Advisory function. TS Advisory is a collection compliance function that interacts with taxpayers on complex lien issues such as: Certificate of Discharge, Subordination, Subrogation, Non-Attachment, Withdrawal and other complex lien issues. Publication 4235, Technical Services Advisory Group Addresses should be used to locate the appropriate office to contact for assistance.Appealing the Filing of a Lien
The law requires us to notify you in writing not more than 5 business days after the filing of a lien. We may give you this notice in person, leave it at your home or your usual place of business, or send it by certified or registered mail to your last known address. You may ask an IRS manager to review your case, and you may request a Collection Due Process hearing with the Office of Appeals by filing a request for a hearing with the office listed on your notice. You must file your request by the date shown on your notice. Some of the issues you may discuss include:
You paid all you owed before we filed the lien,
We assessed the tax and filed the lien when you were in bankruptcy, and subject to the automatic stay during bankruptcy,
We made a procedural error in an assessment,
The time to collect the tax (called the statute of limitations) expired before we filed the lien,
You did not have an opportunity to dispute the assessed liability,
You wish to discuss the collection options, or
You wish to make spousal defenses.
At the conclusion of your Collection Due Process hearing, the IRS Office of Appeals will issue a determination. That determination may support the continued existence of the filed federal tax lien or it may determine that the lien should be released or withdrawn. If you disagree with Appeal's determination, there is a 30-day period starting with the date of determination, in which you may request judicial review in a court of proper jurisdiction. Refer to Publication 1660 (PDF), Collection Appeal Rights, for more information.
from www.irs.gov
Notice of Federal Tax Lien
Liens give us a legal claim to your property as security or payment for your tax debt. A Notice of Federal Tax Lien may be filed only after:
We assess the liability;
We send you a Notice and Demand for Payment - a bill that tells you how much you owe in taxes; and
You neglect or refuse to fully pay the debt within 10 days after we notify you about it.
Once these requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that we have a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate.
The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business).
Caution!Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card, or sign a lease. Therefore it is important that you work to resolve your tax liability as quickly as possible, before lien filing becomes necessary.Releasing a Lien
We will issue a Release of the Notice of Federal Tax Lien:
Within 30 days after you satisfy the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
Within 30 days after we accept a bond that you submit, guaranteeing payment of the debt.
In addition, you must pay all fees that a state or other jurisdiction charges to file and release the lien. These fees will be added to the amount you owe. Refer to Publication 1450 (PDF), Request for Release of Federal Tax Lien.
Usually 10 years after a tax is assessed, a lien releases automatically if we have not filed it again. If we knowingly or negligently do not release a Notice of Federal Tax Lien when it should be released, you may sue the federal government, but not IRS employees, for damages.Payoff Amount
The full amount of your lien will remain a matter of public record until it is paid in full, including all accruals and additions. However, at any time you may request an updated lien payoff amount to show the remaining balance due by calling the toll-free customer service telephone number at 1-800-913-6050. An IRS employee will issue you a letter with the current amount that must be paid before we release the Notice of Federal Tax Lien.Applying for a Discharge of a Federal Tax Lien
If you are giving up ownership of property, such as when you sell your home, you may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If you're selling your primary residence, you may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply. Refer to Publication 783 (PDF), Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien.Making the IRS Lien Secondary to Another Lien
In some cases, a federal tax lien can be made secondary to another lien. That process is called subordination. Refer to Publication 784 (PDF), How to Prepare Application for Certificate of Subordination of Federal Tax Lien.Withdrawing Liens
By law, a filed notice of tax lien can be withdrawn if:
The notice was filed too soon or not according to IRS procedures,
You entered into an installment agreement to pay the debt on the notice of lien (unless the agreement provides otherwise),
Withdrawal will speed collecting the tax, or
Withdrawal would be in your best interest (as determined by the Taxpayer Advocate), and in the best interest of the government.
We will give you a copy of the withdrawal, and if you write to us, we will send a copy to other institutions you name.Lien Inquiries
If you have questions regarding basic lien inquiries such as routine lien releases and lien payoff amounts, contact the Centralized Lien Unit by calling the toll free telephone number (1-800-913-6050).
When faced with a complex lien issue, consider contacting the Collection Technical Services (TS) Advisory function. TS Advisory is a collection compliance function that interacts with taxpayers on complex lien issues such as: Certificate of Discharge, Subordination, Subrogation, Non-Attachment, Withdrawal and other complex lien issues. Publication 4235, Technical Services Advisory Group Addresses should be used to locate the appropriate office to contact for assistance.Appealing the Filing of a Lien
The law requires us to notify you in writing not more than 5 business days after the filing of a lien. We may give you this notice in person, leave it at your home or your usual place of business, or send it by certified or registered mail to your last known address. You may ask an IRS manager to review your case, and you may request a Collection Due Process hearing with the Office of Appeals by filing a request for a hearing with the office listed on your notice. You must file your request by the date shown on your notice. Some of the issues you may discuss include:
You paid all you owed before we filed the lien,
We assessed the tax and filed the lien when you were in bankruptcy, and subject to the automatic stay during bankruptcy,
We made a procedural error in an assessment,
The time to collect the tax (called the statute of limitations) expired before we filed the lien,
You did not have an opportunity to dispute the assessed liability,
You wish to discuss the collection options, or
You wish to make spousal defenses.
At the conclusion of your Collection Due Process hearing, the IRS Office of Appeals will issue a determination. That determination may support the continued existence of the filed federal tax lien or it may determine that the lien should be released or withdrawn. If you disagree with Appeal's determination, there is a 30-day period starting with the date of determination, in which you may request judicial review in a court of proper jurisdiction. Refer to Publication 1660 (PDF), Collection Appeal Rights, for more information.
Made a mistake? File an amended return!
from www.moneycenteral.msn.com
Make a mistake? You can make amends
Although an amended return will make the IRS sit up and take notice, if you do it right, your chances of being audited may actually decrease.
Article IndexBy Jeff Schnepper
I know you were careful. You did the math. Your tax preparer did the math. You double-checked HIS math. But sometimes, no matter how hard you look at a figure, that error you just made -- or that your preparer just made -- doesn't register in your mind.
This is not the end of the world. When a mistake is made on your tax return, correct it. The error may be in your favor, or in favor of the IRS. But in any case, correct it. It may be due to a missed deduction, an incorrect interpretation of the law or facts, or simply a late or corrected W-2 or 1099.
Fortunately, the IRS recognizes that your tax return may need to be corrected and has drafted a specific form for that purpose: Form 1040X (.pdf download). This form is easy to complete. It has three columns: one for what you originally reported, one for the changes in the numbers, and a third for the final, corrected numbers. On the back, you explain the change.
If the reason for the change is a corrected 1099 or other third-party document, attach a copy to your return. If the change is because of a deduction you missed, attach a copy of the receipt to the return. It's optional, but I suggest that you try to attach documentation to "prove" your change.
What I'm trying to do here is minimize your chances of getting audited. The very fact that you filed an amended return will not, in and of itself, increase your chance of being audited. However, an amended return demands extra scrutiny by the IRS. An agency representative must call up your old return and compare the changes with the new return. That gives the IRS twice as many chances to see something that concerns an agent.
Prove those deductions That's why I recommend attaching substantiation for the changes on your Form 1040X. If the change, for example, is a huge charitable contribution missed on your original return, the IRS computer will pop out your return for human review. That's where your attached substantiation should dissolve any audit questions, because you've already "proved" your deduction.
In fact, by attaching substantiation of the change to your amended return, you have shown the reviewing agent that you know the rules and would be a poor audit risk. You may have actually decreased your chances of a full audit.
When can you amend your return? The normal statute of limitations for a tax return is three years. That means that you have three years from the due date of your return to amend your return.
For example, your 2003 individual tax return should have been filed by April 15, 2004. Now that April 15, 2007, is passed, you can no longer amend that return. If you have found a mistake on your 2004 return (which should have been filed by April 15, 2005), you have until April 15, 2008 to amend it.
This statute of limitations is really important if you are due a refund and haven't yet filed your return for the current year. Some people, if they think they're due a refund, take the easy route and procrastinate. They know they don't owe any additional tax, and therefore they figure there's no rush in getting that return out to the IRS. They're wrong.
Use refund or lose it If you don't file your tax return within three years and you're owed money, sorry. You just don't qualify at all to get it back.
Everyone -- even the government -- will agree that you overpaid and that the IRS should have sent you your refund. But they won't and, under the law, you can't make them. In fact, you can't even use that "refund" to offset taxes for future years; it's lost forever.
Look out for hidden tax breaksCongress renewed some tax credits and deductions too late to make the IRS' forms. Here's how to find out what you're entitled to.That's the nature of the statute of limitations. It limits the time both you and the IRS have to make changes. The IRS has publicized the fact that it's holding billions of dollars in unclaimed taxes.
If you haven't filed . . . file! There are penalties for not filing, even if you don't owe any money. If you have filed and received a corrected or late 1099, file an amended return. The IRS computers are going to be looking for those corrected numbers.
If you found out that you missed a deduction or a credit two years ago, file an amended return. And make sure they give you the interest owed for holding your money. (Of course, that interest will be taxable.)
Updated April 30, 20if you need help filing an amended return, contact us at www.taxadvocacyllc.com
Make a mistake? You can make amends
Although an amended return will make the IRS sit up and take notice, if you do it right, your chances of being audited may actually decrease.
Article IndexBy Jeff Schnepper
I know you were careful. You did the math. Your tax preparer did the math. You double-checked HIS math. But sometimes, no matter how hard you look at a figure, that error you just made -- or that your preparer just made -- doesn't register in your mind.
This is not the end of the world. When a mistake is made on your tax return, correct it. The error may be in your favor, or in favor of the IRS. But in any case, correct it. It may be due to a missed deduction, an incorrect interpretation of the law or facts, or simply a late or corrected W-2 or 1099.
Fortunately, the IRS recognizes that your tax return may need to be corrected and has drafted a specific form for that purpose: Form 1040X (.pdf download). This form is easy to complete. It has three columns: one for what you originally reported, one for the changes in the numbers, and a third for the final, corrected numbers. On the back, you explain the change.
If the reason for the change is a corrected 1099 or other third-party document, attach a copy to your return. If the change is because of a deduction you missed, attach a copy of the receipt to the return. It's optional, but I suggest that you try to attach documentation to "prove" your change.
What I'm trying to do here is minimize your chances of getting audited. The very fact that you filed an amended return will not, in and of itself, increase your chance of being audited. However, an amended return demands extra scrutiny by the IRS. An agency representative must call up your old return and compare the changes with the new return. That gives the IRS twice as many chances to see something that concerns an agent.
Prove those deductions That's why I recommend attaching substantiation for the changes on your Form 1040X. If the change, for example, is a huge charitable contribution missed on your original return, the IRS computer will pop out your return for human review. That's where your attached substantiation should dissolve any audit questions, because you've already "proved" your deduction.
In fact, by attaching substantiation of the change to your amended return, you have shown the reviewing agent that you know the rules and would be a poor audit risk. You may have actually decreased your chances of a full audit.
When can you amend your return? The normal statute of limitations for a tax return is three years. That means that you have three years from the due date of your return to amend your return.
For example, your 2003 individual tax return should have been filed by April 15, 2004. Now that April 15, 2007, is passed, you can no longer amend that return. If you have found a mistake on your 2004 return (which should have been filed by April 15, 2005), you have until April 15, 2008 to amend it.
This statute of limitations is really important if you are due a refund and haven't yet filed your return for the current year. Some people, if they think they're due a refund, take the easy route and procrastinate. They know they don't owe any additional tax, and therefore they figure there's no rush in getting that return out to the IRS. They're wrong.
Use refund or lose it If you don't file your tax return within three years and you're owed money, sorry. You just don't qualify at all to get it back.
Everyone -- even the government -- will agree that you overpaid and that the IRS should have sent you your refund. But they won't and, under the law, you can't make them. In fact, you can't even use that "refund" to offset taxes for future years; it's lost forever.
Look out for hidden tax breaksCongress renewed some tax credits and deductions too late to make the IRS' forms. Here's how to find out what you're entitled to.That's the nature of the statute of limitations. It limits the time both you and the IRS have to make changes. The IRS has publicized the fact that it's holding billions of dollars in unclaimed taxes.
If you haven't filed . . . file! There are penalties for not filing, even if you don't owe any money. If you have filed and received a corrected or late 1099, file an amended return. The IRS computers are going to be looking for those corrected numbers.
If you found out that you missed a deduction or a credit two years ago, file an amended return. And make sure they give you the interest owed for holding your money. (Of course, that interest will be taxable.)
Updated April 30, 20if you need help filing an amended return, contact us at www.taxadvocacyllc.com
File Electronically?
from www.moneycentral.msn.com
What are the upsides and downsides of filing taxes electronically?
E-filing is fast - a good thing if you are getting a refund. If you owe money, however, you may not be in such a hurry. In that case, sending a check in an envelope postmarked with the due date is probably fast enough.
Another downside to e-filing is that the IRS seems to be auditing a higher percentage of e-filers, especially those with large refunds. Many people are happy to stay with old-fashioned paper filing rather than risk being exposed to higher scrutiny.
for additional information contact us at www.taxadvocacyllc.com
What are the upsides and downsides of filing taxes electronically?
E-filing is fast - a good thing if you are getting a refund. If you owe money, however, you may not be in such a hurry. In that case, sending a check in an envelope postmarked with the due date is probably fast enough.
Another downside to e-filing is that the IRS seems to be auditing a higher percentage of e-filers, especially those with large refunds. Many people are happy to stay with old-fashioned paper filing rather than risk being exposed to higher scrutiny.
for additional information contact us at www.taxadvocacyllc.com
Sunday, August 12, 2007
Bush Threatens to Veto Democratic Tax Legislation
from www.tax-net.com
Bush Threatens To Veto Democrat Tax Legislation, by Mike Godfrey, Tax-News.com, Washington 10 August 2007
US President George W. Bush has once again warned Congress that he is prepared to veto any fiscal legislation that would increase taxes or spending, and has hinted that he may send to Congress plans to cut the US corporate tax rate, now one of the highest among the major trading nations.
In a press conference following a meeting with his economic advisors earlier this week, Bush said that tax and spending legislation proposed by the Democrats, who control Congress, threatens to undermine US economic growth brought about by the tax cuts for individuals and investors passed during his presidency.
"My administration follows a simple philosophy: Our economy prospers when we trust the American people with their own paychecks. When I came to office in 2001, our nation was headed toward a recession. And so we acted. We acted on the philosophy I just described, and we cut the taxes across-the-board. And the American people have used this money to fuel an economic resurgence," Bush stated.
"Tax cuts let Americans keep their own money. It stimulates entrepreneurship. And we have a debate here in Washington over tax cuts. Democrats in Congress want to increase taxes and turn them into additional government programs, and I strongly oppose that approach."
Bush said that tax revenues are expected to increase by $167 billion this year compared to last year, because tax cuts have helped fuel growth in the US economy. This, he said, would help bring the budget into surplus on schedule in 2012.
According to Bush the Democrats, by contrast, have proposed a tax and spend budget which would add an extra $205 billion in discretionary spending over the next five years. "Somebody is going to have to pay for it," he argued. "If the majority in Congress gets its way, American families, small businesses will face a massive tax hike. It would amount to the largest tax increase in American history."
"I recognize the Democrats control the Congress, and with it, the power of the purse. I also have some power, and it's called the veto. And I have the votes in Congress to sustain vetoes, and therefore, I will use the veto to keep your taxes low and to keep federal spending under control."
With tax reform, particularly in the area of business taxation, having climbed up the Bush administration's policy agenda once again, Bush also hinted that he is preparing new proposals that would allow a cut in the rate of US corporate tax by repealing narrowly targeted tax breaks.
In an interview with a group of journalists after his meeting with economists, Bush stated, according to the Washington Post, that he is "inclined" to send a corporate tax package to Congress, but he conceded that these plans had a slim chance of succeeding.
While the US corporate tax system has gone largely unchanged since the Reagan administration reforms in 1986, corporate tax rates have been falling rapidly around the world, and a recent study by the free market think-tank, the Cato Institute warned last month that the US will soon have "the most unambiguously punitive business tax regime among the advanced economies", unless it begins to close the growing corporate tax gap with its competitors, particularly in Europe.
This study showed that the average corporate tax rate across Europe has dropped by 14% since the mid-1990s, meaning that the European average is now 16% lower than the US corporate tax burden. By contrast, America's average corporate tax rate has remained static at 40% for several years.
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Bush Threatens To Veto Democrat Tax Legislation, by Mike Godfrey, Tax-News.com, Washington 10 August 2007
US President George W. Bush has once again warned Congress that he is prepared to veto any fiscal legislation that would increase taxes or spending, and has hinted that he may send to Congress plans to cut the US corporate tax rate, now one of the highest among the major trading nations.
In a press conference following a meeting with his economic advisors earlier this week, Bush said that tax and spending legislation proposed by the Democrats, who control Congress, threatens to undermine US economic growth brought about by the tax cuts for individuals and investors passed during his presidency.
"My administration follows a simple philosophy: Our economy prospers when we trust the American people with their own paychecks. When I came to office in 2001, our nation was headed toward a recession. And so we acted. We acted on the philosophy I just described, and we cut the taxes across-the-board. And the American people have used this money to fuel an economic resurgence," Bush stated.
"Tax cuts let Americans keep their own money. It stimulates entrepreneurship. And we have a debate here in Washington over tax cuts. Democrats in Congress want to increase taxes and turn them into additional government programs, and I strongly oppose that approach."
Bush said that tax revenues are expected to increase by $167 billion this year compared to last year, because tax cuts have helped fuel growth in the US economy. This, he said, would help bring the budget into surplus on schedule in 2012.
According to Bush the Democrats, by contrast, have proposed a tax and spend budget which would add an extra $205 billion in discretionary spending over the next five years. "Somebody is going to have to pay for it," he argued. "If the majority in Congress gets its way, American families, small businesses will face a massive tax hike. It would amount to the largest tax increase in American history."
"I recognize the Democrats control the Congress, and with it, the power of the purse. I also have some power, and it's called the veto. And I have the votes in Congress to sustain vetoes, and therefore, I will use the veto to keep your taxes low and to keep federal spending under control."
With tax reform, particularly in the area of business taxation, having climbed up the Bush administration's policy agenda once again, Bush also hinted that he is preparing new proposals that would allow a cut in the rate of US corporate tax by repealing narrowly targeted tax breaks.
In an interview with a group of journalists after his meeting with economists, Bush stated, according to the Washington Post, that he is "inclined" to send a corporate tax package to Congress, but he conceded that these plans had a slim chance of succeeding.
While the US corporate tax system has gone largely unchanged since the Reagan administration reforms in 1986, corporate tax rates have been falling rapidly around the world, and a recent study by the free market think-tank, the Cato Institute warned last month that the US will soon have "the most unambiguously punitive business tax regime among the advanced economies", unless it begins to close the growing corporate tax gap with its competitors, particularly in Europe.
This study showed that the average corporate tax rate across Europe has dropped by 14% since the mid-1990s, meaning that the European average is now 16% lower than the US corporate tax burden. By contrast, America's average corporate tax rate has remained static at 40% for several years.
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How much $$ should you withold?
from www.money.cnn.com
Top things to know
In Lesson 181. If you get a big refund each year, you're having too much withheld from your paycheck.
In effect, you're giving the government an interest-free loan.
2. If you have too little withheld, you may be charged an underpayment penalty.
You must pay 90 percent of what you owe for the tax year by the end of that year or an amount equal to 100 percent of your tax liability for the previous tax year, whichever is smaller.
3. Not every dollar of your taxable income is taxed at the same rate.
That's because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.
4. Your combined tax bracket determines how much tax you'll owe on income from investments such as CDs and money market funds.
Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.
5. If you file your return by April 15, but don't pay the tax you owe, you may receive a late payment penalty.
The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.
6. You can reduce your chances of being audited.
One of the best ways is to fill out your return completely, correctly, and on time every year.
7. You should pay estimated taxes if you're self-employed; expect hefty investment income or profits from a property sale; or if you don't have enough taxes withheld to cover the taxes you'll owe on non-wage-related income.
Retirees should also consider paying them if they haven't opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).
8. Your adjusted gross income (AGI) is your total income minus certain "above the line" deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.
Your AGI primarily determines whether or not you're eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.
9. Your taxable income is your AGI minus exemptions and deductions.
The less your taxable income, the less in taxes you'll owe. That's why it's in your best interest to take advantage of tax breaks where you can.
10. A credit is better than a deduction.
A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct.
You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you're in the 25 percent tax bracket, a $100 deduction means you'll pay $25 less in taxes (0.25 times $100).
Top things to know
In Lesson 181. If you get a big refund each year, you're having too much withheld from your paycheck.
In effect, you're giving the government an interest-free loan.
2. If you have too little withheld, you may be charged an underpayment penalty.
You must pay 90 percent of what you owe for the tax year by the end of that year or an amount equal to 100 percent of your tax liability for the previous tax year, whichever is smaller.
3. Not every dollar of your taxable income is taxed at the same rate.
That's because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.
4. Your combined tax bracket determines how much tax you'll owe on income from investments such as CDs and money market funds.
Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.
5. If you file your return by April 15, but don't pay the tax you owe, you may receive a late payment penalty.
The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.
6. You can reduce your chances of being audited.
One of the best ways is to fill out your return completely, correctly, and on time every year.
7. You should pay estimated taxes if you're self-employed; expect hefty investment income or profits from a property sale; or if you don't have enough taxes withheld to cover the taxes you'll owe on non-wage-related income.
Retirees should also consider paying them if they haven't opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).
8. Your adjusted gross income (AGI) is your total income minus certain "above the line" deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.
Your AGI primarily determines whether or not you're eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.
9. Your taxable income is your AGI minus exemptions and deductions.
The less your taxable income, the less in taxes you'll owe. That's why it's in your best interest to take advantage of tax breaks where you can.
10. A credit is better than a deduction.
A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct.
You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you're in the 25 percent tax bracket, a $100 deduction means you'll pay $25 less in taxes (0.25 times $100).
U.S. Government Sues Jackson Hewitt Tax Preparation Franchises in Four States
from www.irs.gov
U.S. Government Sues Jackson Hewitt Tax Preparation Franchises in Four States, Alleging Pervasive Fraud
WASHINGTON — The United States has filed civil injunction suits against five corporations that operate Jackson Hewitt tax preparation franchises, as well as 24 individuals who manage or work at the franchises, the Justice Department and the Internal Revenue Service (IRS) announced today. According to the four lawsuits — filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C. — the corporations operate under franchise agreements with Jackson Hewitt Tax Services Inc. of Parsippany, N.J., the nation’s second largest tax preparation firm.
The suits allege that one of the individual defendants, Farrukh Sohail of Atlanta, Ga., wholly or partly owns each of the five corporations, which prepared and filed over 105,000 federal income tax returns last year. The five corporations allegedly operate more than 125 Jackson Hewitt retail tax preparation stores in the Chicago, Atlanta, Detroit and Raleigh-Durham, N.C. areas.
According to the government complaint, Sohail and other defendants “created and fostered a business environment” at the Jackson Hewitt franchises “in which fraudulent tax return preparation is encouraged and flourishes.” Examples of fraud alleged in the lawsuits include filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses on returns to claim bogus deductions; claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits; and massive fraud related to claiming the federal earned income tax credit.
One complaint cites a Jackson Hewitt franchise customer whose Jackson Hewitt-prepared tax return claimed he was a barber who was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges the customer would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair. Last December, the Justice Department sued a Miami tax preparer alleging similar fraudulent claims of the fuel tax credit. In July 2006, a federal court in Miami enjoined a large Jackson Hewitt franchise from asserting frivolous positions on tax returns.
The suits further allege that some of the Jackson Hewitt franchises’ managers and employees received kickbacks from customers for helping the customers file fraudulent tax returns. The suits further allege more than $70 million in combined losses to the U.S. Treasury, and seek court orders barring the franchises and other defendants from preparing tax returns for others.
"Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law," said Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division. “The Justice Department and Internal Revenue Service are working vigorously to put a stop to these activities.”
“When practitioners prepare a false tax return, it has a corrosive impact on the tax system,” said IRS Commissioner Mark W. Everson. “I am deeply disturbed by the allegation that a major franchisee of the nation’s second-largest tax preparation firm is intentionally preparing improper tax returns with inflated refunds. I’m particularly concerned that many taxpayers of modest means could actually end up owing the government thousands of dollars if they claimed an improper refund.”
The five Jackson Hewitt franchises named in the four suits are:
Chicago: Smart Tax, Inc., d/b/a Jackson Hewitt Tax Service; Ask Tax, Inc., d/b/a Jackson Hewitt Tax Service;
Atlanta: Smart Tax of Georgia, Inc., d/b/a Jackson Hewitt Tax Service;
Detroit: So Far, Inc., d/b/a Jackson Hewitt Tax Service; and
Raleigh: Smart Tax of North Carolina, Inc., d/b/a Jackson Hewitt Tax Service
Questions or information about these suits may be sent to jh.tips@usdoj.gov
Since 2001, the Justice Department’s Tax Division has obtained more than 230 injunctions to stop the promotion of tax fraud schemes and the preparation ww.irs.gov
U.S. Government Sues Jackson Hewitt Tax Preparation Franchises in Four States, Alleging Pervasive Fraud
WASHINGTON — The United States has filed civil injunction suits against five corporations that operate Jackson Hewitt tax preparation franchises, as well as 24 individuals who manage or work at the franchises, the Justice Department and the Internal Revenue Service (IRS) announced today. According to the four lawsuits — filed in federal courts in Chicago, Atlanta, Detroit and Raleigh, N.C. — the corporations operate under franchise agreements with Jackson Hewitt Tax Services Inc. of Parsippany, N.J., the nation’s second largest tax preparation firm.
The suits allege that one of the individual defendants, Farrukh Sohail of Atlanta, Ga., wholly or partly owns each of the five corporations, which prepared and filed over 105,000 federal income tax returns last year. The five corporations allegedly operate more than 125 Jackson Hewitt retail tax preparation stores in the Chicago, Atlanta, Detroit and Raleigh-Durham, N.C. areas.
According to the government complaint, Sohail and other defendants “created and fostered a business environment” at the Jackson Hewitt franchises “in which fraudulent tax return preparation is encouraged and flourishes.” Examples of fraud alleged in the lawsuits include filing false returns claiming refunds based on phony W-2 forms; using fabricated businesses and business expenses on returns to claim bogus deductions; claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits; and massive fraud related to claiming the federal earned income tax credit.
One complaint cites a Jackson Hewitt franchise customer whose Jackson Hewitt-prepared tax return claimed he was a barber who was entitled to a fuel tax credit for buying 25,000 gallons of gasoline for off-highway business use. The complaint alleges the customer would have had to drive 1,370 miles each day, seven days a week, to consume that much fuel in one year, leaving little if any time to cut hair. Last December, the Justice Department sued a Miami tax preparer alleging similar fraudulent claims of the fuel tax credit. In July 2006, a federal court in Miami enjoined a large Jackson Hewitt franchise from asserting frivolous positions on tax returns.
The suits further allege that some of the Jackson Hewitt franchises’ managers and employees received kickbacks from customers for helping the customers file fraudulent tax returns. The suits further allege more than $70 million in combined losses to the U.S. Treasury, and seek court orders barring the franchises and other defendants from preparing tax returns for others.
"Preparing federal income tax returns based on falsehoods and fabrications is a serious violation of the law," said Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division. “The Justice Department and Internal Revenue Service are working vigorously to put a stop to these activities.”
“When practitioners prepare a false tax return, it has a corrosive impact on the tax system,” said IRS Commissioner Mark W. Everson. “I am deeply disturbed by the allegation that a major franchisee of the nation’s second-largest tax preparation firm is intentionally preparing improper tax returns with inflated refunds. I’m particularly concerned that many taxpayers of modest means could actually end up owing the government thousands of dollars if they claimed an improper refund.”
The five Jackson Hewitt franchises named in the four suits are:
Chicago: Smart Tax, Inc., d/b/a Jackson Hewitt Tax Service; Ask Tax, Inc., d/b/a Jackson Hewitt Tax Service;
Atlanta: Smart Tax of Georgia, Inc., d/b/a Jackson Hewitt Tax Service;
Detroit: So Far, Inc., d/b/a Jackson Hewitt Tax Service; and
Raleigh: Smart Tax of North Carolina, Inc., d/b/a Jackson Hewitt Tax Service
Questions or information about these suits may be sent to jh.tips@usdoj.gov
Since 2001, the Justice Department’s Tax Division has obtained more than 230 injunctions to stop the promotion of tax fraud schemes and the preparation ww.irs.gov
Saturday, August 11, 2007
What is Alternative Minimum Tax? IRS
from www.blurtit.com
Most Popular Q&AWhat is MAT (Minimum Alternative Tax)?-->
by mahnaashu in Money
Brief Explanation of Minimum Alternative tax (MAT):Minimum alternative tax is also a federal tax, imposed in United States of America. Two types of MAT’s exist. One for companies and other for individuals. MAT for individuals in illustrated below:This tax has been imposed under 26U.S.C & 55 and do not allow the exemptions and deductions that are allowed while calculating normal tax liability. MAT’s rate starts from 25% to 27%.MAT was introduced by Tax reform Act 1969 and was imposed in 1970.Its aim was to trap 155 wealthy tax class that were given so many exemptions and deductions under normal tax.In recent years AMT has gained much attention because it does not prone to inflation and tax holidays. Most of its taxpayers are moderate income tax payers.The AMT resembles with flat tax of 28% on gross income over $175, 000 add 26% on less than $175, 000 less any exemptions allowed. But the taxpayer has to file separate return for this tax on form 6251.Also its set-off is different from regular tax; and exemptions, deductions; allowances are not defined as so in regular tax.Like all other taxes, MAT is also tried to be avoided. The solution to the problem is to have less & less tax preference deduction from other sources like Real Estate and state income taxes.
I am a 13 year resident of NC. In March of 2007 I sold 16 acres of land deeded to me by my living father for $183, 722. The value of the land when bought several years ago was $6, 000 an acre. 16 acres were sold = $96, 000.$183, 722 - $96, 000 = $87, 722 Long Term Gains to be taxed. For information if helpful:My 2006 AGI = $102, 875; Taxable income=$62, 288 and tax liability = $8, 684 but paid $10, 437 thus $1, 753 refund was due. Received $1, 494 Federal refund too. Filing jointly on fixed incomes again for 2007 our salaries have increased 5%. My purpose for inquiry is wanting to know the amount of State Capital Gain Taxes to expect due in April 2008. Is the following computation correct? I understand from one CPA that there is a 44% exclusion in NC or SC applied to the $87, 722 (Long Term Gain) =$38, 598.$87, 722 - $38, 598 = $49, 124 which would then be the (State LT Capital Gains). $49, 124 x 7% tax rate = $3, 439 in state taxes to be paid in April 2008.Federal Capital Gains Tax at 15% = $13, 158. If we set aside the total $16, 597 for Federal and State Capital Gains Taxes will this be sufficient? Knowing this information will I be subject to any penalties or alternate minimum taxes (?) ? Do I file a SC tax return in addition to my NC return. We just don't want any surprises when we think we are ready to pay our tax obligation in April 2008 for the year 2007 gains f
Most Popular Q&AWhat is MAT (Minimum Alternative Tax)?-->
by mahnaashu in Money
Brief Explanation of Minimum Alternative tax (MAT):Minimum alternative tax is also a federal tax, imposed in United States of America. Two types of MAT’s exist. One for companies and other for individuals. MAT for individuals in illustrated below:This tax has been imposed under 26U.S.C & 55 and do not allow the exemptions and deductions that are allowed while calculating normal tax liability. MAT’s rate starts from 25% to 27%.MAT was introduced by Tax reform Act 1969 and was imposed in 1970.Its aim was to trap 155 wealthy tax class that were given so many exemptions and deductions under normal tax.In recent years AMT has gained much attention because it does not prone to inflation and tax holidays. Most of its taxpayers are moderate income tax payers.The AMT resembles with flat tax of 28% on gross income over $175, 000 add 26% on less than $175, 000 less any exemptions allowed. But the taxpayer has to file separate return for this tax on form 6251.Also its set-off is different from regular tax; and exemptions, deductions; allowances are not defined as so in regular tax.Like all other taxes, MAT is also tried to be avoided. The solution to the problem is to have less & less tax preference deduction from other sources like Real Estate and state income taxes.
I am a 13 year resident of NC. In March of 2007 I sold 16 acres of land deeded to me by my living father for $183, 722. The value of the land when bought several years ago was $6, 000 an acre. 16 acres were sold = $96, 000.$183, 722 - $96, 000 = $87, 722 Long Term Gains to be taxed. For information if helpful:My 2006 AGI = $102, 875; Taxable income=$62, 288 and tax liability = $8, 684 but paid $10, 437 thus $1, 753 refund was due. Received $1, 494 Federal refund too. Filing jointly on fixed incomes again for 2007 our salaries have increased 5%. My purpose for inquiry is wanting to know the amount of State Capital Gain Taxes to expect due in April 2008. Is the following computation correct? I understand from one CPA that there is a 44% exclusion in NC or SC applied to the $87, 722 (Long Term Gain) =$38, 598.$87, 722 - $38, 598 = $49, 124 which would then be the (State LT Capital Gains). $49, 124 x 7% tax rate = $3, 439 in state taxes to be paid in April 2008.Federal Capital Gains Tax at 15% = $13, 158. If we set aside the total $16, 597 for Federal and State Capital Gains Taxes will this be sufficient? Knowing this information will I be subject to any penalties or alternate minimum taxes (?) ? Do I file a SC tax return in addition to my NC return. We just don't want any surprises when we think we are ready to pay our tax obligation in April 2008 for the year 2007 gains f
Innocent Spouse Relief-IRS
from www.cpa2biz.com
Innocent Spouse Relief
An analysis of recent cases reveals that the Service interprets the rules as narrowly as possible. This is especially true of the "equitable" relief cases using Sec. 6015(f).
April 2007from The Tax Adviser
Searching the Internet under “innocent spouse relief” will turn up many organizations, CPAs, attorneys and others offering to assist a taxpayer with an innocent spouse claim. IRS Pub. 971, Innocent Spouse Relief (And Separation of Liability and Equitable Relief), explains the various types of relief, who may qualify and how to apply. Although the current innocent spouse rules under Sec. 6015 have been effective for determining unpaid balances due the IRS as of July 22, 1998 and Federal tax liabilities arising after that date, many cases have recently been decided by the Tax Court and district courts.
In her 2006 annual report, Nina Olson, the National Taxpayer Advocate, included innocent spouse cases as among the most litigated; see National Taxpayer Advocate’s 2006 Annual Report to Congress.
An analysis of recent cases reveals that the Service interprets the rules as narrowly as possible. This is especially true of the “equitable” relief cases using Sec. 6015(f), which Congress intended for cases that do not fit the other two forms of innocent spouse protection: innocent spouse relief and relief by separation of liability.
Taxpayer LossesThe Tax Court has supported the IRS’s rulings against taxpayers in many equitable relief cases, including Madden, TC Memo 2006-4, Motsko, TC Memo 2006-17 and Lopez, TC Memo 2005-36. The Tax Court denied relief even though the taxpayers in the cases might suffer economic hardship.
The Tax Relief and Health Care Act of 2006 (TRAHCA ’06) amended Sec. 6015 specifically to give the Tax Court jurisdiction to review innocent spouse cases claiming equitable relief and to suspend the statute of limitations while such claims are pending. This provision may change the dynamic in some of these cases.
Until the TRAHCA ’06 was passed, Sec. 6015(e) gave taxpayers the option to petition the Tax Court to review denials of innocent spouse relief and relief by separation-of-liability cases, but not equitable relief cases. However, in Capehart, 11/7/06, the Ninth Circuit ruled that the Tax Court properly determined the taxpayer was not eligible for Sec. 6015(b) relief from joint liabilities arising from tax shelter investments, because she played a substantial role in managing the investments in question.
Taxpayer Victories
Partial: Sometimes the taxpayer prevails in part. In Levy, TC Memo 2005-92, the court held that the IRS abused its discretion in denying the taxpayer Sec. 6015(f) equitable relief from joint liabilities for five years of understatements attributable solely to her ex-husband. The court found that although the taxpayer significantly benefited from unpaid liabilities and failed to show that she would suffer economic hardship if not granted relief, she had no knowledge or reason to know, at the time she signed the returns, that her ex-husband would not pay those tax liabilities.
Complete: Sometimes the taxpayer wins outright. In Campbell, TC Memo 2006-24, the court ruled that a nurse/homemaker was entitled to Sec. 6015(b) relief from over $2.8 million of liabilities attributable to her husband’s sham commodities-trading transaction. It was deemed highly inequitable to hold her liable, given her lack of knowledge, lowered standard of living, age and relatively modest assets. The court rejected the Service’s argument that the taxpayer misled by not fully disclosing account ownership.
In DeFore, TC Summ. Op. 2004-162, a husband qualified for innocent spouse relief under Sec. 6015(c), despite having reason to know that his wife had understated her income. Proportionate relief was appropriate, as he was no longer married and did not have actual knowledge when signing the return of any of the items giving rise to the deficiency. Because the tax understatement was attributable entirely to the wife’s omitted income, the entire deficiency was allocated to her.
In Cook, TC Memo 2005-22, the taxpayer qualified for innocent spouse relief under Sec. 6015(c), even though she prepared invoices for the omitted income. She had been subjected to physical and emotional abuse throughout her marriage. The court concluded that she lacked actual knowledge of the unreported income and qualified for relief from joint liability.
Similarly, in Neal, TC Memo 2005-201, the taxpayer was held entitled to Sec. 6015(f) relief from joint liabilities. In McClelland, TC Memo 2005-121, the taxpayer was entitled to Sec. 6015(b) relief from liability for a deficiency arising from her and her husband’s false interest deduction. The court felt it would be inequitable under Sec. 6015(b)(1)(D) to hold her liable, because her husband had caused the false deduction and concealed it from her.
Overwhelming: Sometimes the taxpayer really wins. In Owen, TC Memo 2005-115, and Bulger, TC Memo 2005-147, the Tax Court held that a widowed taxpayer was entitled to reasonable administrative and litigation costs resulting from pursuit of a Sec. 6015(c) allocation claim for partial innocent spouse relief from joint partnership/tax-shelter-related liabilities. The IRS’s position, that the taxpayer did not qualify for allocation because of her alleged knowledge about items giving rise to deficiencies, was not substantially justified. The court held that the Service failed to apply a proper standard for evaluating actual knowledge, and did not investigate or account for the taxpayer’s detailed response indicating her lack of knowledge (which was bolstered by clear evidence that the partnership promoter had deceived all of the investors).
Conclusion
Claims for innocent spouse relief need to be very carefully and fully prepared before being sent to the IRS. The questions in Form 12507, Innocent Spouse Statement, should be used as a guide to determine whether a case has a reasonable chance of success. The answers should be prepared before Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), is submitted. Form 12507 should not be submitted until the Service requests it.
for additional information go to www.taxadvocacyllc.com
Innocent Spouse Relief
An analysis of recent cases reveals that the Service interprets the rules as narrowly as possible. This is especially true of the "equitable" relief cases using Sec. 6015(f).
April 2007from The Tax Adviser
Searching the Internet under “innocent spouse relief” will turn up many organizations, CPAs, attorneys and others offering to assist a taxpayer with an innocent spouse claim. IRS Pub. 971, Innocent Spouse Relief (And Separation of Liability and Equitable Relief), explains the various types of relief, who may qualify and how to apply. Although the current innocent spouse rules under Sec. 6015 have been effective for determining unpaid balances due the IRS as of July 22, 1998 and Federal tax liabilities arising after that date, many cases have recently been decided by the Tax Court and district courts.
In her 2006 annual report, Nina Olson, the National Taxpayer Advocate, included innocent spouse cases as among the most litigated; see National Taxpayer Advocate’s 2006 Annual Report to Congress.
An analysis of recent cases reveals that the Service interprets the rules as narrowly as possible. This is especially true of the “equitable” relief cases using Sec. 6015(f), which Congress intended for cases that do not fit the other two forms of innocent spouse protection: innocent spouse relief and relief by separation of liability.
Taxpayer LossesThe Tax Court has supported the IRS’s rulings against taxpayers in many equitable relief cases, including Madden, TC Memo 2006-4, Motsko, TC Memo 2006-17 and Lopez, TC Memo 2005-36. The Tax Court denied relief even though the taxpayers in the cases might suffer economic hardship.
The Tax Relief and Health Care Act of 2006 (TRAHCA ’06) amended Sec. 6015 specifically to give the Tax Court jurisdiction to review innocent spouse cases claiming equitable relief and to suspend the statute of limitations while such claims are pending. This provision may change the dynamic in some of these cases.
Until the TRAHCA ’06 was passed, Sec. 6015(e) gave taxpayers the option to petition the Tax Court to review denials of innocent spouse relief and relief by separation-of-liability cases, but not equitable relief cases. However, in Capehart, 11/7/06, the Ninth Circuit ruled that the Tax Court properly determined the taxpayer was not eligible for Sec. 6015(b) relief from joint liabilities arising from tax shelter investments, because she played a substantial role in managing the investments in question.
Taxpayer Victories
Partial: Sometimes the taxpayer prevails in part. In Levy, TC Memo 2005-92, the court held that the IRS abused its discretion in denying the taxpayer Sec. 6015(f) equitable relief from joint liabilities for five years of understatements attributable solely to her ex-husband. The court found that although the taxpayer significantly benefited from unpaid liabilities and failed to show that she would suffer economic hardship if not granted relief, she had no knowledge or reason to know, at the time she signed the returns, that her ex-husband would not pay those tax liabilities.
Complete: Sometimes the taxpayer wins outright. In Campbell, TC Memo 2006-24, the court ruled that a nurse/homemaker was entitled to Sec. 6015(b) relief from over $2.8 million of liabilities attributable to her husband’s sham commodities-trading transaction. It was deemed highly inequitable to hold her liable, given her lack of knowledge, lowered standard of living, age and relatively modest assets. The court rejected the Service’s argument that the taxpayer misled by not fully disclosing account ownership.
In DeFore, TC Summ. Op. 2004-162, a husband qualified for innocent spouse relief under Sec. 6015(c), despite having reason to know that his wife had understated her income. Proportionate relief was appropriate, as he was no longer married and did not have actual knowledge when signing the return of any of the items giving rise to the deficiency. Because the tax understatement was attributable entirely to the wife’s omitted income, the entire deficiency was allocated to her.
In Cook, TC Memo 2005-22, the taxpayer qualified for innocent spouse relief under Sec. 6015(c), even though she prepared invoices for the omitted income. She had been subjected to physical and emotional abuse throughout her marriage. The court concluded that she lacked actual knowledge of the unreported income and qualified for relief from joint liability.
Similarly, in Neal, TC Memo 2005-201, the taxpayer was held entitled to Sec. 6015(f) relief from joint liabilities. In McClelland, TC Memo 2005-121, the taxpayer was entitled to Sec. 6015(b) relief from liability for a deficiency arising from her and her husband’s false interest deduction. The court felt it would be inequitable under Sec. 6015(b)(1)(D) to hold her liable, because her husband had caused the false deduction and concealed it from her.
Overwhelming: Sometimes the taxpayer really wins. In Owen, TC Memo 2005-115, and Bulger, TC Memo 2005-147, the Tax Court held that a widowed taxpayer was entitled to reasonable administrative and litigation costs resulting from pursuit of a Sec. 6015(c) allocation claim for partial innocent spouse relief from joint partnership/tax-shelter-related liabilities. The IRS’s position, that the taxpayer did not qualify for allocation because of her alleged knowledge about items giving rise to deficiencies, was not substantially justified. The court held that the Service failed to apply a proper standard for evaluating actual knowledge, and did not investigate or account for the taxpayer’s detailed response indicating her lack of knowledge (which was bolstered by clear evidence that the partnership promoter had deceived all of the investors).
Conclusion
Claims for innocent spouse relief need to be very carefully and fully prepared before being sent to the IRS. The questions in Form 12507, Innocent Spouse Statement, should be used as a guide to determine whether a case has a reasonable chance of success. The answers should be prepared before Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), is submitted. Form 12507 should not be submitted until the Service requests it.
for additional information go to www.taxadvocacyllc.com
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