Deductible Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? The IRS says you can if you file Form 1040 and itemize deductions on Schedule A. Deductions decrease the amount of income subject to taxation. There are four types of deductible non-business taxes:

1. State and local income and sales taxes;
2. Real estate taxes;
3. Personal property taxes; and
4. Foreign income taxes.

This year, people will have a chance of claiming a state and local tax deduction for either income or sales taxes on their returns.

You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid to the general sales tax rate.

Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax.

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information. Call us or contact us today to find out how we can save you money!

Selling your Home

If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. You also must not have excluded gain on another home sold during the two years before the current sale.

If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.

If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home. Send us a message for more!

Charitable Contributions

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations can add up to a nice tax deduction for your corporation or your personal taxes if you are a member of a flow-through business entity and itemize deductions on IRS Form 1040, Schedule A.

Here are a few tips to help make sure your contributions pay off on your tax return:

You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance.

To be deductible, contributions must be made to qualified organizations.

Organizations can tell you if they are qualified and if donations to them are deductible. IRS.gov has an exempt organization search feature to help you see if an organization is qualified. IRS Publication 78, Cumulative List of Organizations, lists all charitable organizations except those most recently granted tax exempt status. Pub. 78 is available online and in many public libraries. Alternatively, contact us for more!

Amended Returns

Oops! You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return.

The IRS usually corrects math errors or requests missing forms (such as W-2s) or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly:

• Your filing status
• Your total income
• Your deductions or credits

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed paper or electronically-filed Form 1040, 1040A, or 1040EZ return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X for each year and mail each in a separate envelope to the IRS processing center for your state. The 1040X instructions list the addresses for the centers.

Form 1040X has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. You should explain the items you are changing and the reason for each change on the back of the form.

If the changes involve another schedule or form, attach it to the 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Tax Credit, you must complete and attach a Schedule EIC to the amended return.

If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you owe additional tax for the prior year, Form 1040X must be filed and the tax paid by April 15 of this year, to avoid any penalty and interest.

You generally must file Form 1040X to claim a refund within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later. Please contact us for more!

Haiti Donations Deadline Approaches

From Webcpa Daily

The Internal Revenue Service reminded taxpayers that the Feb. 28 deadline is fast approaching for Haiti earthquake relief donations that can be deducted this tax season.
Individuals and corporations have until midnight on Sunday, Feb. 28, to make cash contributions to charities providing earthquake relief in Haiti. These contributions can be claimed on either a 2009 or 2010 return, but not both. Contributions made after that date but before the end of the year can only be claimed on a 2010 return.
Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before the end of February count for 2009. This is true even if the credit card bill isn’t paid until after Feb. 28. Also, checks count for 2009 as long as they are mailed by the end of this month and clear your financial institution shortly thereafter.

Taxpayers can benefit from their donations most quickly by filing their 2009 returns early, filing electronically and choosing direct deposit. Refunds take as few as ten days and can be directly deposited into a savings, checking or brokerage account, or used to purchase Series I U.S. savings bonds.
The special provision on Haiti relief donations, enacted Jan. 22, does not apply to contributions of property. Eligible contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti. Gifts made directly to individual victims are not deductible. Notice 1396, a one-page notice describing this provision, is available on IRS.gov and is printed in English, Spanish, French and Haitian Creole.
To get a tax benefit, individuals must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible. Taxpayers should be sure their contributions go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov. Donors can find out more about organizations helping Haitian earthquake victims from agencies such as USAID.
The IRS noted that donors that contributions to foreign organizations generally are not deductible. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.
Federal law requires that taxpayers keep a record of any deductible donations they make. For donations by text message, a telephone bill will meet the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. In addition, for text message donations of $250 or more, taxpayers must obtain a written acknowledgement from the charity.
For cash contributions made by other means, taxpayers should be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution. Publication 526 has further details on the recordkeeping rules for cash contributions.

Making Work Pay Credit

from www.irs.gov

Most eligible taxpayers qualify for the maximum making work pay credit of $800 for a married couple filing a joint return or $400 for other taxpayers. The credit equals 6.2 percent of earned income up to the maximum amount. Thus, any eligible couple whose earned income is $12,903 or more qualifies for the $800 maximum credit. Other taxpayers qualify for the $400 maximum if their earned income is $6,451 or more.

For most workers, the credit is based on the taxable wages reported to them on Forms W-2. Self-employed individuals figure the credit using the net profit or loss they receive from a business or farm. Additional calculations are necessary for some taxpayers, including those who have net business losses, wages from work performed while a prison inmate or foreign earned income. More information, including a worksheet, can be found in the instructions for Schedule M.

Some taxpayers are not eligible for the making work pay credit, including:

• Joint filers whose modified adjusted gross income (MAGI) is $190,000 or more.
• Other taxpayers whose MAGI is $95,000 or more.
• Anyone who can be claimed as a dependent on someone else’s return.
• A taxpayer who doesn’t have a valid social security number.
• Joint filers, if neither spouse has a valid Social Security number.
• Nonresident aliens.

Other taxpayers qualify for the credit but must reduce the amount of the credit they claim, including:

• Joint filers whose MAGI is more than $150,000 but less than $190,000.
• Other taxpayers whose MAGI is more than $75,000 but less than $95,000.
• Taxpayers who received an economic recovery payment. This special $250 payment was made during 2009 to recipients of Social Security benefits, supplemental security income (SSI), railroad retirement benefits or veterans disability compensation or pension benefits.
• Taxpayers who claim the government retiree credit.

See Schedule M and its instructions for details.

Though all eligible taxpayers must file Schedule M to claim the making work pay credit, most workers got the benefit of this credit through larger paychecks, reflecting reduced federal income tax withholding during 2009.

8 Facts about the New Vehicle Sales and Excise Tax Deduction

Eight Facts about the New Vehicle Sales and Excise Tax Deduction

Taxpayers that purchased a new vehicle in 2009 may be entitled to a special tax deduction for the sales and excise taxes on the purchase regardless of whether the taxpayer takes the itemized or standard deduction on Form 1040.

Here are eight important facts the Internal Revenue Service wants you to know about this deduction.

1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8500 pounds or less. New motor homes are not subject to the weight limit.
4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
5. Purchases made in states without a sales tax – such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon – may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.
6. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
7. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
8. Taxpayers who do not itemize on Schedule A must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.

Choosing an Accountant for your Small Business

From Openforum.com

Small business owners often overlook the importance of having a good accountant on their side. The role of the accountant doesn't have to be limited to tax preparation. He can be a valuable adviser for your business year round. Here are some things your accoutant should be involved in for your small business.
Taxes
This is the area of expertise your accoutant should know backwards and forwards. Get an accountant who has a lot of small business clients -- even better, a lot of small business clients in your industry. There are a ton of tax laws and codes, and the more experience your accountant has in your particular industry, the better he can help you optimize your tax planning. He can advise you on common practices and keep you up to date on recent developments. He should also be monitoring your business growth, and be able to advise you on options as you grow. For example, he may recommend that you change your business structure (from LLC to C-Corp) if it looks like you can see significant tax savings based on your earnings. You should also be calling your accountant before you make large purchases or enter into lease agreements to see what options are most beneficial to you from a tax standpoint.
Money Management
Beyond tax considerations, your accountant should be able to advise you on all aspects of your financial planning and management. He can be a sounding board when you are considering an investment for your business. He can guide you through financial hurdles. Whether you have a problem with cash flow, credit, or collecting money due, your accountant should be the first person you call before taking any action. In addition to your business finances, you can go to your accountant for personal finance advice. Because he knows your business so well, he can make good recommendations on how you should save or invest your own money.
Employment Laws
From labor laws to benefits, your accountant can help you navigate through all the rules and regulations required of employers. Once you have employees, you'll need to find out about workers comp insurance, health and retirement benefits, and payroll taxes. If you're not ready to have a full fledged Human Resources department, your accountant can fill in. It can get complicated, and it'll be wise to have an accountant ready to guide you, especially as your business grows. For example, some employment laws only apply after you have a certain number of employees. It's important that someone is on top of the various phases of your business, and sometimes it's just nice if it doesn't have to be you.
Numbers Analysis
Numbers are a second language to accountants. You don't have to be good with numbers if you have an accountant. He can look at your sales figures and determine profitability. He can verify that your debt vs. equity ratio is appropriate. He can be a resource to help you compare your benchmarks within the industry. He can provide profit forecasts, cash flow projections, perform annual audits. These reports can help you greatly in monitoring and optimizing business performance and growth.
Business Financing
A good accountant is invaluable if you are seeking capital. He can help you evaluate various options available for business financing. He can read your financial statements and tell you exactly what your lenders are looking for. He can prepare you for the questions you'll need to answer and the documents you'll need to prepare. Additionally, it's likely that he'll have access to resources and contacts that will give you an edge for obtaining the best financing.
As tax season rolls around, you may want to give more thought to building a relationship with your accountant, or shop around for one who can provide expert advise for your small business.

IRS Issues Statement - Return Processing Not Affected

In light of the recent Austin tragedy, the IRS wants to reassure Americans that this incident will not affect filing season activities, including tax return processing.
The IRS does not process tax returns or issue refunds at the Echelon 1 Building at 9430 Research Blvd.in Austin, Texas.
During this time, our dedicated workforce continues the work of the IRS, which includes helping taxpayers, processing tax returns and issuing refunds as quickly as possible.

Timely Action on IRA's and Retirement Plan Contributions can cut an individual's 2009 tax bill

From Thomsonreuters.com

Many individuals think that the time to plan for the 2009 tax year has come and gone, and most of them are right—the door to almost all tax-saving moves for 2009 closed on Dec. 31, 2009. However, as this Practice Alert explains, there are some noteworthy exceptions involving IRA and retirement plan contributions.
Here are some moves clients can take right now to reduce their 2009 adjusted gross income:
Make regular IRA contributions. Contributions to traditional IRAs for tax year 2009 including deductible contributions by those eligible to make them, can be made as late as Apr. 15, 2010. A married client also should be reminded that he or she won't be treated as an active participant in an employer-sponsored retirement plan subject to the usual joint filer's IRA deduction phaseout (for 2009, between $89,000 and $109,000 of modified adjusted gross income (AGI)) merely because his or her spouse is a participant. Instead, the non-active-participant-spouse's IRA deduction phases out over $166,000 to $176,000 of modified AGI.
RIA illustration: For 2009, one spouse has $140,000 of salary income and is covered by a retirement plan, but the other is a home-maker with no earned income. Their combined modified AGI is $160,000. The home-maker can contribute $5,000 to a traditional IRA ($6,000 if age 50 or older) as late as Apr. 15, 2010, and the couple can deduct the full amount on their 2009 return.
Salvage a late-2009 IRA or qualified plan payout. A taxpayer who was financially compelled to take a distribution from a traditional IRA or an individual account in a qualified retirement plan late in 2009, but now has the money to replenish the retirement savings, can avoid taxes on the withdrawal by making a rollover to a traditional IRA generally no later than the 60th day after the day he received the distribution. Thus, for example, a taxpayer who had to withdraw $10,000 from a traditional IRA on Dec. 28, 2009, but now is able to replenish those funds, can avoid paying a tax on the withdrawal by recontributing $10,000 to a traditional IRA no later than Feb. 26, 2010. Even if he doesn't have the full $10,000, he can reduce his tax by rolling over a lesser amount, say $5,000. The 60-day requirement may be waived under some circumstances (see Federal Tax Coordinator ¶H-11472 which discusses the hardship exemptions to the 60-day rule).
Back out of a traditional-IRA-to-Roth-IRA conversion. A taxpayer who converted a traditional IRA to a Roth IRA during 2009 may decide that this wasn't a good tax move after all. For example, the taxpayer may realize that 2010 would be a better time to make the conversion because his tax bracket will be much lower this year than it was last year. Or the taxpayer may have made the conversion when the value of the assets held in the traditional IRA were much higher than they are now. The taxpayer can back out of the conversion by recharacterizing the Roth IRA as a traditional IRA. This involves transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a direct (trustee-to-trustee) transfer.
RIA illustration: In 2009, Jim converted a traditional IRA invested in a stock fund to a Roth IRA invested in the same stock fund. At that time, the regular IRA had a $50,000 balance, all of it attributable to deductible contributions and their earnings. Jim's Roth IRA currently is worth only $40,000. To avoid paying tax on $10,000 of evaporated income, Jim can recharacterize the Roth IRA as a traditional IRA.
The easiest way to make a recharacterization is to do so by the due date (plus extensions) of the taxpayer's return for the affected year, and reflect it on that year's return. Thus, a taxpayer who made a 2009 conversion may recharacterize it on the return he files on or before Apr. 15, 2010 (he has until Oct. 15, 2010, if he gets an automatic extension of six months to file his 2009 return). However, a taxpayer who timely files his 2009 return without having recharacterized a 2009 conversion may do so as late as six months after the original due date for filing the 2008 return, i.e., by Oct. 15, 2010. If a 2009 conversion is recharacterized after the taxpayer timely files his 2009 return, he should file an amended return for 2009 reflecting the recharacterization.
RIA observation: A person who converted an amount from a traditional IRA to a Roth IRA may not only transfer the amount back to a traditional IRA in a recharacterization, but may later reconvert that amount from the traditional IRA to a Roth IRA. The reconversion cannot be made before the later of: (a) the beginning of the tax year following the tax year in which the amount was converted to a Roth IRA; or (b) the end of the 30-day period beginning on the day on which the IRA owner transfers the amount from the Roth IRA back to a traditional IRA by way of a recharacterization.
Turn a Roth IRA contribution into a traditional IRA contribution. A taxpayer in the process of getting together his documents for return preparation may now realize that a deductible contribution to a traditional IRA for 2009 would be preferable to the nondeductible Roth IRA contribution he actually made in 2009. The recharacterization strategy (if implemented by deadlines shown above for traditional-IRA-to-Roth IRA conversions) allows him to change his mind and get a 2009 deduction.
Shelter self-employment income. A taxpayer who earned self-employment income during 2009 can shelter part of it by making a deductible retirement plan contribution even if he didn't set up a retirement plan before the end of last year. He can both set up and contribute to a SEP (simplified employee pension) as late as his return due date (plus extensions). For 2009, the maximum deductible contribution generally is 20% of net earnings from self-employment income, or $49,000, whichever is less.
Source: Federal Tax Updates on Checkpoint Newsstand tab 2/19/2010

Beware of Suspicious E-Mails

Beware of Suspicious E-Mails
Be aware of e-mail scams that fraudulently use the IRS name or Logo as a lure. The goal of the scam is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft
and steal your money.
The IRS does not send unsolicited e-mails about a person's tax account 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.
If you receive an e-mail from someone claiming to be the IRS,
. Do not reply.
. Do not open any attachments. Attachments may contain malicious code that will infect your computer.
. Do not click on any links. If you clicked on links in a suspicious e-mail or phishing Web site and entered confidential information, visit the Identify Theft page on IRS.gov.

You can help shut down these schemes and prevent others from being victimized. Warn your friends and families about these suspicious emails.
If you receive a suspicious email claiming to be from the IRS, please forward the suspicious e-mail to phishing@irs.gov. Materials forwarded to this mailbox will be examined and acted on by their
information security staff.

Avoid an Audit: 6 "Red Flags" You Should Know

by Glen Curtis, provided by Investopedia

If history is any indicator, less than 1% of Americans will be audited by the Internal Revenue Service in the coming year. And while some of these audits are totally random, and there's nothing that the individual taxpayer can do about them, many audits are actually instigated by the taxpayers themselves.
To that end, below is a list of "red flags" that can cause your return to be cherry picked by the IRS for review. Pay particular attention, as knowing what the flags are can keep you out of trouble.
1. Overestimating Donated Amounts
The IRS encourages individuals to donate things like clothes, food and even old automobiles to charities. It does this by offering a deduction in return for a donation. However, the problem with this system is that it is up to the taxpayer to determine the value of goods that are donated.
As a general rule, the IRS likes to see individuals value the items they donate at anywhere between 1% and 30% of the original purchase price (unless special circumstances exist). Unfortunately many, if not most, taxpayers either aren't aware of this, or simply choose to ignore this fact.
There are several other tips that the taxpayer can use to ensure that he or she is valuing donated goods at a "fair" price. Aside from the 30% and under rule mentioned above, consider having an appraiser write a letter. (In fact, for individual items valued at $5,000 or more, an appraisal is required.). Another benchmark the IRS uses that could come in handy is the willing-buyer-willing-seller test.
This means that taxpayers should value their goods at a point or price where a willing seller (who is under no duress) would be able to sell his property to a willing buyer (who also is under no duress to purchase the item). Using such a benchmark will keep you out of trouble and prevent you from placing an excessive value on your dad's old Frank Sinatra albums.
2. Math Errors
While this may sound simple, many returns are selected for audit due to basic math errors. So when filling out your tax return (or checking it after your accountant has completed the form) make sure that the columns add up. Also make sure that the total dollar value of capital gains and/or losses are properly calculated. Even a small error can raise eyebrows.
3. Failure to Sign the Return
A large percentage of folks simply forget to sign their tax returns. Don't be a part of that number! Failure to sign the return will almost guarantee that it will receive additional scrutiny. The IRS will wonder what else you might have forgotten to include in the return.
4. Under-Reporting Income
Tempting as it might be to exclude income from your tax return, it is vital that you report all money that you received throughout the year from work and/or from the sale of an asset (such as a home) to the IRS. If you fail to report income and you are caught, you will be forced to pay back-taxes plus penalties and interest.
How can the IRS tell if you've reported everything? In some situations it can't. After all, the system isn't perfect. However, a common way some individuals get caught is that they accept cash for a service they've performed. If the customer or individual who paid that individual the cash gets audited, the IRS will see a large cash disbursement from his or her bank account. The IRS agent will then follow that lead and ask the individual what that cash layout was for. Inevitably, the trail leads right back to the individual who failed to report that money as income.
In short, it's better to be safe than sorry. Make sure you report all of your income.
5. Home Office Deductions
Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well.
For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.
Deduct only items that were used in the course of your business.
6. Income Thresholds
There is nothing the individual taxpayer can do about this one, but if you earn more than $100,000 each year, your odds of being audited increase exponentially. In fact, some accountants put the odds of being audited at one in 72, compared to the one in 154 odds for people with lower incomes.
Other Sensitive Tax Areas
Partnership/Trust/Tax Shelter Risk
If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.Small Business Ownership
Small business owners are an easy target - particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.
Incidentally, other actions that go part and parcel with business ownership may draw unwanted IRS interest too, including putting family members on the payroll and over-estimating expenses.
In short, business owners must know that they can't "push the envelope". If they want to stay in business and avoid the scrutiny of an audit, it's best to remain on the straight and narrow.
So why does the IRS seem to be cracking down more and more on individuals and small business owners these days? It's simple. According to the IRS there is roughly an annual $300 billion gap between what Americans pay in taxes versus what they owe. That equates to about $2,680 per household. The Congress knows this too, and given the deficits the United States government has run up over the past 20 years, there is enormous pressure on legislators and the IRS to collect all tax funds.
Being Audited
What should you do if you are audited? Be honest with the auditor and respond to all inquiries as quickly as possible. Don't be afraid to show all of your documentation. If possible, have a qualified accountant and/or tax attorney represent you.
Bottom Line
Audits have and will remain a part of the tax collection process for a long time to come, but that doesn't mean that you have to be among the "lucky" few to be chosen. The key to avoiding an audit is to be honest, document your deductions, donations and income.

IRS Debunks Frivolous Tax Arguments

From IRS.gov

IR 2010-18; “The Truth About Frivolous Tax Arguments” (http://www.irs.gov/newsroom/article/0,,id=219104,00.html)
IRS has issued a detailed, 80-page document discussing and rebutting many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. An accompanying news release reminds taxpayers that under Code Sec. 6702, the penalty for frivolous tax returns is $5,000, and applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position that IRS identifies as frivolous.
Detailed rebuttals. IRS's “The Truth About Frivolous Tax Arguments” responds to some of the more common frivolous “legal” arguments about the federal tax system. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention.
The document covers these broad categories of frivolous arguments:
· Various contentions that: the federal income tax system is voluntary; terms in the Code such as taxable income, gross income and “the taxpayer” are improperly defined; and payment of taxes is unconstitutional. Other arguments in the category have fictional legal bases, for example, that IRS isn't an agency of the U.S., or that taxpayers are entitled to the refund of social security taxes paid over their lifetime.
· Frivolous arguments in collection due process cases brought under Code Sec. 6320 or Code Sec. 6330 , including various contentions that assessments are invalid, or that the statutory notice of deficiency, notice of federal tax lien or statutory notice and demand is invalid.
· Contentions that the Tax Court isn't authorized to decide legal issues, or that IRS personnel don't have the authority to seize property in satisfaction of unpaid taxes, or that IRS employees lack credentials.
A final section of IRS's frivolous tax arguments document explains in detail the penalties that courts may impose on those who pursue tax cases on frivolous grounds, and cites scores of cases rejecting various frivolous arguments and imposing penalties.
RIA Research References: For penalties for frivolous income tax returns and specified frivolous submissions, see FTC 2d/FIN ¶ V-2551; United States Tax Reporter ¶ 67,024; TaxDesk ¶ 866,001.
Source: Federal Tax Updates on Checkpoint Newsstand tab 2/8/2010

How Do I Adjust My Tax Withholding

from thomsonreuters.com

The 2010 version of Publication 919, How Do I Adjust My Tax Withholding, is now on the IRS website at http://www.irs.gov/pub/irs-pdf/p919.pdf. Employees use this publication to help them determine if their federal income tax withholding is sufficient, and, if necessary, to prepare a new Form W-4 to adjust their withholding. The publication includes worksheets to help employees estimate their 2010 tax liability (Worksheets 1 and 2), compute withholding (Worksheet 7), and determine the amount of the “Making Work Pay” credit that they will receive (Worksheet 9). The IRS advises employees to check their withholding if they had a lifestyle change (such as a marriage, divorce, birth or adoption of a child, purchase of a new home, or retirement) or significant changes in their income or itemized deductions. There is a good chance that employees are not having enough tax withheld if: (1) they have more than one job at a time; (2) their spouse also works; (3) they have income not subject to withholding, such as capital gains, rental income, interest, and dividends; or (4) they owe other taxes, such as self-employment tax or household employment taxes. Form W-4, line 6, is used to request additional withholding. Adjustments to withholding allowances are made on Form W-4, line 5. Employees must complete a new Form W-4 to adjust their withholding. It is helpful for employers to keep a few copies of IRS Publication 919 in the office, because some employees may soon discover after they file their 2009 personal income tax returns that they didn't have enough money withheld from their paychecks.

IRS helps with Free Tax Preparation Services

Some 12,000 free tax preparation sites will be open this year as a result of expanded cooperation agreements between IRS and nonprofit and community organizations performing tax services for low-income and elderly taxpayers.

The IRS Volunteer Income Tax Assistance (VITA) Program provides help to individuals who earn less than $49,000. The Tax Counseling for the Elderly (TCE) Program offers assistance to taxpayers age 60 and above. Most of the sites use free electronic filing. To e-file a “Married Filing Jointly” tax return, both spouses must be present to sign the required forms.

Taxpayers must bring the following items when they visit a VITA or TCE site: photo identification; valid Social Security cards for the taxpayer, spouse, and dependents; birthdates for all those listed on the tax return; the current year's tax package, if received; wage and earnings statements from all employers; interest and dividend statements from banks; a copy of last year's federal and state returns, if available; bank routing numbers and account numbers for direct deposit; other relevant information about income and expenses; the total amount paid for daycare; and the day care provider's identifying number.

CPA firm produces donation-tracking iPhone App

From Accountingweb.com

CPA firm produces donation-tracking iPhone AppThe Lincoln, NE-based firm BMG Certified Public Accountants, LLP has released a $2.99 donation-tracking application for iPhone, iPod Touch, and iPad users. Written by a team of CPAs, iDonatedIt allows taxpayers to track non-cash donations, which typically include clothes or household goods that are to be donated to organizations like The Salvation Army or Goodwill. According to the BMG Web site, iDonatedIt is the first app to track and value your non-cash charitable donations.
Users first indicate the name and address of the organization and the date of the donation, then add entries for the individual items. The application suggests market values for donated goods based on the users' description of the condition of the item. Values differ based on rankings of good, better or best. Users can attach pictures of the donated items to the donation record, and then e-mail a report of their donations to themselves or their tax preparer. BMG has created a three-minute YouTube video demonstrating the use of iDonatedIt, as well as a step-by-step guide. iDonatedIt can be purchased at the iTunes App Store.

With this release, BMG joins the ranks of 30,000 iPhone app developers, who have collectively created approximately 150,000 apps. Potential iPhone application developers can view the Developing Apps for iPhone video on the Apple Web site for tips on getting started.

Introduced Legislation: "Hire Now Tax Cut Act of 2010"

On February 3, Senator Chuck Schumer (D-NY) and Orrin Hatch (R-UT) introduced the “Hire Now Tax Cut Act of 2010” to help stimulate the hiring of workers by the private sector. It would exempt employers that hire a worker who has been unemployed for at least 60 days from having to pay the employer's 6.2% of the Social Security payroll tax on that employee for the remainder of 2010. What's more, if the new hire is on payroll continuously for at least 52 weeks, and his pay for the second 26-week period is at least 80% of what it was in the first 26-week period, then the employer could claim a $1,000 credit for hiring the employee. Workers hired after the date of introduction would be eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the enactment date would receive the exemption from payroll taxes.
A press release issued by Schumer and Hatch stressed that their measure would be simple to explain and administer, and give businesses an immediate incentive for hiring workers right away.
An employer couldn't claim the new tax breaks for hiring family members, or for replacing another worker who performed the same job for the employer (unless the prior employee left voluntarily or for cause). The bill would bar employers from claiming the new tax breaks as well as the Work Opportunity Tax Credit for the same new hire.

A Different Perspective on the Registration of Tax Preparers

As has been in the news of late, the IRS is working toward a program so that all tax preparers are licensed and tested. This has been a hotly-debated issue, and from reading below, the issue is far from resolved.

Although most observers are on board with the new proposals to register, test and license tax return preparers, some questions about the goals and the process remain.

“This is being done in large part because of the tax gap,” said Marty Davidoff, CPA, Esq., of Dayton, N.J.-based E. Martin Davidoff & Associates. “But most of the tax gap is due to intentionally bad behavior, not incompetent behavior. When a preparer underreports $100,000 in income, it’s not because someone didn’t know it’s reportable; it’s because a person wanted to cheat. And when the preparer makes up a deduction for $30,000 for automobile expenses and $10,000 for travel and entertainment, it has nothing to do with his lack of knowledge.”Registration is good, and should be encouraged, according to Davidoff. “Return preparers should be registered and should be subject to Circular 230, the same as CPAs, attorneys and enrolled agents,” he said. “The most important aspect is to clearly identify the entire preparer community. Once we do that, we should be eliminating bad behavior.”

“The problem with testing is that it won’t motivate preparers to register – it will have the opposite effect,” he said. “If people know they will be tested, fewer will register. The greater the requirements, the more preparation work will be pushed underground, or the very small preparers will choose to no longer help out their friends and family. People will have fewer choices.”

Even if an individual is registered, licensed and competent, they may still be a tax cheat, while someone who may not pass the test can still be competent to file 1040 EZs, he observed.
“Teachers, police and doctors are three of the most trusted professions, yet many fail to report correctly,” said Davidoff. “Practically every newspaper has ads for private tutoring. When you call the number it’s usually a school teacher, and half the time that teacher will ask to be paid in cash.
“Likewise, many police precincts have a precinct tax preparer,” he added. “It’s often a retired cop who’s good with numbers. When he makes up numbers he’s encouraging the young cop who doesn’t know any better and thinks it’s a game, that ‘it’s OK to cheat the system and I’ll help you.’
"And in the case of doctors, the cash co-pay is the biggest boon for tax cheating,” Davodoff pointed out. “The front desk girl hands the cash to the doctor and it never goes into the accounting system. Of course, not every teacher, policeman or doctor does this, but I’ve run into numerous examples of these.”
The testing process will be an enormous task. “It has to be easier than the enrolled agent exam because you need 900,000 to 1.2 million individuals to pass,” he said. “Otherwise there won’t be enough preparers in the country. Most people don’t understand what an enrolled agent is, but now they will have another class of accredited prepares. Some of them, even though passing the test, may not be good preparers. And, inevitably, some of them will be cheats.”
As it is with the enrolled agent exam, the testing process will emphasize memorization of facts that are built into preparation software, according to Sarah A. Fields, a tax controversy specialist at Davidoff’s firm. “For example, you have to memorize the phase-out amounts for certain credits or the AMT exemption,” she said. “It’s not necessary to know this to prepare a return so long as you know they exist and how they work.”
Davidoff hopes that by the time the deliberative process is complete, more emphasis will be placed on registration and enforcement than on testing and licensing. “Never could you see more well-intentioned people than those who are working on this,” he said. “They are hard working and super smart people who really want to do the right thing.”

Man Please Guilty to Filing 250 Tax Returns for Dead People

Man Pleads Guilty to Filing 250 Tax Returns for Dead People
Riverside, Calif.

By WebCPA Staff
A California man has pleaded guilty to conspiracy to defraud the U.S. after he was accused of filing at least 250 tax returns of deceased individuals.
Haroon Amin of Upland, Calif., pleaded guilty Monday to the charges. He was indicted, along with Ather Ali of Diamond Bar, Calif., in December 2008. The two were accused of filing the returns in 2002 and 2003 falsely stating that the deceased individuals earned wages from which income tax was withheld. The false returns claimed more than $2 million in income tax refunds.
The IRS rejected most of the refund claims, but it issued a number of refund checks that were delivered to addresses controlled by Amin, Ali and their co-conspirators, including to various mailboxes opened by Ali using false forms of identification. Most of the refund checks were then delivered overseas to be deposited in bank accounts in Armenia and Pakistan.

Amin admitted that he was a knowing participant in the scheme. According to the indictment and statements made at the plea hearing, he and his co-conspirators obtained deceased individuals’ Social Security numbers and other identification information from the Internet. The returns filed as part of the scheme had fictitious Form W-2 wage and tax statements as attachments. Amin created fake W-2 forms using employer identification numbers that he had obtained from an acquaintance who was a CPA.
Judge Robert H. Whaley has scheduled Amin's sentencing for June 22, 2010. Amin faces up to five years in prison and a maximum fine of $250,000.
Ali is scheduled to begin trial on March 2, 2010.

2009 Changes to the Earned Income Tax Credit (EITC)

The IRS reminds taxpayers that for the 2009 tax year there are new additional EITC and income thresholds for a third qualifying child, as well as changes to the uniform definition of a child.
For tax years 2009 and 2010, the American Recovery and Reinvestment Act (ARRA) created a new category three or more children, which will provide larger credits to larger families. The change in the uniform definition of a child adds two new rules to the definition of who is a “qualifying child.”
The child must::
(1) be younger than the person claiming the child, unless the child is permanently and totally disabled; and
(2) not have filed a joint return other than to claim a refund.Also new for 2009, if a qualifying child can be claimed by both a parent and another person, the other person must have an adjusted gross income (AGI) higher than the parent in order to claim the child for EITC purposes.
For the 2009 tax year, a taxpayer's earned income and (AGI) must each be less than:
... $43,279 ($48,279) married filing jointly) with three or more qualifying children
... $40,295 ($45,295 married filing jointly) with two qualifying children
... $35,463 ($40,463 married filing jointly) with one qualifying child
... $13,440 ($18,440 married filing jointly) with no qualifying children
For the 2009 tax year, the maximum credit amounts are:
... $5,657 with three or more qualifying children
... $5,028 with two qualifying children... $3,043 with one qualifying child
... $457 with no qualifying children
Qualification for the EITC.
To qualify, the IRS explains, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a U.S. individual income tax return.
Other requirements provide that a taxpayer:
... must have earned income
.... must have a valid Social Security number for himself, his spouse (if married filing jointly) and his qualifying child
.... must not have investment income in excess of $3,100
.... have a filing status that's not “married filing separately.”
... generally, be a U.S. citizen or resident alien all year
.... not be a qualifying child of another person
.... not file Form 2555 or Form 2555-EZ (related to foreign earned income)
.... have income that exceeds certain limitations.I
f a taxpayer claims a child, he or she must meet three eligibility tests:
· Residency test. The child must have lived with the taxpayer in the U.S. for more than half of 2009.
· Relationship test.
The child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them.
A taxpayer's child includes:
... A foster child who was placed with you by an authorized placement agency, or by judgment, decree, or other order of any court of competent jurisdiction; or
... A legally adopted child or a child lawfully placed with you for legal adoption.
· Age test. At the end of 2009, the child must have been under age 19, a full-time student under age 24, younger than the EITC-claiming taxpayer or any age if permanently and totally disabled at anytime during 2009.
A qualifying child cannot be used by more than one person to claim EITC. If a child meets the rules to be a qualifying child of more than one person, only one person can treat that child as a qualifying child and claim EITC.If a taxpayer doesn't have a child, he must meet three additional tests:
... At the end of 2009, you must have been at least age 25, but under age 65.
... The taxpayer can't qualify as the dependent of another person.
... The taxpayer must have lived in the U.S. for more than half of 2009.

2010 Haitian Contributions can be deducted on 2009 Returns

As a result of legislation passed last month through Congress, the President has signed a bill into law allowing 2010 Haitian relief contributions to be deducted on 2009 returns; Public law number assigned
On January 22, President Obama signed into law H.R. 4462, a bill that allows donors to accelerate the income tax benefits of charitable cash contributions for the relief of victims of the earthquake in Haiti. The Senate had previously passed the bill by voice vote on January 21, and the House had similarly passed it by voice vote on January 20. The Act has been assigned a Public law number: P.L. 111-126.
The bill allows individuals who make charitable contributions to aid Haitian earthquake victims to elect to claim an itemized charitable deduction on their 2009 tax return (instead of having to wait until next year to claim the deductions on their 2010 tax return). The election applies only to Haitian relief contributions made in cash after Jan. 11, 2010, and before Mar. 1, 2010. If the election is made, Haiti relief donations are deductible on the 2009 return, not the 2010 return. The bill also relieves recordkeeping requirements for Haitian relief contributions. For these contributions, a telephone bill satisfies the Code Sec. 170(f)(17) recordkeeping requirements if it shows the name of the donee organization, the date of the contribution, and the amount of the contribution. See article below for additional discussion.