Wednesday, March 31, 2010

IRS Rules Would Require One Number to Identify All Tax Preparers

The Internal Revenue Service March 24 proposed rules (REG-134235-08) that would require tax preparers who sign a return to use a single, distinct identification number, rather than several different numbers, when identifying themselves as tax return preparers.

The proposed rules stipulate that a tax preparer's identification number will exclusively be the identification number prescribed by the IRS.

The assigning of tax preparer identification numbers is part of a larger tax preparer initiative IRS announced in 2009, aimed at raising preparer standards by forcing preparers who are not tested at the state level or authorized as enrolled agents by the IRS to pass a minimum competency test. However, all tax preparers with responsibility for signing a return will have to register with the IRS and receive a preparer identification number.

The proposed rules also said all preparers who sign a return must apply for, and regularly renew, their preparer identification numbers.

“Because an identifying number is unique to the person to whom assigned, the IRS is able to use the number to correctly identify the taxpayer or the tax return preparer,” the proposed rules said.

Currently, tax preparers are allowed to use their Social Security number or a preparer tax ID number (PTIN) when submitting returns to IRS. However, some are also using employer identification numbers (EINs), electronic filing identification numbers (EFINs)—a number assigned to IRS e-file providers—and electronic transmitter identification numbers (ETINs), a number assigned to IRS e-file providers who electronically transmit tax returns to the IRS. None of these will be valid under the new tax preparer regime, with the exception of the PTIN, which will be required.

The proposed regulations state that any identifying number issued by IRS prior to the effective date of the regulation will expire Dec. 31, 2010, “unless properly renewed” as set forth in forms instructions and or other appropriate guidance, “including these regulations.”

Support was widespread for use of the PTIN as the exclusive identifying number when IRS took comments from the industry.

New Set of Unlicensed, Unenrolled Preparers

The American Institute of Certified Public Accountants was quick to home in on language in the proposed rules that referred to a new set of possibly a million unlicensed and unenrolled tax preparers who will now be reporting to IRS as “registered tax return preparers.”

The naming of this category of tax preparers overwhelmed much of the discussion over how to reform the tax preparation industry in public hearings IRS held in 2009, and in comment letters the IRS received following that.

“We've been a little bit concerned about the relative qualifications of the different types of preparers,” Ed Karl, AICPA tax division director, told BNA March 24. “We want to make sure the public knows completely what they are getting.”

Karl said AICPA is trying to understand what name the IRS will be using for tax preparers who are not currently Circular 230 practitioners—attorneys, CPAs, and agents enrolled with IRS who are already subject to testing and ethical standards under that Treasury Department directive.

“The proposed rules talk about a transition period, so we will want to talk about whether this is the name for the proposed transition period, or the final name for them,” Karl said. The group has heard that other names are still being considered. “The naming and messaging is really important in terms of avoiding confusion with the public,” he added.

The proposed rules also refer to registered tax preparers “authorized to practice before the IRS” during an interim period in which the rules are being implemented, so some have speculated “authorized” could be another term for them.

Paul Cinquemani, National Association of Tax Professionals director of government relations, said he has heard that the new group of preparers will be called “registered tax preparers” until they pass the IRS examination. After that time, they would be called “authorized” tax preparers.

Tracking Bad Apples

AICPA supports use of PTINs exclusively as identifiers, Karl said. “If one preparer uses four or five different ID numbers, it makes it hard to track potentially problematic preparers,” he said. Incompetent or fraudulent tax preparers can switch to different numbers so that IRS cannot keep tabs on them, he said, but the proposed rules would stop that.

The guidance stated that IRS can designate an expiration date for any preparer tax ID number or other number it has given out, and will also be “prescribing the time and manner for renewing a preparer PTIN or other number, including the payment of a user fee.”

“They are asking you to register and or renew, and the renewal constitutes a registration,” Cinquemani said.

However, even those who are renewing an old PTIN would have to register with IRS and be subject to an initial tax compliance check, and subsequent periodic checks, to determine whether preparers themselves have paid their personal and business taxes.

NATP has members who prepare taxes in retirement, or for whom tax preparation is a second career. Some have been doing taxes for 35 year and they are saying, “Now you want to give me a test?”

Cinquemani said they can cite the tax code and Treasury regulations, and often test the tax software they use because they do not trust it. “That's a breed of cat you hate to lose to the system,” he said. Others have said they can pass the test and are not worried.

Backing the Plan

NATP's members are generally in favor of registering and having the PTIN be the sole identifier, he said. The proposed rules follow discussions the group has had with IRS all along, he said.

A PTIN would be required by the end of the year, he said. However, there is a question of whether preparers who did not register by the time the examination is developed would have to pass the exam before they could register. “The proposed rules appear to be saying you just have to be registered by Dec. 31. After that point, it appears you could be without identification, or you could get Section 6695 penalties,” Cinquemani said.

He added that the service is very interested in getting all the registration requirements done by the end of the year, which he considers reasonable.

The rules are scheduled to be published in the March 26 Federal Register.

The complete text of this article can be found in the BNA Daily Tax Report, March 29, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.

Tuesday, March 30, 2010

Top Ten Tips for Last Minute Filers

With the tax filing deadline close at hand, here are the top 10 tips the IRS wants you to know if you are still working on your federal tax return.

1. E-file your return Don’t miss out on the benefits of e-file. Your tax return will get processed quickly if you use e-file. If there is an error on your return, it will typically be identified and can be corrected right away. E-file is available 24 hours a day, seven days a week, from the convenience of your own home. If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days. Two out of three taxpayers, 95 million, already get the benefits of e-file.

2. Review tax ID numbers Remember to carefully check all identification numbers on your return. Incorrect or illegible Social Security Numbers can delay or reduce a tax refund.

3. Double-check your figures Whether you are filing electronically or by paper, review all the amounts you transferred over from your Forms W-2 or 1099.

4. Review your math Taxpayers filing paper returns should also double-check that they have correctly figured the refund or balance due and have used the right figure from the tax table.

5. Sign and date your return Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.

6. Choose Direct Deposit To receive your refund quicker, select Direct Deposit and the IRS will deposit your refund directly into your bank account.

7. How to make a payment People sending a payment should make the check out to "United States Treasury" and should enclose it with, but not attach it to, the tax return or the Form 1040-V, Payment Voucher, if used. Write your name, address, SSN, telephone number, tax year and form number on the check or money order. If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal. Whether you file a paper return or file electronically, you can pay by phone or online using a credit or debit card. Visit for more information on payment options.

8. File an extension Taxpayers who will not be able to file a return by the April 15 deadline should request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.

9. Visit the IRS Web site anytime of the day or night has forms, publications and helpful information on a variety of tax subjects.

10. Review your return…one more time Before you seal the envelope or hit send, go over all the information on your return again. Errors may delay the processing of your return, so it’s best for you to make sure everything on your return is correct.

Monday, March 29, 2010

Ten Tips for Deducting Charitable Contributions

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. If you made qualified donations last year, you may be able to take a tax deduction if you itemize on IRS Form 1040, Schedule A.

The IRS has put together the following 10 tips to help ensure your contributions pay off on your tax return.

1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.

2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.

3. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

4. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.

5. Clothing and household items donated must generally be in good used condition or better to be deductible.

6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given.

7. To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.

8. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

9. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.

10. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining value, refer to Publication 561, Determining the Value of Donated Property. These forms and publications are available at or by calling 800-TAX-FORM (800-829-3676).

Ten Tips for Taxpayers Contributing to an Individual Retirement Plan

If you haven’t made all the contributions to your traditional Individual Retirement Arrangement that you want to make – don’t worry, you may still have time. Here are the top 10 things the Internal Revenue Service wants you to know about setting aside retirement money in an IRA.

1. You may be able to deduct some or all of your contributions to your IRA. You may also be eligible for the Savers Credit formally known as the Retirement Savings Contributions Credit.

2. Contributions can be made to your traditional IRA at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means contributions for 2009 must be made by April 15, 2010. Additionally, if you make a contribution between Jan. 1 and April 15, you should designate the year targeted for that contribution.

3. The funds in your IRA are generally not taxed until you receive distributions from that IRA.

4. Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure your deduction for IRA contributions.

5. For 2009, the most that can be contributed to your traditional IRA is generally the smaller of the following amounts: $5,000 or $6,000 for taxpayers who are 50 or older or the amount of your taxable compensation for the year.

6. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to determine whether you are also eligible for a tax credit equal to a percentage of your contribution.

7. You must use either Form 1040A or Form 1040 to claim the Credit for Qualified Retirement Savings Contribution or if you deduct an IRA contribution.

8. You must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA.

9. You must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment to contribute to an IRA. If you file a joint return, generally only one of you needs to have taxable compensation, however, see Spousal IRA Limits in IRS Publication 590, Individual Retirement Arrangements for additional rules.

10. Refer to IRS Publication 590, for more information on contributing to your IRA account.

Both Form 8880 and Publication 590 can be downloaded at or ordered by calling 800-TAX-FORM (800-829-3676).

Thursday, March 25, 2010

Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

WASHINGTON — Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law today.

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.

The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on during the next few weeks.

Eight Important Facts about the Health Coverage Tax Credit

The Health Coverage Tax Credit pays 80 percent of health insurance premiums for eligible taxpayers and their qualified family members. However, many people who could be receiving this valuable credit don’t know about it, and are missing out on big savings that can help them and their families keep their health insurance.

Here are the top eight things the IRS wants you to know about the HCTC:

1. The HCTC pays 80 percent of an eligible taxpayer’s health insurance premiums.

2. The HCTC is a refundable credit, which means it not only reduces a taxpayer’s tax liability but also may result in cash back in his or her pocket at the end of the year.

3. Taxpayers can receive the HCTC monthly—when their health plan premiums are due—or as a yearly tax credit.

4. Nationwide, thousands of people are eligible for the HCTC.

5. You may be eligible for the HCTC if you receive Trade Readjustment Allowances—or unemployment insurance in lieu of TRA—through one of the Trade Adjustment Assistance programs.

6. You also may be eligible for the HCTC if you are a Pension Benefit Guaranty Corporation payee and are 55 years old or older.

7. The most common types of health plans that qualify for the HCTC include COBRA, state-qualified health plans, and spousal coverage. In some cases, non-group/individual plans and health plans associated with Voluntary Employee Benefit Associations established in lieu of COBRA plans also qualify.

8. HCTC candidates receive the HCTC Program Kit by mail. The Kit explains the tax credit and provides a simple checklist to determine eligibility. Also included in the Kit is the HCTC Registration Form.

For more information on the HCTC and how it may benefit you, call the HCTC Customer Contact Center toll free at 1-866-628-HCTC (4282). If you have a hearing impairment, please call 1-866-626-4282 (TTY). You also can visit the HCTC online at

Ten Things You May Not Know about Farm Income and Deductions

If you are in the business of farming, there are a number of tax issues that you should consider before filing your federal tax return. The IRS has compiled a list of 10 things that farmers may want to know before filing their federal tax return.

1. Crop Insurance Proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.

2. Sales Caused by Weather-Related Condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to choose to postpone reporting the gain from selling the additional animals due to the weather until the next year.

3. Farm Income Averaging You may be able to average all or some of your current year's farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.

4. Deductible Farm Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.

5. Employees and hired help You can deduct reasonable wages paid for labor hired to perform your farming operations. This would include full-time employees as well as part-time workers.

6. Items Purchased for Resale You may be able to deduct the cost of livestock and other items purchased for resale in the year of sale. This cost includes freight charges for transporting the livestock to the farm.

7. Net Operating Losses If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. If you have a net operating loss this year, you can carry it over to other years and deduct it. You may be able to get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Repayment of loans You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.

9. Fuel and Road Use You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.

10. Farmers Tax Guide More information about farm income and deductions can be found in IRS Publication 225, Farmer’s Tax Guide which is available at or by calling the IRS at 800-TAX-FORM (800-829-3676).

Five Facts about the Foreign Earned Income Exclusion

If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion. Here are five important facts from the IRS about the exclusion:

1. The Foreign Earned Income Exclusion United States Citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign salary or wages from their income when filing their U.S. federal tax return. They may also qualify to exclude compensation for their personal services or certain foreign housing costs.

2. The General Rules To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and income received for working in a foreign country, otherwise known as foreign earned income. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.

3. The Exclusion Amount The foreign earned income exclusion is adjusted annually for inflation. For 2009, the maximum exclusion is up to $91,400 per qualifying person.

4. Claiming the Exclusion The foreign earned income exclusion and the foreign housing exclusion or deductions are claimed using Form 2555, Foreign Earned Income, which should be attached to the taxpayer’s Form 1040. A shorter Form 2555-EZ, Foreign Earned Income Exclusion, is available to certain taxpayers claiming only the foreign income exclusion.

5. Taking Other Credits or Deductions Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked.

For more information about the Foreign Earned Income Exclusion see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad and the instructions for Form 2555 or Form 2555-EZ. Forms and publications are available at or by calling 800-TAX-FORM (800-829-3676).

Ten Things the IRS Wants You to Know About Identity Theft

Criminals use many methods to steal personal information from taxpayers. They can use your information to steal your identity and file a tax return in order to receive a refund. Here are 10 things the IRS wants you to know about identity theft so you can avoid becoming the victim of a scam artist.

1. Identity thieves get your personal information by many different means, including stealing a wallet or purse or accessing information you provide to an unsecured Internet site. They even look for personal information in your trash. They also pose as someone who needs information through a phone call or e-mail.

2. The IRS does not initiate contact with a taxpayer by e-mail.

3. If you receive an e-mail scam, forward it to the IRS at

4. If you receive a letter from the IRS leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.

5. Your identity may be stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don’t know.

6. If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.

7. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification – such as a Social Security card, driver's license, or passport – along with a copy of a police report and/or a completed Form 14039, IRS Identity Theft Affidavit.

8. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your SSN.

9. If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.

10. For more information about identity theft – including information about how to report identity theft, phishing and related fraudulent activity – visit the IRS Identity Theft Resource Page, which you can find by typing “Identity Theft” in the search box on the home page.

Six Important Facts about Tax-Exempt Organizations

Every year, millions of taxpayers donate money to charitable organizations. The IRS has put together the following list of six things you should know about the tax treatment of tax-exempt organizations.

1. Annual returns are made available to the public. Exempt organizations generally must make their annual returns available for public inspection. This also includes the organization’s application for exemption. In addition, an organization exempt under 501(c)(3) must make available any Form 990-T, Exempt Organization Business Income Tax Return. These documents must be made available to any individual who requests them, and must be made available immediately when the request is made in person. If the request is made in writing, an organization has 30 days to provide a copy of the information, unless it makes the information widely available.

2. Donor lists generally are not public information. The list of donors filed with Form 990, Return of Organization Exempt From Income Tax, is specifically excluded from the information required to be made available for public inspection by the exempt organization. There is an exception, private foundations and political organizations must make their donor list available to the public.

3. How to find tax-exempt organizations. The easiest way to find out whether an organization is qualified to receive deductible contributions is to ask them. You can ask to see an organization's exemption letter, which states the Code section that describes the organization and whether contributions made to the organization are deductible. You can also search for organizations qualified to accept deductible contributions in IRS Publication 78, Cumulative List of Organizations and its Addendum, available at Taxpayers can also confirm an organization’s status by calling the IRS at 877-829-5000.

4. Which organizations may accept charitable contributions. Not all exempt organizations are eligible to receive tax-deductible charitable contributions. Organizations that are eligible to receive deductible contributions include most charities described in section 501(c)(3) of the Internal Revenue Code and, in some circumstances, fraternal organizations described in section 501(c)(8) or section 501(c)(10), cemetery companies described in section 501(c)(13), volunteer fire departments described in section 501(c)(4), and veterans organizations described in section 501(c)(4) or 501(c)(19).

5. Requirement for organizations not able to accept deductible contributions. If an exempt organization is ineligible to receive tax-deductible contributions, it must disclose that fact when soliciting contributions.

6. How to report inappropriate activities by an exempt organization. If you believe that the activities or operations of a tax-exempt organization are inconsistent with its tax-exempt status, you may file a complaint with the Exempt Organizations Examination Division by completing Form 13909, Tax-Exempt Organization Complaint (Referral) Form. The complaint should contain all relevant facts concerning the alleged violation of tax law. Form 13909 is available at or by calling 800-TAX-FORM (800-829-3676).

IRS Provides Guidance on Identifying Numbers for Tax Return Preparers

WASHINGTON — The Internal Revenue Service today issued proposed regulations allowing the IRS to require that tax return preparers use Preparer Tax Identification Numbers (PTINs) as the preparer’s identifying number on all tax returns and tax refund claims that they prepare. These regulations when final will implement some of the recommendations in Publication 4832, Return Preparer Review.

“These regulations allow the IRS to better identify and match tax return preparers with the tax forms and claims they prepare. This proposed PTIN system will help us ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of our tax system,” said IRS Commissioner Doug Shulman.

Under the proposed regulations, the IRS will issue forms, instructions, or other guidance that will require paid tax return preparers to begin using PTINs for all tax returns and refund claims filed after Dec. 31, 2010. Currently, tax return preparers must use either a PTIN or their social security number on tax returns or refund claims that they prepare.

The proposed regulations also provide that tax return preparers must apply for a PTIN, regularly renew the PTIN, and pay associated user fees, which will be described in upcoming guidance. As part of the process, some tax return preparers would also be subject to a tax compliance check, which could include a review of the preparer’s history of compliance with personal and business tax filing and payment obligations.

Tax professionals and other interested parties have until April 26, 2010 to submit comments regarding the attached proposed regulations.

The IRS plans to launch a new system later this year through which all tax return preparers will be required to register, including those who already have a PTIN. Tax return preparers who already have a PTIN will have the number revalidated and reassigned to them through the new system, while tax return preparers who do not have a PTIN will be issued one through the new system.

It is estimated that there are as many as 1.2 million paid tax return preparers.

Tuesday, March 16, 2010

Six Things You Need to Know About Your Economic Recovery Payment

Did you receive a $250 Economic Recovery Payment in 2009? You'll need to know if you are claiming the Making Work Pay Tax Credit on your 2009 tax return.

Only individuals who received income from the Social Security Administration, Department of Veterans Affairs and Railroad Retirement Board received a $250 Economic Recovery Payment.

If you received benefits from one or more of these agencies, but you are unsure if you received the $250 Economic Recovery Payment, you can find out by using the "Did I Receive a 2009 Economic Recovery Payment?" feature online at or by calling 1-866-234-2942. These tools give you an easy way to verify if you received the one-time Economic Recovery Payment and which agency made the payment. These payments must be included when claiming the Making Work Pay Tax Credit on 2009 tax returns.

Here are six tips from the IRS that will help you determine if you received an Economic Recovery Payment:

1. If you had earned income in 2009 or are a government retiree and received an Economic Recovery Payment you need to report the payment and the amount when claiming the Making Work Pay and Government Retiree Credit on Schedule M, Making Work Pay Credit and Government Retiree Credits or as you complete your return using e-file software.

2. The Economic Recovery Payments are not taxable income; however, anyone who receives social security, veteran or railroad retirement benefits, as well as certain other government retirement benefits, must reduce the Making Work Pay Tax Credit they claim by the amount of any payment they received in 2009.

3. To verify whether you received the $250 payment, you can call 1-866-234-2942 and select Option 1 to access the "Did I Receive a 2009 Economic Recovery Payment?" telephone feature. The online version for verifying your Economic Recovery Payment will be available on in mid-March.

4. When using the "Did I Receive a 2009 Economic Recovery Payment?" feature to determine if you received an Economic Recovery Payment, you must provide your Social Security number, date of birth and zip code from your last filed tax return.

5. You must make a separate inquiry for each person on the tax return when using the "Did I Receive a 2009 Economic Recovery Payment?", even if you are filing a joint tax return.

6. Not claiming the Economic Recovery Payment on the Schedule M can delay the processing of your tax return. To avoid delays be sure to use the "Did I Receive a 2009 Economic Recovery Payment?" feature to find out if you received the payment.

Oops! Errors to Avoid at Tax Time

Errors made on tax returns may delay the processing of your tax return, which in turn, may cause your refund to arrive later. Here are nine common errors the IRS wants you to avoid to help guarantee your refund arrives on time.

1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.

2. Incorrect or misspelling of dependent’s last name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.

3. Filing status errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.

4. Math errors When preparing paper returns, review all math for accuracy. Remember, when you file electronically, the software takes care of the math for you!

5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.

6. Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit, be sure to review the routing and account numbers for your financial institution.

7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid.

8. Incorrect Adjusted Gross Income information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2008 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.

9. Claiming the Making Work Pay Tax Credit Taxpayers with earned income should claim the Making Work Pay Tax Credit by attaching a Schedule M, Making Work Pay and Government Retiree Credits to their 2009 Form 1040 or 1040 A. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit. The credit is worth up to $400 for individuals and $800 for married couples filing jointly. Many people who worked during 2009 are slowing down the processing of their tax return by not properly claiming this credit.

Beware of IRS’ 2010 “Dirty Dozen” Tax Scams

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

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

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

The IRS urges taxpayers to avoid these common schemes:

Return Preparer Fraud

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

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

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

Hiding Income Offshore

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

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


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

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.
Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with should be forwarded to the IRS mailbox:

Filing False or Misleading Forms

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

Nontaxable Social Security Benefits with Exaggerated Withholding Credit

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

Abuse of Charitable Organizations and Deductions

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

Frivolous Arguments

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

Abusive Retirement Plans

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

Disguised Corporate Ownership

Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.

Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

Misuse of Trusts

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

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

Fuel Tax Credit Scams

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

How to Report Suspected Tax Fraud Activity

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

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

Monday, March 15, 2010

Nine Things You Should Know about Penalties

The tax filing deadline is approaching. If you don’t file your return and pay your tax by the due date you may have to pay a penalty. Here are nine things the IRS wants you to know about the two different penalties you may face if you do not pay or file on time.

1. If you do not file by the deadline, you might face a failure-to-file penalty.

2. If you do not pay by the due date, you could face a failure-to-pay penalty.

3. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.

4. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

5. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

6. You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

7. If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.

8. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

9. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Friday, March 5, 2010

Ten Facts about Claiming the Child Tax Credit

The Child Tax Credit is a valuable credit that can significantly reduce your tax liability. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

1. Amount - With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

2. Qualification - A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

3. Age Test - To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2009.

4. Relationship Test - To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

5. Support Test - In order to claim a child for this credit, the child must not have provided more than half of their own support.

6. Dependent Test - You must claim the child as a dependent on your federal tax return.

7. Citizenship Test - To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.

8. Residence Test - The child must have lived with you for more than half of 2009. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.

9. Limitations - The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

10. Additional Child Tax Credit - If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

For more information, see IRS Publication 972, Child Tax Credit, available at the or by calling 800-TAX-FORM (800-829-3676).

Thursday, March 4, 2010

Bookkeeper and Employee Theft

I had a client who went through a very difficult period of time a number of years ago due to a bookkeeper (and a few other employees) who were literally robbing the business blind. The owner of the business had no idea what his bookkeeper was doing because he NEVER double checked any of her work. It was a small business – the owner and his wife, a bookkeeper, and 5 other employees. Here’s the story, as told to me by the business owner.

Crime # 1
The business owner (we will call him Jack) owned his business for about 20 years. He hired a new bookkeeper who was good at her job. So good in fact, that Jack felt he didn’t have to check her work after about one year. (We will call the bookkeeper Lisa.) 18 months after she started working for Jack, Lisa began to embezzle.

Jack had 5 employees whom he provided cell phones for, as well as one phone for himself, for a total of 6 cell phones. Lisa had a good friend who worked for a cell phone competitor. Between Lisa and this friend, they got another cell phone (similar to the ones used by Jack), and had this cell phone put on Jack’s business cell phone account. These charges were added for about 3 years before Jack accidentally stumbled onto the situation by accident. Lisa had left a recent cell bill on her desk and Jack saw the bill.

Jack immediately contacted the phone company regarding the 7th phone and was told he did not have authorization to remove it from the bill. The phone company did not believe that Jack was the owner of the company, or that he was the only person authorized to add or remove phones to his business account. This resulted in a 6-month battle between Jack and the phone company before Jack was able to have the additional phone removed.

Crime # 2
During the 6 month cell phone battle, Lisa convinced two other employees to help her steal products from the company. She would order 100 items of a product the company normally ordered, when the company only needed 50 or 60 items. The other employees would then receive the 50 or 60 items into the inventory, while the remaining items were placed in the employees vehicles (including Lisa’s) when the owner was not on the premises. With Lisa’s help, the employees would sell these products to Jack’s business customers at steeply discounted prices (often for less than what the product actually cost).

Jack’s Stand
Jack had noticed that during Lisa’s employment, business had been slowing down – that sales were not as high as they had been in previous years – but he never knew why. He trusted his bookkeeper, and his CPA never verified any work done by the bookkeeper either. Jack NEVER took inventory, or compared vendor invoices to items received.

Needless to say, Jack got wise to the bookkeeper as a result of the cell phone bill he found on her desk. He asked her on a weekly basis whether she had taken the additional phone off the bill (which she always said she would get to, but never did anything about). Jack finally fired Lisa and all other workers involved during that time. However, before he did, Lisa destroyed all evidence linking her to any embezzlement (including hard copies of invoices) and ALL computerized accounting records. She destroyed this information in such a way that there was no way to recover any of it. Because of this, Jack was unable to prosecute Lisa or prove anything else.

Moral of this story (especially for small business owners):

• NEVER trust all of your bookkeeping to be done by just one person without periodically checking the work yourself. As a business owner, you have every right (as well as the responsibility) to know how your business is doing financially. You have the right to see all vendor invoices and to check those invoices for accuracy. Furthermore, you should be the person who authorizes all payments to vendors (or to anyone else), including payroll for employees.

• If your business carries any kind of inventory, you should perform an annual inventory count. (This is required for income tax purposes anyway.) When you purchase products, you should periodically spot check the products that arrive with the vendor invoices and other shipping documentation to verify that you are receiving everything that was ordered.

• If your company receives services of any kind (cell phone service, etc.), periodically look at the vendor invoices to see what services you are being billed for. Sometimes vendors will charge you for services not properly authorized by you.

• Bookkeeper theft is not always easy to catch, but will never be caught if the business owner or other company officials NEVER check the work of the bookkeeper — especially in small business settings. Small businesses do not always have the ability to segregate duties in the “accounting” function of the business, so almost all work is done by one or two people, with no way to separate certain functions to other employees.

IRS Wins 48-Month Suspension of a Lawyer for Failing to File His Own Tax Return and Late Filing

WASHINGTON — Massachusetts Tax Attorney Kevin Kilduff was barred from practicing before the Internal Revenue Service for 48 months for failing to file one federal tax return and for filing another five returns late.

“Professionals who demonstrate a lack of respect for our tax system by failing to meet their own tax filing obligations should not expect to retain the privilege to practice before the IRS,” said Karen L. Hawkins, Director of the IRS Office of Professional Responsibility (OPR).

The OPR had originally sought the 48-month suspension, alleging Kilduff’s conduct was willful and disreputable. OPR enforces standards of conduct under Treasury Circular 230, which governs enrolled agents, attorneys and certified public accountants. Kilduff formerly worked for the IRS Office of Chief Counsel.

The Administrative Law Judge (ALJ) subsequently set the penalty at a 24-month suspension. Kilduff appealed the ALJ decision to the Secretary of the Treasury’s Appellate Authority, which in fact ultimately imposed the harsher 48-month suspension.

Kilduff’s suspension is for a minimum of 48 months. OPR has sole discretion regarding his reinstatement to practice before the IRS. At the very least, Kilduff must file all federal returns and pay all taxes he is responsible for, or enter an acceptable installment agreement or offer in compromise.

The complete decisions of the ALJ and the Appellate Authority are available on the OPR page on this web site.

Ten Facts about Mortgage Debt Forgiveness

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from or by calling 800-TAX-FORM (800-829-3676).

Cracking Down on Independent Contractors

Federal and state regulators increasingly want to know whether companies' independent contractors are truly independent.

Employers may want to reexamine how they label their workers this year, as federal and state officials vow to clamp down on the misclassification of employees as independent contractors.

The Internal Revenue Service plans to look at the issue in audits of 6,000 randomly chosen companies during the next three years, starting this month. Meanwhile, proposals on Capitol Hill would give the Department of Labor more resources to ensure that companies classify their workers correctly. They would also change a safe harbor in the tax code that has enabled some companies to continue their practice of misclassifying workers.

Moreover, various states, including California, Massachusetts, New York, and Ohio, have recently enforced their rules on independent contractors by demanding changes and restitution from companies they found to have misidentified their workers as contractors. Earlier this year, for example, Massachusetts's Attorney General settled with four local dining-delivery companies that agreed to reclassify all their drivers as employees rather than independent contractors. Other states, including Maryland, have passed or proposed related new laws.

In a high-profile case, FedEx Ground has been the target of lawsuits, IRS auditors, and several states that believe the company has misclassified workers as contractors. Other companies that could be affected by a widespread crackdown include those that employ nurses, couriers, and construction workers.

To be sure, the issue has become more pressing because of the increased use of contract workers by companies wanting to introduce more flexibility in their labor costs in the wake of the downturn. That trend is expected to continue: CFOs plan to increase their temporary hiring over the next year, and most of them don't expect their companies' full-time staffs to return to prerecession levels before 2012, according to the latest Duke University/CFO Magazine Global Business Outlook Survey.

It's not surprising why, considering that independent contractors can be much cheaper than full-time workers. With contractors, who receive a 1099 tax form instead of a W-2, companies don't have to pony up for unemployment insurance, workers' compensation, health benefits, or Social Security taxes. Plus, companies aren't required to withhold income taxes for contractors. They are estimated to save as much as 30% in their payroll costs by going this route.

The price could rise, though, if officials make good on their word to uncover the presumed incidences of companies that fail to follow the rules, which vary by state and among federal agencies. The most recent federal estimates, from 2005, say that 7.4% of the workforce is considered to be independent contractors, but there is no solid, up-to-date data on how many of those workers are mislabeled. The IRS plans to get a better handle on contractor data by 2013, after concluding its round of random audits.

"Given the state of the economy, more people are trying to push the limits of when they can get away with classifying someone as an independent contractor, and probably a lot of people are pushing them too far," says Matthew Bainer, senior associate at Scott Cole & Associates, which represents workers with wage disputes.

Advocates of a crackdown believe it will benefit federal and state governments by bolstering their tax revenues and replenishing unemployment-insurance funds. The consequences of misclassifications vary by agency and the number of workers involved; companies may have to pay back taxes, unpaid wages, and penalties. In 2008 the IRS expected to collect almost $64 million in taxes and penalties from 844 companies that misclassified workers.

President Obama claims the government could collect $7 billion over 10 years by changing the incentives companies have for misclassifying workers, and by better enforcing the current rules through the hiring of 100 new employees in the Department of Labor. However, many misclassifications may come to light through a more indirect way: workers themselves. Contractors — some of whom do benefit from their status by having flexible schedules and the ability to work for various employers — may discover they should have been labeled differently when putting together their tax returns. These discoveries may have become more commonplace in recent years as workers have become more knowledgeable about their rights through the Internet, Bainer suggests.

Indeed, the renewed attention to the issue stems in part from the rise in complaints from workers who find themselves ineligible for unemployment insurance (independent contractors are also not offered the same protections as full-time employees subject to labor laws). As a workaround, some companies are putting aside unemployment insurance for workers they account for as independent contractors for federal tax purposes, says John Barrie, a partner at Bryan Cave.

That may be a mistake, however, if the IRS notices the discrepancy. Indeed, experts suggest that firms tread carefully when trying to save on labor costs and maintain consistency in their reporting. (The IRS provides a 20-factor test to help companies determine the status of their workers.) In general, the IRS believes the issue comes down to how much power a company exerts over a worker.

"If companies are controlling what the worker is doing and when it's getting done, they probably have an employee [instead of an independent contractor]," says Grafton "Cap" Willey, a managing director at CBIZ Tofias, which provides tax and consulting services. "Paying additional taxes is probably cheaper than getting in trouble."

Wednesday, March 3, 2010

Is Your Business At Risk?

Many times, small businesses do not have the resources to properly segregate accounting duties to multiple employees. In many small businesses, there is only one person who handles all of the bookkeeping/accounting functions within the business. This person is most often an employee (assuming the business has more than one employee).

If your business has several employees, but only one person works in the accounting department, your business might be at risk for employee theft, embezzlement, fraud, and many other types of "white collar" crimes. This is especially true if the business owner NEVER looks at what the "bookkeeper" is doing. Even if an outside accounting firm is used (for financial statements and/or income tax preparation), the outside accountant might not catch possible problems, including employee theft, fraud, etc.

I had a client many years ago who had a bookkeeper that was robbing the company in many ways, and the owner was unaware of what was going on for almost 4 years. The business owner had noticed that annual sales were dropping each year over this four year period, but had no idea why. The business owner had no idea that he was paying for inventory that was never "received," or that he was paying for more cell phones than he actually was using in his business.

The bookkeeper that had been hired was actually purchasing products (from vendors), and had another employee in the company receive the products that were shipped, but the employee and the bookkeeper were recording approximately 60 percent of the products purchased into inventory. The rest were being set aside (and put into the employee's vehicle). The "stolen" products were then sold to the customers of the business for steeply discounted prices, thus causing these customers to no longer purchase from the business (but from the employee and bookkeeper).

The bookkeeper had a friend who worked for a competitor. The bookkeeper and her friend got together and decided to add a cell phone to the business cell phone account, with the friend getting the cell phone with the company (the bookkeeper worked for) paying the bill.

This went on for about 4 years before the owner of the business found out what was going on. The business owner happened to walk past the bookkeeper's desk one day and saw the cell phone bill on her desk. He glanced at the bill and saw that he was paying for 7 cell phones. He knew there should have only been 6 cell phones on the bill - one for himself, and one for each of his 5 service employees.

The business owner confronted the bookkeeper regarding the additional phone on the cell phone bill. She denied any knowledge about the additional phone charges. She told the business owner she would take care of it. She never intended to "take care of" the matter. After several months, the business owner asked to see the current cell phone bill. He saw that nothing had been done about it.

The business owner contacted the cell phone provider and asked that the additional phone be removed from the account. He was told he did not have the authority to remove the phone from the account. The business owner became furious at this, stating that he was the owner of the business, and that he was the only person in the business that had the authority to add or remove cell phones to the account.

The business owner, after further investigation, discovered that the bookkeeper had also been ordering more products than what had been received into inventory. (The business owner never took inventory, annually or otherwise.) The business owner attempted to get to the bottom of the fraud and theft.

In the end, the bookkeeper destroyed all evidence, including all computer records and hard copies of vendor invoices, etc., that could be used to prosecute her. She was fired, but the business owner was not able to prosecute her or the other employees that were working with her.

The business owner fired the bookkeeper, and all other employees. He hired new employees, but never hired an internal bookkeeper. He changed cell phone vendors. He contacted all of his vendors and asked to be put on COD terms, which meant that payment had to be made when products were purchased. He (the business owner) started making all purchases (although the employees would pick up the products). The business owner at least knew what was being purchased from that point forward.

The accountant could not be blamed because the bookkeeper was the only contact the accountant had at the company, outside of the business owner signing various tax returns (which were mailed to the business address). The business owner never really had any contact with the accountant except by phone at tax time.

What am I trying to say here? The business owner needs to keep an eye on what is going on in his/her business. It is very easy for employee theft and fraud to take place if no-one is paying attention.

IRS Has $1.3 Billion for People Who Have Not Filed a 2006 Tax Return

Washington — Unclaimed refunds totaling more than $1.3 billion are awaiting nearly 1.4 million people who did not file a federal income tax return for 2006, the Internal Revenue Service announced today. However, to collect the money, a return for 2006 must be filed with the IRS no later than Thursday, April 15, 2010.

The IRS estimates that the median unclaimed refund for tax-year 2006 is $604.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.

For 2006 returns, the window closes on April 15, 2010. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund. Though back-year tax returns cannot be filed electronically, taxpayers can still speed up their refunds by choosing to have them deposited directly into a checking or savings account.

The IRS reminds taxpayers seeking a 2006 refund that their checks will be held if they have not filed tax returns for 2007 or 2008. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell-phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on

In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.

Current and prior year tax forms and instructions are available on the Forms and Publications page of or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2006, 2007 or 2008 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by calling 1-800-829-1040, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.

Five Important Tax Credits

You might be eligible for a valuable tax credit. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are even refundable, which means you might receive a refund rather than owe any taxes at all. Here are five popular tax credits you should consider before filing your 2009 Federal Income Tax Return:

1. The Earned Income Tax Credit is a refundable credit for certain people who work and have earned income from wages, self-employment or farming. Income, age and the number of qualifying children determine the amount of the credit. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, to enable you to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

5. The Health Coverage Tax Credit pays up to 80% of the health insurance premiums for eligible Trade Adjustment Assistance recipients and Pension Benefit Guaranty Corporation payees. You can complete IRS Form 8885, Health Coverage Tax Credit to claim the credit on your tax return. To determine if you’re qualified, or to find out how to receive the HCTC each month, visit and search for “HCTC.”

There are other credits available to eligible taxpayers. Since many qualifications and limitations apply to the various tax credits, taxpayers should carefully check their tax form instructions, the listed publications and additional information available at IRS forms and publications are also available by calling 800-TAX-FORM (800-829-3676).