Tuesday, March 20, 2012

The first group of unenrolled preparers have passed the competency test.

Each scored 70% or better on the test. Those who pass a tax compliance check will receive certificates from IRS stating that they are “Registered Tax Return Preparers”.

Nobody can call themselves a “Registered Tax Return Preparer” UNTIL they have received that IRS R.T.R.P. Certificate.

But the licensing rules for unenrolled preparers are facing a court challenge. The lawsuit claims that the Service’s regulatory scheme is invalid. As we have noted, IRS is requiring preparers of the 1040 series of returns who aren’t CPAs, attorneys or enrolled agents to pass a competency test, satisfy continuing education rules and pay fees. It may take some time for this case to wind its way through the legal system.

Late Breaking IRS news....

Unemployed people who can’t pay their 2011 taxes on time get a break.

The IRS is giving them six extra months to pay the taxes due without penalty.

This applies to wage earners who were jobless at least 30 consecutive days in 2011 or in 2012 up to the April 17 filing deadline. This also applies to self-employed taxpayers whose income in 2011 was at least 25% lower than in 2010.

Couples with incomes over $200,000 and others with incomes exceeding $100,000 don’t qualify. Filers owing over $50,000 are out of luck as well.

File Form 1127-A with IRS by April 17 to request the extra time to pay. And keep in mind that interest will still be due on any unpaid balance.

And more individuals will be able to pay their back taxes in installments without having to supply detailed financial information. IRS is doubling the threshold to $50,000 to use these streamlined installment procedures and is allowing six years for repayment. You’ll have to agree to let the IRS debit your bank account monthly.

Friday, March 16, 2012

Tax Rules May Affect Your Child’s Investment Income

Parents may not realize that there are tax rules that may affect their child’s investment income. The IRS offers the following four facts to help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child's rate.

1. Investment income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.

2. Age requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2011:

• Was under age 18 at the end of the year,

• Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or

• Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

3. Form 8615 To figure the child's tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child's federal income tax return.

4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents' Election To Report Child's Interest and Dividends.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Forms 8615 and 8814 are available on this website or by calling 800-TAX-FORM (800-829-3676).

Wednesday, March 14, 2012

IRS Creates Online Search Tool for Easier Check On Information About Exempt Organizations

WASHINGTON — The Internal Revenue Service has launched a new online search tool, Exempt Organizations Select Check, to help users more easily find key information about tax-exempt organizations, such as federal tax status and filings.

Users can now go to one location on IRS.gov, select a tax-exempt organization, and check if the organization:

o Is eligible to receive tax-deductible charitable contributions (Publication 78 data, which is incorporated here). Users may rely on this list in determining deductibility of contributions (just as they did when Publication 78 was a separate electronic publication rather than part of Select Check).

o Has had its federal tax exemption automatically revoked under the law for not filing a Form 990-series return or notice for three consecutive years (known as the Auto-Revocation List).

o Has filed a Form 990-N (e-Postcard) annual electronic notice. (Most small organizations whose annual gross receipts are normally $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.)

EO Select Check also offers improved search functions. For example, users can now look for organizations eligible to receive deductible contributions by Employer Identification Number (EIN), which was previously not a searchable or sortable field in the electronic Publication 78. And data about organizations eligible to receive deductible contributions are now updated monthly, rather than quarterly.

In addition, organizations that have automatically lost their tax exemptions may now be searched by EIN, name, city, state, ZIP Code, country, exemption type, and revocation posting date, rather than only by state. EO Select Check also provides new pop-up help text to assist users in understanding the significance of auto-revocation search results, including the meaning of, and distinctions between, revocation dates and revocation posting dates.

EO Select Check offers search tips that provide suggestions on how to use the search application.

Tax breaks for the unemployed

CNNMoney.com By Blake Ellis | CNNMoney.com

For unemployed Americans who have watched their savings diminish as they look for work, tax season may finally bring some relief.

Out of work job seekers can deduct all sorts of expenses, including the cost of printing and sending hundreds of resumes, hiring headhunters, even what they spend on travel to interviews. There are also tax perks they can qualify for if they decide to throw in the towel on the job search and become self-employed or freelance.

And for those who can't come up with the money to pay their taxes right away, the IRS is offering the unemployed additional help this year -- a "grace period" that will give them extra time to pay their tax bill without incurring penalties.

"There's no question, most people would rather have a job than have to look for tax breaks for being unemployed," said Mark Luscombe, principal federal tax analyst at accounting firm CCH. "But for those facing an extended period of unemployment, they can benefit from knowing the steps to take to lower their tax bill."

Seeking employment: Job seekers can deduct search-related expenses, including employment and outplacement agency fees, job search site memberships, as well as resume printing and mailing costs.

Travel costs are also fair game. Say you have an interview in Washington, D.C., but live in Ohio. You can write off the airfare or the cost of gas if you drive there. You can even claim these costs if you head to D.C. without an interview lined up, as long as you're actively looking for work while you're there.

Be careful not to push it too far when claiming these expenses. Manicures, clothes and makeup are some of the deductions the IRS views as red flags.

One general rule of thumb to follow is that anything that can be used for purposes other than your job hunt can't be deducted, said Gordon Ulen, a Danvers, Mass.-based CPA. But because it can be hard to know which expenses qualify, and you need to itemize in order to claim the deductions, it's smart to use a tax preparer. And it's extremely important to document all of your expenses in case you do end up being audited.

Another important thing to remember is that to qualify for job search deductions, you must be looking for a job in your present field of work. You can't be looking to switch careers.

Craziest tax deductions

First-time job seekers, like college graduates, don't qualify for job search deductions, and neither do taxpayers re-entering the workforce after a substantial period of unemployment, like stay-at-home parents who decide to go back to work.

Job search costs must also exceed 2% of your adjusted gross income to qualify as deductible expenses, which shouldn't be a problem for most out-of-work job seekers but could prevent some freelancers or self-employed taxpayers from being able to claim them.

And don't worry: You can still deduct the costs of a job search even if you weren't hired.

You're hired!: If you end up landing a job that requires you to relocate, you can often deduct moving costs -- including lodging, packing, transportation, tolls and parking.

Typically, you can deduct these costs if the new job is at least 50 miles farther from your previous home than your former workplace was, you moved within a year of taking the new job and you were employed full time for 39 weeks during the first 12 months following the move, said Luscombe.

If you haven't been at the new job 39 weeks yet, you can claim the expense but you have to file an amended return or include the deducted expense as part of your gross income on your return.

The $13,000 adoption tax credit is back!

Just remember: You can't claim any costs that your new employer is already reimbursing.

Going it alone: If you gave up on the job hunt and started freelancing or working for yourself, you can deduct self-employment expenses like a home office and certain meal and entertainment costs.

Home office deductions are big audit red flags for the IRS, however. So make sure you document all of your expenses -- down to the utilities you use, alarm systems, even housekeeping. To qualify for a home office deduction, you must use the office exclusively for work and it must be your primary place of business -- not one of several offices.

And don't get carried away with the office-related expenses you claim. For example, Luscombe said some taxpayers claim the main household phone line as an office expense, when they would need to have a second office line that they use exclusively for business to qualify as a legitimate expense.

Along with home office expenses, work-related travel costs, health insurance premiums and professional association fees are also acceptable deductions when you're self-employed.

Health care costs are deductible too, if they exceed 7.5% of your adjusted gross income. If this is the case, deductible medical expenses include doctor visits, treatments, prescriptions and dental costs, said Luscombe.

Watch out!: Aside from being careful about what you deduct, remember to pay taxes on any wages you earned during the year before losing your job. If you were laid off and you received a severance package from your employer, that pay is also considered taxable income. And don't forget that you'll be taxed on any unemployment benefits you received during the year.

Can't pay your taxes?: If you were, or will be, out of work for at least 30 consecutive days during 2011 or 2012 -- up to April 17 this year -- or you're self-employed and your business income has dropped by 25% or more due to the economy, the IRS is giving you some extra time to pay your taxes without charging late penalties.

The agency announced this month that it will give qualifying taxpayers a six-month grace period on "failure-to-pay" penalties, which are typically assessed each month a taxpayer is late paying their taxes.

In addition to the penalty relief, the IRS is also allowing more taxpayers to spread out payments on their tax bills. Taxpayers with bills as high as $50,000 are now eligible for installment payments -- up from a previous cap of $25,000. And these taxpayers aren't required to file a financial statement to do so. The maximum installment term was also boosted to 72 months, up from 60 months.

IRS offers relief to unemployed taxpayers

"If you can't pay your taxes, file anyway, and just work with the IRS to create a payment plan," said Ulen. "As long as you keep up with the plan, they won't bother you -- but if you ignore them, they can be nasty."

View this article on CNNMoney

A refresher for tax season on the some of the intricacies of claiming rental real estate income and losses.

1. Passive activity limits. Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them.

2. If there is active participation in a passive rental real estate activity, a loss of up to $25,000 of loss from the activity is allowed. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities.

3. Active participation is achieved by owning at least 10% of the rental property and making management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Examples of management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

4. There are income limitations on this allowed loss. Once a taxpayer’s modified adjusted gross income exceeds $100,000 the $25,000 loss is phased out. When modified adjusted gross income reaches $150,000 no loss is allowed. For MFS returns this limit is cut in half except when the spouses lived together (in this case there is no special loss allowed). This $100,000 threshold is not adjusted for inflation and has remained the same since the Tax Reform Act of 1986 was passed. Modified adjusted gross income is AGI without taking into account taxable social security, the deductions allowed for (IRAs, portion of SE tax, interest paid on student loans, qualified tuition and domestic production activities), passive activity gains or losses, losses from both real estate professionals and publicly traded partnerships and a few other exceptions. This convoluted calculation is what tax software programs are for.

5. Rental real estate losses are allowed like other passive losses to the extent of gains from passive activities. When a rental property is sold all previously unallowed losses are allowed. Plus the excess of the gain over previously unallowed losses is used to allow any other passive losses. This can offer an incentive to taxpayers with large unallowed passive losses to sell appreciated rental property.

6. If someone qualifies as a rental real estate professional all rental losses are allowed provided they also materially participate in the particular activity. In order to qualify for this exception the following conditions must be met. First more than half of the personal services the taxpayer performed in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated. This requirement makes it very difficult for anyone with full time employment to qualify. There have been several tax court cases almost all ruling against the taxpayer. Second the taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which they materially participated.

7. In order to meet the requirements of a real estate professional rental properties can be elected to be treated as a group. This election must be made or the IRS will view the properties as separate. According to the IRS instructions a written statement with the original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. The statement must provide the names, addresses, and employer identification numbers (EIN), if applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. In spite of these instructions the IRS has issued Rev Procedure 2011-34 which provides guidance to taxpayers on making a late election.

8. There are downsides to making this election and the taxpayer will be bound by it once made. One downside is any suspended losses held from prior to making this election will not be freed up unless a complete disposition is made of all properties under the election. If any properties can be expected to generate income the election should be made with care because that income will not be allowed to offset passive activities.

9. The IRS has stepped up audits of real estate losses. According to a study by the GAO at least 53 percent of individual taxpayers with rental real estate activity for the tax year 2001 misreported the rental real estate activity, resulting in an estimated $12.4 billion of net misreported income.

IRS cuts penalties; but don’t forget the forms

By Eva Rosenberg, MarketWatch

LOS ANGELES (MarketWatch) — For the past several years, as we have struggled with this depressed economy, the kinder, gentler IRS has released announcement after announcement about ways they are trying to help taxpayers.

The latest announcement came last week, all about IRS’s latest installment in their so-called Fresh Start initiative. There’s lots of good news for taxpayers who don’t have enough money to pay their tax balance on April 17.

What the announcement doesn’t make clear is that to get these benefits, you must a file a new form on or before April 17. The new form is Form 1127A.

What does this form get you?

An extension of time pay taxes for 2011. You get until Oct. 15, 2012. That’s a unique benefit. For years, it’s been hammered into our minds that the normal extension, Form 4868, is only an extension of time to file your tax return — not to pay your taxes. Note: If you do not pay your 2011 taxes in full by Oct. 15, 2012, all your penalties on the unpaid balance will be reinstated from April 17, as if you had never filed this form.

A 6-month waiver of the IRS failure to pay penalty, from April 17 to Oct. 15, 2012. Normally, that penalty is ½ of 1% (.005) per month until it reaches 25%. That means, if you pay your 2011 taxes on Oct. 15, 2012, you will save 3% in penalties. If you owe $5,000, 3% savings is worth $150.

What does this form not get you?

It does not get you an extension of time to file your tax return. You still need to file Form 4868. If you don’t remember to file for your extension, you will be subject to the late filing penalty of 5% per month, until it reaches 25%.

It does not give you a waiver of the interest on your unpaid balance. The current interest rate is 3% per year. Much cheaper than credit cards.

Who is entitled to this Fresh Start protection?

Not everyone. The penalty relief will be available to two categories of taxpayers:

Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.

Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

And there are limitations on income and balance due. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

What if you know that you absolutely will not be able to pay the balance due by the October deadline? Is there any hope? Yes.

You can get an installment agreement more easily than before. The IRS has raised the threshold for automatic approval on installment agreements to $50,000 (from $25,000). You now have 72 months to pay your balance in full, including interest and penalties (instead of 60 months). Though you will have to submit a financial statement on Form 433-A or 433-F (the shorter version), to qualify.

You can use the online payment agreement application and get instant confirmation. Or you can mail Form 9465 to the appropriate IRS office. Note: There are fees for these installment agreements. $105 is the base fee for folks paying by cash, check or payroll withdrawal. The fee is reduced to $52 if you agree to have the funds withdrawn automatically from your bank account. If you qualify as a low-income taxpayer based on the data on Form 13844, you can get a reduced fee of $43.

But this will ruin your credit?

Yes, having an IRS debt generally means there will be an IRS lien placed on your credit. That’s why your best bet is always to avoid tax debt altogether. If you can find a way to borrow the money, do so. If you cannot, there is another way to protect your credit.

At the urging of Nina Olson, the National Taxpayers Advocate, the IRS has agreed to do two things to help protect your credit. It all revolves around withdrawing liens.

First, liens will not be filed if your tax debt is under $10,000.

Second, for your 2011 debt, if you agree to a direct debit payment of your installment agreement, IRS will not file the lien.

If a lien has already been filed and you enter into a direct debit installment agreement, IRS will withdraw the tax lien, if you ask nicely.

If you are paying a tax debt now, and you pay it off, the IRS will withdraw the lien, if you request it.

Finally, the IRS has put systems in place to speed up the withdrawal of liens.

Note the word “withdrawal.” That is very different from removing a lien. When someone removes a lien, it remains on your credit for at least seven years. Withdrawing a lien means it’s as if the lien were never there. Withdrawals are designed for the lien to be removed from your credit right away.

Other little benefits

The IRS knows that even with all this help, not everyone will be able to pay their taxes in full, regardless of how much time is provided. There are simply too many people out of work, or under-employed.

So, the IRS has also streamlined their offer-in-compromise (OIC) process for folks with income levels up to $100,000. If your tax debt is up to $50,000, IRS will make it easier for you to pay pennies on the dollar. You will have to file your financial information with IRS on 433-A or 433-F. And if IRS sees that you have enough assets to pay your tax debt, you will not get your OIC. But if it’s clear that you’re insolvent, the IRS will work your case.

None of this is easy. Not all of these benefits will take effect overnight. But, you didn’t get into tax debt overnight, either.

These benefits are predicated on your being in compliance right now. So, if you’re working, be sure to have enough withholding taken from your paycheck to cover your 2012 taxes. And if you’re self-employed, your first priority is to pay your 1st estimated tax installment for 2012 by April 17.

Of course, with an extension and the penalty waiver until Oct. 15, you do have time to run a tax sale or garage sale to generate enough money to cover last year’s taxes. Maybe you won’t need an installment agreement, after all.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered for free. Rosenberg is the author of several books and ebooks, including “Small Business Taxes Made Easy,” and teaches tax courses at IRSExams.com and CPELINK.

Friday, March 2, 2012

Payroll Tax Cut Extended to the End of 2012; Revised Payroll Tax Form Now Available to Employers

The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted February 22, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted Dec. 23.

No action is required by workers to continue receiving the payroll tax cut. As before, the lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4 percent to 10.4 percent. For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply.

The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

Tax Scam Warning: Beware of Phony Refund Scheme Abusing Popular College Tax Credit; Senior Citizens, Working Families and Church Members Are Targets

WASHINGTON – The Internal Revenue Service today warned senior citizens and other taxpayers to beware of an emerging scheme tempting them to file tax returns claiming fraudulent refunds.

The scheme carries a common theme of promising refunds to people who have little or no income and normally don’t have a tax filing requirement. Under the scheme, promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.

In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of the scheme, and its promoters may be subject to criminal prosecution.

“This is a disgraceful effort by scam artists to take advantage of people by giving them false hopes of a nonexistent refund,” said IRS Commissioner Doug Shulman. “We want to warn innocent taxpayers about this new scheme before more people get trapped.”

Typically, con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.

The IRS has also seen a variation of this scheme that incorrectly claims the college credit is available to compensate people for paying taxes on groceries.

The IRS has already detected and stopped thousands of these fraudulent claims. Nevertheless, the scheme can still be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they’ve been scammed.

The IRS is reminding people to be careful because all taxpayers, including those who use paid tax preparers, are legally responsible for the accuracy of their returns, and must repay any refunds received in error.

To get the facts on tax benefits related to education, go to the Tax Benefits for Education Information Center on IRS.gov.

To avoid becoming ensnared in this scheme, the IRS says taxpayers should beware of any of the following:

• Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.

• Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.

• Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.

• Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.

• Offers of free money with no documentation required.

• Promises of refunds for “Low Income – No Documents Tax Returns.”

• Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.

• Unsolicited offers to prepare a return and split the refund.

• Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.

This refund scheme features many of the warning signs IRS cautions taxpayers to watch for when choosing a tax preparer. For advice on choosing a competent tax professional, see Tips for Choosing a Tax Return Preparer on IRS.gov.

For additional information on tax scams, see the 2012 Dirty Dozen list.