IRS Grants Filing and Payment Extension for Taxpayers Affected by Boston Marathon Tragedy

Posted on May 1, 2013 by TaxAlerts

Written by: Karen Reed, EA

The IRS has granted a three month tax filing and payment extension to taxpayers affected by the Boston Marathon explosions that occurred on Tax Day. All individuals who live in Suffolk County, MA, which includes the city of Boston, are eligible for this extension. Victims and their families as well as first responders and others who were adversely affected are also eligible.

Under the relief, eligible taxpayers have until July 15th, 2013, to file their 2012 income tax returns and pay any taxes that would have been due on April 15th. Penalties and interest will not be assessed on payments made by July 15th.

Suffolk County residents have received an automatic extension. Eligible taxpayers living outside the county must call the IRS at 866-562-5227 to claim the relief.

An additional extension is available for those who need more time. Form 4868 may be filed by July 15, 2013, to extend the individual tax filing due date to October 15th.

If you have questions about this extension, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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IRS Releases Annual “Dirty Dozen” List of Tax Scams

Posted on April 1, 2013 by TaxAlerts

On March 26th, the IRS released its annual “Dirty Dozen” list of tax scams. The agency is actively pursuing and shutting down promoters of these schemes, warning all taxpayers that participation in these activities can result in the assessment of significant penalties and interest, as well as possible prosecution.

Here is this year’s list, as published on the IRS website:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012. The Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.

We know identity theft is a frustrating and complex process for victims. The IRS has 3,000 people working on identity theft related cases — more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit the IRS website.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some 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. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments 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.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. 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 may also 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 variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable 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 of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have 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 a trust arrangement.

If you have questions about the “Dirty Dozen” tax scams, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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What Documents Do You Need for an Audit?

Posted on March 1, 2013 by TaxAlerts

Written by: Karen Reed, EA

When your tax return is audited, the IRS will ask to see the specific records and documents that show how you came up with the dollar amounts you reported on your tax return. Many deductible expenses will not be allowed unless there has been adequate recordkeeping and you can prove your eligibility for credits and deductions as written by Congress in the Internal Revenue Code.

For certain business deductions the IRS requires records to be contemporaneous with the transactions and will often disallow expenses that are based on incomplete and re-created records. In addition, there must be suitable evidence to prove that the expenses were “ordinary and necessary but not lavish” in your business field. Proof of payment is not enough ─ each expense must have a valid business purpose that you can prove.

There are specific requirements for substantiating deductions for travel, meals and entertainment. As a business owner or employee, you are required to maintain an account book, diary, log, trip sheet or similar records, as well as documentary evidence, such as receipts and cancelled checks, to substantiate the amount, time, place, persons met with and the business purpose of your expenditures.

Specific types of records may be needed for an audit of your business, including those that verify assets, gross receipts, purchases and expenses. All records should be timely and indicate what was received, from whom and for what business reason.

Credit card or electronic banking statements alone may not be accepted if you are audited. The IRS requires receipts for the expenses you claim, as this is often the only way to prove what specific item or service was purchased for business purposes.

The length of time to retain books or records varies. The IRS recommends that records be retained for “as long as they may be needed for the administration of any provision of the Internal Revenue Code.”  This generally means until the statute runs out, or as long as the return can be audited, which is generally three years for federal audits in most but not all cases. The statute of limitations varies by state.

Certain documents should be retained longer, if not permanently. These include copies of old tax returns, divorce decrees, adoption papers, retirement plan documents and basis records for real estate, stock, assets and depreciable property.

If you have questions about the documents you need for an audit, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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The Simplified Home Office Deduction

Posted on February 1, 2013 by TaxAlerts

Written by: Susan Weber, CPA, EA

On January 15, 2013, the IRS announced a new, simplified method of calculating the home office deduction starting for 2013. The new method is optional for businesses and employees who are eligible to deduct the offices in their homes that are used regularly and exclusively for their business or job.

Before 2013, taxpayers who wanted to deduct the cost of a home office had to complete Form 8829, a complex, 43-line form. Now taxpayers have the option to complete a much simpler form to claim the deduction. Please keep in mind that you still need to meet all the qualifications to claim this deduction using either method.

The maximum home office deduction using the simplified method is $1,500. Taxpayers who choose this method will not be able to depreciate the portion of their home used in a trade or business. They will be able to claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A, but these deductions will not have to be allocated between personal and business use as they do with the regular method using the Form 8829.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

If you are a taxpayer with a qualified office in your home, you should review both the regular method and the new, simplified method to determine which method will work best for you.

If you have questions about the home office deduction, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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The American Taxpayer Relief Act

Posted on January 3, 2013 by TaxAlerts

Written by: Karen Reed, EA

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act, averting the tax aspect of the so-called “Fiscal Cliff.” The law creates a new, higher tax bracket for upper income taxpayers and increases the tax rates for capital gains and qualified dividends for the top income brackets. In addition, itemized deduction and exemption phase-outs for the wealthy have been reinstituted, though the income thresholds have been raised.

The new law contains a number of provisions that benefit middle class taxpayers, including a permanent AMT patch and the revival of several popular tax breaks, such as the deduction for mortgage insurance premiums and the general sales tax deduction. Since the bill allows the payroll tax holiday to lapse, taxes for all wage earners and self-employed taxpayers increase by two percent for this year and beyond.

Here are just some of the highlights of the Act:

  •  Single taxpayers with adjusted gross income (AGI) of $400,000 or higher, joint filers with AGI of $450,000 and Head of Household filers with $425,000 in AGI will be subject to a higher maximum tax rate of 39.6%.
  • Capital gains and qualified dividends rates will increase from 15% to 20% for this same group of “high income” taxpayers.
  • Itemized deductions will phase-out for taxpayers with AGI of $250k, $275k and $300k or more for Single, Head of Household and Joint filers respectively.
  • There will continue to be a zero percent capital gains rate for taxpayers with incomes below certain amounts. For 2013 these amounts are expected to be $72,500 for joint filers and $36,250 for single filers.
  • AMT exemption amounts have been increased for 2012 and the law provides for annual inflation adjustments for subsequent tax years. In addition, nonrefundable personal credits will be allowed for the AMT calculation.
  • American Opportunity Tax credit has been extended through 2017.
  • The deduction for tuition and fees has been extended through 2013.
  • The two percent reduction in Social Security tax has expired.
  • The ability of taxpayers to exclude cancelled debt from taxable income under the Qualified Principal Residence Indebtedness exclusion has been extended another year, through 2013.
  • Taxpayers 70 1/2 and older will still be allowed to make a qualified charitable contribution of up to $100,000 from an IRA through 2013.
  • The expense deduction for primary and secondary school education professionals has been extended through 2013.
  • Mortgage insurance premiums will be deductible as mortgage interest through 2013.
  • The 60-month rule for the student loan interest deduction is permanently suspended, and the income limit for the phase-out has been increased. The restriction that made voluntary interest payments nondeductible has been repealed.

If you have questions about the American Taxpayer Relief Act, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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Tax Relief for Hurricane Sandy Victims

Posted on December 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

In the aftermath of Hurricane Sandy, the IRS has announced a range of relief measures intended to help those in disaster areas meet their tax obligations and recover from the damage caused by the storm. The Service is also making it easier for individuals to help friends and family affected by the storm. Here is a recap of the tax relief for Sandy victims announced by the IRS during November.

  • Taxpayers in qualified federal disaster areas may exclude disaster relief payments received from employers or others from taxable income. Qualified disaster relief payments include funds received to cover personal expenses not covered by insurance such as personal living expenses, funeral expenses, or the repair or rehabilitation of personal residences.
  • Individuals and businesses will have until Feb. 1, 2013, to file returns and tax payments that were due starting in late October. This includes the fourth quarter individual estimated tax payment and payroll and excise tax returns and accompanying payments for the third and fourth quarters. It also applies to tax-exempt organizations with an original or extended deadline for a Form 990 series return falling during this period.
  • In response to shortages of clear diesel fuel caused by Hurricane Sandy, the IRS will not impose a tax penalty when dyed diesel fuel is sold for use or used on the highway provided the operator or the person selling the fuel pays the tax of 24.4 cents per gallon that is normally applied to diesel fuel for on-road use. The relief is available in New Jersey, New York, and Pennsylvania beginning Oct. 30, 2012, through December 7, 2012. In addition, the IRS will not impose penalties for failure to make semimonthly deposits of this tax. The Internal Revenue Service also will not impose the tax penalty on a failure to meet the requirements of EPA highway diesel fuel sulfur content regulations if the EPA has waived those requirements.
  • In an effort to expand the availability of housing for disaster victims and their families, the Internal Revenue Service will waive low-income housing tax credit rules that prohibit owners of low-income housing from providing housing to victims of Hurricane Sandy who do not qualify as low-income. Income limitation requirements and non-transient requirements for qualified low-income housing projects that provide housing to victims of Hurricane Sandy will be temporarily suspended.
  • Special relief programs allow employees to donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Employees can forgo leave in exchange for employer cash payments made before Jan. 1, 2014. Under this program, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the amount of the cash payment.
  • The IRS is relaxing procedural and administrative rules for loans and hardship distributions from 401 (k) and similar employer sponsored retirement plans. The relief can allow a Sandy victim to take a hardship distribution or borrow up to certain limits from their retirement plan. A person who lives outside the disaster area can take out a retirement plan loan or hardship distribution to assist certain relatives and dependents who lived or worked in the disaster area. Generally, hardship distributions are still subject to taxation, and a 10% penalty may apply for early distributions.

This article is intended to provide general information about IRS disaster tax relief. Before you take any action, you should seek personalized advice from a tax professional who knows the details of your particular situation.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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South Carolina Taxpayer Information Exposed in Cyber Attack

Posted on November 2, 2012 by TaxAlerts

Written by: Karen Reed, EA

On October 30th, the South Carolina Department of Revenue announced that security may have been compromised on 3.6 million Social Security numbers and 387,000 credit cards in a September cyber attack. Those who have filed a South Carolina tax return since 1998 should visit protectmyid.com/scdor or call (866) 578-5422 to determine if their information has been affected.

The State of South Carolina recommends these steps for taxpayers who may be affected:

  • Review credit reports regularly;
  • Place fraud alerts with the three major national credit bureaus (Equifax at (888) 766-0008, Experian at (888) 397-3742, and Transunion at (800) 680-7289); and,
  • Place a security freeze on financial and credit information with the three major national credit bureaus

Steps to follow if you have been affected by Identity Theft:

  • Place fraud alerts with the three major national credit bureaus (Equifax at (888) 766-0008, Experian at (888) 397-3742, and Transunion at (800) 680-7289);
  • Place a security freeze on financial and credit information with the three major national credit bureaus;
  • Contact your bank(s) to cancel and reissue bank card(s); and
  • Contact the IRS Identity Protection Specialized Unit (IPUS) at (800) 908-4490. This unit will ask you to complete Form 14039, Identity Theft Affidavit. This unit will put an identity theft marker on your account. Each year, around December, the IRS will send an “Identity Theft Personal Identification Number” (IP PIN) to taxpayers who submitted the Form 14039 to protect them from refund-related tax identify theft. You will need this number to be able to electronically file your return.

If you have questions about IPUS, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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Tax Relief for Storm Victims

Posted on November 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

President Obama signed major disaster declarations for several counties of New York, New Jersey and Connecticut affected by Superstorm Sandy. Presidential emergency declarations were issued for counties in Rhode Island, New Hampshire, Massachusetts, Maryland, Delaware, Virginia, West Virginia, Pennsylvania, and the District of Columbia.

Presidential declarations allow the IRS to grant relief to taxpayers who reside or have businesses in affected locations. Disaster relief generally includes postponement of filing and payment deadlines. As of the date of the publication of this article, the relief announced extends the due date for payroll and excise tax returns and payments normally due on October 31 until November 7. Additional relief will be announced by the IRS in the coming weeks.

While the IRS makes allowances for time-sensitive obligations during times of disaster, it does not relieve taxpayers of the burden of producing documents in an audit, even when records have been lost in fires or floods. The Service expects taxpayers to be prepared for disasters by keeping a set of back-up records. Check back next month for an update on available disaster relief, and for tips to help you recover your lost documents and tax information.

If you have specific questions about IRS disaster relief, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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Stay Out of the Surtax Zone with Year-End Tax Planning

Posted on October 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

Tax planning can make a big difference in the amount of taxes you are legally required to pay, especially in a year that may mark the end of an era of lower tax rates. Beginning in 2013, taxpayers with modified adjusted gross incomes (MAGI) above certain thresholds will be subject to a 3.8% surtax. In addition, if Congress does not extend the “Bush Tax Cuts,” rates on investment income will increase for all taxpayers.

The new surtax will apply to the lesser of net investment income or the amount by which your income exceeds the threshold amount. The threshold amount is $250,000 for joint filers, $125,000 for married taxpayers filing separately from their spouses, and $200,000 for single and head of household filers. Even if your income tends to be far below these amounts, you could find yourself unexpectedly in the surtax zone without careful planning of your retirement plan distributions and investment sales.

Plan Your Retirement Distributions

Before you take a retirement plan distribution, consider all of your other sources of income as well as your spending needs. Retirement distributions from traditional IRAs and 401ks are added to your MAGI, so if you are close to the threshold amount, you may be able to adjust your distribution to stay under the threshold. Alternatively, you may want to consider taking a greater distribution in 2012 in order to plan ahead for 2013.

Qualified Roth distributions are tax-free and do not increase your MAGI. If you have Roth accounts, and expect to be near the income threshold for the surtax, plan your distribution amounts from your various accounts so that you stay under the threshold.

If you are currently putting money aside for your future retirement, the new surtax strengthens the case for choosing Roth accounts, especially if you expect to be in a high income bracket when you retire.

Conversion to a Roth Now Instead of Later

If you are planning to convert your traditional IRA accounts to Roth IRAs, you may benefit by completing your conversions this year instead of next if your Roth conversions have the potential to push your MAGI over the threshold for the surtax.

Sell your home in 2012 instead of in 2013

The taxable gain on the sale of a home is considered investment income, and amounts not excludable from income under section 121 may subject you to the surtax if your home has appreciated a great deal since you purchased it. In addition, if the “Bush Tax Cuts” expire, you’ll pay a higher tax rate on the gain in 2013. If you were thinking about selling your principal residence or vacation home in 2013, it might be worthwhile to consider the possible tax advantages of selling it in 2012 rather than next year.

If you have questions about tax planning, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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A Controversial Position Reversed

Posted on September 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

For more than two years, the IRS has been taking a controversial position with regard to accuracy-related penalties on disallowed refundable tax credits. Taxpayers ineligible for refundable credits who mistakenly claimed them were being assessed a 20% penalty on their unallowed credit amount based on a misguided and convoluted interpretation of the formula for making the underpayment calculation. A recent technical assistance memorandum reverses that position.

According to Program Manager Technical Advice (PMTA) 2012-16, the Chief Counsel’s office has reconsidered its advice in regard to the accuracy-related penalty in situations that involve frozen refunds. This may apply to taxpayers who claimed but never received refundable credits such as the Earned Income Tax Credit, the Adoption Credit or the First-Time Homebuyer Credit because they were deemed to be ineligible. The memo explains that in such situations an underpayment penalty does not exist because there is no underpayment based on a change in the interpretation of the computation. Without an underpayment there can be no liability for the accuracy-related penalty. Other penalties may apply, however, when the taxpayer lacks a reasonable basis for claiming a refundable credit.

Taxpayers who have already paid a penalty that was incorrectly assessed should consider filing Form 843, Claim for Refund and Request for Abatement. This form is used to request a refund of a penalty resulting from erroneous written advice from the IRS.

If you have questions about filing a Claim for Refund or Request for Abatement, consider becoming a TaxAudit.com Member and using our professionally staffed TaxHotline Service. Our TaxHotline professionals will answer your tax questions in a prompt, accurate, and confidential manner.

This information is being provided to the taxpayer as required by the Internal Revenue Service and follows the guidelines for best practices for tax advisors per Circular 230 §10.33(a)(1-4), and §10.35(b)(2),(8), and (10). This written statement may be considered to be a “covered opinion” as defined by the Internal Revenue Service. This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice included here has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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