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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Tax Tips for Business Travelers

Posted on August 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

As a Business Traveler, What Can You Deduct?

If you are a business traveler – either as an employee or a self-employed business owner – you are allowed to deduct the costs of your meals, lodging and transportation costs, as well as incidentals, such as tips and laundry, for your trips away from home that require an overnight stay.

Your deduction for meals is limited to fifty percent of your actual costs, unless you work in the transportation field – for example, as a truck driver, bus driver or airplane pilot – and are subject to Department of Transportation (DOT) regulations. If you do fall under DOT rules, you are allowed to deduct eighty percent of your meal expenses.

Entertainment expenses are also limited to fifty percent, and there must be a business purpose. The entertainment event should occur directly before or after a business meeting or in a setting conducive to a business discussion. A contemporaneous listing of your entertainment expenses is the best way to provide the required substantiation, along with the related receipts and proof of payment.

What Expenses Are Not Deductible?

Travel expenses related to a work assignment that is indefinite or expected to go on for more than a year are considered personal, nondeductible expenses. The IRS does not allow deductions for lavish and extravagant travel expenses, the costs of personal side trips and personal activities, the extra expenses involved in extending a stay for personal reasons, or travel costs for a spouse or other travelling companion, unless the companion is an employee or has a business purpose for going on the trip.

Specific requirements need to be met in order to deduct expenses for attending seminars and conventions outside of North America or on cruise ships. In addition, if you extend a stay for personal purposes when travelling outside the U.S. on business for more than one week, you should make sure that you do not spend 25% or more of your time on the trip on nonbusiness related activities, otherwise your allowable deductions could be limited if certain requirements are not met.

Are There Any Tricks?

Whether or not you should report your travel expenses on your tax return depends on the type of reimbursement plan you have at work. Accountable reimbursement plans require employees to account for business expenses and return excess reimbursements, and usually no tax reporting is needed. Nonaccountable plans provide additional compensation to employees for travel expenses without requiring them to provide receipts for their expenses. An accountable plan is generally more advantageous for the employee, as a dollar for dollar reimbursement is better than the partial benefit one receives from claiming a tax deduction.

Moreover, employees who do not itemize deductions or who are are subject to the Alternative Minimum Tax receive no tax benefit at all from claiming unreimbursed job-related expenses. And those who are able to claim a deduction will have it limited by the two percent of the Adjusted Gross Income (AGI) threshold for employee expenses.

What Are Some Tips for Business Travelers?

If you are an employee who is responsible for paying for your own travel expenses and you do not have an accountable plan at work, consider requesting that your employer include an accountable plan in your compensation package. If you do have accountable plan at work, be sure to submit your receipts for reimbursement. If you are entitled to be reimbursed for your expenses but fail to seek reimbursement, you are not allowed to claim a deduction according to IRS rules.

How Long Should Business Travelers Keep Records?

For most taxpayers, the minimum length of time to keep records for the federal return is three years after the tax return is filed, and possibly longer for a state return. There are a number of situations in which you might need the records longer. For example, if business property, such as a vehicle, is involved, the records should be kept for at least three years after the vehicle is sold.

If there is a net operating loss with a carryforward, the records should be kept three years after the last tax return reporting the carryforward of the NOL, which could be over 20 years in some cases.

Other records that will be needed to substantiate business trips in an audit include the time and place of the travel or entertainment event, information about the people involved in the meetings, and the business purpose. You should also keep descriptions of the expected benefit of the meetings and the business discussions with your records.

If you are an employee and you are audited for your job-related expense deductions, you will also need to supply the IRS with a letter from your employer.

If you have questions about how to report your business travel expenses, 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 Does the Individual Mandate Mean for You?

Posted on July 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

On June 28, 2012, the Supreme Court held that the keystone provision of the Patient Protection and Affordable Care Act – the individual mandate – is constitutional and will remain in effect. The underlying argument of the majority opinion, that the government has the right to tax individuals for not purchasing health insurance, was a surprising twist for many who believed the constitutional issue under scrutiny was interstate trade.

Beginning in 2014, all individuals will be required to maintain what the bill refers to as minimum essential coverage. The monthly penalty – or tax – that will be imposed on those who fail to carry the minimum essential coverage will be 1/12 per month of the greater of a flat dollar amount or a percentage of income. The flat dollar and percentage of income amounts will start low – at 1% and capping at $285 per family – but rise to 2.5% and capping at $695 by 2016. Joint filers will be jointly and individually liable for any penalty.

A refundable tax credit will be available to help certain lower income taxpayers pay for health insurance premiums. The new Premium Assistance Tax Credit will be determined based on an individual’s income as compared with the federal poverty level.

Individuals with gross incomes below the filing requirement will be exempt from the penalty. An exemption also will apply to religious objectors, members of Native American tribes, incarcerated individuals, and individuals with certain hardships.

Starting in 2013, higher income individuals will pay an additional Medicare tax of 0.9 percent on the amount of earned income (such as W-2 wages and self-employment income) above $200,000 and $250,000 for joint filers. The threshold amount for married individuals filing separately will be $125,000. Individuals at higher income levels also will be subject to an unearned income Medicare contribution tax of 3.8%. The tax will be owed on the lesser of net investment income (such as stock sales) or amounts exceeding the income threshold.

If you have questions about the Patient Protection and Affordable Care Act and how if affects you, 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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When Proof of Payment Is Not Enough

Posted on June 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

Two recent Tax Court decisions reinforce the need for taxpayer vigilance in obtaining proper documentation to support items claimed on federal income tax returns. In both cases, legitimate deductions were denied because the taxpayers did not meet the substantiation requirements set forth by the Internal Revenue Code for their specific types of charitable contributions.

On May 17, 2012, the Tax Court sided with the IRS in Durden v. Commissioner of Internal Revenue, disallowing $22,517 in charitable contribution deductions claimed by David and Veronda Durden on their 2007 tax return. The Durdens had obtained an acknowledgement letter from their church, but it did not include a specific statement as to whether goods or services had been received in exchange for the gifts, a requirement of the Code for charitable contributions over $250. The Durdens obtained a second letter from the church during the audit, but the IRS disallowed the document because it did not meet the contemporaneous requirement prescribed by the Code, and the Court agreed.

Just twelve days later the Tax Court sided with the IRS in Mohammed v. Commissioner, denying Joseph Mohammed 19 million in legitimate charitable deductions. He had failed to meet the specific substantiation rules for property contributions in excess of $5,000, which require a “qualified appraisal” of the property within a specified period before or after the gift is made.

Mohammed, who had prepared his own tax return, completed the IRS appraisal form himself, believing his certification as a real estate appraiser qualified him to do so. He was unaware of the requirement for an independent appraisal and only obtained one when he was already under audit. At that point it was too late; even though the independent appraisal he provided during the audit showed that the value of the property at the time of the gift was higher than the amount he had claimed, it had not been done by the required due date and therefore could not be considered a “qualified appraisal” in the eyes of the IRS and Tax Court.

As a general rule, the types of records you are required to keep in order to substantiate your deductions are not specified by the Internal Revenue Code – they will generally be accepted if they allow the IRS to determine your correct tax. However, certain deductions, such as charitable contributions, have their own specific rules, and the proof needed becomes increasingly onerous depending on the amount claimed. As the taxpayer, it is your responsibility to know and comply with the requirements for each deduction you take, even when they are not clearly spelled out on the tax forms. The Tax Court has acknowledged that while the form – and the written form instructions – may not be clear, their decisions are based on the Internal Revenue Code. As these decisions show, strict compliance is essential to ensure that your deductions stand in an audit.

If you have questions about the proper documentation you may need, 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 Tips for U.S. Citizens Living & Working Abroad

Posted on May 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

If you are a U.S. citizen living and working overseas, the IRS expects you to report the money you earn just as if you were residing on U.S. soil. There are some special tax breaks to help you avoid double taxation, but properly claiming them can be complicated. Here are a few pointers to help you navigate your way through the process.

When to File

If you live and work outside of the United States and U.S. possessions, such as Puerto Rico, on tax day, your tax return filing due date is automatically extended to June 15th. Filing a form is not necessary to request this extension, but any taxes you owe still need to be paid by the April due date to avoid late payment penalties, and you should include a statement with your tax return explaining your situation. To request even more time, file Form 4868 for an additional four months. If you expect to qualify for the Foreign Earned Income Exclusion, you can file Form 2350 to request the extra time you might need to meet the bona fide residence test or the physical presence test.

Tax Breaks on Foreign Income

Depending on how much you make, you may be able to exclude all of your income and housing expenses from U.S. taxation if you meet the requirements for the Foreign Earned Income Exclusion. Money you earn for services performed in a foreign country can be subtracted from your taxable income, up to certain limits, when you have been a resident for an uninterrupted period that includes a year, or you were physically present in the foreign country for 330 days during a twelve month period. Pay you receive as a military or civilian employee of the United States Government or its agencies does not qualify for this provision of the Internal Revenue Code.

If you pay taxes to a foreign country, you can claim the Foreign Tax Credit or include the amount paid in your itemized deductions. More often than not, claiming the credit is more beneficial than the deduction, and if you are subject to the Alternative Minimum Tax, you will receive no benefit at all from claiming the deduction.

To avoid mistakes that could lead to an IRS audit, review your return carefully if you are claiming the Foreign Earned Income Exclusion. Check to make sure you are not excluding more income than you are reporting. For example, do not report the net amount of your self-employment income and then exclude your higher gross amount, a common error for those do their own taxes. In addition, do not double dip by claiming a foreign tax credit on wages or business income that you were allowed to exclude.

What about Social Security and Medicare Taxes?

The United States has agreements with many countries that eliminate dual Social Security taxation, including Japan, South Korea, and most Western European countries. Known as totalization agreements, they protect workers who divide their careers between two countries and as a result may not qualify for retirement benefits in either country. Totalization agreements should be taken into account for determining whether you are subject to U.S. Social Security and Medicare taxes.

Self-Employed in a Foreign Country

If you are self-employed, you are generally not subject to U.S. self-employment taxes if you live and work in a country that has a totalization agreement with the United States exempting you from these taxes. Most tax programs automatically apply self-employment taxes to Schedule C business income unless you indicate your special circumstances. If you are preparing your own tax return, review your entries carefully to make sure you are not needlessly paying U.S. self-employment taxes. You will need to attach a copy of your certificate of coverage from the other country to your return to prove your exemption.

Working for Foreign Governments and International Organizations

If you are a U.S. citizen working for a foreign government or certain international organizations, such as the United Nations, World Bank, and the International Monetary Fund, you are responsible for paying your own Social Security and Medicare Taxes. Although this puts you in the self-employed category for these taxes, you are still considered to be an employee and therefore you are not allowed to report business expenses even though you may be filing the Schedule C business form. In addition, you should not claim business deductions that apply only to self-employed taxpayers, such as the self-employed retirement plan deduction.

Any qualifying expenses you do have should be reported as employee expenses. The deduction for job expenses is available only if you itemize, and only expenses above 2% of your adjusted gross income will be deductible.

Tax Treaties with Foreign Countries

The country you live and work in may have a tax treaty with the United States that reduces or eliminates your U.S. tax obligations. If you adjust the amount of U.S. taxes you pay based on information you find in a treaty, the IRS says you must file Form 8833, Treaty-Based Return Position Disclosure. Even if, based on the information in the treaty, your income is reduced to the extent that you do not have a filing requirement, the IRS still wants you to send in a tax return along with the disclosure form.

Foreign Bank Account and Asset Disclosure

If you have one or more foreign bank accounts and the aggregate balance of all of your accounts exceeds $10,000 at any time during the year, the U.S. Treasury Department requires that you provide them with the details about your accounts by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, also known as the FBAR. The FBAR must be filed by June 30th of the year after your balances reach the filing requirement threshold and every year that you have more than $10,000 in your foreign accounts. A due date of this extension is not available.

The new Form 8938, Statement of Specified Foreign Financial Assets, must be filed along with your tax return if your foreign financial assets exceed certain amounts. Financial assets you need to consider include stock, securities and mutual fund accounts held in foreign financial institutions, interest in foreign partnerships, foreign-issued life insurance or annuity contracts with cash-value, and foreign hedge funds. The threshold amounts begin at $50,000 and vary depending on filing status and whether you are a U.S. resident or living abroad.

Not filing these forms as required could subject you to civil penalties. Willful failure to disclose foreign bank accounts and financial assets can result in both monetary penalties and criminal prosecution.

If you have questions about living and working abroad, 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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How to Spot and Avoid “Tax Debt Relief” Scams

Posted on April 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

One after another, the large “tax debt relief” companies are going away. In 2011, the state of California shut down the operations of Roni Deutch for preying on consumers who could not afford to pay their taxes. In January, JK Harris was forced into liquidation bankruptcy after being sued for deceptive business practices. More recently, TaxMasters filed for bankruptcy after similar charges were levied against it by the states of Texas and Minnesota. Long before their demise, the warning signs of a scam were apparent in all three of these companies.

What are the warning signs of fraud?

All three companies specialized in “tax debt relief.” They promised to settle tax debts for “pennies on the dollar.” They charged upfront fees in the thousands without ever looking at their clients’ tax documents. All of these practices were indications that the companies may not have been providing legitimate services, and their “F” ratings with the Better Business Bureau were another sign.

Why are these “pennies on the dollar” promises false and deceptive?

The advertising claims made so often on television make people believe that an Offer–in–Compromise (OIC) is available to everyone at any time. The fact is, however, that only 20 to 25% of the OIC applications submitted are ever accepted, even after negotiation. In addition, when an OIC application is submitted, a down payment must accompany the application, and it will not be returned if the application is rejected. Those who have the ability to pay through other means, such as installment agreements or even selling assets, will not be accepted for an OIC. When a company asks for money upfront without ever looking at your documents to analyze your likelihood of qualifying for an OIC, they probably have no intention of helping you.

What to do if you owe the IRS and are unable to pay?

If you owe the IRS but are unable to pay, there are many options available to you. The IRS recently increased the maximum debt amount to $50,000 for a streamlined installment agreement and lengthened the allowed payment term from sixty to seventy-two months, making it easier for more people to qualify without having to complete onerous paperwork. In addition to OIC, other possible remedies include applying for economic hardship status, innocent spouse relief or bankruptcy. If you believe you do not actually owe the money, filing a corrected return if the IRS filed one for you or requesting an Audit Reconsideration are additional possibilities.

There are many competent tax professionals who specialize in helping people with their collections issues. Be sure to choose wisely, and look for an enrolled agent, CPA or attorney. For a bankruptcy filing you would be best served by an attorney with a strong background in both taxation and bankruptcy.

What is the difference between Tax Audit Defense and Tax Resolution?

TaxAudit.com offers Audit Defense, which is professional tax audit representation. This service happens before your case is decided and sent to IRS collections. When you have Audit Defense, a TaxAudit.com audit representative faces the IRS examiners on your behalf, alleviating the stress involved in doing it on your own and removing the unfair advantage the IRS has over you.

Oftentimes, “tax resolution” is just another term for tax debt relief. “Tax debt relief” is not available for taxpayers who have assets, jobs or a way to pay their tax bill, yet many unscrupulous tax debt relief firms promise to lower your bill and charge exorbitant fees. They often do nothing to help you but they keep the fees.

If Audit Defense is so inexpensive, how can it be good?

TaxAudit.com has over three million members who pay an annual membership fee for defense of their tax returns. The membership fee is so low that any taxpayer can afford a membership. For this nominal price, each TaxAudit.com member has the expertise of an attorney, CPA or enrolled agent available on retainer should the need for it ever arise.

Audit Defense services are available to non–members too. Those who have received a tax audit notice can send it in for a comprehensive evaluation. The low membership fee will not be available once an audit is already under way, but the fees charged will be commensurate with the valuable service TaxAudit.com provides.

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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Beware of Phishing Emails Pretending to be from Tax Software Companies

Posted on March 9, 2012 by TaxAlerts

Written by: Karen Reed, EA

There’s a new wave of “phishing” scams involving phony emails from tax software companies such as TurboTax. Beware of emails prompting you to confirm your invoice or an order for tax software. Even if you are a customer of the software provider, do not respond, do not click any links, do not download files, and do not provide personal financial information via an email.

The newest scam involves emails that purport to confirm or thank recipients for purchasing software and include links to download an invoice, complete order information, and reorder checks. Clicking the links could result in a virus transferring to your computer, or you could be taken to a phony website prompting you to provide personal financial information.

Phishing scammers are known for using the information they receive from unsuspecting taxpayers to empty bank accounts, run up credit card charges, and apply for loans, services and other benefits in the scammed individual’s name. Often, the perpetrators perform these activities from locations overseas.

If you receive an email message that you suspect is a phishing email, forward it to the software company’s security center right away. The email address for TurboTax is spoof@intuit.com.

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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President Signs Middle Class Tax Relief and Job Creation Act of 2012

Posted on March 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012. The bill extends the payroll cut for employees and self-employed individuals through tax year 2012 and includes two nontax provisions ─ an extension of unemployment benefits and a Medicare “doc fix.”

Individuals who receive wages and salaries normally would pay Old-Age, Survivors, and Disability Insurance (OASDI) at a rate of 6.2%. The payroll tax cut, which was first enacted in 2011, reduced the rate by two percentage points to 4.2%. Similarly, the OASDI rate for self-employed individuals was reduced from 12.4% to 10.4%.

The government estimates that 170 million employees and self-employed individuals will benefit from the payroll tax cut extension. The increase in take-home pay for the average worker will be approximately $1,000 for the year.

The long battle over the millionaire surtax and the extension of the Bush-era tax cuts remains at an impasse. While President Obama has promised to veto any legislation that extends tax cuts on higher income taxpayers, Republicans are still refusing to consider a tax increase on millionaires. With the parties far from reaching an agreement on both issues, neither proposal made it into the new bill.

If you have questions about the Tax Relief and Job Creation Act of 2012, 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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Don’t Miss Out on the Earned Income Credit

Posted on February 1, 2012 by TaxAlerts

Written by: Karen Reed, EA

Every year millions of Americans take advantage of the Earned Income Tax Credit, a tax incentive that helps boost income for working families and individuals with low to moderate income. But with the large number of people who have recently experienced a reduction in income, such as a lay-off, or life changes, such as a marriage or birth of a child, the IRS estimates that one in five eligible workers is missing out on the credit.

The Earned Income Tax Credit is available to workers who earn $49,078 or less from wages or self-employment. The amount of the credit a taxpayer may receive will depend on the income earned, filing status, and number of qualifying children. The credit ranges from $464 for taxpayers with no qualifying children to $5,757 for those with three or more. The average credit received last year was about $2,200. This credit is a refundable credit, which means it can reduce the balance owed, create a refund or add to an existing refund.

In order to receive the credit, several requirements must be met, and it is not possible to receive it without filing the federal tax return. Most tax preparation software will alert you to your potential eligibility and take you step by step through the rules to see if you qualify. But unless all of the related questions are answered, the tax program will not include the credit on your return. If there’s a chance you might qualify, be sure to complete all of the questions in the Earned Income Credit section of your tax program − or seek the assistance of a qualified tax professional. You can also seek assistance with our professionally staffed TaxHotline Service. TaxAudit.com’s 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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Independent Contractor or Employee?

Posted on January 3, 2012 by TaxAlerts

Written by: Karen Reed, EA

If you hire or contract with individuals to provide services to your business, it is important to correctly determine whether each person is an employee or independent contractor. This determination will be the basis for how you treat the payments you make to them for their services. The consequences of misclassifying workers can be costly and may include back payments of employment taxes as well as penalties of as much as 100% and interest to both federal and state taxing agencies. Beginning in 2012, the State of California has the authority to assess penalties as high as $15,000 for each improperly classified worker, with matching penalties assessed against the business’s advisors. Other states are expected to follow suit.

The classification of workers depends on the degree of your control over the worker and the independence of the worker. The factors that need to be considered are the extent to which you control the workers and how they do their jobs, whether or not you provide the tools and supplies needed for the work, and whether or not there are written contracts and/or benefits, such as insurance, retirement plans and vacation pay. Generally, when you as the company owner control what the worker does and provide the tools necessary to perform the work, the worker is considered to be your employee rather than an independent contractor.

At the federal level, employers that are able to show a reasonable basis for not treating a worker as an employee may qualify for relief under Section 530. To establish a reasonable basis, the employer would need to show that one of the following situations applies:

  • Reliance on a court case or IRS ruling
  • An IRS audit commenced before 1997 during which the IRS did not reclassify similar workers not treated as employees
  • An IRS audit after December 31, 1996, that included an employment tax examination during which similar workers were not reclassified
  • A significant segment of their industry treats similar workers as independent contractors
  • Reliance on some other reasonable basis, such as the advice of a business attorney

In addition, the employer must also have treated the workers and any similar workers as independent contractors and filed all required federal tax and information returns consistent with their treatment of their employees.

There are major differences in how payments are treated for employees versus independent contractors. For all of your employees you will be required to withhold income taxes, withhold and pay FICA (Social Security and Medicare) taxes, as well as pay unemployment tax on wages paid to employees. To avoid penalties, be sure to take the steps needed to correctly classify the individuals providing services to your business.

If you have questions about the classification of workers, 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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