July 30, 2008

Tax Questions And Answers

The Internal Revenue Service has a general questions and answers section you can read in detail here. Each year the IRS updates the answers to reflect the latest changes in tax regulations. These questions and answers came from taxpayers like you.

Frequently Asked Questions

1. IRS Procedures

1.1. General Procedural Questions

1.2. Address Changes

1.3. Amended Returns & Form 1040X

1.4. Code, Revenue Procedures, Regulations, Letter Rulings

1.5. Collection Procedural Questions

1.6. Copies & Transcripts

1.7. Extensions

1.8. Forms & Publications

1.9. Injured Spouse

1.10. Name Changes & Social Security Number Matching Issues

1.11. Notices & Letters

1.12. Refund Inquiries

1.13. Reporting Fraud

1.14. Signing the Return

1.15. W–2 - Additional, Incorrect, Lost, Non-receipt, Omitted

1.16. W–4 - Allowances, Excess FICA, Students, Withholding

2. Filing Requirements/Status/Dependents/Exemptions

2.1. Filing Requirements

2.2. Filing Status

2.3. Dependents & Exemptions

3. Itemized Deductions/Standard Deductions

3.1. Autos, Computers, Electronic Devices (Listed Property)

3.2. Education & Work-Related Expenses

3.3. Gifts & Charitable Contributions

3.4. Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)

3.5. 5. Medical, Nursing Home, Special Care Expenses

3.6. 6. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)

3.7. 7. Other Deduction Questions

4. Interest/Dividends/Other Types of Income

4.1. 1099–DIV Dividend Income

4.2. 1099–INT Interest Income

4.3. 1099–MISC, Independent Contractors, and Self-employed

4.4. 1099 Information Returns (All Other)

4.5. Alimony, Child Support, Court Awards, Damages

4.6. Employee Reimbursements, Form W–2, Wage Inquiries

4.7. Gifts & Inheritances

4.8. Grants, Scholarships, Student Loans, Work Study

4.9. Life Insurance & Disability Insurance Proceeds

4.10. Ministers' Compensation & Housing Allowance

4.11. Savings Bonds

4.12. Tips

5. Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.)

5.1. General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans

5.2. Rollovers

5.3. Types of Plans

5.4. Plan Operations

5.5. Plan Design

5.6. Correcting Plan Errors

6. Social Security Income

6.1. Back Payments

6.2. Regular & Disability Benefits

6.3. Survivors' Benefits

7. Child Care Credit/Other Credits

7.1. Child and Dependent Care Credit & Flexible Benefit Plans

7.2. Child Tax Credit

7.3. Credit for the Elderly or the Disabled

7.4. Hope & Life Time Learning Educational Credits

7.5. Other Credits

8. Earned Income Tax Credit

8.1. Qualifying Child Rules

8.2. Taxable & Nontaxable Income

8.3. Other EITC Issues

9. Estimated Tax

9.1. Businesses

9.2. Farmers & Fishermen

9.3. Individuals

9.4. Large Gains, Lump-sum Distributions, etc.

9.5. Penalty Questions

10. Capital Gains, Losses/Sale of Home

10.1. Property (Basis, Sale of Home, etc.)

10.2. Stocks (Options, Splits, Traders)

10.3. Mutual Funds (Costs, Distributions, etc.)

10.4. Losses (Homes, Stocks, Other Property)

11. Sale or Trade of Business, Depreciation, Rentals

11.1. Depreciation & Recapture

11.2. Rental Expenses versus Passive Activity Losses (PALs)

11.3. Personal Use of Business Property (Condo, Timeshare, etc.)

11.4. Sales, Trades, Exchanges

12. Small Business/Self-Employed/Other Business

12.1. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

12.2. Form 1099–MISC & Independent Contractors

12.3. Form W–2, FICA, Medicare, Tips, Employee Benefits

12.4. Form W–4 & Wage Withholding

12.5. Form SS–4 & Employer Identification Number (EIN)

12.6. Forms 941, 940, Employment Taxes

12.7. Income & Expenses

12.8. Schedule C & Schedule SE

12.9. Starting or Ending a Business

13. Aliens and U.S. Citizens Living Abroad

13.1. Canadian & U.S. Tax Issues

13.2. Exchange Rate

13.3. Foreign Income & Foreign Income Exclusion

13.4. Nonresident Alien - General

13.5. Nonresident Alien - Tax Withholding

13.6. Nonresident Alien - Students

13.7. U.S. Citizens Overseas

13.8. Other

14. Electronic Filing (e-file)

14.1. Age/Name/SSN Rejects, Errors, Correction Procedures

14.2. Amended Returns

14.3. Due Dates & Extension Dates for e-file

14.4. Forms W–2 & Other Attachments

15. Magnetic Media Filers

16. Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries)

17. Individual Retirement Arrangements (IRAs)

17.1. Distributions, Early Withdrawals, 10% Additional Tax

17.2. Rollovers

17.3. Roth IRA

17.4. Traditional IRA

Are you in tax trouble with any of these federal compliance procedures? Talk to a professional: talk with tax attorney Mitchell A. Port at 310.559.5259.

July 28, 2008

Withholding Compliance

As a California business person, have you asked yourself any of the questions below concerning employees and their tax for which you may be responsible in part? The IRS has the answers to these question on its website at IRS.gov.

Here are the questions:

As an employee, what happens if the IRS determines that I do not have adequate withholding?

If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?

If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?

As an employer who has received a modification letter (letter 2808C) from the WHC program, do I wait for another 60 days to change the marital status and/or number of allowances per the modification letter?

I have been directed to lock in an employee’s withholding. What happens if I do not lock in the employee’s withholding as directed?

As an employer, after I lock in withholding on an employee based on a lock-in letter from the IRS, what do I do if I receive a revised Form W-4 from the employee?

Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after they have been locked-in by the IRS?

What should I do if an employee submits a valid Form W-4 that appears to be claiming an incorrect withholding amount?

What do I do if an employee hands me a substitute Form W-4 developed by the employee?

I heard my employer no longer has to routinely submit Forms W-4 to the IRS. How will this affect me as an employee?

What if I don’t want to submit a Form W-4 to my employer?

What do I do if an employee hands me an official IRS Form W-4 that is clearly altered?

In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?

Tax problems? Would you like tax help? Tax compliance a problem? Want to settle with the IRS? Call Los Angeles tax attorney Mitchell A. Port at 310.559.5259.

July 21, 2008

IRS Enforcement Getting Better

Don’t have tax problems or need tax help at the moment? California’s taxpayers beware: the IRS continues to make progress in a number of key enforcement areas. The IRS is showing improvements in areas critical to maintaining a fair, efficient tax system while bringing billions of additional dollars into the Treasury.

The IRS enforcement efforts increased again in fiscal year 2007. For instance, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002.

Highlights of the enforcement and services numbers for fiscal year 2007, which ended on September 30, include:

Individuals

• Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers.

• The IRS filed 3.8 million levies and almost 700,000 liens during 2007, an increase from the previous year and a substantial increase from five years earlier.

• Audits of individuals with incomes of $1 million or more increased 84 percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007.

• Overall, the total individual returns audited increased by 7 percent. That’s the highest number since 1998.

• Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year.

• The IRS increased audits of individual returns with income of $100,000 or more, up 13.7 percent from last year’s total.

Businesses

In the business arena, the IRS continued efforts to review more returns of flow-through entities – partnerships and S Corporations. Our business numbers reflect that we have placed more emphasis in the growing area of these flow-through returns. While large corporate audits are down slightly, we have increased our focus on mid-market corporations – those with assets between $10 million and $50 million dollars. The IRS enforcement budget in 2007 was similar to the budget in 2006, and in times of flat budgets, the agency cannot increase activity across the board but must address the areas where there is growth and potential risk.

• Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year.

• Audits of partnerships increased to 12,195 during 2007, up almost 25 percent.

• Audits of mid-market corporations increased to 4,473, up 6 percent from last year.

• Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year.

• Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the number of audits is up 14 percent.

Taxpayer Services

• More taxpayers chose to file electronically in 2007 than during the prior year, with 57 percent of individual tax filers choosing to e-file in 2007.

• More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million times in 2007, up more than 10.5 percent.

• As in the prior year, the IRS accuracy was 91 percent on tax law questions answered through its toll-free telephone service.

For tax help with serious problems, call tax attorney Mitchell A. Port at (310) 559-5259.

July 15, 2008

Eliminate Interest On Tax

In almost every situation, the IRS never abates interest on unpaid taxes since the thinking is that not paying tax is like getting a loan which the IRS is not about to make interest-free.

But in a U.S. Tax Court case decided last week, the Court held that the IRS has the authority to abate interest. The sole issue for decision was whether the IRS’s decision not to abate interest with respect to the taxpayer’s income tax liability was an abuse of discretion.

The relevant part of the Select Steel, Inc. case was the Court's explanation for its decision that was as follows:

If, as part of a section 6330 proceeding, a taxpayer makes a request for abatement of interest, the Court has jurisdiction over the request for abatement of interest that is the subject of the Commissioner’s collection activities. Katz v. Commissioner, 115 T.C. 329, 340-341 (2000).

Under section 6404(e)(1), as in effect for petitioner’s 1994 fiscal year, the Commissioner may abate part or all of an assessment of interest on any deficiency or payment of income taxes to the extent that the deficiency in payment is attributable in whole or in part to any error or delay by an officer or employee of the IRS in performing a ministerial act.

Although Congress amended section 6404(e)(1) in 1996 to permit the Commissioner to abate interest with respect to “unreasonable” error or delay resulting from “managerial” or ministerial acts, the amendment applies only to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996.

The term “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of a taxpayer’s case after all the prerequisites to the act, such as conferences and review by supervisors, have taken place. Corson v. Commissioner, 123 T.C. 202, 207 (2004).

A decision concerning the proper application of Federal tax law is not a ministerial act. Id. An error or delay in performing a ministerial act is taken into account only if it is in no significant aspect attributable to the taxpayer and only if it occurs after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. Sec. 6404(e)(1).

Section 6404(e) is intended to apply only “in instances where failure to abate interest would be widely perceived as grossly unfair.” H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844. Section 6404(h)(1) authorizes the Court to decide whether the Commissioner’s failure to abate interest was an abuse of discretion and, if so, to order an abatement. See Jones v. Commissioner, T.C. Memo. 2008-56.

Generally, the taxpayer must prove that the Commissioner’s discretion was exercised arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). However, “The Commissioner is in the best position to know what actions were taken by Internal Revenue Service officers and employees during the period for which petitioners’ abatement request was made and during any subsequent inquiry based upon that request.” Jacobs v. Commissioner, T.C. Memo. 2000-123.

Do you have a similar situation and believe that interest should be eliminated? Do you have other tax problems you want to discuss with a California tax attorney? Call Mitchell A. Port at (310) 559-5259.

July 11, 2008

Requests For Extension Of Time To File Partnership Tax Return

In an announcement made on July 1, 2008, the Internal Revenue Service determined that the deadline for extension requests filed by partnerships, including those formed in California, will be shortened by one month. For partnerships whose year ends on or after September 30, 2008, a calendar-year partnership requesting an extension on Form 7004 to file a partnership tax return (Form 1065) will have an extension granted to September 15th instead of to October 15th as it used to be.

The reason is that partnerships must issue K-1 forms when their Form 1065 is filed. Until now, a partner (who needs the K-1 form to file his own individual income tax return) might get the K-1 form after his or her own extended deadline.

That problem is avoided by having the partnership deadline end a month earlier. Partners will now have at least a month before their own extended deadline in which to incorporate their K-1 forms.

July 8, 2008

California's Husband and Wife Business: A Partnership Or Joint Venture (And Other Tax Issues)?

An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Reasons Why a Husband and Wife Might Want to Make the Election Not to be Treated as a Partnership

Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses must comply with filing and record keeping requirements imposed on partnerships and their partners. Married co-owners failing to file properly as a partnership may have been reporting on a Schedule C in the name of one spouse, so that only one spouse received credit for social security and Medicare coverage purposes. The election permits certain married co-owners to avoid filing partnership returns, if each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit. Under the election, both spouses will receive credit for social security and Medicare coverage purposes.

The rest of this article is available at www.irs.gov. It continues with a discussion of these business topics:

Definition of a Qualified Joint Venture

How to Make the Election to be Treated as a Qualified Joint Venture

A Business Owned and Operated by the Spouses Through a Limited Liability Company Does not Qualify for the Election

How to Report Federal Income Tax as a Qualified Joint Venture (Including Self-employment Tax)

In General, Spouses Do NOT Need an Employer Identification Number (EIN) for the Qualified Joint Venture

What to do if the Spouses Already Have an EIN for the Partnership

How to Handle Requests From the IRS for a Partnership Return from the Spouses for Tax Years for Which the Election is in Effect

If the Spouses Elect to be Treated as a Qualified Joint Venture, How Do They Report and Pay Federal Employment Taxes?

Duration that the Election Remains in Effect

Also, take a look at Husband and Wife Business.

For help from a California business attorney on these and other topics, call Mitchell A. Port at (310) 559.5259.

July 1, 2008

IRS Increases Mileage Rates

Due to rising gas prices, the mileage rate will increase by eight cents to 58.5 cents a mile for all business miles driven from July 1 through Dec. 31, 2008. The new rate for computing deductible medical or moving expenses will also increase by eight cents to 27 cents a mile. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.