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Last-Minute Tax Tips

Apr 15th, 2013
by jblankenship.
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Deadline

Since today is D-Day for income tax filing, I’ve pulled together a few recent tips that the IRS published.  These tips cover a few of the areas that you may find interesting, including how to get a six-month extension for your filing (but not for payment of tax), errors to avoid as you complete your tax return, how to make IRA contributions, and tips for the self-employed at tax time.  This is a much longer post than I normally write, but I think it has a lot of very good and very timely information that will be useful today.

The actual text of these tips are listed below, with the reference number of each tip.

 

IRS Newswire IR-2013-38

Can’t File by April 15? Use Free File to Get a Six-Month Extension; E-Pay and Payment Agreement Options Available to People Who Owe Tax

WASHINGTON – The Internal Revenue Service today reminded taxpayers that quick and easy solutions are available if they can’t file their returns on time, and they can even request relief online.

The IRS says don’t panic.  Tax-filing extensions are available to taxpayers who need more time to finish their returns.  Remember, this is an extension of time to file; not an extension of time to pay.  However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief.

Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline.  Taxpayers should file, even if they can’t pay the full amount due.  Here are further details on the options available.

More Time to File

People who haven’t finished filling out their return can get an automatic six-month extension.  The fastest and easiest way to get the extra time is through the Free File link on IRS.gov.  In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic tax-filing extension on form 4868.

Filing this form gives taxpayers until Oct. 15 to file a return.  To get the extension, taxpayers must estimate their tax liability on this form and should also pay any amount due.

By properly filing this form, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline.  In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 15.  The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov.  Of the nearly 10.7 million extension forms received by the IRS last year, almost 5.8 million were filed electronically.

Some taxpayers get more time to file without having to ask for it.  These include:

  • Taxpayers abroad.  US citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the US, have until June 17 to file.  Tax payments are still due April 15.
  • Members of the military and others serving in Afghanistan or combat zone localities.  Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due.  For details, see Extensions of Deadlines in Publication 3, Armed Forces Tax Guide.
  • People affected by certain tornadoes, severe storms, floods and other recent natural disasters.  Currently, parts of Mississippi are covered by a federal disaster declaration, and affected individuals and businesses in these areas have until April 30 to file and pay.

Easy Ways to E-Pay

Taxpayers with a balance due now have several quick and easy ways to electronically pay what they owe.  They include:

  • Electronic Federal Tax Payment System (EFTPS).  This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online.  To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
  • Electronic funds withdrawal.  E-file and e-pay in a single step.
  • Credit or debit card.  Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors.  Though the IRS does not charge a fee for this service, the card processors do.  For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A Line 23.

Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury”.  Write “2012 Form 1040”, name, address, daytime phone number and Social Security number on the front of the check or money order.  To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.

More Time to Pay

Taxpayers who have finished their returns should file by the regular April 15 deadline, even if they can’t pay the full amount due.  In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including the following:

  • Most people can set up a payment agreement with the IRS on line in a matter of minutes.  Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to 72 months.  Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS.  With the Online Payment Agreement, no paperwork is required, there is no need to call, write or visit the IRS and qualified taxpayers can avoid the filing of a Notice of Federal Tax Lien if one was not previously filed.  Alternatively, taxpayers can request a payment agreement by filing Form 9465.  This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
  • Some struggling taxpayers may qualify for an offer-in-compromise.  This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.  To help determine eligibility, use the Offer In Compromise Pre-Qualifier, a free online tool available on IRS.gov.

 

IRS Tax Tip 2013-52

Five Things to Know if You Need More Time to File

The April 15 tax-filing deadline is fast approaching.  Some taxpayers may find that they need more time to file their tax returns.  If you need extra time, you can get an automatic six-month extension from the IRS.

Here are five important things you need to know about filing an extension:

  1. Extra time fo file is not extra time to pay.  You may request an extension of time to file your federal tax return to get an extra six months to file, until Oct. 15.  Although an extension will give you an extra six months to get your tax return to the IRS, it does not extend the time you have to pay any tax you owe.  You will owe interest on any amount not paid by the April 15 deadline.  You may also owe a penalty for failing to pay on time.
  2. File on time even if you can’t pay.  If you complete your return but you can’t pay the full amount due, do not request an extension.  File your return on time and pay as much as you can.  You should pay the balance as soon as possible to minimize penalty and interest charges.  If you need more time to pay, you can apply for a payment plan using the Online Payment Agreement tool on IRS.gov.  You can also send Form 9465,Installment Agreement Request, with your return.  If you are unable to make payments because of a financial hardship, the IRS will work with you.  Call the IRS at 800-829-1040 to discuss your options.
  3. Use Free File to request an extension.  Everyone can use IRS Free File to e-file their extension request.  Free File is available exclusively through the IRS.gov website.  You must e-file the request by midnight on April 15.  If you e-file your extension request, the IRS will acknowledge receipt of your request.
  4. Use Form 4868 if you file a paper form.  You can request an extension of time to file by submitting Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  You must submit this form to the IRS by April 15.  Form 4868 is available on IRS.gov.
  5. Electronic funds withdrawal.  If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from a checking or savings account.  To do this you will need your bank routing and account numbers.

 

IRS Tax Tip 2013-51

Eight Tax-Time Errors to Avoid

If you make a mistake on your tax return, it usually takes the IRS longer to process it.  The IRS may have to contact you about that mistake before your return is processed. This will delay the receipt of your tax refund.

The IRS reminds filers that e-filing their tax return greatly lowers the chance of errors.  In fact, taxpayers are about twenty times more likely to make a mistake on their return if they file a paper return instead of e-filing their return.

Here are eight common errors to avoid.

  1. Wrong or missing Social Security numbers.  Be sure you enter SSNs for yourself and others on your tax return exactly as they are on the Social Security cards.
  2. Names wrong or misspelled.  Be sure you enter names of all individuals on your tax return exactly as they are on their Social Security cards.
  3. Filing status errors.  Choose the right filing status.  There are five filing statuses:  Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child.  See Publication 501, Exemptions, Standard Deduction and Filing Information, to help you choose the right one.  E-filing your tax return will also help you choose the right filing status.
  4. Math mistakes.  If you file a paper tax return, double check the math.  If you e-file, the software does the math for you.  For example, if your Social Security benefits are taxable, check to ensure you figured the taxable portion correctly.
  5. Errors in figuring credits, deductions.  Take your time and read the instructions in your tax booklet carefully.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit and the standard deduction.  For example, if you are age 65 or older or blind check to make sure you claim the correct, larger standard deduction amount.
  6. Wrong bank account numbers.  Direct deposit is the fast, easy and safe way to receive your tax refund.  Make sure you enter your bank routing and account numbers correctly.
  7. Forms not signed, dated.  An unsigned tax return is like an unsigned check – it’s invalid.  Remember both spouses must sign a joint return.
  8. Electronic signature errors.  If you e-file your tax return, you will sign the return electronically using a Personal Identification Number.  For Security purposes, the software will ask you to enter the Adjusted Gross Income from your originally-filed 2011 federal tax return.  Do not use the AGI amount from an amended 2011 return or an AGI provided to you if the IRS corrected your return.  You may also use last year’s PIN if you e-filed last year and remember your PIN.

 

IRS Tax Tip 2013-50

Top Ten Tips on Making IRA Contributions

The IRS has 10 important tips for you about setting aside money for your retirement in an Individual Retirement Arrangement.

  1. You must be under age 70½ at the end of the tax year in order to contribute to a traditional IRA.
  2. You must have taxable compensation to contribute to an IRA.  This includes income from wages, salaries, tips, commissions and bonuses.  It also includes net income from self-employment.  If you file a joint return, generally only one spouse needs to have taxable compensation.
  3. You can contribute to your traditional IRA at any time during the year.  You must make all contributions by the de date for filing your tax return.  This due date does not include extensions.  For most people this means you must contribute for 2012 by April 15, 2013.  If you contribute between Jan. 1 and April 15, you should contact your IRA plan sponsor to make sure they apply it to the right year.
  4. For 2012, the most you can contribute to your IRA is the smaller of either your taxable compensation for the year or $5,000.  If you were 50 or older at the end of 2012 the maximum amount increases to $6,000.
  5. Generally, you will not pay income tax on the funds in your traditional IRA until you begin taking distributions from it.
  6. You may be able to deduct some or all of your contributions to your traditional IRA.
  7. Use the worksheets in the instructions for either Form 1040A or Form 1040 to figure the amount of your contributions that you can deduct.
  8. You may also qualify for the Savers Credit, formally known as the Retirement Savings Contributions Credit.  The credit can reduce your taxes up to $1,000 (up to $2,000 if filing jointly).  Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the Saver’s Credit.
  9. You must file either Form 1040A or Form 1040 to deduct your IRA contribution or to claim the Saver’s Credit.
  10. See Publication 590, Individual Retirement Arrangements, for more about IRA contributions.

 

IRS Tax Tip 2013-46

Top Six Tax Tips for the Self-Employed

When your are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business.  Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

  1. Self-employment income can include pay that you receive for part-time work you do out of your home.  This could include income you earn in addition to your regular job.
  2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.
  3. If you are self-employed, you generally have to pay self-employment tax as well as income tax.  Self-employment ax includes Social Security and Medicare taxes.  You figure this tax using Schedule SE, Self-Employment tax.
  4. If you are self-employed you may have to make estimated tax payments.  People typically make estimated tax payments to pay taxes on income that is not subject to withholding.  If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return.  The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.
  5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business.  You can deduct most business expenses in full, but some costs must be ‘capitalized’.  This means you can deduct a portion of the expense each year over a period of years.
  6. You may deduct only the costs that are both ordinary and necessary.  An ordinary expense is one that is common and accepted in your industry.  A necessary expense is one that is helpful and appropriate for your trade or business.

For more information, visit the Small Business and Self-Employed Tax Center on the IRS website.  There are three IRS publications that will also help you.  See Publications 334, Tax Guide for Small Business; 535, Business Expenses and 505, Tax Withholding and Estimated Tax.  All tax forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Estimated Tax Payments

Apr 11th, 2013
by jblankenship.
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tax payments

When you have income from sources other than traditional employment, it often becomes necessary to make Estimated Tax payments since you don’t have withholding (as you would from traditional wages).  This income may be from self-employment, rents or royalties, or from interest and dividends from your investments.  Income of this variety may also be from pensions, Social Security, and IRAs or qualified retirement plans.

Sometimes you can set up the payments from various sources to withhold tax payments and the provider will then send the withheld tax to the IRS on your behalf.  These tax payments will be reported to you on your 1099R, SSA-1099, and/or other specific tax documents that you receive at the end of the year.  If you don’t have another form of withholding, you may need to make estimated tax payments throughout the year.

The IRS recently issued their Tax Tip 2013-49, which details Six Tips on Making Estimated Tax Payments.  The actual text of the Tip is listed below.

Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year.  The type of income you receive determines whether you must pay estimated taxes.  Here are six tips from the IRS about making estimated tax payments. 

  1. If you do not have taxes withheld from your income, you may need to make estimated tax payments.  This may apply if you have income such as self-employment, interest, dividends or capital gains.  It could also apply if you do not have enough taxes withheld from your wages.  If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.
  2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return.  Other rules apply, and special rules apply to farmers and fishermen.
  3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year.  You shold also include any tax deductions and credits that you will be eligible to claim.  Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes.  Try to make your estimaes as accurate as possible.
  4. You normally make estimated tax payments four times a year.  The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.
  5. You should use Form 1040-ES, Estimated Tax for individuals, to figure your estimated tax.
  6. You may pay online or by phone.  You may also pay by check or money order, or by credit or debit card.  You’ll find more information about your payment options in the Form 1040-ES instructions.  Also, check out the Electronic Payment Options Home Page at IRS.gov.  If you mail your payments to the RIS, you should use the payment vouchers that come with Form 1040-ES.

For more information about estimated taxes, see Publication 505, Tax Withholding and Estimated Tax.  Forms and publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

jb Note: Another way to ensure that you have appropriate withholding for the tax year is by taking a distribution from an IRA and having tax withheld from the distribution.  This is a little-known option that you can use to avoid having to make quarterly estimated tax payments throughout the year – see the article “IRA Trick – Eliminate Quarterly Estimated Tax Payments” for more details.

What Income is Taxable?

Apr 10th, 2013
by jblankenship.
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Withholding Water

It may be tough to figure out which parts of your income you’ve received over the year are taxable, and what parts are not taxable.  This is because certain kinds of income may seem like they should not be taxed (but they are), while other items of income seem like they should be taxed (but they’re not).

The IRS has published a Tax Tip to help understand which income is taxable and which is not.  The complete text of IRS Tax Tip 2013-12 is detailed below.

Taxable and Nontaxable Income

Most types of income are taxable, but some are not.  Income can include money, property or services that you receive.  Here are some examples of income that are usually not taxable:

  • Child support payments;
  • Gifts, bequests and inheritances;
  • Welfare benefits;
  • Damage awards for physical injury or sickness;
  • Cash rebates from a dealer or manufacturer for an item you buy; and
  • Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions.  Examples include:

  • Life insurance proceeds paid to you because of an insured person’s death are usually not taxable.  However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income you get from a qualified scholarship is normally not taxable.  Amounts you use for certain costs, such as tuition and required course books, are not taxable.  However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it.  This includes non-cash income from bartering – the exchange of property or services.  Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount.  If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you.  That agency may have made the form available only in an electronic format.  You will need to get instructions from the agency to retrieve this document.  Report any taxable refund you received even if you did not receive Form 1099-G*.

For more information and examples, see Publication 525, Taxable and Nontaxable Income.  The booklet is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

* jb Note: If you didn’t itemize your deductions on the previous year’s return and/or if you did not deduct state or local income taxes on the previous year’s return, your refund is likely not taxable income.  An example would be if you took the state & local sales tax deduction instead of state & local income taxes (you have to choose between the two) – in this case if you received a refund from the state or local taxing authority, this is usually not taxable in the current year.

What You Need to Know About the Alternative Minimum Tax (AMT)

Apr 8th, 2013
by jblankenship.
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AMT

When you have high taxable income and certain deductions and exclusions from income, you may be subject to the Alternative Minimum Tax, or AMT.  This is a nearly flat-tax, which excludes a higher amount of income from the regular income tax.  For 2012 taxes, the exclusion of income is $50,600 for singles, and $78,750 for married couples.  The “nearly flat” tax rate starts at 26% and the upper end rate is 28%.

Under the AMT, no deduction is allowed for the standard deduction, or for personal exemptions.  State and local taxes are also not allowed to be deducted from your income.  Your other itemized deductions are allowed, at least to a certain extent.

Recently the IRS issued their Tax Tip 2013-17, which lists Five Facts to Know About AMT.  The actual text of this Tip is below.

Five Facts to Know about AMT

The Alternative Minimum Tax may apply to you if your income is above a certain amount.  Here are five facts the IRS wants you to know about the AMT:

  1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.
  2. The 2012 AMT exemption amounts for each filing status are:
    • Single and Head of Household = $50,600;
    • Married Filing Joint and Qualifying Widow(er) = $78,750; and
    • Married Filing Separate = $39,375.
  3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.
  4. You should use IRS e-file to prepare and file your tax return.  You figure AMT using different rules than those you use to figure your regular income tax.  IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for your.
  5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

Visit IRS.gov for more information about AMT.  You should also check Form 6251, Alternative Minimum Tax – Individuals and its instructions.  Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

The IRS Released Their “Dirty Dozen” Tax Scams for 2013

Apr 1st, 2013
by jblankenship.
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The Dirty Dozen

Every year the IRS releases a list of what they refer to as the “Dirty Dozen” tax scams – which are particularly timely to review during tax filing season.  Don’t expect this to be as much fun as watching the original 1967 movie – c’mon, this is the IRS, not Lee Marvin!  However, it’s important to know about these scams because, as the taxpayer, it is you who is ultimately responsible for the information on your tax return – even if you were duped into believing a particular “scam” was legit.

Recently this list was released for 2013, in the IRS’ Special Edition Tax Tip 2013-08.  The actual text of 2013-08 follows:

Protect Yourself from the Dirty Dozen Tax Scams

The IRS’s annual ‘Dirty Dozen’ list includes common tax scams that often peak during the tax filing season.  The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true.  Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.

Tax scams that made the Dirty Dozen list this filing season are:

Identity Theft.  Tax fraud through the use of identity theft tops this year’s Dirty Dozen list.  Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance.  During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft.  This compares to $14 billion in 2011.  Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account.  You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490.  Find more informaiton on the identity protection page on IRS.gov.

Phishing.  Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information.  Once scammers obtain that information, they can commit identity theft or financial theft.  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.  If you receive an unsolicited email that appears to be from the RIS, send it to phishing@irs.gov.

Return Preparer Fraud.  Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN).  For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.

Hiding Income Offshore. One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.

“Free Money” from the IRS & Tax Scams Involving Social Security.  Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.

Impersonation of Charitable Organizations.  Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. 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. Taxpayers need to be sure they donate to recognized charities.

False/Inflated Income and Expenses.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims.  In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.

Frivolous Arguments.  Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. 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, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.

Disguised Corporate Ownership.  Scammers improperly use third parties to form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.

Misuse of Trusts.  There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.

For more on the Dirty Dozen, see IRS news release IR-2013-33.

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Free Income Tax Filing Options

Feb 25th, 2013
by jblankenship.
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Files

Did you know that you can file your taxes online for free? There are options available for you to file your income tax return for nothing – nada.  There are also options available to get free assistance and use tax preparation software for free, as long as your income is within the limits.

As you research a way to prepare your taxes using one of the no-cost or low-cost methods, keep your guard up.  Beware of Refund Anticipation Loans – the loan that the tax prep company offers you in order to receive your refund (actually only a portion of it).  These loans are tempting, especially if you need the money right away, but the problem is that these loans are nothing more than well-disguised payday loans.

Hopefully you realize that this type of loan is extremely costly in terms of interest rate being charged – effective rates can be as high as 100% or more in many cases.  When e-filing a return, as long as there aren’t any problems with the return, you’ll receive your refund by direct deposit in a relatively short time, 4-6 weeks or less in many cases.  Don’t fall for the easy money offer!

Regarding free filing options, the IRS has recently published a couple of documents describing the process and the availability of these options for you.  The complete text of the two documents is duplicated below:

IRS NEWSWIRE IR-2013-15

Do your Taxes and E-File for Free with Free File

WASHINGTON – All taxpayers have a fast, safe and free option when it comes to preparing their own federal taxes.  It’s called Free File, and it’s available only at IRS.gov.

Free File offers brand-name tax software to people who earned $57,000 or less last year, which is 70 percent of all taxpayers.  For those who earned more, there are free online fillable forms. Both options allow people to file returns electronically and use direct deposit, which is the fastest way to get refunds.

The nations leading tax software companies have partnered with the IRS to make their products available for free through IRS.gov.  Each company sets its own eligibility criteria, generally based on income, state residency, age, military service or eligibility for the Earned Income Tax Credit (EITC).  There is also a software option that is available in Spanish for people who earned $30,000 or less.

Free File does the hard work for you.  The software asks the questions; you provide the answers.  It picks the right forms, does the math and helps you find all the tax benefits for which you are eligible.

All participating Free File partners have been vetted and use the latest in security technology.  Some Free File software providers also offer state tax returns for free or for a fee.

Free File Fillable Forms is the electronic version of IRS paper forms.  It’s best for people experienced and comfortable preparing their own returns on paper.  It does not support state tax returns.

Some Free File software products also are available in select free tax preparation sites operated by Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE).  Taxpayers can use VITA or TCE computers to access Free File, prepare their own state and federal returns with a trained and certified volunteer on stand-by to help and e-file – all for free.

To find a participating site near you, go to IRS.gov and search for “VITA” to find a self-preparation site location near you.

More than 36 million people have used Free File since it started in 2003.  You can explore all your options at www.irs.gov/freefile.

Businesses, organizations, states or local governments may want to promote Free File to their employees, customers or clients with products from the IRS.  Just go to www.freefile.irs.gov/partners to see what you can do to help.  There are printable posters, a tax-day countdown widget for websites and prepared social media posts for your use.

IRS TAX TIP 2013-05

Let Free File Do The Hard Work For You

Taxes can be taxing.  But, you don’t have to be a tax expert to prepare your federal tax return.  Using IRS Free File, you can prepare and e-file your federal taxes on brand-name software for free.  The program is a partnership between the IRS and the Free File Alliance, a group of about 15 private-sector tax software companies.

All Free File software companies use the latest encryption software.  More than 36 million taxpayers used Free File safely and securely since 2003.  Free File is not only safe and secure, but using Free File’s e-file option and direct deposit is the fastest way to get a refund.

Here are four tips about IRS Free File:

  1. Access IRS.gov.  To avoid any charges for preparing or e-filing your federal tax return, you must access Free File through the IRS.gov website.  Once you choose a Free File company, you will be directed to their website to prepare, print and e-file your return.
  2. Taxes simplified.  Free File software’s question and answer format will help you find tax breaks, such as the Earned Income Tax Credit.  The software selects the appropriate tax form and does the calculations for you.
  3. Free options for all.  People who make $57,000 or less, which includes most Americans, can use the Free File brand-name software.  People who earn more can use Free File Fillable Forms, an electronic version of IRS paper forms.
  4. Free extensions.  Taxpayers who cannot complete their tax returns by the April 15 filing deadline can request a six=month extension.  It’s free and easy.  Remember, though, that this is an extension of time to file, not to pay.  If you think you owe, complete the estimated payment section and submit your payment with your extension request to avoid penalties and interest.

Free File.  It’s Fast.  It’s Safe.  It’s Free.  For more information, visit IRS.gov/freefile.

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Choosing a Tax Preparer

Feb 18th, 2013
by jblankenship.
No comments yet
Statue of Liberty tax preparer

It’s that time of year again – time to do your income taxes.  While lots of folks will opt for the “box”, using one of the many do-it-yourself options like TurboTax, Tax Cut and others, many folks will choose to go to a professional tax preparer to have their returns prepared.

There are several types of professionals who are qualified to prepare your tax return: Certified Public Accountants (CPAs), attorneys, Enrolled Agents (EAs), and unenrolled tax preparers.  You’re likely familiar with CPAs and attorneys, so I won’t go into explaining them.  Enrolled Agents (EAs) are enrolled with the IRS and empowered to represent taxpayers before the IRS.  This type of professional must pass a rigorous series of exams to be enrolled, and then must complete 72 hours of continuing education every three years to remain enrolled.

CPAs, attorneys and EAs (as well as Enrolled Actuaries) are among a group known as Federally Authorized Tax Practitioners (FATPs).  There are other folks who are authorized to prepare taxes as well – but some of the qualifications are a bit up in the air at the moment.  The Registered Tax Return Preparer (RTRP) designation is to be the new designation for those outside the FATP group, but this designation has recently been challenged in court.  This leaves the unenrolled preparer group with no regulation – essentially it’s the wild, wild west, you don’t know what qualifications your preparer may have.  Sometimes, they even double as a Statue of Liberty <gasp!>.

So what should you look for when choosing a tax preparer?  The IRS recently issued their Tax Tip 2013-07, which lists Ten Tips to Help You Choose a Tax Preparer.  The actual text of the Tip is listed below:

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully.  Even if someone else prepares your return, you are legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax return preparer:

  1. Check the preparer’s qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number.  In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.
  2. Check on the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history.  Also check for any disciplinary actions and for the status of their licenses.  For certified public accountants, check with the state boards of accountancy.  For attorneys, check with the state bar associations.  For enrolled agents, check with the IRS Office of Enrollment.
  3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Taxpayers should not deposit their refund into a preparer’s bank account.
  4. Ask to e-file your return.  Make sure your preparer offers IRS e-file.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.
  5. Make sure the preparer is accessible.  Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date.  This may be helpful in the event questions arise about your tax return.
  6. Provide records and receipts.  Reputable preparers will request to see your records and receipts.  They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your latest pay stub before you receive your Form W-2. This is against IRS e-file rules.
  7. Never sign a blank return.  Avoid tax preparers that ask you to sign a blank tax form.
  8. Review the entire return before signing.  Before you sign your tax return, review it and ask questions.  Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
  9. Make sure the preparer signs and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.
  10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer.  If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.  Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).
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What Should You Do If You’re Missing a W2?

Feb 11th, 2013
by jblankenship.
1 comment
IRS 1040 Tax Form Being Filled Out

By now you should have received your W2’s for 2012, since employers should have sent them out by the end of January.  If you haven’t received one yet, there are several things that you can do to be able to file your taxes on time.

Recently the IRS issued their Tax Tip 2013-10, which gives guidance for folks who have not received their W2 in a timely manner.  The actual text of the Tip is below:

Missing Your W-2? Here’s What to Do

It’s a good idea to have all your tax documents together before preparing your 2012 tax return.  You will need your W-2, Wage and Tax Statement, which employers should send by the end of January.  Give it two weeks to arrive by mail.

If you have not received your W-2, follow these three steps:

  1. Contact your employer first.  Ask your employer – or former employer – to send your W-2 if it has not already been sent.  Make sure your employer has your correct address.
  2. Contact the IRS.  After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2.  Be prepared to provide your name, address, Social Security number and phone number.  You should also have the following information when you call:
    • Your employer’s name, address, and phone number;
    • Your employment dates; and
    • An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.
  3. File your return on time.  You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2.  Use the form to estimate your income and withholding taxes as accurately as possible.  The IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time.  File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  If you are requesting an extension, you must file this form on or before April 15, 2013.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return.  File Form 1040X, Amended US Individual Income Tax Return to amend your tax return.

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IRS Guidance for the Principal Reduction Alternative of HAMP

Feb 4th, 2013
by jblankenship.
1 comment
home again

There is a program that the Department of Treasury and HUD have established to assist financially-distressed homeowners.  Under this program, called Home Affordable Modification Program-Principal Reduction Alternative (HAMP-PRA), the principal of the borrower’s mortgage may be reduced, allowing the homeowner to (hopefully) retain his home and not lose it to foreclosure.

The IRS recently offered guidance on how the program works, in their Newswire IR-2013-8, dated January 24, 2013.  The actual text of the release is below:

IRS Announces Guidance on the Principal Reduction Alternative Offered in the Home Affordable Modification Program (HAMP)

WASHINGTON – The Internal Revenue Service today announced guidance to borrowers, mortgage loan holders and loan servicers who are participating in the Principal Reduction AlternativeSM offered through the Department of the Treasury’s and Department of Housing And Urban Development’s Home Affordable Modification Program® (HAMP-PRA®).

To help financially distressed homeowners lower their monthly mortgage payments, Treasury and HUD established HAMP, which is described at www.makinghomeaffordable.gov. Under HAMP-PRA, the principal of the borrower’s mortgage may be reduced by a predetermined amount called the PRA Forbearance Amount if the borrower satisfies certain conditions during a trial period.  The principal reduction occurs over three years.

More specifically, if the loan is in good standing on the first, second and third annual anniversaries of the effective date of the trial period, the loan servicer reduces the unpaid balance of the loan by one-third of the initial PRA Forbearance Amount on each anniversary date. This means that if the borrower continues to make timely payments on the loan for three years, the entire PRA Forbearance Amount is forgiven. To encourage mortgage loan holders to participate in HAMP-PRA, the HAMP program administrator will make an incentive payment to the loan holder (called a PRA investor incentive payment) for each of the three years in which the loan principal balance is reduced.

Guidance on Tax Consequences to Borrowers

The guidance issued today provides that PRA investor incentive payments made by the HAMP program administrator to mortgage loan holders are treated as payments on the mortgage loans by the United States government on behalf of the borrowers.  These payments are generally not taxable to the borrowers under the general welfare doctrine.

If the principal amount of a mortgage loan is reduced by an amount that exceeds the total amount of the PRA investor incentive payments made to the mortgage loan holder, the borrower may be required to include the excess amount in gross income as income from the discharge of indebtedness.  However, many borrowers will qualify for an exclusion from gross income.

For example, a borrower may be eligible to exclude the discharge of indebtedness income from gross income if (1) the discharge of indebtedness occurs (in other words, the loan is modified) before Jan. 1, 2014, and the mortgage loan is qualified principal residence indebtedness, or (2) the discharge of indebtedness occurs when the borrower is insolvent.  For additional exclusions that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

Borrowers receiving aid under the HAMP-PRA program may report any discharge of indebtedness income – whether included in, or excluded from, gross income – either in the year of the permanent modification of the mortgage loan or ratably over the three years in which the mortgage loan principal is reduced on the servicer’s books.  Borrowers who exclude the discharge of indebtednes income must report both the amount of the income and any resulting reduction in basis or tax attributes on Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Guidance on Tax Consequences to Mortgage Loan Holders

The guidance issued today explains that mortgage loan holders are required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness income of $600 or more for the year in which the permanent modification of the mortgage loan occurs. This rule applies regardless of when the borrower chooses to report the income (that is, in the year of the permanent modification or one-third each year as the mortgage loan principal is reduced) and regardless of whether the borrower excludes some or all of the amount from gross income.

Penalty relief is provided for mortgage loan holders that fail to timely file and furnish required Forms 1099-C, as long as certain requirements described in the guidance are satisfied.

Details are in Revenue Procedure 2013-16 available on IRS.gov.

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