A Tax Consultant for All Seasons

If you requested that your Stimulus Payment be directly deposited into you IRA or some other type of tax-favored account, relief is on the way. Since many taxpayers did not realize that they would not be able to withdraw that money without penalty, the IRS has decided to allow that money to be withdrawn tax-free and penalty free.

Many taxpayers did not realize that the stimulus payment would go into the same account that they had requested for their refund. You will be allowed to withdraw without penalty, up to the amount of you stimulus payment. To qualify for the penalty free withdrawal, you must withdraw the funds by April 15, 2009.

If you split your refund, you will automatically be sent a paper check. For more detail see the information below provided by the IRS or visit the IRS website.

Eligible tax-favored accounts include traditional and Roth IRAs, health savings accounts (HSAs), Archer MSAs, Coverdell education savings accounts (ESAs) and qualified tuition programs, also known as QTPs or 529 plans. Thus, for example, a taxpayer whose $1,200 stimulus payment is directly deposited into his or her IRA can take out anywhere up to $1,200 from the IRA, tax-free and penalty-free.

In general, the deadline for these withdrawals is the due date or extended due date for filing a 2008 return. This means April 15, 2009, for most taxpayers, or Oct. 15, 2009, for those who obtain tax-filing extensions.

Details on reporting these withdrawals and claiming relief will be included in tax forms and instructions for 2008. Other details are in Announcement 2008-44 on this Web site.

Related Item: Economic Stimulus Payments Information Center

If you are getting ready to close your business, it is not as simple as turning out the lights and closing the door. The IRS provides a checklist of items you need to be sure you have taken care of to be sure you don’t incur penalties for items you may not have realized you need to do.  One of the main things you have to be sure to do is to file all income tax forms to stop the filing requirement for your business. That also is true if you have employees. Be sure you have filed all tax forms to stop the filing requirements for payroll taxes as well. Closing your company does not stop these requirements.  You must file final forms (there is a box on most forms to check if this is your final return) to stop the filing requirement.

If you have a retirement plan, you have to complete the correct forms an be sure you have followed all the steps necessary to terminate the plan.  Follow the previous link to get the forms and instructions you may need to terminate your retirement plan.

Be aware your state may also have requirements and you may need to notify the Secretary of State in your state of the closing. Regulations vary by state so your state Department of Revenue or the Secretary of State office should have the information you need.

Be sure you retain your business records for 7 years in case a tax return you filed for the business is audited. The IRS can go back 10 years, but rarely goes back more than 7 unless fraud is suspected.

Depending on the complexity of your business, it may be wise to contact an attorney and/or a tax professional.

Included below is an excerpt from an article from the IRS that explains the requirements for US citizens living and working abroad. If this pertains to you or someone you know. Use the links below to get additional information about the requirements and laws that are applicable for their particular situation or contact an Enrolled Agent or other tax professional.

As globalization continues to grow, international non-compliance is a significant area of concern and focus for the Internal Revenue Service. The ease of utilizing complex international structures and cross border transactions results in constantly evolving compliance issues. To address these challenges, the IRS has developed a Servicewide Approach to International Tax Administration to improve voluntary compliance with the international tax provisions and to reduce the tax gap.Who Must File US Tax Returns?

U.S. citizens and residents are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. Foreign income must be reported on a U.S. tax return whether or not the person receives a Form W-2, Wage and Tax Statement, a Form 1099 (information return) or the foreign equivalent of those forms. Foreign source income includes but is not limited to earned and unearned income, such as wages and tips, interest, dividends, capital gains, pensions, rents, and royalties.

Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This type of income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.

Generally, a foreign corporation must file a U.S. tax return if it is engaged in a trade or business in the United States, whether or not it had income from that trade or business. It must also file if it had income, gains, or losses treated as if they were effectively connected with a U.S. trade or business, and if it had income from any U.S. source (even if its income is tax exempt under an income tax treaty or code section).

How Does the IRS Get Information About Foreign Source Income and Foreign Transactions?

While the IRS does not have the same level of information reporting on foreign source income as it does for U.S. source income, they do have several means by which they can secure information on foreign source income and transactions. The U.S. has over 60 bilateral tax treaties with other countries, and over 20 Tax Information Exchange Agreements (TIEA) in effect with various countries and jurisdictions where a bilateral tax treaty is not in place. These treaties and agreements facilitate the exchange of information, and generally allow for mutual assistance for both civil and criminal investigations. The tax treaties allow for information exchange by specific request, and in most cases, through spontaneous and automatic exchanges as well.

Specific requests allow treaty partners to request and exchange information relative to a specific tax investigation or tax administration matter. A spontaneous exchange allows a country to spontaneously share information relative to tax administration that might be of interest to its treaty partner, even when a request has not been made. And the automatic exchange program allows treaties partners to routinely share information they maintain about income sourced in one country and paid to a resident of the other treaty partner country.

As part of the IRS Servicewide Approach to International Tax Administration, there is a concerted effort to make better use of these information exchange tools and to coordinate with treaty partners to share information about international tax compliance issues.

What Should You Do If You Have Not Filed Your Tax Returns?

Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.

Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions. Continued non-compliance by flagrant or repeat nonfilers could result in additional penalties and/or criminal prosecution. A taxpayer’s timely voluntary disclosure of a substantial unreported tax liability has long been an important factor in deciding whether the taxpayer’s case should ultimately be referred for criminal prosecution.
Tools and Links

International Customer Service: 215-516-2000 (Not a toll-free number)

International Information on irs.gov

Publication 54, Tax Guide for US Citizens and Residents

Publication 519, US Tax Guide for Aliens

Publication 901, US Tax Treaties.

 If you still have not filed a return because you didn’t think you had to, you still have time to file and still receive your stimulus payment. Your return–if you weren’t required to file–didn’t have to be filed by April 15. You do however, have a deadline. Your must file by October 15, 2008, or it will be too late. If you or someone you know is on Social Security or  you know someone who has low wages and does not normally file a return, let them know they can still file a return to get the stimulus payment.

If you still need to file, you just need to do a simple 1040A to get your stimulus payment.  What you need to include is:

Your name; address; dependents, if any; amount of qualifying income (which must be $3,000 or more); direct deposit information, if you want your payment done direct deposit and your signatures. Form 1040A and instructions are available on the IRS Web site.All eligible persons, including qualifying children, must have Social Security numbers. People with Individual Taxpayer Identification Numbers are not eligible.

As I am sure everyone know by now, Wesley Snipes was convicted of tax evasion. It is important to point out here that it is not filing your taxes is what is illegal. Not paying your taxes will not land you in jail. It may cause you to lose a lot of what you own, but will not put you behind bars. However, as Wesley Snipes found out, listening to schemes that claim they have found a loophole and that you do not have to file, is a huge mistake. I don’t think the jury believed that a person of reasonable intelligence would believe that after all the years faxes have been in existence, that now someone has figured out a way that don’t have to file or pay taxes.

If you have unfiled tax returns, don’t panic! You just need to contact a tax professional such as an Enrolled Agent who can contact the IRS on your behalf and get a Stay on Collections while you get those returns filed. This will usually prevent the IRS from levying you wages and or your bank account. Just get those returns filed, as this compliance with the law is required before the IRS will work with you or the person representing you in negotiating a a payment plan.

I received an article from the IRS on its new initiative on helping the small business owner. This article includes some great links to information that should help the small business owner keep good records and stay compliant with the IRS.  Hope this helps those of you who are trying to do the right thing and learn upfront what needs to be done, rather than finding out after you are audited and can’t substantiate your deductions. An Enrolled Agent or other tax professional can help you with questions specific to your business.

WASHINGTON — The Internal Revenue Service today launched a campaign to help educate new self-employed small business owners about federal tax responsibilities.

The campaign kick-off coincides with the Small Business Administration’s annual Small Business Week, April 21-25, which recognizes outstanding small business owners for their contributions to the nation’s economy and their personal achievements.

“One of the biggest challenges faced by people starting out in business is understanding and meeting their tax filing requirements,” said Kathy Petronchak, commissioner of the IRS’s Small Business/Self-Employed operating division. “It’s a new, different and potentially overwhelming experience for them. We want new small business owners to know that the IRS has resources to help them learn about their federal tax responsibilities and avoid common pitfalls.”

The campaign will provide new Schedule C, Profit or Loss from Business, filers with improved and updated educational materials through a variety of channels, including IRS.gov, small business workshops and other outreach events.

Schedule C is filed by sole proprietors (one-owner businesses) as an attachment to their Form 1040 individual income tax return. Self-employed individuals with less complex situations – including business expenses of less than $5,000, no net losses and no employees – may be able to file Schedule C-EZ, Net Profit for Business.

About one in seven federal income tax returns includes a Schedule C or Schedule C-EZ.  Taxpayers filed over 21 million Schedules C for tax year 2006, reporting overall net profits from sole proprietorships totaling more than $269 billion.

In this introductory phase of the campaign, IRS is offering some basic tips to avoid potential problems:

• Classify workers properly as employees or independent contractors as determined by law, not the choice of the worker or business owner;
• Deposit federal employment taxes, called trust fund taxes, according to the appropriate schedule;
• Start making quarterly estimated-tax payments to cover your own income tax and social security self-employment tax liability;
• Keep good records to protect your personal and financial investment and to make tax filing easier;
• Consider a tax professional to help you with Schedule C;
• File and pay your taxes electronically; it’s fast, easy, and secure;
• Protect financial and tax records to ensure business continuity in the event of a disaster; and
• Avoid abusive tax avoidance schemes such as the IRS’s 2008 “Dirty Dozen.”

I had a question on my last blog about whether or not someone with a pool business could take a deduction for use of the garage and pool.

• On the Garage, the rule is to be taken as a business deduction it has to be for “regular and exclusive” business use. in other words if you put you car and your tools and such in the garage, then the answer is no. If you use you garage solely for storage of your business equipment, then the answer is, yes. On the business us of home form, you put the total square feet of you home and the number of square feet you use regularly and exclusively for business use.  You will get a percentage of your mortgage payment, utilities, and repairs that effect that space.
• On the pool, I would say, no–I doubt the IRS would believe that you have a pool and never use it for personal use.

For additional information on Business Use of Home check out the IRS Website or contact a tax professional.

I received a comment on my blog on keeping business records and it requested additional information. It noted there would be differences in a sole proprietorship and a small business. There are actually more similarities than differences.

• Both need to keep detailed records on income. Sole props and many small businesses are cash basis and need to note that income is taxable when received and keep income records such as deposit slips filed by date received. You need to keep up with who paid you as well as how much they paid you.  Some small businesses may be accrual basis and their income is taxable when invoiced. In that case you need to keep up with when your invoices are dated and file them by invoice date.
• Both need to keep detailed records of all business expenses. A sole prop may have less categories of expenses and may have a business use of home deduction. A small business may have that as well or may pay rent for its office space. Both have office expenses, phone expenses..etc. If you are a sole prop a Schedule C is a good place to start to determine what types of expenses you can deduct and therefore need to keep records. If you are a “S” corp your 1120S form lists expenses you need to track.
• What types of expenses vary widely depending on what type of business you have.
• Either can have independent contractors and will need to keep track of how much you pay each person who does work for you. Anytime it is $600 or more you are required to file a 1099-misc–so be sure whenever someone starts to do work for you that you have their Social Security Number and home address on file.
• Either can have employees–in this case you have a lot of additional records to keep. You will need to have a W4 and an I9 on file for all employees and possible a state form as well. You will need to have payroll records to show what was paid and what was deducted from each paycheck. Reports by month and by quarter will help make completing your quarterly and annual payroll reports easier.

If you need more specific details, just leave a comment and I will address it in another blog. Without knowing what type of business you have it is tough to know what type of information you are looking for. The IRS website or an Enrolled Agent can give you more details as well.

As I indicated in my last blog, now is the best time to be getting organized for 2008. If you are self employed or own a small business, it is crucial that you maintain good business records. If you are self-employed, being sure to keep your business and your personal expenses separate is extremely important. Each day in my work as an Enrolled Agent, I see problems clients have when they are audited by the IRS and have mixed their business and personal expenses.

Be sure you have separate checking accounts and credit cards.  If you currently haven’t separated them, be sure that you clearly have noted on the receipts or checks what the expense was for and that it was a business expense. If you don’t do this now, it will be virtually impossible to do so years later if your tax return were to be audited. Not being able to document the expenses as business ones could cost you a great deal of money. The IRS will not allow you to take deductions for business expenses that you cannot document were business expenses.

Take the time now to separate your expenses and document your business expenses and when you need these documents you will have saved yourself time and money. Don’t under estimate the importance of keeping good business records. I have seen many clients end up owing the the IRS thousands of dollars because they could not substantiate those business expenses they has claimed on their tax return. They owed additional taxes and penalties and interest for underpaying taxes because their records did not hold up.

If you need additional information about what records you need to keep, contact a tax professional or visit the IRS website.

Ok, so you filed your taxes and all the digging you had to do to find what you needed to complete your return is still fresh in your mind.  We are only 4 months into the year and now is the best time to start organizing for 2008. Make yourself a file labeled 2008 Taxes. Start putting all your receipts for your itemized deduction like medical expenses, property tax bills, unreimbursed  business expenses…etc. in this file. It will save you hours of time when you are preparing to file your 2008 return.

If you are self employed, it is especially important that you start filing your receipts now. If your job requires use of you personal vehicle be sure you are tracking your mileage. A simple small notebook that you can log your daily business miles along with the January 1st odometer reading will be the documentation you will need to substantiate what part of you total mileage driven is used for business purposes.  The next blog will have more suggestions for small business owners.  If you are unsure what records you need to keep for your particular situation a tax professional will be able to assist you. If you need additional information on what is deductible visit the IRS website.