A Tax Consultant for All Seasons

Today rather than talk about taxes, I want to talk about where I work. My employer (Effectur) is in the running for Best Place To Work in the Triad. (the Triad being our local tri-city area)  I share this information with pride.

If you have ever Googled any of the other tax resolution companies on the internet, you will see a lot of negative comments. You will quickly surmise that none of these are in the running as Best Place to Work.  Our management team has created an environment that is both employee and customer service oriented.

I am proud to work for a company that strives to stand out above the crowd.  A company that has as it’s mission statement “Providing Our Clients With Peace of Mind”.  I hope I will be able to blog next week to tell you we won first place. But even if we don’t, we were nominated and have been recognized for our company’s efforts to provide a fantastic place to work.  They are well aware that a great work environment inspires employees to do their best for their clients.

If you need assistance with a tax resolution problem, check out our web link above.  Google Effectur. Google other tax resolution companies too. Check with the BBB. Pick the one with the least complaints and the most satisfied clients. I know who that will be.

If you have liability from filing a joint return with a current or former spouse, you may be entitled to relief.  They are very specific rules and requirement for this relief.  I have included below information from the IRS to help you determine if you may be eligible for this tax relief.  If you find all this too much to do on your own, contact an Enrolled Agent or other tax professional.

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse (or former spouse).

The IRS will figure the tax you are responsible for after you file Form 8857. You are not required to figure this amount. But if you wish, you can figure it yourself. See How To Allocate the Understatement of Tax, within the Publication 971.

You must meet all of the following conditions to qualify for innocent spouse relief.

1. You filed a joint return which has an understatement of tax due to erroneous items (defined below) of your spouse (or former spouse).

2. You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax (See Actual Knowledge or Reason To Know, defined below).

3. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax. (See Indications of Unfairness for Innocent Spouse Relief, later).

4. A request for innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

Erroneous Items

Erroneous items are either of the following.

1. Unreported income. This is any gross income item received by your spouse (or former spouse) that is not reported.

2. Incorrect deduction, credit, or basis. This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse).

The following are examples of erroneous items.

1. The expense for which the deduction is taken was never paid or incurred. For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising.

2. The expense does not qualify as a deductible expense. For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Fines are not deductible.

3. No factual argument can be made to support the deductibility of the expense. For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family’s two dogs.

Actual Knowledge or Reason To Know

You knew or had reason to know of an understatement if:

· You actually knew of the understatement, or

· A reasonable person in similar circumstances would have known of the understatement.

Actual knowledge. If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement. For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Relief by Separation of Liability.

Reason to know. If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understatement of tax due to that item. You and your spouse (or former spouse) remain jointly liable for that part of the understatement.

The IRS will consider all facts and circumstances in determining whether you had reason to know of an understatement of tax due to an erroneous item. The facts and circumstances include:

· The nature of the erroneous item and the amount of the erroneous item relative to other items.

· The financial situation of you and your spouse (or former spouse).

· Your educational background and business experience.

· The extent of your participation in the activity that resulted in the erroneous item.

· Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question.

· Whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns (for example, omitted income from an investment regularly reported on prior years’ returns).

Partial relief when portion of erroneous item is unknown. You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. You will be relieved of the understatement due to that portion of the item if all other requirements are met for that portion.

Indications of Unfairness for Innocent Spouse ReliefThe IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understatement.

The following are examples of factors the IRS will consider.

· Whether you received a significant benefit (defined next), either directly or indirectly, from the understatement.

· Whether your spouse (or former spouse) deserted you.

· Whether you and your spouse have been divorced or separated.

· Whether you received a benefit on the return from the understatement.

For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief.

Significant benefit. A significant benefit is any benefit in excess of normal support. Normal support depends on your particular circumstances. Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understatement.

You made a wise decision in having a tax preparer do you taxes. They can help you find deductions you did not know about and help keep you from making costly mistakes. However, if you do not do your homework in searching for a tax preparer you could really end up owing the IRS a bundle in penalties and interest.

Some things to be aware of:

• A tax preparer who does not sign the return and put his or her tax preparer ID on the tax form.
• Tax preparers that guarantee you will get a refund
• Tax preparers that give you deductions you do not understand (they could be giving you ones you are not eligible for)
• Tax prepares that are in hotel rooms and do not have a permanent location. (Where will they be if there is a problem with your return once it is filed?)

These are just some of the items you should watch out for. Find a tax professional such as an Enrolled Agent or CPA. In my job as an Enrolled Agent I see many clients who end up owing the IRS hundreds and sometimes thousands of dollars, due to returns prepared by unscrupulous tax preparers. Remember when you sign the return you are agreeing to everything on that return, so be sure you understand what is put on your return.

Just do some checking into the tax preparer you are planning to use. Check them out with the Better Business Bureau. Ask friends if they have someone they have used for years, or Google Enrolled Agents and find one in your area. Remember as always, if they promise something to good to be true, it probably is!

If you are a small business owner and need information on setting up or running your business, two websites that provide assistance are the IRS and the Business.gov site.  Business.gov has available a new toolkit you can use to:

• Search for information, forms, and contacts from federal, state and local governments
• Find topics of current interest to the nation’s small business community
• Get a listing of licenses and permits that apply to your business
• Watch videos featuring expert advice from successful entrepreneurs and small business owners

The website is a great find and you will find a lot of useful information to help you start or run your small business. If you find you need additional help on tax matters, contact a tax professional such as an Enrolled Agent for more help.

The IRS just published a helpful calendar for small business owners. This calendar has important dates and information that will help you meet your tax deadlines.  Read the information below from the IRS that tells you how to get the calendar and has other helpful information.

Are you running a small business?  Would you like a calendar packed with valuable business tax information?  The IRS is offering a free calendar to help you keep track of tax deadlines and important dates throughout the year.

You might be surprised to learn that the IRS publishes a calendar, like our popular Web site, IRS.gov, the calendar is part of our many services to help owners and operators of small businesses.

The Tax Calendar for Small Businesses and Self-Employed Individuals from the Internal Revenue Service is a 12-month calendar filled with deadline reminders, important information such as changes in deductible mileage rates and business tips such as how to organize business and travel expenses.

This widely-used special business tax calendar provides the small business owner with a ready resource for meeting his or her tax obligations.

Each page of the calendar highlights different tax issues and tips such as business planning, accounting methods, tracking your records, and protecting your information that are especially relevant to small-business owners.  The calendar has room each month to add notes, state tax dates or business appointments.

Topics include information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, common tax filing dates, federal holidays and much more.

The 2008 IRS Tax Calendar for Small Businesses and Self-Employed, Publication 1518, is now available in both English and Spanish versions.  For an online version of the calendar, visit the Small Business Self-Employed pages on the IRS Web site at IRS.gov. On IRS.gov you can download the tax calendar due dates and actions, and import them into Outlook or iCal. Printed copies of the tax calendar can also be ordered online or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov.  Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.
Links:

• Small Business and Self-Employed One-Stop Resource
• Small Business Products Online Ordering

No it is not too soon to be thinking about your 2008 taxes. The information from the IRS included below tells you all you need to know about record keeping for your Charitable Contributions. The rules have changed, so be sure you are aware of the new requirements.  If you need more info, follow the IRS link below or contact an Enrolled Agent or other tax professional.

Did you make a cash contribution to your favorite charity? Have you recently spent a weekend cleaning stuff out of your garage or basement that you then donated to a local charity?

Charitable contributions can be tax deductible, but you must have the proper records to support your deduction.  Due to the Pension Protection Act of 2006 the rules on recordkeeping for charitable contributions became a little more strict beginning in January 2007.

To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.

Under the previous rules, records such as personal bank registers, diaries or notes made around the time of the donation could often be used as evidence of cash donations. Personal records like this are no longer sufficient.

Here are some additional tips to help you deduct your charitable contributions on your 2008 federal tax return.

• Charitable contributions are deductible only if you itemize deductions using Form 1040.
• Contributions must be made to a qualified organization.
• Used clothing and household items such as furniture, linens and appliances must be in good used condition.
• Vehicle donations are subject to special rules.
• To deduct charitable contributions of items valued at $250 or more you must have a written acknowledgment from the qualified organization.
• To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.

More information is available on the IRS Web site at IRS.gov. A good resource is IRS Publication 526, Charitable Contributions, found on the web site or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov.  Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Is your business venture truly a business, or is it a hobby. The IRS has very specific rules about what constitutes a business, and what determines if it is a hobby. Listed below is important information from the IRS on how you can determine which applies to you. If you need more information, contact an Enrolled Agent or other tax professional.

Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship, Scrap Booking, Stamp and Coin Collecting. Millions of Americans participate in activities for pleasure that can also result in a profit.

The IRS isn’t trying to spoil your fun but if your favorite activity makes a profit every year or so, there may be tax implications that surprise you. For one thing, you must report and pay tax on income from almost all sources, including hobbies.

What is a hobby? Hobbies, also called not-for-profit activities, are those activities that are not pursued for profit. What is a business? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.

If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:

• Do you run the activity in a businesslike manner?
• Does the time and effort you put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year.

An exception is breeding, showing, training or racing horses. Such activity is presumed to be a business if it makes a profit during at least two of the last seven years.

If you are conducting a trade or business you may deduct your ordinary and necessary expenses. An ordinary expense is an expense that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Losses from a not-for-profit activity (hobby) may not be used to offset other income. It is possible to claim some deductions for hobby activities as itemized deductions on your Form 1040 income tax return. However, there are special rules and limits to the deductions you can claim, and those deductions may not exceed the gross income from your hobby.

More information is available on the IRS Web site at IRS.gov. A good resource is Publication 535, Business Expenses, found on the web site or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Link:

• IRS Publication 535, Business Expenses

I received a request for some clarification on the housing allowance for members of the clergy. The request specifically asked about clergy who own their own homes and as to what is what is a part of the housing allowance. Here is information straight from the IRS about clergy who own their own home and explains what is allowed:

If you own your home and you receive a housing allowance as part of your pay, for your services as a minister, the exclusion cannot be more than the smaller of the following:

• The amount actually used to provide a home,
• The amount officially designated (in advance of payment) as a rental or housing allowance,
• The fair market rental value of the home, including furnishings, utilities, garage, etc., or
• An amount which represents reasonable pay for your services as a minister.

You may deduct the home mortgage interest and real estate taxes you pay on your home even though all or part of the mortgage is paid with funds you get through a tax-free rental or parsonage allowance. However, these expenses can be deducted only as itemized deductions on Schedule A (Form 1040).

For more information on taxes and the clergy visit the IRS website and lookup Publication 517 or contact an Enrolled Agent or other tax professional.

If you find yourself unable to pay your tax bill and you have received a notice that tells you to pay it all now, you do have options. Listed below is an excerpt  from an IRS Summertime tax tip that tells you what you need to know to settle your  tax debt.  If you find all this information daunting, your best option may be to contact a company that specializes in tax resolution.

There are many of them out there and some will promise you a specific resolution. If you are shopping tax resolutions firms you need to be aware that NO ONE can promise you a specific resolution. What type of resolution plan will work for you depends on many factors, but most importantly, what the IRS determines.

Do your homework before you make a decision. Google the firms name and look at the number of negative reviews versus the positive. Effectur is a firm that gives you straight answers and utilizes its team of tax professional to help you find the best resolution for your situation.

Here is the IRS info, should you decide to handle your tax situation yourself:

The IRS encourages you to pay the full amount of your tax liability on time. If you get a bill for late taxes you are expected to promptly pay the tax owed including any additional penalties and interest. It is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS. You can also pay the bill with your credit card. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

You can pay the balance owed by credit card, electronic funds transfer, check, money order, cashier’s check, or cash. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com). To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System (EFTPS) by calling 800-555-4477 or 800-945-8400 (also www.eftps.gov).

An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement you must first file all returns that are required and be current with estimated tax payments. If you are an employer you must be current with your federal tax deposits.

If you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application, Online Payment Agreement (OPA), found on the Internet at IRS.gov. Or, you can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, may need to be completed.

If an agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged.

For more information about installment agreements and other payment options visit the IRS Web site at IRS.gov. IRS Publications 594, The IRS Collection Process and 966, Electronic Choices to Pay All Your Federal Taxes also provide additional information regarding your payment options. These publications and Form 9465 can be obtained on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• Form 433-F, Collection Information Statement
• IRS Publication 594, What You Should Know About The IRS Collection Process
• IRS Publication 966, Electronic Choices to Pay All Your Federal Taxes

Since I am soon to be the parent of a college student, I have been looking carefully at tax breaks for parents of college students. As I have written in previous blogs, there are 3 types of tax breaks you may qualify for. The Hope Credit, The Lifetime Learning Credit and thee Tuition and Fees Deduction.  All 3 have income restrictions. Visit the IRS website for details on these tax breaks.

Also thinking about these tax breaks and their income ceilings made me think about another decision most parents are faced with — saving  for retirement. How do these two things tie together?  They tie together through your decision of whether to have a Traditional IRA , 401K or Roth IRA.  Financial  planners generally say you should participate in s 401k if your company matches some portion of your contribution. If they do not, they suggest a Roth IRA. Generally I agree with that.

However, if you have student in college, especially in the first 2 years where you may be able to take the Hope Credit, it make sense to me to still contribute to your 401k or Traditional IRA. This would only be true if your income is close to those ceilings and your contributions could make a difference in whether or not you qualify for the credit.

You either need to do some calculations yourself, or contact an Enrolled Agent or other tax professional who can look at your situation and help you determination which type of retirement savings is best for you, especially during your child’s college years.