New Tax withholding tables produce unwanted results

The IRS has released the new withholding tables (IRS Pub. 15-T) that are to be used by employers for the remainder of 2009 and in 2010. The tables reduce the amount of federal tax that is withheld from employees’ paychecks to account for the new Making Work Pay tax credit.

The lower withholding may cause some unwanted results for taxpayers with more than one job, two-earner married couples, and high income taxpayers.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Correcting Employment Taxes

New processes have been established in 2009 to correct employment tax errors. Employers should now use the new corresponding "X" forms to correct employment tax errors as soon as they are discovered. For example, use the new Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to correct errors on a previously filed Form 941. Employers correcting an overpayment must use the corresponding "X" form and can choose to either make an adjustment or claim a refund on the form. For underpayments, amounts owed must be paid by the receipt of the return and can be made using EFTPS, by sending a check, or by credit card.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Unemployment Benefits Tax-free in 2009

In 2009, the first $2,400 of unemployment benefits will be tax-free, under relief provided by the American Recovery and Reinvestment Act. Every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.

The new law doesn’t affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.

Unemployed workers who expect to receive more than $2,400 in benefits in 2009 should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.


John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Makaing Work Pay Tax Credit

This tax credit is reflected in an automatic adjustment in the revised 2009 withholding tables found in Publication 15-T.

The IRS has advised that individuals and couples with multiple jobs may want to submit revised W-4 forms to ensure adequate withholding to cover the tax for the combined income. This would also be the case for taxpayers with AGI falling within or above the credit phase-out range. The credit phases-out for individuals with modified adjusted gross income between $75,000 and $95,000 and for married couples filing jointly with modified AGI between $150,000 and $190,000.

The refundable credit is available for 2009 and 2010. It is equal to the lesser of 6.2 percent of the taxpayer's earned income or $400 ($800 for married couples filing a joint return). The credit is equivalent to a single employee's share of social security tax on about the first $6,450 of wages.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

IRS Offers Amnesty to tax evaders using 'off shore' bank accounts

March 26 (Bloomberg) -- The Internal Revenue Service said it will waive some penalties for Americans who disclose they hid assets in foreign bank accounts to avoid taxes, including U.S. customers of UBS AG.

The tax agency, in a memo today, said it will move to collect only 20 percent, and in some cases as little as 5 percent, of assets in previously undisclosed offshore bank accounts. Normal penalties can exceed the account balance in cases of deliberate efforts to conceal the money. The penalty will be in addition to back taxes and interest for as many as six years and additional IRS penalties on taxes owed.

“We believe this guidance is a firm but fair resolution of these cases,” IRS Commissioner Douglas Shulman told reporters in a conference call. “For taxpayers who continue to hide their head in the sand, the situation will only become more dire.”
The IRS action has been anticipated by tax lawyers since the U.S. sued UBS, Switzerland’s largest bank, for the names of 52,000 current and former U.S. clients the IRS claims evaded taxes. UBS provided about 300 names though it has refused to provide the rest, citing Swiss secrecy laws.

Coming forward voluntarily usually allows a taxpayer to avoid criminal charges, although all applications for leniency under today’s initiative will be screened by criminal investigators, the agency said.

More Than Double

The IRS said the number of people voluntarily disclosing they have an offshore account has more than doubled in the last year. That number is expected to grow as a result of the new guidelines, said lawyers representing clients with offshore accounts.

Mark Matthews, former head of the IRS’s criminal tax division, said the agency’s move will probably entice many UBS clients who feared confiscatory penalties to come forward.
“There have been some clients who have been fearful of the penalties and this may be the final piece of information they need,” said Matthews, who was also once a deputy assistant attorney general in the Justice Department’s tax division. He is now a partner at the Morgan Lewis law firm in Washington.

It is legal for Americans to have money in offshore accounts, which many do for legitimate reasons such as when they own a home or business overseas. The accounts must be disclosed to the Treasury Department when they hold more than $10,000, and U.S. taxes must be paid on any income earned.

50 Percent Penalty

The IRS can confiscate the higher of $100,000 or 50 percent of an offshore account’s value when the holder deliberately doesn’t disclose the account to Treasury. The penalty can apply each year the form isn’t filed, so after three years of noncompliance the account holder can owe 150 percent of the account’s value.

Under the IRS program announced today, the tax agency will take 20 percent of the account’s assets based on its peak value in the previous six years.

Under one hypothetical example that includes the effects of compounding, a $1 million offshore account that earned 10 percent annually for six years would owe 35 percent in taxes and interest on the $772,000 earned by the account.

In addition, the account holder would owe either a 20 percent “accuracy” penalty or a 25 percent “delinquency” penalty, plus 20 percent of the $1.77 million the account had grown to hold.

In limited cases, the 20 percent asset penalty will be reduced to 5 percent for inactive accounts owned by someone who didn’t open it, if initial deposits were made using previously taxed money, the IRS said.

Holocaust Survivors

Matthews said that carve-out appears tailored to minimize the impact on heirs to Holocaust survivors, many of whom didn’t know what to do with their inherited Swiss accounts. It would also apply to Americans who opened Swiss accounts on a lark while on vacation but didn’t actively manage them.

Americans with offshore accounts who don’t voluntarily come forward face a redoubled effort by the IRS to catch them.

“Offshore cases sent to the field are work of the highest priority,” IRS deputy commissioners Faris Fink and Barry Shott wrote in a memo earlier this week to the agency’s field auditors. “Examiners should utilize the full range of information-gathering tools in properly developing offshore issues, with special emphasis on detecting unreported income.”

Those tools include interviews with the taxpayers and third parties, and issuing summonses, Fink and Shott said, as well as seeking information from foreign governments through tax-treaty networks. The IRS released the memos today.

IRS Policy

Under long-standing IRS policy, taxpayers who voluntarily disclose potential tax problems before the agency pursues them can generally avoid harsh penalties, including criminal prosecution. IRS spokesman Bruce Friedland said anyone identified to the IRS as part of a criminal enforcement action wouldn’t be eligible to make a voluntary disclosure under the terms announced by the agency today.

Ed Robbins Jr., a Beverly Hills, California, tax attorney with dozens of clients with offshore accounts, said many UBS clients still risk exposure to criminal prosecution, even if they voluntarily come in.

“The Department of Justice has its own voluntary disclosure policy, which is a different animal,” he said. “If a movie star comes in and prosecutors are alerted, prosecutors are in a position basically to trump the IRS if they find somebody they really like” and want to make an example of, he said.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

IRS Voluntary Disclosure Practice

IRS Voluntary Disclosure Practice
TAX CRIMES - GENERALIRM 9.5.11.9

Voluntary Disclosure Practice

(1) It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

(2) A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

(3) A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b. the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

(4) A disclosure is timely if it is received before:

a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

(5) Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure. Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues.

(6) Examples of voluntary disclosures include:

a. a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above. This is a voluntary disclosure because all elements of (3), above are met.

b. a disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges; however the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so. In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met

c. a disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme regarding which the IRS has begun a civil compliance project and already obtained information which might lead to an examination of the taxpayer; however, the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so. In addition, the taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met.

d. A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year. The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full. This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met.

(7) Examples of what are not voluntary disclosures include:

a. a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met.

b. a disclosure made by a taxpayer who is under grand jury investigation. This is not a voluntary disclosure because the taxpayer is already under criminal investigation. The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.

c. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership. This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.

d. a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently under examination. This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.

e. a disclosure made by a taxpayer after an employee has contacted the IRS regarding the
taxpayer's double set of books. This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer's noncompliance. The conclusion would be the same whether or not the taxpayer knew of the informant's contact with the IRS.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

In defense of Tax Havens

If the government suddenly said you would incur more onerous and expensive tax regulations and reporting requirements if you moved your business to a low-tax state such as Texas or Florida from a high-tax state such as New York or California, you would be justifiably outraged. Now substitute Switzerland and Bermuda for Texas and Florida, and France and Germany for New York and California, and you'll understand a new form of "tax protectionism" that is infecting Washington. Several serious proposals are being floated in the nation's capital that would penalize Americans for investing in low-tax rather than high-tax jurisdictions. Proponents say the measures are needed to catch tax cheats -- but ignore the fact that most of the low-tax jurisdictions such as the Cayman Islands, Switzerland, etc., already have tax information exchange (for cases of probable cause), or tax withholding, agreements with the U.S. and other countries such as the U.K. and France. ...

The proposals by Messrs. Dorgan, Levin, Baucus and the Treasury will almost certainly have the unintended consequences of driving more U.S. businesses elsewhere, discouraging foreign investment in the U.S., and actually encouraging more U.S. investors to move their funds (either legally or illegally) not only out of the country, but to places in Asia or the Mideast that tend to be less cooperative with U.S. tax authorities than are the European and British low-tax jurisdictions. The correct policy for the United States to follow is to reduce its corporate tax rate to make it internationally competitive, and to move toward a tax system that does not punish savings and productive investment so severely. We know from the experiences of many countries that reducing tax rates and simplifying the tax code improve both tax compliance and economic growth. Tax protectionism should be rejected because it is at least as destructive to economic growth and job creation as are tariffs on goods and services.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Changes to NOL Carryback for Small Business

On Tuesday, the IRS announced that qualifying small businesses with deductions exceeding their income in 2008 are able to get a refund of taxes paid in prior years through a new net operating loss (NOL) tax provision. The new provision, enacted as part of the most recent stimulus bill (the American Recovery and Reinvestment Act of 2009 (P.L. 111-5)), enables small businesses with a net operating loss in 2008 to elect to offset this loss against income earned in up to five prior years.

Rev. Proc 2009-19 lists the qualifying conditions for the new five-year carryback provision, most importantly that a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009. Form 1045 (Application for Tentative Refund) or Form 1139 (Corporation Application for Tentative Refund), whichever the taxpayer uses, generally must be filed within one year after the end of the tax year of the NOL. Further, the current year's tax return must be filed by the date the Form 1045 or Form 1139 is filed.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Passive Activity Loss Limitations on rental property

If you rented out a dwelling unit that you also used for personal purposes during the year, you may not be able to deduct all the expenses for the rental part. “Dwelling unit” (unit) means a house, apartment, condominium, or similar property.

A day of personal use is any day, or part of a day, that the unit was used by:

• You for personal purposes,
• Any other person for personal purposes, if that person owns part of the unit (unless rented to that person under a “shared equity” financing agreement),
• Anyone in your family (or in the family of someone else who owns part of the unit), unless the unit is rented at a fair rental price to that person as his or her main home.
• Anyone who pays less than a fair rental price for the unit, or
• Anyone under an agreement that lets you use some other unit.
  Do not count as personal use:
• Any day you spent working substantially full time repairing and maintaining the unit, even if family members used it for recreational purposes on that day, or
• Any days you used the unit as your main home before or after renting it or offering it for rent, if you rented or tried to rent it for at least 12 consecutive months (or for a period of less than 12 consecutive months at the end of which you sold or exchanged it).

Check “Yes” if you or your family used the unit for personal purposes in 2008 more than the greater of:

14 days, or
10% of the total days it was rented to others at a fair rental price.

Otherwise, check “No.”

If you checked “No” you can deduct all your expenses for the rental part, subject to the At-Risk Rules and the Passive Activity Loss Rules explained beginning on page E-1.

If you checked “Yes” and rented the unit out for fewer than 15 days in 2008, do not report the rental income and do not deduct any rental expenses. If you itemize deductions on Schedule A, you can deduct allowable interest, taxes, and casualty losses. If you do not itemize, you can increase your standard deduction by certain state or local real estate taxes and a net disaster loss attributable to a federally declared disaster.

If you checked “Yes” and rented the unit out for at least 15 days in 2008, you may not be able to deduct all your rental expenses. You can deduct all of the following expenses for the rental part on Schedule E.

• Mortgage interest.
• Real estate taxes.
• Casualty losses.
• Other rental expenses not related to your use of the unit as a home, such as advertising expenses and rental agents' fees.

If any income is left after deducting these expenses, you can deduct other expenses, including depreciation, up to the amount of remaining income. You can carry over to 2009 the amounts you cannot deduct.

See Pub. 527 for details.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

IRS Updates the Allowable Living Expense Standards for 2009

The IRS has released the 2009 update to the Allowable Living Expense (ALE) standards effective March 1, 2009. The ALE standards are used to reduce subjectivity in determining what a taxpayer may claim as basic living expenses necessary to avoid undue hardship when the taxpayer must delay full payment of a delinquent tax. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for citizens in similar geographic areas. Go to this page to access the new standards

http://www.irs.gov/individuals/article/0,,id=96543,00.html


John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Deducting Theft Losses From "Ponzi" Schemes

The IRS released Rev. Rul. 2009-9 addressing the tax treatment of "Ponzi" scheme losses, and Rev. Proc. 2009-20 which provides safe harbor options for deducting these losses. The guidance is welcome relief to the thousands of investors who have lost money in the Bernard Madoff scandal and others who have incurred similar Ponzi scheme losses.

The revenue ruling holds that the losses are theft losses not subject to casualty loss limitations under §165(h) or the itemized deduction limits under §67 and §68. The rulings allow the losses against ordinary income and even allow an NOL generated by Ponzi losses to be treated as sole proprietorship losses potentially eligible to be carried back 3, 4, or 5 years under the business tax breaks enacted by the American Recovery and Reinvestment Act of 2009.

The safe harbor options under Rev. Proc. 2009-20 allow a 95% deductible loss for investors with no potential third-party recovery or a 75% deductible loss for investors with potential third-party recoveries. The investor may have additional losses or income in later years depending on actual recoveries

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177

Additional Standard Deduction for Real Estate Tax

There is an additional standard deduction for those who don’t qualify to itemize their tax deductions, but who do pay state or local real estate taxes. This deduction is available for the 2008 and 2009 tax years. Things you need to know about the additional standard deduction for real estate taxes:

1. The additional deduction amount is equal to the amount of real estate taxes paid. The amount can be up to $500 for single filers or up to $1,000 for joint filers.
   
2. The taxes must be imposed on you.
   
3. You must have paid the taxes during your tax year.
   
4. The taxes must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks and sewer lines. These taxes usually cannot be deducted.
   
5. Real estate taxes paid on foreign or business property do not qualify for the increased standard deduction.
   
6. You must file a Form 1040 or 1040A to claim the additional deduction. When claiming the additional standard deduction for real estate taxes, be sure to check the box on line 39c of Form 1040 or line 23c of Form 1040A.

John R. Dundon, EA - www.1040.com/jd - Taxpayer Advocate - Enrolled with the United States Department of Treasury to Practice before the IRS - Under contract with the United States Department of Treasury as a Certified ITIN Acceptance Agent - Direct phone # 720-234-1177