Discharge income tax debt through bankruptcy

If the income tax debt meets all five of these rules, then the tax debt is dischargeable in Chapter 7 and Chapter 13 bankruptcy petitions.

1. The due date for filing a tax return is at least three years ago.
2. The tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old.
4. The tax return was not fraudulent.
5. The taxpayer is not guilty of tax evasion.

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

Currently Not Collectible IRS transaction code 530

Currently Not Collectible means that a taxpayer has no ability to pay his or her tax debts. The IRS can declare a taxpayer "currently not collectible," after the IRS receives evidence that a taxpayer has no ability to pay. Such evidence is usually obtained from the taxpayer on IRS Form 433-F, Collection Information Statement. A taxpayer can request "currently not collectible" status by submitting Form 433-F to an IRS Revenue Officer or the IRS Automated Collection System unit.

Once the IRS declares a taxpayer currently not collectible, the IRS must stop all collection activities, including levies and garnishments. The IRS must send an annual statement to the taxpayer stating the amount of tax still owed. This annual statement is not a bill.

While in not collectible status, the 10-year statute of limitations on tax debt collection is still running. If the IRS cannot collect the tax within the 10-year statutory period, then the tax debts will expire.

Being declared "currently not collectible" is one of five ways to get out of tax debt. A taxpayer facing significant financial hardships or tax debt burdens should seek the advice of a tax professional specializing in tax debts.

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

Loosing tax exempt status as a non-profit

Gina M. Lavarda (J.D. 2010, Iowa) has published Note, Nonprofits: Are You at Risk of Losing Your Tax-Exempt Status?, 94 Iowa L. Rev. 1473 (2009). Here is the abstract:

In 2004, the IRS studied 110 § 501(c)(3) organizations and found that seventy-five percent of them had violated federal tax law by engaging in political-campaign activities during the 2004 campaign period. The IRS learned that many of these organizations did not understand the broad scope of the political-campaign prohibition and that organizations’ leaders mistakenly spoke on behalf of their organizations rather than in their personal capacities separate from their organizations. Following the study, the IRS stated that any § 501(c)(3) organization that did not comply with federal tax law’s statutory requirements and restrictions risked losing its tax-exempt status.

As the 2008 campaign was in full swing, the IRS promised to step up its enforcement of § 501(c)(3) requirements. As a result, courts likely will face increased litigation related to § 501(c)(3) organization violations. This Note reviews the requirements and restrictions that are placed on § 501(c)(3) organizations, including the political-campaign prohibition. In addition, this Note proposes a test to assist courts, § 501(c)(3) organizations, and leaders of § 501(c)(3) organizations in determining when organizations’ leaders are acting or speaking on behalf of their organizations and when they are speaking in their personal capacities, exercising their First Amendment free-speech rights.

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

President Obama Wants Your Tax Reform Ideas

The White House yesterday invited the public to submit tax reform ideas to President Obama's tax reform panel:

President Obama has asked the President's Economic Recovery Advisory Board (PERAB) to develop options for tax reform. The members of the tax subcommittee are preparing ideas to be considered by the board and would like to give anyone a chance to have input into the process on this important issue. Anyone wanting to share ideas and opinions for consideration by the subcommittee can do so here. The deadline for submissions is October 15th, 2009.

Note: The mandate to the PERAB is NOT to recommend a new tax system. They are to consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes and to present the pros and cons of potential tax options. They were instructed not to consider options that involve raising taxes on families making less than $250,000 per year. So be mindful of their constraints when submitting ideas.

In general, the tax subcommittee will post all comments online for others to examine and those suggestions may spur other people's ideas. All statements, including attachments and other supporting materials, received are part of the public record and subject to public disclosure. You should submit only information that you wish to make available publicly. Please do not submit materials exceeding five single-spaced pages of text. If submitting via e-mail, please send to perab@do.treas.gov . Please also include a cover sheet including the submitter's name and organization, type of organization (individual, business, government, non-profit organization, or association), submission date, and contact information.

Hopefully, the task force will seriously consider Toward Tax Reform: Recommendations for President Obama's Task Force (Tan Analysts, 2009).

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

Tax Preparers Help Families Get More College Financial Aid

Eric P. Bettinger (Stanford University, School of Education), Bridget Terry Long (Harvard Graduate School of Education), Philip Oreopoulos (University of Toronto, Department of Economics) & Lisa Sanbonmatsu (NBER) today released The Role of Simplification and Information in College Decisions: Results from the H&R Block FAFSA Experiment on NBER. Here is the abstract:

Growing concerns about low awareness and take-up rates for government support programs like financial aid for college have recently spurred calls to simplify the application process and enhance visibility. However, little research has been done to determine whether such reforms would truly improve college access and in what form “simplification” should take. This project examines the effects of two experimental treatments designed to test of the importance of simplifying the process of receiving financial aid and providing clear information about personal aid eligibility using a random assignment research design. H&R Block tax professionals helped low- to moderate-income families complete the FAFSA, the federal application for financial aid. Families were then immediately given an estimate of their eligibility for government aid as well as information about local postsecondary options. A second randomly-chosen group of individuals received only personalized aid eligibility information, which was calculated based on data from the tax form, but they did not receive help completing the FAFSA. Comparing the outcomes of participants in the treatment groups to a control group using multiple sources of administrative data, the analysis suggests that individuals who received assistance with the FAFSA and information about aid were substantially more likely to submit the aid application. High school seniors among this group were also much more likely to enroll in college and receive need-based financial aid the following fall. The program also increased college enrollment for independent adults with no prior college experience, and it increased aid receipt among independent adults who had previously attended college.

These results suggest that simplifying the process and providing direct help with the application along with better information could be effective ways to improve college access. However, only providing aid eligibility information without also giving assistance with the form had no significant effect on FAFSA submission rates or college outcomes.

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

The Case for an Employer Tax Break

Op-ed in tHE Wall Street Journal, The Case for an Employer Tax Break: Temporary Tax Relief for Businesses Who Hire New Workers Can Energize the Economy, by Blair W. Effron (Centerview partners, New York):

Companies need more robust consumer spending to justify increased payrolls, but without increased payrolls, the consumer is less likely to spend. The way to break out is by enacting temporary tax credit for companies willing to reinvest in jobs.

To earn the credit, companies would have to demonstrate an increase in their U.S. employment levels (excluding the impact of acquisitions and divestitures) year-over-year. And to most effectively encourage businesses to hire new workers, the tax offset must come very close to equalling the additional payroll costs incurred, so the effect on company earnings is negligible. We remain in an environment where there is a reluctance to hire for long-term growth if it means short-term earnings dilution.

Ideally, this tax benefit would be available for the next two fiscal years. The consumer must be reactivated now, without further delay. With such a program, the accelerated benefit from creating more consumers should, over time, more than justify the incremental wage expense to companies after the tax offset is phased out.

Second, the impact of a two-year program on the federal deficit would be relatively modest. Using a conservative set of assumptions, an $18 billion annual program, which represents 10% of estimated corporate tax receipts in the next fiscal year (excluding the $4 billion benefit of increased individual income taxes) could create nearly 600,000 good-paying jobs at the national median income. And this approach to job creation—which would impact government receipts less than 1%—would be much less costly than the more traditional solution of direct government spending.

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

Foreign Bank Account Reporting Disclosure

Taxpayers now have until October 15th, 2009, to submit paperwork, tax returns and foreign bank account reports. The IRS announced today that the deadline for filing voluntary disclosures relating to foreign bank accounts has been extended from September 23rd to October 15th. This short-term extension of the deadline provides "relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it," the IRS explained, and emphasizing that "there will be no further extensions" of time provided to file disclosures with the IRS's Offshore Income Unit and the Treasury Department.

The IRS has also updated their FAQ about the FBAR disclosure program to note the extended October 15th deadline and adding Q&A 52 concerning whether UBS account holders are eligible for the voluntary disclosure program

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

An International Tax Guide for Professors Taking Non-U.S. Sabbaticals

Michelle Dhanda (J.D. 2010, Suffolk) has published, International Taxation: A Guide for Academics Abroad, 32 Suffolk Transnat'l L. Rev. 701 (2009). Here is part of the Introduction:

Academics are one group who consistently travel to other nations, and their tax burden is relatively heavy. Once preparation for an academic career is complete, however, academics abroad can take advantage of one very important tax benefit: income exclusion for U.S. tax purposes. Further, academics are not required to pay foreign taxes while residing abroad under many bilateral tax treaties negotiated by the Department of Treasury.

Thus, academics may receive one particular benefit that others, even business people, may not. The IRS has not welcomed the idea of academics working abroad, tax-free, because the purpose of this statutory exclusion in section 911 of the tax code was to assist American businesses competing abroad. Despite the resistance from the IRS, however, public policy and equity are good grounds for continued academic tax exclusion, and the Department of Treasury's tax treaties support exclusion.

This Note will explain some of the tax consequences of academic sabbaticals abroad. Specifically, Part II of this Note will provide a history of the applicable tax law, both congressional and administrative. Part III will consider various hypothetical academic situations, and Part IV will demonstrate how academics may benefit from tax laws. Finally, Part V will summarize the benefits and burdens of specific travel decisions.

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

Online Tool Helps Exempt Organizations Complete Form 990

The IRS has created an online tool on its website for exempt organizations that uses a hypothetical case study to illustrate how Form 990 should be filled out. The website also has a video series that walks you through key reporting issues common to most organizations required to file Form 990. This information is available on the IRS website.

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 issues new Offer-In-Compromise form

The IRS has released the new Form 656-B, Offer in Compromise Booklet, and the revised Form 656, Offer in Compromise. The new Form 656-B contains all of the forms and instructions necessary to file an offer in compromise. The revised Form 656 has been slimmed down to four pages and now only includes the offer-in-compromise application.

All of the worksheets, checklists, and instructions previously found in Form 656 can now be found in Form 656-B. The availability of the two forms allows taxpayers and practitioners to easily access the offer-in-compromise application without printing or sorting through the offer booklet.

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax liability. Under certain circumstances, the IRS has the authority to settle federal tax liabilities by accepting less than full payment.

The new Form 656-B contains all forms and instructions necessary to file an offer in compromise, including:

• A checklist to determine if the offer can be processed.
  
• The revised Worksheet to Calculate an Offer Amount. The worksheet was revised to be used with the new Form 433-A (revision Jan. 2008).
  
• Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, revision Jan. 2008, and Form 433-B, Collection Information Statement for Businesses, revision Jan. 2008.
• A revised IRS Offer in Compromise Low Income Guidelines table based on the 2009 U.S. Department of Health and Human Services (HHS) standards.
  
• A revised Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment.
  
• The Offer in Compromise Summary Checklist to ensure all necessary information has been reviewed and the appropriate forms have been completed.

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

Undocumented Residents of the USA - tax requirements

A distinction must be made between the immigration laws of the United States and the tax laws of the United States. Although immigration laws of the United States refer to aliens as immigrants, nonimmigrants, and undocumented (illegal) aliens, tax laws of the United States refer only to resident and nonresident aliens. Under tax law, resident aliens are taxed in the same manner as U.S. citizens on their worldwide income, regardless of their immigration status. The residency rules for tax purposes are found in §7701(b). Undocumented aliens become residents, for tax purposes only, by passing the substantial presence test. To meet the substantial presence test, a person must be physically present in the United States on at least: 31 days during the current year, and, 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting all days present in the current year, and 1/3 of the days present in the first year before the current year, and 1/6 of the days present in the second year before the current year. The application of this somewhat complicated formula is simplified when considering undocumented individuals present in the U.S. for at least 183 days in the year; they are considered resident aliens for tax purposes. Detailed information on the substantial presence test can be found in IRS Publication 519, U.S. Tax Guide for Aliens.

Resident aliens, even though undocumented, are generally taxed in the same way as U.S. citizens. Resident aliens should file Form 1040EZ, 1040A, or 1040. The due date for filing the return and paying any tax due is April 15 of the year following the year for which a return is filed. Undocumented resident aliens are not eligible for social security numbers but are required to file tax returns and pay taxes. Individual Taxpayer Identification Numbers (ITINs) are issued by the IRS and used for tax filing purposes only. ITINs are issued to help individuals comply with U.S. tax law, and to provide a means to efficiently process and account for tax returns and payments for individuals not eligible for social security numbers. An ITIN does not authorize work in the U.S. or provide eligibility for social security benefits or the earned income tax credit (EITC), is not valid for identification outside of the tax system, and does not establish immigration status. Form W-7, Application for IRS Individual Taxpayer Identification Number, is used to apply for an ITIN and usually must be included with a valid tax return. (There are certain exceptions to this rule beyond the scope of this article.) Form W-7 is available in both English and Spanish.

Form W-7 is a brief, six part, one page form. When completing Form W-7, “N/A” (not applicable) should be entered on any lines that do not apply. Do not leave any lines blank. Documentation must be included with Form W-7. Original documents may be submitted, and will be returned to the applicant by the IRS. However, the IRS encourages tax professionals to use certified or notarized copies of documents instead of submitting original documents. Document copies must be certified by the issuing agency, or certified/notarized by a U.S. military judge advocate general officer, a foreign notary authorized under the Hague Convention, or a U.S. notary public. For documents certified by foreign notaries authorized under the Hague Convention, a document called an apostille must accompany the supporting documentation. The supporting documentation must be consistent with the applicant’s information provided on Form W-7. For example, the name, date of birth, and country of citizenship must be the same as on lines 1a, 4, and 6a of the Form W-7.

Only certain documents can be used when applying for an ITIN. An original passport or a properly notarized or certified copy of a passport is the only document that can be submitted by itself and considered valid proof of identity. If a valid passport is not available, a combination of current documents (at least two or more) that show the name and photograph and support the claim of identity and foreign status of the applicant must be submitted. Of the minimum of two documents, only one of them is required to present a recent photograph.

Tax returns filed with an ITIN reporting wages paid are required to also show the social security number under which the wages were earned. This creates an identification number (ITIN/SSN) mismatch since undocumented residents cannot possess valid social security numbers. In the past, returns with this mismatch could only be filed on paper. Due to programming changes the IRS’ e-file system can now accept these mismatch returns. The taxpayer’s correct ITIN should be used as the identifying number at the top of Form 1040. When entering W-2 information, the SSN should be entered exactly as shown on the Form W-2 issued by the employer. It is now possible to e-file a return with an ITIN/SSN mismatch. If a primary taxpayer, spouse, or both have ITINs, they are ineligible to receive the EITC, even if their dependents have valid SSNs. If the taxpayer and spouse (if filing jointly) have valid SSNs, only dependents with valid SSNs—not ITINs—qualify to receive EITC.

Some undocumented resident aliens have expressed fear that the IRS will reveal information about their undocumented status to other federal agencies. Such disclosures are generally prohibited under §6103.

In summary, many undocumented resident aliens are required to file U.S. income tax returns. Tax professionals have an opportunity to increase tax preparation revenues by assisting these individuals.

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

Education assistance excluded from income

You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the Hope credit and the lifetime learning credit.

Employer-Provided Educational Assistance

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Educational Assistance Program

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work. Educational Assistance Benefits include tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.

Educational assistance benefits do not include payments for the following items.

• Meals, lodging, or transportation.
• Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
• Courses involving sports, games, or hobbies unless they: Have a reasonable relationship to the business of your employer, or Are required as part of a degree program.
• Benefits over $5,250

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

Working Condition Fringe Benefit

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

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

Scholarships and Fellowships

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate.

A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

• You are a candidate for a degree at an eligible educational institution.
• You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses.

Expenses that Don’t Qualify Qualified education expenses do not include the cost of:

• Room and board.
• Travel.
• Research.
• Clerical help.
• Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. This is true even if the fee must be paid to the institution as a condition of enrollment or attendance.

Scholarship or fellowship amounts used to pay these costs are taxable.

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

529 Education savings plans expanded

Tax-free college savings plans and prepaid tuition programs can be used to buy computer equipment and services for an eligible student during 2009 and 2010. These 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books, supplies, equipment and special needs services. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, the ARRA change adds to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, Hope credit, lifetime learning credit or tuition and fees deduction.

States sponsor 529 plans that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses.

Coverdell Education Savings Account

This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about distributions from Coverdell accounts:

• Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
• There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law.
• Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible. Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
• If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

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

Business Deduction for Work-Related Education

If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and lifetime learning credits. You may qualify for these other benefits even if you do not meet the requirements listed above.

To claim a business deduction for work-related education, you must:

1. Be working.
2. Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
3. File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
4. Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.
   

Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

1. The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
   The education maintains or improves skills needed in your present work.
   However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:
2. Is needed to meet the minimum educational requirements of your present trade or business or Is part of a program of study that will qualify you for a new trade or business.
   You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

1. It is required for you to keep your present salary, status or job.
2. The requirement serves a business purpose of your employer.
3. The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

Education to Maintain or Improve Skills
If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.

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

Qualified Education expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

1. Tuition and fees.
2. Room and board.
3. Books, supplies and equipment.
4. Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

• The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
• The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

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

Qualified Student Loans

This is a loan you took out solely to pay qualified education expenses that were:

1. For you, your spouse, or a person who was your dependent when you took out the loan.
   
2. Paid or incurred within a reasonable period of time before or after you took out the loan.
   
3. For education provided during an academic period for an eligible student.
   

Loans from the following sources are not qualified student loans:

1. A related person.
   
2. A qualified employer plan.

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

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($145,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2008.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).

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

Tuition and Fees deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

1. You pay qualified education expenses of higher education.
2. You pay the education expenses for an eligible student.
3. The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

1. Your filing status is married filing separately.
2. Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.
3. Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).
4. You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes.

More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

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

American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

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

The Tax Disincentives for Married Women

Margaret Ryznar (Law Clerk to Myron H. Bright, U.S. Court of Appeals for the Eighth Circuit) has posted To Work, or Not to Work? The Immortal Tax Disincentives for Married Women, 13 Lewis & Clark L. Rev. ___ (2009), on SSRN. Here is the abstract:

Among the most fundamental barriers to the aggressive participation of many married women in the work force are the disincentives for secondary income earners embedded in the federal tax code. Specifically, the current code contains a marriage penalty, which is aggravated by the progressive nature of taxation and any potential increases in income taxation. Meanwhile, child care expenses, a prerequisite for entry to the labor market, are treated inadequately. Although these immortal problems persist despite political pushes for relief, new attention to this topic is warranted given the Obama Administration’s pledge for tax law reform. If the principle to be prioritized is that married women should not face tax disincentives to pursue paid work, then the tax code must finally deal with these issues effectively.

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

Deposit tax refund into retirement acct - President Obama

In his weekly radio address on Saturday, President Obama announced:

[W]e’ll make it easier for people to save their federal tax refunds, which 100 million families receive. Today, if you have a retirement account, you can have your refund deposited directly into your account. With this change, we’ll make it easier for those without retirement plans to save their refunds as well. You’ll be able to check a box on your tax return to receive your refund as a savings bond.

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 auditing people with Swiss Bank Accts at UBS

According to Bloomberg news the U.S. Internal Revenue Service is shifting audits of wealthy Americans suspected of offshore tax evasion to an elite division that usually examines businesses as it prepares to receive data on 4,450 UBS AG Swiss bank accounts.

The tax agency posted internal job listings yesterday seeking auditors to work for a newly created office within its Large and Mid-Size Business division that will be tasked with monitoring what it called the “global high-wealth industry.”

The move centralizes responsibility for auditing wealthy individuals suspected of offshore tax evasion in a unit with the most experience navigating international tax treaties and untangling complex cross-border business structures.

Responsibility for auditing wealthy individuals is currently split among IRS divisions devoted to small businesses and self-employed wage earners and investors, which don’t have as much experience in cross-border transactions, Murphy said.

The IRS says it anticipates handling up to 10,000 new cases related to UBS, including thousands of people who come forward voluntarily in exchange for reduced penalties before Sept. 23.
52,000 Accounts

UBS agreed Aug. 19 to hand over the account information to settle a U.S. lawsuit seeking the names of Americans suspected of evading taxes through 52,000 Swiss accounts. The bank will give the material to the Swiss government, which will then determine how much will go to the IRS.

The new global high-wealth industry sector will be one of six industry-specific offices within the IRS’s Large and Mid- Size Business division. Other industry sectors focus on financial services; retailers, food, pharmaceuticals and health care; natural resources and construction; communications, technology and media; and heavy manufacturing and transportation
.
“The establishment of this group is a step in our ongoing effort to align our resources around our long-term enforcement strategy,” IRS spokesman Frank Keith said. “The new group will focus on examinations involving webs of entities and arrangements controlled by the high wealth taxpayer segment.”

The Large and Mid-Size Business division has more experience in dealing with violations of tax treaties, better access to data gained from information-exchange agreements, and an embedded legal organization, Murphy said.

IRS Commissioner Doug Shulman said Aug. 19 that the 4,450 accounts that will be turned over by UBS at one point held $18 billion and included a range of securities, commodities and cash.
It will take up to a year for the Swiss government to decide whether to give the information to the IRS, and UBS clients will be allowed to appeal the determination.

Switzerland said it received a formal request for the accounts from the IRS. The Swiss authorities now have 90 days to decide whether they can pass on details on the first 500 accounts to the U.S., according to a statement on the Federal Tax Administration’s Web site in Zurich. The remaining accounts have to be processed within a year.

Right to Appeal

UBS will inform affected customers they have a right under Swiss law to appeal to the Swiss Federal Administrative Court to keep their accounts secret. The account holders also will be told they are required by U.S. law to notify the Justice Department of any appeal.

It is legal for Americans to have offshore bank accounts, so long as they declare the accounts to the Treasury Department and pay taxes on any earnings.

The IRS, meanwhile, is seeking additional resources from Congress to beef up its enforcement of tax rules governing cross-border financial transactions.

The House last month approved the hiring of 784 new fulltime IRS workers at a cost of $128.1 million. The measure is awaiting action in the Senate.

The expanded workforce would include 109 employees to investigate U.S. taxpayers with offshore activities and 113 to audit smaller international businesses. None would be fully trained until 2012.

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

Single member LLC

Over the years, there has been confusion regarding Single Member Limited Liability Companies (SMLLCs) in general and specifically, how they can report and pay employment taxes.

An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by federal law as one of these types of taxable entities.

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified by federal law as a partnership. A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated by federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a Disregarded Entity which is taxed as a sole proprietor for income taxes.

The confusion in this area arises when determining employment tax requirements for an SMLLC that is a disregarded entity. Notice 99-6 gives the SMLLC classified as a “disregarded entity” two options for reporting and paying employment taxes:

Using the name and EIN assigned to the LLC, or
Using the name and EIN of the single member owner

Even if the employment tax obligations are reported using the SMLLC's name and employer identification number (EIN), the single member owner retains ultimate responsibility for collecting, reporting and paying over the employment taxes.

An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number, and completing lines 8 a, b, and c. An SMLLC that is a disregarded entity and does not have or will not have employees does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a SMLLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the SMLLC to have a federal EIN, then the SMLLC can apply for and obtain an EIN. If the SMLLC has no employees, it will not use this EIN for any federal tax reporting purpose.

If an SMLLC has or intends to have employees, the EIN rules are different. If there is or will be employment tax reporting, both the single member owner and the SMLLC will need an EIN (two EIN's). If the SMLLC has already received an EIN for reasons set out in the above paragraph, then only the owner will need to file the SS-4 and be assigned an EIN.

These numbers should not be used interchangeably. Doing so will result in complicated problems which could require the taxpayer's, practitioner's, and IRS's resources to correct.

There are also instructions contained in Notice 99-6 which limit changing back and forth between reporting under the SMLLC or the single member owner's EINs. Be sure to review this notice and its limitations before making a change.

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

C Corporations

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31, 2006.

If you are a C corporation or an S corporation then you may be liable for...
Income Tax

1120, U.S. Corporation Income Tax Return (PDF) Estimated tax 1120-W, Estimated Tax for Corporations (PDF) and 8109-B, Federal Tax Deposit Coupon (PDF) Employment taxes:

Social security and Medicare taxes and income tax withholding
Federal unemployment (FUTA) tax

Depositing employment taxes
941, Employer's Quarterly Federal Tax Return (PDF) or 943, Employer's Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees) 940, Employer's Annual Federal Unemployment (FUTA) Tax return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF)

Excise Taxes
Refer to the Excise Tax Web page

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

Forming an S Corporation

S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet the following requirements:

• Be a domestic corporation
  
• Have only allowable shareholders including individuals, certain trust, and estates and
  may not include partnerships, corporations or non-resident alien shareholders
  
• Have no more than 100 shareholders
  
• Have one class of stock
  
• Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.

Filing Requirements:
If you are an S corporation then you may be liable for...

Income Tax
1120S (PDF) (Instructions for Form 1120S (PDF))1120S Sch. K-1 (PDF) ( Instructions for Form 1120S Sch. K-1 (PDF))

Estimated tax
1120-W (PDF) (corporation only) and 8109

Employment taxes:
Social security and Medicare taxes and income tax withholding
Federal unemployment (FUTA) tax

Depositing employment taxes
941 (PDF) ( 943 (PDF) for farm employees)
940 (PDF)8109

Excise Taxes
Refer to the Excise Tax web page

S Corporation Shareholders

Income Tax
1040 and Schedule E (PDF)

Estimated tax
1040-ES (PDF)

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

Julio Cesar Chavez - boxing great dealt IRS blow

According to the Detroit news Julio Cesar Chavez, considered by many one of the pound-for-pound greatest boxers and the best Mexican fighter ever, owes more than $12.7 million in federal income taxes, according to public records filed this month in Arizona.

Chavez, 47, retired in 2006 after a Hall of Fame-worthy career that included training stints with Kronk Gym's Emanuel Steward and a 107-6 record. He is preparing to open a restaurant and entertainment center in Mesa. But the development was recently delayed over a legal dispute.

What's owed:

The IRS filed a $12,404,422.54 lien against Chavez on Aug. 10 in the Maricopa County (Ariz.) Recorder's office. According to the lien, he owes income taxes from 1993 through 1998.

The IRS filed a $366,262.21 lien against Chavez on Aug. 10 in Maricopa County. He owes income taxes from 1999, according to the lien.

Lesson here is that the IRS goes after everyone it can ..........

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