941 vs. 944 filing - Revenue Proceedure

Revenue Procedure In Rev. Proc. 2009-51, IRS sets forth procedures for employers to opt in to filing Form 944 (Employer's Annual Federal Tax Return) and for employers previously notified to file Form 944 to opt out and file Forms 941 (Employer's Quarterly Federal Tax Return) instead.

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- 720-234-1177

IRS Will Continue to Face Major Management Challenges in Fiscal Year 2010

The Internal Revenue Service will continue to face significant management challenges in fiscal year 2010, according to the Treasury Inspector General for Tax Administration. In its annual report outlining the management and performance challenges confronting the IRS in the new fiscal year, TIGTA notes that these challenges include: modernizing its computer systems and business processes; ensuring security of its resources, including taxpayer data; addressing the tax gap; balancing customer service and enforcement while protecting taxpayer rights; strategically managing its human capital; and a new challenge - globalization.

A continuing challenge for the IRS in fiscal year 2010 will be tax compliance. The IRS's estimate of the tax gap, which is defined as the difference between what taxpayers are supposed to pay and what is actually and timely paid, is currently $345 billion. The IRS has significant challenges in obtaining complete and timely data regarding compliance and developing the methods for interpreting data. Even with better data, the IRS needs broader strategies and better research to determine what actions are most effective in addressing noncompliance.

Additionally, the numerous tax provisions in the American Recovery and Reinvestment Act of 2009, commonly referred to as the Recovery Act, will pose significant challenges to the IRS as it administers approximately $60.5 billion in tax credits and other provisions through 2019.
The IRS also will face significant enforcement challenges due to the scope, complexity and magnitude of the international financial system. The IRS Commissioner has emphasized that international issues will be a top priority during his tenure.

To view the Major Management Challenges Facing the Internal Revenue Service for Fiscal Year 2010, go to: http://www.treas.gov/tigta/management/management_fy2010.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- 720-234-1177

ITIN issuance generates questionable returns

Billions of dollars in tax credits are being provided to Individual Taxpayer Identification Number filers without adequate verification of eligibility, according to the Treasury Inspector General for Tax Administration.

The Internal Revenue Service provides ITINs to individuals who are not eligible for a Social Security number to help them comply with the tax laws. Although ITINs are specifically not to be used in employment for wages, a TIGTA audit reveals that 292,992 employers filed 790,701 W-2s with ITINs reporting wages totaling more than $9.5 billion in 2006.

TIGTA says that incomplete or inaccurate information is being input into IRS systems when a tax return is filed with an ITIN and the attached Form W-2 contains an SSN that does not belong to the individual filing the tax return. For electronically filed returns, this is due to some tax software auto-populating the ITIN in place of the SSN.

Verification of eligibility is critical because claims for credits are substantial, TIGTA stated. In tax year 2007, more than 1.2 million, or 66 percent, of ITIN filers received Additional Child Tax Credits of almost $1.8 billion. This is a refundable credit available to individuals with no tax liability.

TIGTA recommended that the commissioner of the Wage and Investment Division develop processes to identify individuals who are improperly using ITINs for work purposes and develop outreach efforts with the Social Security Administration to address their improper use; limit the automatic population feature for ITIN tax returns; ensure that accurate tax information is input into IRS systems from both paper and electronically filed ITIN tax returns; and ensure that the requirements for the Child Tax Credit and ACTC are met on ITIN returns claiming the credits.
TIGTA also made a legislative recommendation to clarify whether or not refundable tax credits such as the ACTC may be paid to filers without a valid SSN and, if these credits may not be paid, to provide the IRS with math error authority to disallow the associated claims for the credits. Disallowance of the ACTC to filers without a valid SSN would reduce federal outlays by $8.9 billion over five years.

IRS officials agreed to continue to work with software companies to limit the auto-populate feature. They also agreed to work with the Treasury Office of Tax Policy to consider legislation to limit claims for the ACTC to taxpayers with an SSN. The IRS disagreed with the other recommendations. TIGTA said it does not believe that management provided adequate justification for the recommendations with which the IRS disagreed.

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- 720-234-1177

IRS starts special unit targeting the wealthy

The IRS is setting up a special unit that will take a more skeptical look at the various strategies used by the wealthy to reduce their tax burden (see Shulman Has ‘Some Sympathy’ for CPA Concerns). That includes trusts, real estate investments, royalty and licensing agreements, private foundations and flow-through entities of various kinds. The agency is hiring extra agents and specialists for the new unit, including flow-through specialists and international examiners, to scrutinize high-wealth individuals and their related enterprises.

Not only that, but the IRS is also expanding its international enforcement efforts, going after tax evaders and affiliated businesses in Central America, Asia and the Caribbean, while opening new IRS offices in Beijing, Panama City, and Sydney, Australia. Shulman noted that other countries are also creating high-wealth groups, including the United Kingdom, Japan, Germany, Canada and Australia. The IRS will likely be working with those agencies and sharing information with them.

CPAs and their clients should be prepared for the increased scrutiny and enforcement efforts. A major concern for many tax preparers is the regulatory overhaul that Shulman has been working on since June. Shulman plans to send his recommendations by the end of the year to Treasury Secretary Tim Geithner and the White House.

He has been hearing from the AICPA in the public forums the IRS has been holding that CPAs are already subject to stiff Circular 230 requirements (as are enrolled agents and tax attorneys). Shulman said he had some sympathy with CPAs’ concerns about having new testing requirements imposed on them. But testing requirements may be beside the point. CPAs will need to be extra careful about signing off on the kinds of complex tax strategies used by high-income individuals, and having a hand in devising such plans. Otherwise the IRS’s new unit could make them a target as well as their clients.

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- 720-234-1177

NEW - Schedule L for Standard Deductions

The IRS has released a new tax form, Schedule L, Standard Deduction for Certain Filers (2 pages including instructions, pdf) for use with 2009 tax returns. Taxpayers may need to use this form if they are claiming various additions to their standard deduction, such as the additional standar deduction for property taxes or the new car sales tax deduction. Schedule L can be attached either to the long Form 1040 or the shorter 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 - 720-234-1177

Net Operating Losses

Sec. 172(a) allows taxpayers to deduct against a tax year's income those net operating losses both carried over to the tax year from previous tax years and carried back from later tax years. An NOL basically is the excess of allowed deductions over gross income. It does not include losses, however, that are disallowed because they cannot be further netted.

For 2008 NOLs, qualified small businesses (those having average annual gross receipts of $15 million or less) have been entitled to carry back NOLs for a three-, four- or five-year period. Generally, however, both businesses and individuals can carry back their NOLs two years and carry them forward up to 20 years. The NOL must be used in the earliest year (except in connection with the 2008 NOL election); any balance that exceeds taxable income then must be used in the succeeding year, until the NOL is used up.

Individuals as well as corporations may incur NOLs. NOLs may not pass from a C corp to its shareholders (or vice versa). However, when a partnership or S corp incurs an NOL, it passes through to the individual partners or shareholders, who may carry back or carry forward the loss. Disregarded entities and sole proprietorships also impart the NOL benefit to their individual owner. Under Sec. 382, a corporation that undergoes a change in ownership and also has NOLs to carry forward from a previous year is limited in the amount it may deduct for them.

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 -720-234-1177

Hobby Losses

Sec. 183 denies loss deductions beyond income earned from activities in which the taxpayer does not intend to make a profit. These deductions are typically referred to as "hobby losses." Generally, an activity is presumed to be carried on for-profit if it makes a profit in at least three of the last five tax years, including the current year (Sec. 183(d)). If an activity is not for-profit, losses from it may not be used to offset other income. Taxpayers are generally considered to have engaged in an activity for profit based on a nine-factor test.

Taxpayers and the IRS have litigated many hobby loss cases, with the outcome not always in the IRS's favor. In Helmick (TC Memo 2009-220), for example, a horse breeder who racked up more than $400,000 in claimed tax losses over a nine-year period could convince the court that a long-term goal to realize a profit was legitimate

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 -720-234-1177

Gambling Losses

Sec. 165(d) limits all but professional gamblers from taking losses incurred in a wagering activity to the amount of any gains. As a result, a taxpayer cannot claim a deduction for losses incurred while gambling or betting in excess of the amount they gained from that activity over the tax year. Excess losses cannot be carried forward into the next tax year

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 - 720-234-1177

Abandoment Losses

While a taxpayer conducts a trade or business, one or more items of business property may suddenly stop being useful. For a variety of reasons, the taxpayer may choose to stop conducting business with the property or permanently discard it. The IRS allows these businesses to claim an abandonment loss deduction under Reg. §1.165-2(a) for non-depreciable property or under Reg. §1.167(a)-8 for depreciable property.

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 -720-234-1177

Bad Debt Losses

Code Sec. 166, titled "Bad Debts," generally controls who is entitled to a bad debt deduction and when a bad debt may be deducted. Sec. 166 conditions treatment generally on whether a bad debt is incurred in a trade or business. Further, Sec. 166 defers to Sec. 165 on the special treatment afforded to worthless securities (discussed earlier).

Non-corporate taxpayers cannot claim a bad debt deduction for non-business debts (debts not created in connection with, or whose loss is not incurred within, a trade or business). Instead, they may claim a short-term capital loss deduction, as if they sold or exchanged the debt or it became worthless and uncollectible - but not before then.

Sec. 166 allows taxpayers a deduction for completely worthless debt, debt which the taxpayer has no reasonable expectation of collecting. The deduction is equal to the taxpayer's basis in the debt instrument. Sec. 166 also allows businesses a deduction for debt that becomes partially worthless. The taxpayer must prove to the satisfaction of the IRS that the debt is partially worthless. Additionally, the amount is limited to the total the taxpayer "charged off" during the year.

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 -720-234-1177

Personal Casualty Losses

Taxpayers may generally deduct losses that are sustained during the tax year and not compensated for by insurance or otherwise (Sec. 165). For individuals, deductible losses must fall within one of three categories: losses incurred in a trade or business; losses incurred in transactions entered into for profit but not connected with a trade or business; and losses incurred as the result of fire, storm, shipwreck or other casualty, or from theft (personal casualty losses).

Special relief is provided for those who sustain losses attributable to a disaster occurring in an area that is later determined by the president of the United States to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Under this provision, a taxpayer may elect to deduct a loss on their return for the immediately preceding tax year (Sec. 165(i)). This in effect allows taxpayers to get a fast refund for their loss. The dollar and AGI floor limitations are also waived

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 -720-234-1177

Investment Theft Losses

Victims of investment schemes or fraud may find themselves under the casualty loss rules, rather than using the net capital loss rules to salvage their position. Sec. 165(e) allows reporting a deduction for theft losses in the year in which a "reasonable taxpayer" discovers that the property was missing.

Revenue Ruling 2009-9 covers the tax treatment of fraudulent investment arrangements under which income amounts that are wholly or partially fictitious have been reported as income to the investors. In it, the IRS clarified that the investor is entitled to an ordinary theft loss, rather than just a capital loss. Next, it determined that the theft is not subject to the $100 floor ($500 in 2009)/10 percent AGI limitation because it arose in connection with a transaction entered into for profit and, therefore, is covered by Sec. 165(c)(2), rather than 165(c)(3). Finally, although the investment theft loss is deductible in the year that the fraud is discovered (subject to reduction for amounts for which a reasonable prospect for recovery remains), the investment theft loss forms part of the taxpayer's net operating loss that may be carried back or forward under normal NOL rules.

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 -720-234-1177

Section 1231 losses

Code Sec. 1231 makes available the best of both worlds to businesses with a certain combination of capital gains and losses. Net gains from the disposal of Sec. 1231 property are taxed at capital gain rates, while net losses from the disposal of Sec. 1231 property are taxed as ordinary losses. If total Sec. 1231 gains exceed losses for the year, then all gains and losses are capital. If total losses exceed gains for the year, then all gains and losses are ordinary. Recapture rules apply.

Sec. 1231 property is depreciable property and real estate that are held for more than one year and used in the taxpayer's trade or business. Sec. 1231 applies to gains and losses from: the sale or exchange of property used in a trade or business; the compulsory or involuntary conversion (from destruction, theft, seizure or government condemnation) of property used in a trade or business; and the compulsory or involuntary conversion of any capital asset held for more than one year in connection with the trade or business. Such property also includes timber and coal, livestock, and unharvested crops. Sec. 1231 does not include inventory and property held for sale to customers, or copyrights, artistic compositions, and letters or memoranda

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 - 720-234-1177

Net Capital Losses

After the netting of long-term and short-term capital gains and losses for any tax year, any remaining net capital loss in excess of $3,000 ($1,500 for married taxpayers filing separately) must be carried forward into the next tax year. That carryforward retains its character as long-term or short-term for netting purposes in that year. One consolation from this carryover rule for higher-bracket taxpayers may be that net capital losses carried over to post-2010 years may get to offset income taxed at higher rates if administration tax proposals move forward as planned.

Under Code Sec. 165(g), taxpayers do not always have to sell a capital asset to deduct a capital loss. If the stock becomes worthless (sadly, not an uncommon occurrence lately), the taxpayer may treat this loss of value as if they sold the stock on the last day of the tax year. This deemed sale results in a deductible capital loss. The stock must be totally worthless, and its worthlessness must be established by an identifiable event, such as bankruptcy.

Code Sec. 1244 special rules govern losses individuals claim on the sale of small-business stock. A small business is a domestic corporation with aggregate paid-in capital of $1 million or less. The losses are treated as ordinary loss and are not netted against capital gains. However, the ordinary loss deduction is limited to $50,000 ($100,000 in the case of a husband and wife filing a joint return).

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 -720-234-1177

At Risk Losses

Code Sec. 465 generally limits a taxpayer's deductible loss applicable to a trade or business or production of income to the amount that the taxpayer has at risk with respect to an activity. The rules apply to individuals and certain closely held corporations. They generally apply separately to each activity, rather than on an aggregated basis, but aggregation is permitted for active management and leases of depreciable personal properties through partnerships and S corporations. Separate rules apply to determine the amount at risk in the activity of holding real property.

Under the at-risk rules, loss deductions are limited to the amount of the taxpayer's cash contribution and the adjusted basis of other property that he contributes to the activity, plus any amounts borrowed for use in the activity if the taxpayer has personal liability for the borrowed amounts or has pledged assets not used in the activity as security.

In CC-2009-027, released in late August, the associate chief counsel advised that the IRS must make at-risk determinations at both the partnership level and at the partner level. Partnership-level items include the partners' shares of partnership liabilities and the character of the liabilities as recourse or non-recourse. Partner-level items include any arrangements with third parties insulating the partner from loss, and whether a partner is a related party under Section 465(b)(3).

A loss that may be determined as deductible under the at-risk rules may still be limited by the passive-activity loss rules.

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 - 720-234-1177

Passive Activity Losses

Code Section 469 provides that individuals, trusts, estates, personal service corporations and closely held C corps may only deduct passive-activity losses from passive-activity income. The rules do not apply to S corps and partnerships, but do apply to their respective shareholders and partners.

Passive activity is trade or business activity in which the taxpayer does not materially participate. Rental activity is passive activity without regard to a taxpayer's material participation, except for real estate professionals, and certain taxpayers primarily providing services and short-term rentals. Individuals who own and actively participate in the management of rental real estate may offset up to $25,000 of passive-activity loss from rental real estate against active income in any tax year. The offset amount is reduced by 50 percent of the amount by which the taxpayer's adjusted gross income exceeds $100,000, phasing out completely at $150,000 of AGI.

Losses from passive activities must be carried forward and applied against income from passive activities in future years. Remaining passive-activity losses are deductible against non-passive income when the taxpayer disposes of the passive activity.

In general, limited partners are not deemed to materially participate in partnership activities. Thus, a limited partner's share of partnership income is passive income. However, general partners or acting general partners may hold limited partnership interests and materially participate in the partnership.

In a recent Tax Court opinion, however, the court determined that interests in LLPs and LLCs are not considered limited partnership interests for purposes of the passive-activity loss rules (Garnett, 132 T.C. No. 19, June 30, 2009). As a result, interests in LLCs and LLPs would not be presumed passive in nature and taxpayers may prove material participation in order to claim any resulting losses. A similar ruling by the U.S. Court of Federal Claims (Thompson, FedCl. July 20, 2009) decided that, to be a limited partnership under the passive-activity loss rules, the entity must be treated as a partnership under state law, not merely taxed as one under the Internal Revenue Code. No official response to these rulings has been put forth by the IRS, but taxpayers should be advised that elimination of the presumption will not mean that the IRS will not litigate that the taxpayer's proof of material participation is not adequate.

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 - 720-234-1177

Retirement Plan Distribution exempt for 2009

If you are normally required to take a minimum distribution from an IRA in 2009 you are exempt from this mandate. IF you have already taken a minimum required distribution you are able to redeposit the distribution as long as the transaction is completed by December 31, 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 -call 720-234-1177

2009 unemployment compensation

The first $2,400 in unemployment compensation is considered non taxable income by the IRS for 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

Mortgage forgiveness debt relief act

Up to $2 Million in relieved mortgage debt is excluded from 2009 income taxation.

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 - 720-234-1177

Tax Strategy Patents Ban

A broad coalition of consumer organizations, taxpayer rights groups and financial planners is calling on Congress to ban people from obtaining patents on strategies for complying with U.S. tax law. With the coalition's support, proponents expect it will be more likely that a ban on tax patents will be included in a larger patent reform bill moving through Congress. The American Institute of Certified Public Accountants has been at the forefront of a two-year effort to ban tax patents. Seventeen organizations signed an Oct. 20 letter to congressional leaders in support of a ban on patents, which unfairly seek to control the ability of all Americans to comply with U.S. tax laws.

In the previous Congress, the House of Representatives passed a patent reform bill that included a ban on tax patents, but a similar provision was not included in the Senate's version of the bill, which never came to a floor vote. Members of the House and Senate Judiciary Committees are now working on a new bill that will be acceptable to both chambers. The Senate is expected to act first on patent reform legislation this Congress and the House may accept the Senate bill without amendments so it is important to include a ban on tax patents in the Senate bill.

The Patent and Trademark Office has issued 82 tax strategy patents and 133 applications are pending. Tax patents may limit taxpayers from using tax laws as they were intended by Congress, may cause taxpayers to pay more taxes than necessary and do not guarantee that the underlying strategy is valid.

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

Order your IRS Transcripts - form 4506T-EZ

The Internal Revenue Service has issued a new form that will make it easier to order tax transcripts and help process mortgage modification applications.

The new forms are being issued in conjunction with the Obama administration’s push to help more homeowners cope with their mortgage problems. The form will aid in the processing of mortgage applications under the Home Affordable Modification Program, part of the Making Home Affordable Program.

Other types of taxpayers, as well as tax practitioners, also often need copies of tax return information. Taxpayers can use the new Form 4506T-EZ, “Short Form Request for Individual Tax Return Transcript.” The transcript is a computer print-out that includes most of the lines on the original return and can act as an acceptable substitute in many cases for a copy of the original tax return for purposes of verifying income.

Form 4506T-EZ is a streamlined version of the Form 4506T, “Request for Transcript of Tax Return.” The Form 4506T-EZ is only for individuals who have filed a Form 1040 series form already. Businesses, partnerships and individuals who need transcript information from other forms must still use the Form 4506T.

Transcripts ordered through the Form 4506T-EZ can be mailed to a third party, such as a financial institution. The IRS cautions taxpayers that they should complete all the required fields, especially the requested years, before signing and dating the form.

The new forms are available at IRS.gov. The 4506T-EZ is a fillable form so people can complete the form online and print a copy. They can then mail or fax it to the addresses and numbers listed in the instructions. It generally takes 10 days to process the request.

Exact copies of tax returns are available by filing Form 4506, “Request for Copy of Tax Return,” but each copy costs $57 and can take 60 days to process.

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-call 720-234-1177

$636M in Fraudulent Homebuyer Credits

The First-Time Homebuyer Credit program that kept the housing industry afloat this year also led to hundreds of millions of dollars in fraudulent or erroneous claims according to an article published bt webCPA.

The program allows a first-time homebuyer to claim a refundable tax credit of up to $8,000. The credit is supposed to expire on December 1, but the real estate and construction industry, and some members of Congress, are pushing to extend and expand the program beyond the cutoff date. However, a new report by the Treasury Department’s Inspector General for Tax Administration uncovered a widespread amount of fraud or misapplication of the credit.

A Treasury Inspector General for Tax Administration (TIGTA) report found that 19,351 taxpayers claimed $139.4 million in credits for homes they had not yet purchased, but would allegedly purchase in the future. In addition, 70,005 taxpayers claimed more than $479 million in credits, despite indications that they were not first-time homebuyers. TIGTA also identified 582 taxpayers under 18 years of age who claimed almost $4 million in First-Time Homebuyer Credits. The youngest taxpayers receiving the credit were four years old.

“Contract law generally exempts children under the age of 18 from being bound by the terms of a contract,” said TIGTA Inspector General J. Russell George in testimony before the House Ways and Means Oversight Subcommittee on Thursday. “Therefore, it is unlikely that these taxpayers would have entered into an arm’s-length transaction for the purchase of a home.”
Congress originally created the credit as part of the Housing and Economic Recovery Act of 2008 to allow taxpayers who purchased a home between April 8, 2008, and July 1, 2009, to claim a credit of up to $7,500. The American Recovery and Reinvestment Act of 2009 extended the credit to homes purchased prior to Dec. 1, 2009, and increased the maximum credit to $8,000.
In November 2008, TIGTA recommended that the IRS use the information provided by taxpayers seeking the credit to verify their eligibility. TIGTA also recommended that the IRS require taxpayers to provide documentation to verify a home purchase, such as a U.S. Department of Housing and Urban Development Settlement Statement issued to homebuyers at closing. The IRS disagreed with both recommendations, stating that other strategies being employed would mitigate TIGTA's concerns.

TIGTA is blaming the IRS’s inaction on its recommendations for the large number of fraudulent credits. "Steps taken by the IRS prior to the 2009 filing season were not sufficient to prevent waste, fraud, error and abuse," said George in a statement. "The IRS should immediately implement TIGTA's recommendations in order to prevent further fraud and abuse of First-Time Homebuyer Credits."

IRS deputy commissioner for services and enforcement Linda Stiff defended the agency’s record during the congressional hearing. “In administering the FTHBC program, the IRS has undertaken significant outreach to ensure that taxpayers are aware of the benefit, developed new forms and instructions to allow taxpayers to file the claim, and instituted significant compliance programs to ensure that those claims are valid,” she said in her prepared testimony. “As with any tax credit, the IRS must run a balanced program aimed at delivering the benefits that the legislation provides, while ensuring that appropriate controls are in place to minimize errors and fraud.”

As of Aug. 22, 2009, over 1.4 million taxpayers have claimed the credit for homes purchased in 2008 and 2009, representing foregone tax revenue of about $10 billion, according to preliminary IRS data cited in a report by the Government Accountability Office. Fifty-nine percent of the taxpayers claiming the credit had an adjusted gross income of less than $50,000 and the credit was disproportionately claimed by taxpayers in the $25,000 to $100,000 AGI range.
Rep. John Lewis, D-Ga., chairman of the House subcommittee holding the hearing, said afterward that he had introduced legislation to give the IRS extra authority to identify and block dubious claims for the credit and require taxpayers to provide documents with their tax returns to prove they had legitimately claimed the 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 phone # 720-234-1177

Biomass fuel is an energy-efficient building property

The American Recovery and Reinvestment Act of 2009 provides that certain expenditures made by the taxpayer for energy-efficient building property are eligible for the nonbusiness energy property credit. The term "energy-efficient building property" includes a biomass fuel stove that burns biomass fuel to heat a dwelling unit that the taxpayer uses as a residence, or to heat water for use in the residence, and that has a thermal efficiency rating of at least 75%, as measured using a lower heating value [§25C(d)(3)(E)] . "Biomass fuel" means any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers [§25C(d)(6)].

Individuals are allowed a credit for the tax year equal to 30% of the sum of:

• The amount paid or incurred by the taxpayer during the tax year for qualified energy efficiency improvements
• The amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year [§25C(a)(2)].

The aggregate amount of credits allowed to a taxpayer for tax years beginning in 2009 and 2010 may not exceed $1,500 [§25C(b)]. The dollar limitations on residential energy property expenditures—$50 for each advanced main air circulating fan, $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, $300 for each item of qualified energy efficient property have been eliminated [§25C(b)]. This credit applies only to existing principal residences [IRS Notice 2009-53].

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

Error Rate of Tax Returns Prepared by IRS's Free Assistance Program: 41%

The Treasury Inspector General for Tax Administration today released its sixth annual review of the IRS's Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs (Ensuring the Quality Assurance Processes Are Consistently Followed Remains a Significant Challenge for the Volunteer Program (2009-40-128)):

The volunteer programs provide no-cost Federal tax return preparation and electronic filing services to low and moderate-income taxpayers, the elderly, the disabled and those who have limited English proficiency.

TIGTA auditors anonymously visited volunteer sites around the country to test the accuracy of tax returns prepared by volunteers. TIGTA found that the accuracy rate of tax returns prepared during the 2009 filing season by volunteers trained by the IRS was lower than last year's accuracy rate. While 59% of the tax returns prepared for TIGTA by volunteers were accurately prepared, 41% were prepared inaccurately.

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

Late Filers info

You will need to mail in your return to the IRS, whether you prepare the return yourself or hire an accountant. Here's a list of mailing addresses for sending your return to the IRS. Be sure to obtain proof of delivery when mailing in your return by using certified mail with return receipt requested.

If you have a balance due with the return, the IRS will impose penalties for filing late. Currently the penalties are:

• 5% of the balance owed for each month or part of a month that the return is filed after the deadline;
• 0.5% of the balance owed for each month or part of a month that the balance is unpaid; and
• 4% annual interest charge on the unpaid balance.

Make sure you gather up all your tax-related documents. If you're missing any W-2, 1099, or other tax documents, you can ask the IRS to send you a copy of what they call the wage and income transcript. To request this you'll first need to fill out Form 4506-T. You can also get the printout from a local IRS office or through me.

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 Tax Year 2010 Inflation Adjustments + Tax Rates

Among the tax code provisions that must be adjusted annually for inflation are personal exemptions and standard deductions. Rev. Proc. 2009-50 provides the full details, but here's a thumbnail sketch:

• Personal exemptions will remain the same, at $3,650
• Standard deductions for MFJ taxpayers will remain the same, at $11,400
• Standard deductions for single and MFS taxpayers will remain the same, at $5,700
• Standard deductions for HoH taxpayers will increase $50, to $8,400
• The annual gift tax exclusion will remain unchanged, at $13,000
• The maximum EITC for families with two qualifying children will increase $8, to $5,036, while the income limit for the credit for MFJ filers with two qualifying children will be $45,295 (for more EITC information, check IRS' website for the EITC Tax Preparer Toolkit)
• The foreign earned income exclusion will increase $100, to $91,500

Additionally, the revenue procedure presents the tax brackets for 2010.

• For single taxpayers, the brackets fall out as follows:
• Taxable income up to $8,375 = 10%
• Taxable income over $8,375 to $34,000 = 15%
• Taxable income over $34,000 to $82,400 = 25%
• Taxable income over $82,400 to $171,850 = 28%
• Taxable income over $171,850 to $373,650 = 33%
• Taxable income over $373,650 = 35%

Accordingly, the brackets for MFJ are:

• Taxable income up to $16,750 = 10%
• Taxable income over $16,750 to $68,000 = 15%
• Taxable income over $68,000 to $137,300 = 25%
• Taxable income over $137,300 to $209,250 = 28%
• Taxable income over $209,250 to $373,650 = 33%
• Taxable income over $373,650 = 35%

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

This Thursday, October 15th 2009 is an important date

Thursday is the last day to file your 2008 tax return without penalty....presuming you applied for an extension. It's also the last day for self-employed persons to fund a SEP-IRA for 2008. It's also the deadline for submitting any late or corrected foreign bank account reports to the Treasury.

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 Consequences of President Obama's Nobel Prize

Ellen Aprill (Loyola-L.A.) comments on the tax consequences of President Obama's receipt of the 2009 Nobel Peace Prize:

At the end of the President's comments on his being awarded the Nobel Peace Prize this morning, a reporter shouted out, "What are you going to do with the money?" The President didn't answer.

The prize this year is estimated to be $1.4 million. The ceremony takes place in December; I assume the prize is awarded then and that thus the amount is included in income for 2009.

My guess is that, since his 2009 tax return will surely be made public and given the content of his remarks this morning, the President will give a great deal of the prize money to organizations eligible for the charitable contribution deduction (although which ones to choose must be a challenge; I wonder if he might choose to make the gift to the United States for public purposes).

His AGI for 2008 was $2,656,902, mostly from sale of his books. Leaving aside the Nobel Prize award, this figure is likely to be higher this year because his candidacy encouraged book sales. If so, he will have no trouble giving away the Nobel Peace Prize money without running up against the 50% AGI limits on charitable deductions.

But if he did run up against the 50% AGI limits, § 74(b) would allow him to transfer money directly from the Nobel Prize Committee to a charitable or governmental recipient without the amounts becoming part of his gross income. Publication 525 now contains detailed guidance on the application of § 74(b) to winners of "Pulitzer, Nobel, and similar prizes."

But even if the 50% AGI limit were a problem, the President would nonetheless decide not to use § 74(b) because he would as a political matter need to show both that he took the Nobel Prize money into income and that he made charitable contributions of it on his publicly disclosed tax return -- the tax benefit of § 74(b) would be too great a public relations detriment to him. That is, using § 74(b) might look to the public, as it did to the foreign government, that he was somehow sheltering income. Often, we think that that exclusions from income have advantages over deductions -- exclusions do not figure into AGI in calculating limitations for the charitable contribution deductions, the medical deduction, etc. But ironically, public disclosure and its public relations function may constrain the use of legitimate and beneficial tax provisions.

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 Failed to answer their phone 22.4 million times in 2008 - that's a lot

The Treasury Inspector General for Tax Administration yesterday released Higher Than Planned Call Demand Reduced Toll-Free Telephone Access for the 2009 Filing Season (2009-40-127):

During the 2008 Filing Season, 75.7 million total dialed attempts were made to the IRS toll-free telephone lines. Through automation and assistors, the IRS answered 35.8 million (47.3%) calls during normal hours of operation. However, 22.4 million calls were not answered during normal hours of operation because the taxpayers hung up, were courtesy disconnected5 by the IRS, or received a busy signal. IRS officials stated that the 22.4 million calls included calls from taxpayers who called back and received service, dialed the IRS repeatedly, or hung up for reasons outside the IRS’ control. The IRS experienced high call demand during the last two filing seasons. Nevertheless, even when the IRS achieves more than an 80% Level of Service, millions of calls are not answered by IRS assistors.

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 Releases New Publication 4128 for Tax Impact of Job Loss

The Service has released Publication 4128 (rev. Aug. 2009), Tax Impact of Job Loss.

The publication explains the job loss tax issues connected to severance pay, unemployment compensation, pension plans, IRAs, expenses for a job search, and possible moving costs. It also discusses self-employment issues for the newly unemployed. The IRS provides the following information to assist those newly unemployed:

• Severance pay and unemployment compensation are taxable. Payment for any accumulated vacation or sick time is also taxable.
• Generally, withdrawals from a pension plan are taxable unless they are transferred to a qualified plan (such as an IRA).
• Certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews.
• Moving costs you incur because of a change in your job location may be deductible. You must meet certain criteria relating to distance moved and timing of the move.

Some unemployed taxpayers may decide to start their own businesses. IRS suggests Publication 334 Tax Guide for Small Businesses, for more information.

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

47% of American Households will pay $0 Income tax in 09

Most people think they pay too much to Uncle Sam, but for some people it simply is not true. In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

Some in that group will even get additional money from the government because they qualify for refundable tax breaks.

The ranks of those whose major federal tax burdens net out at zero -- or less -- is on the rise. The center's original 2009 estimate was 38%. That was before enactment in February of the $787 billion economic recovery package, which included a host of new or expanded tax breaks.

The issue doesn't get a lot of attention even as lawmakers debate how to pay for policy initiatives like health reform, whether to extend the Bush tax cuts and how to reduce the deficit.

The vast majority of households making up to $30,000 fall into the category, as do nearly half of all households making between $30,000 and $40,000.

As you move up the income scale the percentages drop.

Nearly 22% of those making between $50,000 and $75,000 end up with no federal income tax liability or negative liability as do 9% of households with incomes between $75,000 and $100,000.

Of course, income taxes don't tell the whole story. Workers are also subject to payroll taxes, which support Social Security and Medicare.

When considering federal income taxes in combination with payroll taxes, the percent of households with a net liability of zero or less is estimated to be 24% this year, according to the Tax Policy Center's estimates.

A key reason why there is a zero-liability group at all is because the U.S. tax system is progressive. Those who bring in more money pay more than those lower down the income scale to support government functions such as national defense and social safety nets like Medicaid for those in need. That progressivity can be dialed up or down.

"Some think it's too progressive. Some don't think it's progressive enough," said Roberton Williams, a senior fellow at the center.

President Obama falls into the latter camp. He has proposed increasing the income tax burden on families making more than $250,000 and individuals making more than $200,000, while offering new measures to reduce the tax bite for most Americans making less.

One of Obama's proposals is to extend the 2001 and 2003 Bush tax cuts for everyone except high-income tax filers, which was the group that derived the most benefit from those cuts.
As a result, under Obama's budget, he would keep the ranks of the non-payers higher than they would otherwise be.

Why the tax-free matter

The question of who pays and who doesn't is not a trivial matter. But Washington policymakers are not dealing with it in an explicit way. And that's a problem, given the country's fiscal outlook.
If asked to vote up or down on whether they are comfortable with such a large group of voters contributing no federal income tax or payroll tax revenue, the majority may well decide it is appropriate given the means of the households involved. Or they may decide that it's not.
Either way, that decision should inform the debate about the many costly policies and deficit-reduction strategies that lawmakers will be grappling with for years to come.

"As the number [of nonpayers] becomes larger, we have to question whether we'll make good decisions about how to allocate resources," economist George Zodrow, a professor at Rice University. "Most people don't understand how skewed the tax distribution is."
Experts say that to pay for all the things on the country's growing tab, the money can't just come from a shrunken pool of taxpayers.

"Over the long run, you'll have to have a broader base," Zodrow 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 Updates Per Diem Substantiation Rates for 2009

The IRS has released Revenue Procedure 2009-47 updating the maximum per diem rates for meals and lodging. The updated per diem rates are released each year by October. Taxpayers have the option of using the updated amounts for the period beginning October 1, 2009, through December 31, 2009, or using the rates that were in effect for the first nine months of the year for the entire year.

Also included in the notice is the maximum meal and incidental rate allowed for taxpayers in the transportation industry. Beginning October 1, 2009, the meal and incidental rate for travel within the United States is $59/day (outside the United States, $65/day). These rates are limited to 80 percent in 2009. Taxpayers who used the rates in effect prior to October 1, 2009, must continue to use those rates for the remainder of the 2009 tax year. Those taxpayers cannot use the updated rates until January 1, 2010.

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