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Lost Your Tax Records? Relax, the IRS Has Everything Intact

May 31, 2012 By

It is possible to look for particular tax records and not find them for whatever reason. Fortunately, one can get these tax return/account transcripts from the IRS by phone, by mail, or online. However, there are certain key things one must know about retrieving past tax information from the IRS:

  1. It is possible to order tax transcripts online or by phone for the past three years as well as the current year. For previous tax years, one must make the request with the 4506T-EZ Form.
  2. Use the IRS online tool “Order a Transcript” to request for either of the tax transcripts from the agency’s website. Or call 800-908-9946 to place your order by phone and follow the instructions. The transcript will then be mailed to your current record address. However, if you want it mailed to a different address, fill and mail the Request for Transcript of Tax Return Form 4506-T. Also remember that the IRS gives these transcripts free of charge.
  3. The tax return transcript shows most of the line items that were originally present in your tax return those years ago. This includes forms and schedules that were attached. The transcript does not reflect any adjustments made after the return was filed.
  4. The tax account transcript reflects the later adjustments, made by either you or the IRS, after the tax was filed. The transcript’s content includes basic data like marital status, type of return and the adjustments (adjusted gross and taxable income).
  5. For the 1040, 1040A, or 1040EZ tax return transcripts, you should fill the 4506T-EZ Form by mail. Otherwise, Form 4506T should be used by all individuals, partnerships and businesses requesting for tax information on other forms.
  6. It is faster to order by phone or online as it only takes between 5 and 10 calendar days from the day your request is received by the IRS. On the other hand, it takes up to 30 days for delivery of a transcript ordered by mail, either using Form 4506T or Form 4506T-EZ.
  7. You can still get the actual copy of a previously filed tax return, if you need it, but at a cost ($57 per year). This request can be done by mail, just fill the 4506 Form, mail it to the IRS and wait for 60 days. The agency often has copies for the current year as well as the previous six years.
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How to Amend Tax Mistakes

May 30, 2012 By

Nobody is perfect, especially when it comes to tax matters. Anyone is bound to make errors, but unfortunately, the IRS does not take this kindly. The agency keeps records of these errors made both by the taxpayer and his/her tax preparer. Even if you use highly helpful tax preparation software, you still are not guaranteed a perfect tax return.

Amongst the most common mistakes or wrong entries that the IRS will have a problem with, include:

  • Wrong entry of the amount of Social Security benefits
  • Wrong amount of tax entered, perhaps because of incorrect taxable income or filing status
  • Wrong tax amount entered because tax rates on the dividends and capital gains are lower than the agency’s standard income tax rates
  • Incorrect Earned Income Tax Credit
  • Incorrect last name of one or more dependents
  • Incorrect amount of business income or loss entry, because of an error on Schedule C or C-EZ

Fortunately, the IRS allows you a second chance to make things right. You can file an amended version of your tax return with Form 1040X, Amended U.S. Individual Income Tax Return, and straighten all hitches. However, there are certain things to note when making the amendments.

-          This Form 1040X aims at correcting errors in one’s tax forms 1040, 1040A or 1040EZ

-          A tax amendment cannot be e-filed, one must send in a paper 1040X

-          Math errors need not worry you, the IRS can correct them

-          If you forgot to attach certain documents like the W-2, you do not have to file an amended return. The IRS will simply send you a request for the documents.

-          Ensure you enter the correct year of the return being amended at the top of Form 1040X. This form only allows you to make amendments within three years of filing the original tax return.

-          For more than one tax amendment, prepare and mail a 1040X for each return separately.

-          If you are making changes in other schedules or forms as well, don’t forget to attach  them

-          If your amended return earns you more refund, file Form 1040X after receiving your original refund. However, if you owe the IRS, file the amendment immediately because it is better you catch the mistake before the agency does.

Just be sure to make accurate changes in all cases.

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The IRS’s Tax Solutions to Small Businesses and the Self-Employed

May 29, 2012 By

Are you a small business or a self-employed individual with tax questions? Look no further than the IRS’s Small Business and Self-Employed Tax Center for all the answers and educational materials or tools you need.

This is a one-stop shop offering essential resources and online tools to help self-employed persons and small businesses. The resources and tools include:

  • Application for Employer Identification Number online
  • Publications and forms for small businesses
  • Extensive employment tax information
  • Educational events and programs for small businesses
  • Relevant tax-related news
  • Comprehensive A-Z Index for business
  • Relevant IRS videos

Generally, the site provides essential federal tax information for all the stages of one’s business. Whether you are in the starting stage, operating or closure stage of a business, there is information here for you.

Additionally, one can benefit from the following resources:

IRS Video Portal

Through this, one can learn about various tax topics through video and audio presentations to answer various tax questions. The portal has some archived live panel discussions on videos, audio phone forums, and some other webinars and video clips.

The IRS Audits Video Series

Want to know how the IRS carries out its audits? Watch the step by step illustration, from notification to closing, through “Your Guide to an IRS Audit”. The video series demonstrate the stages of the various audit types; correspondence, field and office. Get a view of the various issues common to small business audits.

Virtual Small Business Tax Workshop

This is an interactive resource enabling all small business owners to learn their tax rights and responsibilities. The IRS Virtual Small Business Tax Workshop contains nine unique lessons that can be chosen and viewed individually or otherwise, 24/7 from any PC. You can also order for these lessons on a CD.

Small Business Taxpayers’ Tax Calendar

For all the information concerning taxes for small businesses, the Tax Calendar for Small Business and Self-Employed Publication 1518 is accessible online or even as a printable PDF file. The 12-month calendar contains extensive tax information on various tax-related topics, such as general business taxes, electronic filing and paying options, as well as business publications and forms among other essential data. In fact, each page of the calendar addresses different tax issues and gives tips helpful to small businesses. Add any short notes and tax dates, or download these tax events to the calendar for better tax preparation and filing.

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Tax 411: How to File Your 1040

May 28, 2012 By

Tax filing can be a daunting task especially for beginners. One has to be fully prepared and aware of the tax basics.  The following are key steps to review:

What documents do you need?

The primary requirement is the W-2 or earning statements from all your employers. Your employers can mail these to you saving you the headache of hunting for them. According to the Federal law, these copies should be sent to you by January 31.

Also, there are other documents you may need to look out for in the mail. For instance, depending on one’s present portfolio, one may receive a 1099 for all the additional income not yet taxed. This could include interests on savings or other bank accounts as well as dividends.  They could come alongside other important tax information in January, and it is up to you to be on the lookout. All these forms are essential during tax filing.

What does one fill out?

Obviously, all taxpayers have to fill the IRS’s 1040 Form. However there are different versions of this form for different taxpayers. Those with no dependents or itemized deductions should fill the 1040EZ while the 1040A is reserved for those with dependents but no itemized deductions.

If you need to itemize deductions, either you are a single person or a couple (eligible for deductions higher than $5,800 and $11,600 respectively) you should fill out the 1040 long form. Otherwise, there is a standard deduction for both categories depending on one’s filing status.

Before claiming any deductions, be sure you have the clear records. For instance, you cannot claim charitable donations unless there are receipts proving funds were given out. Beginners may not have much foresight, but by taking time to review the tax forms carefully during your first filing, you will learn all you need for next year.

How do you file?

When it comes to tax preparation and filing, there are several options to consider. A taxpayer can hire an attorney, an enrolled agent, a public accountant or a licensed tax preparer. One can also use free online software.

The best resource, however, depends on the complexity of your tax returns. First timers with fairly straightforward returns can utilize the online resources which offer free services to low-income taxpayers. Still, regardless of the resources one uses to prepare returns, it is advisable to file them electronically for faster refunds.

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Planning For Next Year’s Tax Return? Here Are 8 Things to Do

May 25, 2012 By

If you did meet the tax deadline this year, be proud yes, but it is time to plan for next year. Being organized and planning ahead can save you time, money and headaches, come the 2013 tax year. There are eight key things one can do to make next tax deadline easier, and they are listed below:

  1. Make an adjustment on your withholding

The best time to review your withholding and adjust it appropriately is now, especially if you would like extra cash in this year’s paychecks. In case you still owed at tax time, it is only wise if you make next year’s tax bill smaller. Use the IRS’s Withholding Calculator online for this.

  1. Keep your current return safe

At some point when filing the tax return for 2012, you may need to refer to your 2011 tax return. Therefore, you should put this return and any supporting documents somewhere secure for future reference and also to act as helpful guide for the coming tax year.

  1. Start record-keeping

It is time to be more organized and have a central place for all your tax-related records. Something as simple as a shoebox or a cabinet, can work well enough to keep your documents and receipts safer.

  1. Go through your paycheck

Review your paycheck to ascertain all the details of your withholding, retirement contributions, health benefits and charity deductions among others are accurate. Making the adjustments will not only save you a huge hassle next year, but will make a big difference as far as tax payments are concerned.

  1. Look for a tax professional

For those using tax professionals’ assistance, search for one now. This will keep you safe from anxieties and pressures of tax deadline. Be wise when choosing a tax professional since you are eventually responsible for your return’s credibility regardless of who prepares it.

  1. Plan to itemize deductions

Itemizing deductions can be quite advantageous, and with an extra mortgage payment, planned donations or strategic pre-deadline property tax payments, you could just get a boost. Plan these strategies now and they may pay off come next year.

  1. Strategize for tuition payments

It is time to take advantage of the American Opportunity Tax Credit’s services before they expire after 2012. This tax credit takes care of higher education expenses (up to $2,500) and it may be beneficial to pay 2013 tuition fees this year.

  1. Be updated

Get to know the tax law changes, learn the latest tax tips and get IRS announcements this year, just subscribe to the IRS Tax Tips.

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New Reporting Rules for Tax Purposes in 2012

May 24, 2012 By

For the first time ever, there are new cost basis reporting rules for the Form 1099-B. Other tedious rules for landlords and businesses are yet to come into play in 2012. So if you are an investor or a business or a landlord, here is a brief recap of what to expect this year.

Reporting Rules for Investments 

Though financial institutions were previously mandated to report certain investment information (date of and amount of sale proceeds) on Form 1099-B, it was the investor who gave the acquisition date and purchase price on Schedule D. This meant that investors, with the help of their tax preparers, had to clarify the cost basis of investments prior to compiling the information in Schedule D.

The investors had some freedom in choosing the method for the process especially if he or she had acquired several shares of the same security at different prices and times. As it were, the investor could choose to establish the shares being sold as the providers of the optimal tax result, thus effectively decreasing the taxable gain or increasing loss.

Now under the Emergency Economic Stabilization Act of 2008, financial institutions are mandated to report the relevant cost basis for covered securities started over a three-year period on Form 1099-B. These new rules generally apply to: stocks, real estate trusts and exchange-traded funds acquired on January 1, 2011; mutual funds and dividends acquired on or after January 1, 2012; and any other remaining securities like fixed income and debt instruments acquired on or after January 1, 2013.

Reporting Rules for landlords and businesses

Initially, businesses used to report payments for services on Form 1040 especially if the provider got $600 or more. This also applies to commissions, royalties, rents and interest. However, the rules do not touch on payments for goods. A business does not have to report corporations’ payments either.

Beginning 2012, this was expected to change under the Affordable Care Act of 2010. Businesses will have to provide 1099s for payments of corporations. Furthermore, the controversial healthcare legislation imposed extended rules on reporting payments for goods.

Thanks to the opposition from the tax community and the business sector, the extended requirements were cancelled. Therefore, for the year 2012, there are no new extended reporting requirements, especially those under the healthcare law. Unfortunately, there still are those clients who will panic about these new rules yet to take effect and those that should have but haven’t. You can set the record straight and calm their nerves.

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Is it a Good or Bad Thing that the Tax Collector has Turned Tax Preparer?

May 23, 2012 By

As the tax season closes, there is a heated debate on Federal tax code, especially concerning tax rates, deductions, and exemptions. Congress is also expected to debate wholesale tax reforms to cover taxpayers’ arguments of deficiencies in the tax code.

However, these complaints are being used to create a new system where tax preparation will be the IRS’s job. You will only receive pre-filled forms and bills at the end of the tax year instead of filing on your own. This is definitely bound to cause conflict of interest.

The IRS’s job is to maximize and collect revenue, not prepare returns. To maximize the revenues, it is therefore, possible that the agency would not inform taxpayers of all the deductions and tax credits they could enjoy. The CCIA’s study in 2010 found that with the proposed new system, the eligibility and participation rates would be lower than what is estimated. There would be significant implementation costs, but it is not clear if the system will reduce under-reporting, or narrow the tax gap.

It is not the first time such a system has been used to prepare taxpayers’ returns. Perhaps the IRS should learn from the pitfalls faced by previous proposed systems, like the California’s 2005 pilot program. Last year alone for instance, out of the two million eligible taxpayers, only 83,000 chose this method thus, stressing the fact that Americans prefer the current voluntary compliance model.

The “Pay as You Earn (PAYE)” system in Great Britain is similar, but highly ridiculed for its many errors and inefficiencies. In 2010, for instance, the British taxpayers suffered a huge loss due to the government’s miscalculations that left them repaying the Treasury an average equivalent of $2,200. Imagine if this scenario were to happen in the U.S., where tax errors are common? It would be disastrous. Still, even if the IRS were to update its technology, this information would still be too much and way too sensitive to entrust one agency with it.

The agency will also need new mechanisms for easier tracking of taxpayers and their wages. Already, the IRS has proposed a Real Time Tax System aimed at addressing this issue, though it has its own downsides. It is the first step towards preparing taxpayers’ returns and it will ultimately rub small businesses the wrong way; with arduous reporting requirements and shorter periods for processing W-2s and 1099s (from 3 months to one month). Though tax reforms are inevitable, taxpayers need not hand over so much power to the IRS; taxpayers need to retain their tax rights and responsibilities – including voluntary tax preparation and filing.

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Getting a Passport is Now an IRS Affair

May 22, 2012 By

These days, if you apply for a passport the IRS will hear of it. The data collected in this case may help the IRS in identity verification and for other yet, unclear uses. Recently, the IRS proposed certain regulations to govern the information received. However, these rules will only take legal effect when finalized, as they are only proposals at the moment.

Green Cards not Left Out Either

When applying for a United States passport or looking to renew one, one must now disclose some tax information during the application process. This also applies for those applying for permanent residences in the U.S. (a green card). Though some of these rules are decades old, they have been altered and the expanded new list contains the applicant’s:

  • Full name, even previous name
  • Address of primary or regular place of residence in the country of residence together with the mailing address (only if different)
  • Social Security Number, also referred to as the Taxpayer Identification Number
  • Date of Birth

The applicant is required to submit this information together with the passport application. Otherwise, he or she can face the penalties imposed by the IRS. The agency can fine you up to $500 if you fail to give this information, so be warned.

Should you Care?

Many people may wonder if the IRS has the power to prevent someone from getting a green card or passport. For instance, if you have a hefty tax bill and you apply for a passport, will you get it or not? Well, this is a rare case and perhaps it seems like the IRS’s authoritative hand does not reach this far.

Undoubtedly, the IRS, together with the Department of Justice, take pride in catching tax cheats. They even arrest notorious tax scofflaws the moment they graze the U.S. soil. It is also a fact that when facing prosecution, one will have to give up their passport. Worst case scenario, the passport can be cancelled altogether, and it is presumed that a renewal application will not be allowed unless you clear your tax situation.

So, should you care or throw all caution to the wind? As a U.S. citizen or a permanent resident, remember that you will be legally required to report your worldwide income, regardless of wherever in the world, it is taxed. Furthermore, you will also have to disclose all your foreign accounts, if you have any. This calls for one to tread very carefully.

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Some Ridiculous Claims for Tax Deductions

May 21, 2012 By

Many people have come up with ridiculous arguments to justify tax deductions, which cause one to roll one’s eyes and say, “Good grief, give me a break!” Some of the most creative that the tax courts found inconclusive are:

1. Overdone Overdraft

A couple which was struggling with two non-performing dry-cleaning businesses could not get a loan from their bank because they were at risk of bad credit. So they opted to regularly overdraw their account and then satisfy the overdraft charges when the bank called them. This strategy caused them to incur more than $30,000 a year in overdraft charges, which were deducted as business expense. In the end, the couple applied for bankruptcy.

2. Red Blood Cell Depletion Allowance

A woman with a rare blood type made over $7,000 in a year as a blood plasma donor. She set to offset the income by claiming a depletion deduction for the loss of both her blood mineral content and her blood’s ability to regenerate. The Tax Court found that individuals could not claim depletion on their bodies unlike firms that remove natural resources as minerals.

3. Burning down the House

A worker got a job transfer and hence relocated his family to a new estate, but his wife did not like the idea so returned home with the children. On visiting the home over the holiday weekend, he found his wife was living with another man there. After an argument, the wife left and the man put some of her clothes on the stove and set them on fire. The flames spread and burned down the house. The man claimed a casualty loss deduction, but the Tax Court refused, reasoning that allowing him to deduct a loss from a fire he set would violate public policy.

4. Designer Clothes

A manager of an Yves Saint Laurent boutique was required to purchase and wear the designer’s clothing as a prerequisite of her job to project the image of an exclusive lifestyle. She made tax deductions for her clothes as an employee business expense because she only wore the clothes at work. In her view, the clothes were too classy for her simple lifestyle. The court however denied her deduction because the clothes were suitable for wear outside of work, although they were not her taste.

5. Las Vegas Gambling Junket

A repo firm sponsored a bus trip to Las Vegas in an effort to drum up business from banks. No formal business meetings were set up though the employees informally held discussions with their collection contacts on the ride to Vegas. The business got more clients from the trip attendees but the Tax court denied deductions for the junket because the business discussions were an insubstantial part of the trip.

6. Meals with Colleagues

A law firm’s partner met daily with his colleagues at lunch to discuss the firm’s business, like case assignments and settlements. However, the IRS could not consider picking up part of the tab. The Tax Court sided with IRS arguing that the cost of the meals was a non-deductible personal expense, even though business was discussed.

7. Wrecking a Rental Car

An airline worker wanted to get to New Orleans, but he was stranded by the heavy fog. He worked a deal with a rental car company where he paid nothing for a car that the company wanted driven to New Orleans. He, however, wrecked the car on his way, and had to pay for the damages. He tried to deduct the cost as a casualty loss but the tax Court denied the deduction since he was not the owner of the vehicle.

8. Shoddy Construction

A couple, having built a dream home discovered a series of problems with the house that made living in the house horrible. They claimed that the contractor defrauded them and deducted a large amount on their tax return. The Tax Court denied their deduction saying that they were victims of poor construction and not fraud.

So if you’re thinking of trying to deduct any similar expense, think again.

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Does A Taxpayer Have to Pay the IRS for that Bonus He Turned Down?

May 18, 2012 By

We frequently read stories in newspapers about executives repaying their bonuses. Reasons that motivate executives to move in that direction include: pressure from shareholders or the public, altruism, or regulatory concerns that are sometimes required by law. Have you ever thought of the tax effect?

Many people suppose the tax law allows the returned cash to be untaxed, so there will be no income. There is no logic in taxing cash received one day then handed back the next day. If one refuses a bonus before its announcement and payment, can it really be an income? That is the tax law universe where logic and common sense is turned upside down. All money that is payable, even when turned down, is considered to be income accrued and therefore, taxable. It would not be logical to tell your boss not to pay your bonus in December, but in January since your constructive receipt says you tax is due in December, even after your boss agrees.

Does one ultimately have to pay? The first question is whether the repayment is voluntary. A repayment motivated by altruism, shame, or patriotism may be more admirable, but may bring back a bleaker tax outcome. An executive who gives back a bonus when a law, court order, or administrative pronouncement demands it, runs an easier tax gantlet, even though that does not guarantee an optimistic tax stance. It would be advisable to ask oneself the following questions in as far as tax payment on bonus allowances are concerned:

  • Does the refund happen the same year as the pay? Occasionally, tax code allows one to undo a previous transaction.
  • In case you return compensation in a later year, can tax deduction be made in whole?
  • In case you give back a bonus, do you return the net check after payroll deductions and to who do the payroll taxes go?

If you want to make amendments in the returns of the previous year, the tax code allows only for correction of a mistake, and a mistake does not include a pay giveback. You can claim a business expense deduction if you are required to return pay, but usually only as a miscellaneous itemized deduction, which is open to a 2% floor plus AMT. Alternatively, a company could arrange to reduce the executive’s current salary in order to effect a pay return. There is a complicated provision called section 1341. For a taxpayer to claim a deduction, he/she must include the income statement from the previous year since they had unlimited right to it then. It is important to note that section 1341 is fairly complex and so involvement of a tax professional when invoking it is advisable.

Tax analysis becomes complicated when dealing with deliberate and obligatory repayments so avoid the tax headaches that follow.

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