Stress About your Bracket, Not your Taxes

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We’re approximately one month away from Tax Day and the IRS is offering up a bit of advice on how to get through these next few weeks without losing too much sleep. The most prominent ingredient in IRS’ anti-stress formula is “Don’t Procrastinate.” This is good advice. Why wait until the weekend of April 15th to get started on your taxes? If you rush around at the last minute to get your taxes done, then the likelihood that you will make an error increases. Also, don’t think you can pop in to see an accountant or a busy tax preparer at the 11th hour. There are many people who put it off and you’re going to have to “take a number” and wait your turn.

If you’re due a refund then you probably file early. Most of the last-minute filers are people who know they are going to owe. Some of them know they will owe and also know they can’t afford to pay — and that can certainly be a big source of stress. But it doesn’t have to be…

Self-serving plug: The tax attorneys at Montgomery & Wetenkamp know how to resolve tax debts quickly and fairly. Call now for your free consultation.

Notice of Federal Tax Lien

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Most people who come see us for tax relief want to pay their taxes, but do not have the money. Some ask, “What happens if I don’t pay the IRS?”  One of the consequences of failing to pay your taxes is the filing of a Notice of Federal Tax Lien.  It is a relatively simple document showing the type of tax that is owed, tax form number, tax period, the unpaid balance(s), and the following rather blunt language:

“[W]e are giving a notice that taxes (including interest and penalties) have been assessed against the following-name taxpayer. We have made a demand for payment of this liability, but it remains unpaid. Therefore, there is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.  [IRS Form 668(Y)(c)]

In case there is any question as to what “all property” means, the following explanation can be found on the reverse of the form:

“This Notice of Federal Tax Lien gives public notice that the government has a lien on all your property (such as your house or car), all your rights to property (such as money owed to you) and to property you acquire after this lien is filed.

Early Retirement Distributions

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Many people do not realize that early distributions from retirement accounts qualify as income for tax purposes.  The realization may come in a very disturbing way — such as a 1099 and/or a letter from the IRS stating there has been underreported income.  If nothing is done to correct this, and if no exceptions exist, it will likely result in a tax debt.  A retirement withdrawal is normally considered “early” if done prior to age 59 1/2.  The tax impact of an early withdrawal is the topic of the IRS’ latest installment in its Tax Tips series (IRS Tax Tip 2012-34), and is outlined here:

  • early distributions are subject to an additional 10% tax and must be reported to the IRS
  • rollovers are generally not subject to this tax; not until the new plan actually makes a distribution
  • nondeductible contributions to an IRA are not taxed in an early distribution
  • early distributions attributable to prior contributions to a Roth IRA are not taxed

There are several exceptions to the 10% early withdrawal tax, which are discussed fully in Publications 590 and 575.

Bartering – It’s Still Income to the IRS

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Assume Farmer John, an acquaintance, comes to my office with a small tax problem and I spend 10 minutes researching and looking for the answer.  I then provide him with a bit of advice, and he asks me what he owes me.  I ask him to give me a dozen eggs from his family farm and we’ll call it even.  Do I have to report this transaction as income on my taxes?

This is an exchange of one product or service for another, with no cash changing hands.  It’s a barter.  A barter may be an exchange of goods for goods, services for services, or as in my example, services for goods.  According to the IRS, the fair market value of the goods and services exchanged in a barter transaction must be reported as income by both parties.  So the $2.00 dozen of eggs must be reported as income on my taxes.  And the value of my services must be reported as income by Farmer John.

Besides the income tax responsibilities, there may be other tax implications associated with bartering such as:

  • self-employment tax
  • employment tax
  • excise tax
  • capital gains or capital losses
  • non-deductible personal loss

Bartering transactions take place in a variety of settings, including home-based online bartering businesses, bartering exchanges, or on an informal one-on-one basis. For more information about the IRS rules on bartering, see IRS Tax Tip 2012-33 and the Bartering Tax Center on the IRS website.

The Latest Phishing Expedition

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Phishing: “a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information.” A phishing victim often finds himself burdened with tax problems that are not his own. See IRS website for full detailed information about phishing and everything you need to know about identity theft.

Be on the lookout for the following email subject lines in your inbox:

“Urgent update of tax information is requested”

or

“Tax information required within 30 days.”

It is recommended that you delete these emails immediately because it’s a scam. If you do decide to risk opening the email, the text will look something like this:

Dear Account Holder,

In our continuing effort to guarantee that exact data is being sustained on our systems, as well as to provide you better quality of service; INTUIT INC. has participated in the Internal Revenue Service [IRS] Name and TIN Matching Program.

We have discovered, that your name and/or Taxpayer Identification Number, that is stated on your account does not correspond to the data on file with the Social Security Administration.

In order to check the data on your account, please click here.

Regards,
INTUIT INC.

Corporate Headquarters
2632 Marine Way
Mountain View, CA 94043

Thanks to Kelly Philips Erb for pointing out these scam emails from time to time. If bloggers will repost these scams all over the internet, maybe we can minimize the damage to innocent taxpayers.

Estimated Tax Payments

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Many of our clients find themselves burdened with a tax debt because they did not keep up on their Estimated Tax Payments (ETPs).  Most people think that ETPs are only for the self-employed.  But did you know that you may be required to make ETPs even if you are a wage earner and your employer withholds taxes from your pay?

According to IRS Form 1040-ES, “Estimated tax is the method used to pay tax on income that is not subject to withholding.”  You must pay estimated tax in 2012 if both of the following apply:

  1. You expect to owe at least $1,000 in tax for 2012, after subtracting your withholding and refundable credits.
  2. You expect your withholding and refundable credits to be less than 90% of the tax on your 2012 return or less than 100% of the tax on your 2011 return, whichever is smaller.

This is just the general rule. Special rules apply to farmers, fishermen, household employers, and higher income taxpayers.  The instructions for Form 1040-ES explain how to calculate the amounts of your ETPs and the due dates are as follows:

  • 1st Payment – April 17
  • 2nd Payment – June 15
  • 3rd Payment – September 17
  • 4th Payment – January 15

IRS Offers Advice on Interacting with Tax Preparers

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You can often avoid tax problems early on if you select a competent tax preparer. This post is based on “IRS Tax Tip 2012-06″ published by the IRS earlier today.

The title given by the IRS was “Ten Tips to Help You Choose a Tax Preparer,” but I think you will agree that this is not an accurate title. I think the author started off listing tax preparer selection tips, then ran out of suggestions by #8 or so, but really wanted to have a nice round 10 items on the list. Not that numbers 8-10 are bad suggestions, they just don’t exactly qualify as things you can do to help you choose a tax preparer. Numbers 8 and 9 will probably come into play only after a bad tax preparer has been hired. And number 10 has nothing to do with selecting a tax preparer other than the fact that you most likely would not select an abusive tax preparer two years in a row.

Here’s the list in abbreviated form:

  1. Check the tax preparer’s qualifications: PTIN, certifications, professional organizations, etc.
  2. Check the tax preparer’s history: get on the internet and poke around a little
  3. Find out as much information as you can about their fees
  4. Make sure they will file electronically
  5. Make sure the tax preparer is accessible
  6. Make sure the tax preparer asks you enough questions and asks for enough information/documentation to be able to legitimately prepare your return
  7. Never sign a blank return
  8. Review the return before you sign it (you are ultimately responsible for what is on the return, even if you get a professional to prepare it)
  9. Make sure the tax preparer signs the return and includes his/her PTIN
  10. Report abusive tax preparers to the IRS

California Tax News

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Today the California Franchise Tax Board (FTB) announced that it is now accepting 2011 state tax returns.

California is falling in line with the federal government as far as the 2012 filing deadline. You must have your tax return postmarked no later than Tuesday, April 17th for it to be considered timely.  The standard filing deadline is April 15th, but that falls on a Sunday this year. And Monday, April 16th is Emancipation Day, A District of Columbia holiday, which has the same effect as a national holiday when it comes to tax deadlines.  But even though the April filing deadline is the 17th, the extension deadline will still be October 15th for federal tax returns.

  • The top individual tax rate in California decreased from 9.55 percent to 9.3 percent.
  • The standard deduction increased from $3,670 to 3,769 (increase from $7,340 to $7,538 for joint filers)
  • The dependent exemption credit increased from $99 to $315 per dependent (personal exemption increased from $99 to $102 and from $198 to $204 for joint or surviving spouses)
  • Child and dependent care expense credit is worth up to $1,125 for those who qualify

Avoid Calling the IRS in December

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December is by far the worst time to try to communicate with the IRS about your tax debt.

The Second-Stringers

I have not noticed that the telephone wait times are much different in December. Perhaps there are more IRS representatives taking vacation in December, but many practitioners and taxpayers do the same — so increased phone traffic is not normally an issue. The IRS does a fairly good job replacing the vacationers, but I have usually found the quality of their replacements to be lacking.  If you call the IRS in December (especially late December) then there is a good chance you will be dealing with a new, inexperienced IRS agent (a “second-stringer”). Of course, a tax relief attorney will know how to use that inexperience to the taxpayer’s advantage.

IRS Computer Maintenance

The IRS information technology staff takes advantage of the holidays to do routine maintenance on IRS computer systems. And they like to get a jump on things. So, if they tell you that everything is going to be shut down on Friday in observance of Christmas, then chances are they will be up and down all day on Wednesday and completely offline by early afternoon on Thursday.

If you get through to a representative who tells you their computers have been up and down, then it might be best to put off the call for another day if possible. The problem is that you will get partway through your call and everything the representative did will be lost when the computer goes down, and you’ll have to start over again.

If you have a tax issue that can’t wait until after the holidays, it is best to enlist the help of a qualified and experienced tax professional.

www.mwattorneys.com

Hot off the Press: New IRS Publication 17

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IRS Publication 17 contains a whole host of information on filing your 2011 individual federal income taxes. It is the number one source for basic tax filing information, especially handy for those who plan on filing their taxes themselves (without hiring professional help). This publication has been around for over 60 years, but was recently updated for the 2012 filing season.  In a nutshell, Pub 17 covers the topics of Income, figuring you income, deductions, and credits.  But there is also information on taxpayer rights and how to obtain tax relief if you cannot pay what you owe.

But wait, before you click on the link and hit “Print,” you should be aware that this is a lengthy document.  The index alone is over 20 pages long.  The total page count is just over 300, so you’d be better off just saving the link. Besides, if you print it then you lose some of its functionality — Pub 17, in its electronic form, is full of links that (1) help you navigate those 300 pages quickly, (2) help you find additional information on key topics, and (3) take you to other forms and publications you may need when preparing your 2011 taxes.

Preparing your taxes yourself is not always the right choice for everyone. But if you do, you should definitely consider reading Pub 17 or at least keep it on hand as a reference tool.

www.mwattorneys.com