IRS Tips: Charitable Contributions

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Assuming anybody has any money to give this year, the IRS offers the following advice on claiming deductions for charitable giving:

  • If you want the deduction count on your 2011 taxes, then you have to make the contribution before the end of the year.
  • The organization you donate to must be a qualified organization — confirm using IRS Publication 78.
  • Charitable contributions are only deductible if you itemize, not if you take the standard deduction.
  • Keep good records and save donation receipts.
  • You may need to complete Form 8283 for non-cash contributions

As always, the best, most comprehensive source of information is the IRS publication on the topic.  For more information related to charitable contributions, see Publication 526 (available on the IRS website).

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Forget Packers Stock, Get US Savings Bonds

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I know some people are already looking forward to next year’s tax refund check. If it’s not going to be spent paying off Christmas credit card debt then you may want to consider purchasing some US Savings Bonds.

All you need to do is fill out a simple form — Form 8888 — and attach it to your tax return when you file. On Form 8888 you simply indicate who the bonds should be issued to and the amount you want to purchase (in increments of $50.00 and up to a maximum of $5,ooo.00). If you do not want your entire refund going to the purchase of savings bonds, simply indicate what you want to do with the balance: paper refund check, one or more bank accounts, my bank account perhaps.

Savings bonds may seem like an old-fashioned investment, but it’s a smart investment these days. The Treasury Department describes them as a “low-risk, liquid savings product” that earns interest and protects you from inflation. You must pay federal taxes on the interest earned from savings bonds. But no worries about volatility, and they’re worth considerably more than Green Bay Packers stock.

If you like the feel of actually holding a paper savings bond in your hand, then purchasing them with part of your tax refund may be your last shot at doing so. Beginning January 1, 2012 paper savings bonds will no longer be available for purchase at financial institutions. Electronic savings bonds are available for purchase at any time through www.treasurydirect.gov.

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FTB vs. BOE

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Franchise Tax Board vs. California State Board of Equalization

Navigating your way around the IRS can be a formidable task, one that many prefer to leave in the hands of their tax attorney or other tax practitioners. However, practitioners agree that the California equivalent — the Franchise Tax Board (FTB) — is even worse. In general, the California rules tend to be tougher than the federal rules and the FTB personnel tends to be more difficult and steadfast in enforcing their rules.

One specific complexity in California has to do with the procedure for appealing a tax case. Some states have a state tax court serving as the proper venue after a case has been appealed to the limits at the administrative level, which mirrors the federal process and Federal Tax Court. But, of course, California does things differently. Once you have exhausted your options administratively, there is nowhere to go except the California State Board of Equalization (BOE). The state of California Board of Equalization consists of five elected members that function like a court but is not a court. This article from Robert W. Wood further describes the “quirkiness” of the California BOE.

Don’t Delay Filing Taxes

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My internet connection is just a bit slower today and I wonder if it is due to all the Cyber Monday traffic. I’m going to make today’s post short. I don’t want you to stop what you’re doing — our economy needs you to continue making your online purchases. But take just a moment to think about your taxes.

We are creeping up on the end of the year and it’s a good time to assess where you stand with your federal taxes. Do you anticipate owing taxes for 2011? Many people will owe, and as a result, some will delay filing their tax returns. Don’t delay. File your return on time even if you know you are going to owe and even if you know you can’t pay. There are always options available to you if you cannot pay, and it is not worth the headache to incur additional penalties and interest associated with failure to file.

Talk with the attorneys at Montgomery & Wetenkamp about your tax resolution options.

How Much Can They Take?!

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The short answer to this question is “A LOT.”

My clients always ask me how much the IRS can take from their paycheck if the IRS decides to issue a wage garnishment. This is a common question from someone who does not understand how the process works. The IRS does not take a percentage of one’s income; instead, the IRS is bound by a complex set of levy exemptions. The IRS takes all the income except the amount that is exempt from levy as shown on the tables in Publication 1494. It may be more appropriate to ask, “How much is the IRS required to leave for me?”

The amount of income that is exempt from levy depends primarily on the taxpayer’s filing status, the number of exemptions claimed, and the pay frequency. As an example, a single wage earner claiming one exemption who is paid once a month is allowed to take home $791.67 based on the 2011 rate. The IRS gets the rest regardless of the taxpayer’s actual earnings. That same wage earner, if he were paid weekly, would take home only $182.69. A married wage earner filing jointly and claiming two exemptions is allowed to take home $1,583.33 if paid monthly, and $365.38 if paid weekly.

A wage garnishment can deal a crippling blow to your finances. But a wage garnishment can be stopped. Contact Montgomery & Wetenkamp for more information.

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Small Business Health Care Tax Credit

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The IRS recently released a special edition tax tip of interest to small business owners who may be struggling to continue health care coverage for their employees. A special tax credit is available to employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement. To qualify for the credit, the employer must have 25 or fewer workers with average income of $50,000 or less. The maximum credit for eligible small business employers is 35 percent of premiums paid. The credit may be claimed using Form 8941.

Even though many standard filing deadlines have passed for 2010 taxes, the IRS points out that the Small Business Health Care Tax Credit may still be available subject to the following deadlines:

  • businesses affected by certain natural disasters (deadline is October 31)
  • business entities such as sole props, partnerships, and S-corp shareholders who report their income on Form 1040 and who requested an extension (deadline is October 17)
  • tax-exempt organizations that file on a calendar year basis and requested an extension (deadline is November 15)
  • business that have already filed can still go back and claim the credit by filing an amended return

Are IRS Audits Random?

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As tax relief attorneys, we frequently get the question, “How likely is it that I will be audited?” or “Does the IRS audit people randomly?”

IRS audits are not completely random. You may have heard that the self-employed are a more common target than wage-earners.  This is true.  Income reported on a Schedule C is, according to some, one of the most likely types of returns (or parts of returns) to be audited. According to Forbes columnist, Robert Wood, the sole proprietorship is one of the most tempting targets for the IRS.  Formation of a legal entity like a partnership or a corporation may add complexity to your business, but it is not as routinely audited as the sole proprietorship.

According to the IRS, cases are selected for audit based on a variety of factors, including statistical formula, document matching, and related examinations.

Nobody can audit-proof your return. There is always a chance that the IRS will scrutinize your income and your business filings. But there are certainly steps that can be taken to reduce the likelihood of an audit.  One of those steps is to simply avoid filing as a sole prop.

Installment Agreements & Suspension of Collection Activity

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Installment agreements provide some tax relief if a liability cannot be paid in full. As you may know, IRS procedures prohibit the filing of levies while an installment agreement (IA) is in effect. But did you know that, subject to certain exceptions, no levies may be filed in any of the following situations either?

1. While requests for installment agreements are pending

2. For 30 days after requests for installment agreements are rejected

3. For 30 days after  installment agreements are terminated

4. While an appeal of a default, termination, or rejection is pending or unresolved (See Internal Revenue Manual 5.14.1.5)

What are some of the exceptions, you ask? One is when the taxpayer waives the particular restriction in writing. Another exception is when collection of the tax is in jeopardy (i.e., taxpayer is preparing to leave the country with a suitcase full of cash). And a third exception is when a levy is filed in connection with a tax balance from one or more years not covered by the IA or appeal.

And what qualifies as a “pending” IA? Another good question. A taxpayer must at least provide his identifying information, such as name and social security number, identify the tax period(s) to be covered by the agreement, and propose an amount to be paid. However, an IA will not be deemed “pending” if all back tax returns are not filed or if it is evident that the IA request was submitted solely to delay collections. See Internal Revenue Manual 5.14.1.3.

You’re Being Audited, But Don’t Panic

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The IRS has been offering tax tips all summer long by way of its “Summertime Tax Tips” series. Some topics have been more helpful than others. This is the latest one (my thoughts inserted in blue). Its called “Eight Tips for Taxpayers Who Receive an IRS Notice.” I don’t find it too helpful.

  1. Don’t panic. Many of these letters can be dealt with simply and painlessly. Really?  Don’t panic?  That’s your #1 bit of advice? So, if the notice says that I’m being audited or that I owe, I’m supposed to remain calm?
  2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Yes, there are a number of reasons the IRS sends notices, but most of the time they just want your money.
  3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry. In other words, “read the notice carefully, dummy.”
  4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return. “Again, read the notice!“
  5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due. “Don’t send us any unnecessary docs.”
  6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.This is actually kind of helpful.
  7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call. In other words, “Only call us as a last resort.”
  8. It’s important that you keep copies of any correspondence with your records. Hopefully you took the advice in tip #1 and didn’t panic and toss your notice in the trash.

Federal Tax Liens

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What is a Federal Tax Lien? With all this talk of liens lately, we thought it would be helpful to give a little refresher.

The Federal Tax Lien (FTL) is just one of the many collection tools used by the Internal Revenue Service (IRS) to collect past-due taxes. The FTL secures the IRS’ interest in taxpayers’ property without actually seizing and selling the property on the spot.  A tax lien technically attaches to all the taxpayer’s property, whether real or personal, and the IRS may choose to enforce its lien rights at the time the property is sold.  In practice, however, the FTL usually only affects rights to real property, or personal property of extraordinary value. The FTL is considered a “passive” collection tool. In contrast, bank levies, wage garnishments, and property seizures are all active collection tools.

Under new IRS guidelines, a Federal Tax Lien should not be filed unless the amount owed is $10,000 or more, although circumstances may warrant that a lien be filed on amounts less than $10,000.  Normally a tax lien will not be released until the tax liability has been fully satisfied.  However, a tax lien can be released by entering into a Direct Debit installment agreement as long as the total balance is $25,000 or less.  The IRS will also release a FTL if the taxpayer can convince the government that releasing the lien will facilitate collection of the tax or that it is otherwise in the best interest of the government.

Although tax practitioners and the Taxpayer Advocate Service have cast serious doubt on the effectiveness of the Federal Tax Lien as a collection procedure, it is still widely used and widely feared to this day.