Is This The Year You Should Itemize Your Deductions on Your IRS Tax Return

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It’s now February, and tax day is just around the corner … but far enough away to allow you time to explore your options and minimize your tax exposure. While preparing your tax return the goal is always to legally minimize your tax debt and hopefully increase your tax refund. At its simplest, your tax debt is determined by your taxable income after deductible expenses.

Focusing on the deductible expenses side of the tax equation, according to the Internal Revenue Service (IRS), most taxpayers claim the standard deduction. Is this the year that you should itemize your deductions? My most common response to legal questions is apt; it depends. The analysis requires a determination of which is greater, the standard deduction or itemized allowable deductions?

What is the Standard Deduction?

The standard deduction is a preset amount that reduces the amount of income on which you are taxed. The standard deduction amount depends on your filing status, whether you are 65 or older, or blind, and whether an exemption can be claimed for you by another taxpayer. The standard deduction is generally adjusted annually based on inflation.

The standard deduction amounts for tax year 2012 are $5,950 for single filers and married couples filing separately, $8,700 for head of household filers, and $11,900 for married couples filing jointly and qualifying widow(er). If you are 65 or older, or legally blind you may receive an increased deduction per qualifying status. The additional standard deduction amounts for tax year 2012 are $1,450 for taxpayers who file single or head of household, and $1,150 for those filing married filing jointly, married filing separately, or qualifying widow(er).

Should You Itemize Your Deductions?

Now the hard part: is the standard deduction amount greater than the amount that may be claimed if you were to itemize your allowed expenses? If the standard deduction is greater, use the standard deduction. Determining what expenses you had throughout the year that may be itemized and deducted, is usually difficult because you need to maintain accurate records and the list of the various allowed deductions are exhaustive and riddled with exceptions, exemptions and limitations. Once you have a grasp of the type of deductions that may be claimed, you may find that your actual expenses, when itemized, far exceed the standard deduction provided by the government. This is why it truly pays to prepare your tax return early and not procrastinate so you have time to accurately determine the expenses you may itemize.

The types of expenses that may be itemized are typically a social economic incentivizing type of expenses. Generally, and subject to many exceptions and limitations, expenses paid for or associated with medical care, mortgage interest, student loan interest, taxes, education, charity, job search, relocation, earning income, and investments, may at times be itemized and could potentially reduce your taxes. Once tallied and accounted for, if the total amount spent on the qualified deductions, subject to the applicable exceptions and limitations, are more than your standard deduction, this may be the tax year you save on your taxes by itemizing your deductions; so don’t procrastinate and do your homework … or file an extension.

2012 Whistleblower Awards Top $125 Million

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This week the IRS announced that it paid out a total of $125 million in whistleblower claims during 2012 compared to only $8 million in 2011.  But this flashy statistic is not quite as incredible as you might think.  The IRS paid $104 million of that to a single whistleblower, Mr. Bradley Birkenfeld.  Birkenfeld was the guy who blew the whistle on USB which led to a $780 million settlement between the bank and the Federal Government.

If we exclude Birkenfeld, the IRS paid out $21 million in whistleblower claims last year.  Still pretty impressive, but not earth-shattering.  Perhaps a more telling statistic would be the number of whistleblower cases they closed or the average length.  The IRS is still taking far too long to complete their investigations — usually a few years from start to finish.  According to the Whistleblower Office’s annual report to congress, the typical whistleblower tax case sits in the “Award Evaluation” stage of review for 1141 days!

United States Files Criminal Tax Charges Against Bubba

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According to the associated press, three time Super Bowl champion and former San Francisco 49er Bubba Paris has been charged with failing to file his federal income tax returns over a three year period.

The U.S. Department of Justice announced that Paris has been charged with three misdemeanor charges of failing to file tax returns in 2006, 2007 and 2008. Prosecutors allege that Paris received gross income of more than $57,000, nearly $84,000 and almost $42,000, respectively, in each of those years.

What interests me about this case, besides the 49er who was one of my favorites in the 1980’s, is the amount of money involved and Paris’ lack of true notoriety. While there are exceptions, the government generally prosecutes criminally for non-filing or non-payment of taxes only in cases of extreme income or evasion, or major notoriety i.e. the press garnered from the prosecution will warn the general public to timely file and pay their taxes. Here, the income levels alleged, if correct, are hardly kingpin status. In regards to Paris’ notoriety, the government missed their mark by about 25 years. Even in the Bay Area, most 49er fans may not know the difference between Bubba Paris and Bubba Gump.

Nonetheless, Paris now needs a tax attorney to get him tax relief. I suppose the government’s purpose would be to warn those with smaller incomes, that they too may be the subject of criminal prosecution for otherwise minor tax crimes. Be warned … if you earn approximately $45,000 a year and you miss a tax deadline … you may be doing hard time.

 

OIC Pre-Qualifier Tool

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The IRS is all about automating everything as much as possible, which isn’t always a good thing.  Just ask the National Taxpayer Advocate, Nina Olsen.  She has always been a big critic of this trend.  One of the problems with taking away the “human element” is that cases tend to get handled incorrectly and unfairly.  After all, cases are made up of actual human beings with unique circumstances, and computer programs don’t always have the sophistication to consider unique circumstances.

A case in point is the IRS’ new “Offer in Compromise Pre-Qualifier Tool.”  What it looks like is an attempt to automate the Offer in Compromise (OIC) process.  All you do is plug in your personal financial information and, BOOM! you’re in.  Ok, that’s not fair.  It doesn’t quite work that way.  In fact, the IRS is careful to say that the tool should only be used as a guide and that their final decision is based on the paperwork that is submitted.  But it’s not too much of a stretch to imagine the IRS enhancing this offer in compromise pre qualifier tool and fully automating the OIC process somewhere down the line.

The pre-qualifier tool takes the taxpayer through 5 main steps, each step containing a series of specific questions:

  1. Basic Information – These are the “deal breakers” that normally result in an OIC being automatically returned (such as missing tax returns or an open bankruptcy)
  2. Assets – Questions about equity in bank accounts, real property, cars, etc.
  3. Income – Monthly income from all sources
  4. Expenses – Actual monthly expenses subject to IRS maximum allowances
  5. Proposal – This is the “MSRP” — the magic number that, if offered to the IRS, may result in an accepted offer

I guess we’ll know how hazardous this tool is when people start ordering an OIC from their tax attorney like they order a sandwich: “One OIC please; I know I qualify because I used the OIC Pre-Qualifier Tool.”

Tax Relief via the Earned Income Tax Credit (EITC)

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The Earned Income Tax Credit (EITC) is a refundable tax credit you may be able to take advantage of this tax season to get the tax relief you need. Since the EITC is refundable, this means taxpayers may get money back, even if they have no tax withheld. However, to get the credit, taxpayers need to file a tax return and specifically claim the EITC, even if they don’t have a filing requirement.

Recent changes to the EITC make the credit available to more taxpayers than in years past. Eligibility for the EITC varies based on income and family size. Households with three or more qualifying children will receive a 2012 tax credit of $5,891 if their Adjusted Gross Income (AGI) is less than $45,060 when filing individually or $50,270 when married filing jointly. The equivalent credit for tax year 2011 was $5,751 for individuals with an annual AGI less than $43,998 or $49,078 when married filing jointly.

On the other end of the EITC spectrum, for tax year 2012, households with no qualifying children will receive a $475 tax credit if their AGI is less than $13,980 when filing individually or $19,190 when filing married filing jointly. Similar middle tier credit adjustments are available for taxpayers claiming one or two qualifying children.

Eligibility for the EITC is very fact specific as to eligibility requirements and prone to errors. Even if someone else prepares your tax return, a taxpayer is still responsible for the accuracy their own tax return. Taxpayers should seek tax advice if they are not sure whether they qualify for the EITC. Common EITC errors identified on the IRS website include:

  • Claiming a child who is not a qualifying child.
  • Filing as single or head of household when actually married.
  • Reporting incorrect income or expense amounts.
  • Missing or incorrect Social Security numbers for self, spouse or qualifying children.

While claiming the EITC will get you immediate tax relief, avoiding these common tax errors will give you stress relief.

 

An IRS January Tradition

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On Thursday the IRS announced a massive nation-wide identity theft crackdown, and I believe I’m starting to see a pattern now. Around the end of December each year we tend to get together with our extended families to drink eggnog, decorate trees, exchange gifts, and engage in various other annual family traditions. Well, the IRS appears to have a tradition of its own, although far less jolly than ours. Each January the IRS gets together with the Department of Justice and the US Attorney to sweep the nation for tax cheats — not exactly the kind of party you want to be invited to.

Here are the results of this years’ festivities:

  • the “sweep” involved 32 states and 215 cities
  • 734 enforcement actions (2,400 total in fiscal year 2012)
  •  109 arrests
  • 189 indictments
  • 47 search warrants
  • visits to 197 money service businesses (i.e., check cashing joints)

Read about specific cases here.

There is no doubt the IRS is strengthening its identity theft prevention and prosecution efforts.  Last year there were only 69 indictments and 58 arrests.  Sentencings are also on the rise, and jail times are getting longer.

The IRS is spending an unprecedented amount of resources on identity theft.  Perhaps the best evidence is the dramatic increase in criminal identity theft investigations:

  • 276 criminal identity theft investigations started in 2011
  • 898 criminal identity theft investigations started in 2012
  • 560 criminal identity theft investigations started so far in 2013

I’m not sure how they would do it, but the IRS could probably do a better job publishing this information and these stats.  It’s great that they’re stepping up efforts to punish identity theives, and the timing is perfect (right as people begin getting their taxes done), but if it’s only the tax attorneys and other tax professionals who are in the know, I would consider it a big opportunity lost.

It's Tax Season (Sort of)

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So with the Super Bowl over, and pitchers and catchers reporting next week, these are the signs that tax season is in full swing, right? Wrong; depending on your situation. You still may not be able to file your 2012 tax return and get your refund, or resolve your tax debt.  Based on the last-minute shenanigans in Washington D.C. to avoid falling of the fiscal cliff, the Internal Revenue Service (IRS) is still preparing their systems to accept the remaining tax forms affected by the American Taxpayer Relief Act (ATRA) enacted by Congress on January 2, 2013.

The Internal Revenue Service announced today that taxpayers will be able to start filing two major tax forms next week covering education credits and depreciation. Beginning Sunday, February 10, 2013, the IRS will start processing tax returns that contain Form 4562, Depreciation and Amortization. Then, on Thursday, February 14, 2013, the IRS plans to start processing Form 8863, Education Credits. With these updates, almost all taxpayers may start filing their tax returns for 2012. These forms affected the largest groups of taxpayers who weren’t able to file following the abbreviated January 30, 2013, opening of the 2013 tax season.

However, more updates are still required to accommodate all taxpayers and tax forms. The remaining forms affected by the January 2013 legislation are anticipated to be accepted during the first week of March 2013.  A specific date will be announced later by the IRS. So, don’t delay, if you can help it, to get your taxes completed.

 

The IRS' Human Capital Problems

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TIGTA’s latest audit report discusses the issue of human capital at the Internal Revenue Service.  Human capital consists of the skills, abilities, and contributions of the employees in an organization, and it is interconnected with key functions like hiring, training, and retention.  In this day and age, any discussion of human capital in our government necessarily must also include a discussion of funding.  Sure, human capital has always been an investment, but these days there is so little money to invest.

I think one of the most alarming issues identified in this report, at least from the perspective of a tax attorney, has to do with staffing.  The IRS is quickly losing its most valuable employees.  I don’t know if the IRS will ever be able to significantly reduce turnover with the rank and file.  Phone operators and other service center employees don’t get paid much and their jobs tend to be very stressful.  These just aren’t career / lifetime positions.  But that’s not the primary concern when it comes to staffing.  The bigger issue is the inevitable loss of managers and executives since changes in leadership can have an impact on all other IRS jobs.

This is what I found in TIGTA’s report that really blew me away:

[M]ore than one-third of all executives and almost 20 percent of nonexecutive managers are currently eligible for retirement. IRS data indicate that within five fiscal years, nearly 70 percent of all IRS executives and nearly one-half of the IRS’s nonexecutive managers are projected to be eligible for retirement. Overall, about 40 percent of the IRS’s employees will be retirement eligible within five fiscal years.

Executive positions are not easy to fill; it is critical that the IRS finds the right people to take over when the current executives retire.  In short, it takes a lot of human capital to ensure there will be enough human capital to go around in the future.  They will have their hands full during the next 5 years.

Before You Sign Your Tax Return

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Today the IRS released another installment in its “IRS Tax Tips” series, which is available in the Newsroom of the IRS website.  The IRS lists 10 things to keep in mind when selecting a tax preparer.  But perhaps the most important point is something that many may gloss over — the fact that the taxpayer, not the tax preparer, is legally responsible for what is on the return.  Failure to understand this can result in serious tax problems.

The signature on the return is more important than you might think.  The tax return is not considered complete, and will not be accepted, if it is not signed.  The IRS returns tax forms that are not signed or it sends a separate form that, if signed, has the same effect as a signed original form.  If you file electronically, then you also sign electronically by using a five-digit Personal Identification Number (PIN), which has the same force and effect as a signature made with paper and pen.

When you sign your tax return, you are attesting that the information contained in the return is complete and accurate whether you prepare it yourself or not.

If you have someone prepare your return, you are still responsible for the correctness of the return.

~ Form 1040 instructions

How many of us have carefully read the declaration in the signature box at the very bottom of the Form 1040?  This is what you’re promising when you sign:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

I can’t imagine many people review every single schedule and every page in any kind of detail, although they should.  It is self-evident that you should never sign a blank tax return (as the IRS points out in its Tax Tip) since you would be unable to truthfully declare that you have examined the return.

If you have a preparer who signs (or EA, CPA, tax attorney), the preparer’s attestation is normally based on what he/she has been given by the taxpayer (or by the IRS), whether it be verbal or documentary information.  The preparer is entitled to rely on that information in preparing the return.  However, as you can see, the preparer’s declaration is actually broader than that — the preparer is obligated to prepare an accurate return based on all information and any knowledge he/she might have.

IRS Tax Relief Extended for Hurricane Sandy Victims

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The Internal Revenue Service (IRS) has extended tax relief afforded to Hurricane Sandy victims. The IRS normally issues various forms of tax relief after major catastrophic events. For Hurricane Sandy, affected individuals and businesses will have until April 1, 2013, to file returns and pay any taxes due. This includes the fourth quarter individual estimated tax payments, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively, and calendar year corporate income tax returns due March 15. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.

Additionally, the IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Qualifying taxpayers do not need to not contact the IRS to get this type of tax relief.

Beyond the relief provided to taxpayers in the FEMA-designated disaster counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. Taxpayers who live outside of the impacted area and think they may qualify for this relief, however, do need to contact the IRS to obtain tax relief.