Posts Tagged ‘tax return’

What do I need to know about the Health Care Law for my 2013 Tax Return?

Tuesday, March 18th, 2014

Originally shared via the IRS Tax Tips Mailing List

For most people, the Affordable Care Act has no effect on their 2013 federal income tax return. For example, you will not report health care coverage under the individual shared responsibility provision or claim the premium tax credit until you file your 2014 return in 2015.

However, for some people, a few provisions may affect your 2013 tax return, such as increases in the itemized medical deduction threshold, the additional Medicare tax and the net investment income tax.

Here are some additional tips:

Filing Requirement: If you do not have a tax filing requirement, you do not need to file a 2013 federal tax return to establish eligibility or qualify for financial assistance, including advance payments of the premium tax credit to purchase health insurance coverage through a Health Insurance Marketplace. Learn more at HealthCare.gov.

W-2 Reporting of Employer Coverage: The value of health care coverage reported by your employer in box 12 and identified by Code DD on your Form W-2 is not taxable. Learn more.

Information available about other tax provisions in the health care law: More information is available on IRS.gov regarding the following tax provisions: Premium Rebate for Medical Loss Ratio, Health Flexible Spending Arrangements, and Health Saving Accounts.

More Information

Find out more tax-related provisions of the health care law at IRS.gov/aca.

Find out more about the Health Insurance Marketplace at HealthCare.gov.

Taxpayers Plan to Use Tax Refunds for Necessary Expenses

Thursday, February 27th, 2014

Originally Published in Accounting Today

About 52 percent of Americans intend to spend their annual tax refund on necessary expenses such as loans, credit cards and other household expenses, while another 30 percent plan to put the money into savings and only 8 percent plan to invest the tax refund money, according to a new survey.

The survey, released Tuesday by the financial services firm Edward Jones, contrasts with a similar survey released Monday by TD Ameritrade, which found greater interest in investing tax refunds, at least among the investors who were polled (see Many Plan to Invest Their Tax Refunds).

The Edward Jones survey polled over 1,000 taxpayers in general. It found that the respondents between the ages of 55 and 64 are most likely to save their refund (43 percent). Respondents who are just a few years younger had a much different opinion, with only 25 percent of those between 45 and 54 years of age planning to save their tax refunds. The survey’s youngest respondents, those between the ages of 18 and 34, are most likely to spend their refund checks on “fun” things such as clothes, entertainment and restaurants (12 percent). This compares to just 5 percent of those 65 and older who would do the same.

Household income has the most influence on the decision to save, spend or invest a tax refund in 2014. Survey respondents with the lowest household income (those making less than $35,000 a year) are the most likely to spend their tax refund on necessary expenses (61 percent). This compares to just over one-third (37 percent) of those with the highest household income ($100,000 or more). The wealthiest respondents are not the most likely to invest their refunds, the survey found. Instead, those with household incomes between $50,000 and $75,000 were the most likely to invest the tax refund money.

In general, households with children are the most likely to spend their tax refunds on everyday expenses, and those with older children are even more likely. Following that point, Americans with no children are the most likely (10 percent) to spend their tax refund on something “fun,” whereas only 1 percent of those with children ages 13 to 17 are willing to splurge.

Americans living in the Northeast are the most likely to invest their tax refunds (11 percent). Those who live in the West are the most likely simply to save their tax refunds (35 percent).

IRS Admits Interest Calculation Error on CP2000 Notices

Tuesday, July 16th, 2013

originally posted to www.accountingtoday.com on July 12, 2013

The Internal Revenue Service alerted taxpayers and tax professionals in an email Friday about an interest calculation error on certain notices mailed the weeks of July 1 and July 8.

Later this month, the IRS said it will be sending a special mailing to the recipients of the notices.

The IRS admitted it discovered errors in the CP2000 notices during a two-week period this July. The notices contained an incorrect calculation on the interest owed on proposed taxes from under-reported income. The interest figures were lower than they should be. The IRS said it has corrected the issue for future mailings.

It advised taxpayers to follow the directions on the letter it will be sending taxpayers this month about the error. They will be encouraged to either call a special toll-free number or write to the IRS to receive the corrected interest amount.

A CP2000 notice shows proposed changes to income tax returns based on a comparison of the income, payments, credits and deductions reported on a tax return with information reported by employers, banks, businesses and other payers, the IRS noted. The CP2000 also reflects any corrections made to an original tax return during processing.

Yes, it is hard to see how they could make enough extra interest to cover the cost of the mailings (especially in this interest rate environment). But, I don’t think it matters if it makes any sense or not. The IRS sent multiple mailing for years to my husband’s business, asking him to file payroll tax returns for the three periods prior to the period he first paid himself a payroll. After responding multiple times to each request (over a period of more than one year), they finally sent a notice saying that they had completed their investigation and he didn’t need to file the zero returns or pay any taxes for the periods when he had no employees….duh…. I couldn’t believe the time and money that we (and the IRS) has to expend taking care of something so trivial – for which no tax was due and none should have been expected. One would think they could focus their efforts on something that is more likely to produce income.

Ten Tax Tips for Individuals Selling Their Home

Thursday, August 16th, 2012

Originally posted in the IRS Summertime Tax Tip Newsletter on August 6, 2012

The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with this calculation.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Treasury Audit Says IRS Missed More Than $5 billion in ID Theft-related Tax Fraud Last Year

Thursday, August 9th, 2012

Originally posted on WashingtonPost.com on Thursday, Aug 2, 2012

WASHINGTON — The Internal Revenue Service may have delivered more than $5 billion in refund checks to identity thieves who filed fraudulent tax returns for 2011, Treasury Department investigators said Thursday. They estimate another $21 billion could make its way to ID thieves’ pockets over the next five years.

The IRS is detecting far fewer fraudulent tax refund claims than actually occur, according to a government audit that warned the widespread problem could undermine public trust in the U.S. tax system. Although the IRS detected about 940,000 fraudulent returns for last year claiming $6.5 billion in refunds, there were potentially another 1.5 million undetected cases of thieves seeking refunds after assuming the identity of a dead person, child or someone else who normally wouldn’t file a tax return.

In one example, investigators found a single address in Lansing, Mich., that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida, the epicenter of the identity theft crisis, filed more than 500 returns totaling more than $1 million in refunds for each address.

In one example, investigators found a single address in Lansing, Mich., that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida, the epicenter of the identity theft crisis, filed more than 500 returns totaling more than $1 million in refunds for each address.

In another troubling scenario, hundreds of refunds were deposited into the same bank account — a red flag for investigators searching for ID thieves who may be filing for refunds for multiple people. In one instance, the IRS deposited 590 refunds totaling more than $900,000 into one account.

“We found multiple reasons for the IRS’s inability to detect billions of dollars in fraud,” J. Russell George, the Treasury Department’s inspector general for tax administration, in a statement. “At a time when every dollar counts, these results are extremely troubling.”

Topping the list of concerns is the IRS’s lack of timely access to third-party information it needs to verify returns and root out fraud.

Many Americans are struggling to pay their bills and the IRS takes pride in processing returns and issuing refunds promptly. But taxpayers can start filing their returns in mid-January, while employers and financial institutions don’t have to submit withholding and income documents for taxpayers to the IRS until the end of March. That means the IRS often issues refunds long before it can confirm the veracity of what’s listed on taxpayer returns.

Thieves are also exploiting vulnerabilities in the way the IRS delivers refunds, investigators found. Of the 1.5 million undetected cases of potential fraud, 1.2 million used direct deposits, including pre-loaded debit cards. Thieves often prefer those methods to a paper check, which require a physical address to receive the check and photo ID matching the taxpayer’s name to cash it.

IRS officials said the growth of identity theft-related fraud is one of its biggest challenges. Already this year, the agency has stopped almost $12 billion in confirmed fraud, it says. And it says its criminal investigators are actively pursuing those who perpetrate fraud — including the previously undetected cases identified by the audit.

IRS Expands Help to Struggling Taxpayers

Saturday, March 10th, 2012

From – AccountingToday.com

The Internal Revenue Service is expanding its Fresh Start initiative to help more unemployed and financially stressed taxpayers with installment agreements and relief from failure-to-file penalties.

Under the new Fresh Start provisions, which expanded on an effort that the IRS began in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS said Wednesday it is doubling the dollar threshold for taxpayers eligible for installment agreements to help more people qualify for the program.

“We have an obligation to work with taxpayers who are struggling to make ends meet,” said IRS Commissioner Doug Shulman in a statement. ”This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.”

To assist those taxpayers who are most in need, the IRS will grant a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. However, the request for an extension of time to pay will result in relief from the failure-to-pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two taxpayer categories: wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year; and self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

The penalty relief is also subject to certain income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly, or not exceed $100,000 if he or she files as single or head of household. The penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers who meet those eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov/form1127.

The failure-to-pay penalty is generally half of 1 percent per month, with an upper limit of 25 percent. Under the newly expanded Fresh Start relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS noted that it is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Even with the new penalty relief becoming available, the IRS is strongly encouraging taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, with a 25 percent cap.

Installment Agreements
The new Fresh Start provisions will also provide more taxpayers with the ability to use streamlined installment agreements to catch up on their back taxes.

Effective immediately, the new threshold for using an installment agreement without having to supply the IRS with a financial statement has increased from $25,000 to $50,000, to reduce taxpayer burden.

Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS to stretch out the payment over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.

Taxpayers who are seeking installment agreements of over $50,000 will still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of this payment option.

An installment agreement is an option for those who cannot pay their entire tax bills by the due date. While the penalties are reduced, interest continues to accrue on the outstanding balance. To qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.

Taxpayers can set up an installment agreement with the IRS by going to the On-line Payment Agreement page on IRS.gov and following the instructions.

These changes supplement a number of efforts to help struggling taxpayers, including the “Fresh Start” program announced last year. Input from the Internal Revenue Service Advisory Council and the IRS National Taxpayer Advocate’s office contributed to the formulation of the Fresh Start program. The initiative includes a variety of changes to help individuals and businesses pay back taxes more easily and with less burden, including the issuance of fewer tax liens.

“Our goal is to help people meet their obligations and get back on their feet financially,” said Shulman.

Offers in Compromise
Under the first round of Fresh Start last year, the IRS expanded a new streamlined Offer in Compromise program to cover a larger group of struggling taxpayers. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The IRS said it recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations. For example, the IRS now has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.

Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS noted that it examines the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series “Owe Taxes? Understanding IRS Collection Efforts”, is available on the IRS Web site. For more information please see, IRS Expands Help to Struggling Taxpayers at AccountingToday.com.

Berkshire Tax Return Could be One for the Record Books

Monday, February 27th, 2012

From – AccountingToday.com

Berkshire Hathaway chairman Warren Buffett hinted in his annual letter to shareholders that the holding company’s nearly 18,000-page tax return may merit the attention of the Guinness Book of World Records.

Referring to the people who work with the operating managers, he noted, “Equally important, however, are the 23 men and women who work with me at our corporate office (all on one floor, which is the way we intend to keep it!). This group efficiently deals with a multitude of SEC and other regulatory requirements and files a 17,839-page Federal income tax return—hello, Guinness!—as well as state and foreign returns.”

Even at that length, though, Berkshire’s tax return would be dwarfed by General Electric’s, which reportedly runs about 57,000 pages, so it probably won’t end up in the record books, for this year at least.

Buffett’s tax policies have generated considerable attention in the past year after he wrote a New York Times editorial calling for changes in the Tax Code to tax the “super-rich” at a higher rate to ensure they don’t pay a lower tax rate than their secretaries (see Buffett Says Tax Code is ‘Coddling the Super-Rich’). The editorial led to the “so-called” Buffett Rule, which President Obama cited in his State of the Union address and included in his 2013 budget plan. However, Buffett has also been criticized for the disputes that his company has gotten into with the Internal Revenue Service over the back taxes that the IRS says it owes.

“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future,” Buffett wrote in his shareholder letter Saturday. “At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power—after taxes have been paid on nominal gains—in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” For more information please see Berkshire Tax Return Could be One for the Record Books on AccountingToday.com.

IRS Has $1 Billion for People Who Have Not Filed a 2008 Income Tax Return

Friday, February 24th, 2012

From – IRS Newswire


WASHINGTON — Refunds totaling more than $1 billion may be waiting for one million people who did not file a federal income tax return for 2008, the Internal Revenue Service announced today. However, to collect the money, a return for 2008 must be filed with the IRS no later than Tuesday, April 17, 2012.

The IRS estimates that half of these potential 2008 refunds are $637 or more.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.

For 2008 returns, the window closes on April 17, 2012. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2008 refund that their checks may be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2008. Some people, especially those who did not receive an economic stimulus payment in 2008, may qualify for the Recovery Rebate Credit. In addition, many low-and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2008 were:

  • $38,646 ($41,646 if married filing jointly) for those with two or more qualifying children,
  • $33,995 ($36,995 if married filing jointly) for people with one qualifying child, and
  • $12,880 ($15,880 if married filing jointly) for those with no qualifying children.

For more information, visit the EITC Home Page on IRS.gov.

Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 800-TAX-FORM (800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2008, 2009 or 2010 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering it on IRS.gov, filing Form 4506-T, or by calling 800-908-9946.

Individuals Who Did Not File a 2008 Return with a Potential Refund

State

Individuals

Median

Potential

Refund

Total

Potential

Refunds ($000)*

Alabama

18,400

$641

$15,738

Alaska

5,800

$641

$5,952

Arizona

29,000

$558

$24,913

Arkansas

9,600

$620

$8,152

California

122,500

$595

$112,201

Colorado

20,500

$589

$18,909

Connecticut

12,500

$697

$13,893

Delaware

4,200

$644

$3,784

District of Columbia

4,000

$642

$3,791

Florida

70,400

$650

$66,974

Georgia

35,800

$581

$30,661

Hawaii

7,600

$714

$8,307

Idaho

4,700

$541

$3,878

Illinois

40,800

$692

$40,712

Indiana

21,800

$664

$19,590

Iowa

10,600

$658

$9,295

Kansas

11,500

$631

$10,084

Kentucky

12,300

$640

$10,501

Louisiana

20,500

$662

$18,859

Maine

4,000

$579

$3,248

Maryland

24,600

$641

$22,591

Massachusetts

23,900

$699

$22,957

Michigan

33,300

$660

$30,903

Minnesota

15,200

$584

$12,772

Mississippi

9,900

$591

$8,254

Missouri

21,600

$593

$18,213

Montana

3,600

$599

$3,192

Nebraska

5,100

$623

$4,371

Nevada

14,500

$619

$13,381

New Hampshire

4,300

$733

$4,518

New Jersey

31,300

$716

$31,185

New Mexico

8,000

$611

$7,420

New York

60,300

$686

$61,240

North Carolina

30,800

$558

$24,997

North Dakota

2,000

$625

$1,895

Ohio

36,400

$622

$31,018

Oklahoma

16,800

$620

$14,787

Oregon

18,500

$527

$14,819

Pennsylvania

38,700

$695

$35,565

Rhode Island

3,400

$674

$3,040

South Carolina

12,200

$547

$10,158

South Dakota

2,300

$669

$2,234

Tennessee

18,400

$626

$16,130

Texas

96,200

$689

$97,057

Utah

7,800

$536

$6,676

Vermont

1,700

$647

$1,410

Virginia

30,800

$624

$28,670

Washington

29,900

$705

$32,138

West Virginia

4,300

$687

$4,068

Wisconsin

14,100

$592

$11,885

Wyoming

2,600

$773

$2,919

Grand Total

1,089,000

$637

$1,009,905

*Excluding the Earned Income Tax Credit and other credits.

For more information please see IRS Has $1 Billion for People Who Have Not Filed a 2008 Income Tax Return at IRS.gov

‘Taxmageddon’ looms at end of payroll tax holiday

Monday, February 20th, 2012

From – Washingtonpost.com

With Congress voting last week to extend the payroll tax holiday, 160 million workers will be spared an immediate tax hike. But the move leaves them facing an even bigger hit in January, when the holiday ends and the payroll tax joins a long list of levies already set to sharply and abruptly go up.

On Dec. 31, the George W. Bush-era tax cuts are scheduled to expire, raising rates on investment income, estates and gifts, and earnings at all levels. Overnight, the marriage penalty for joint filers will spring back to life, the value of the child credit will drop from $1,000 to $500, and the rate everyone pays on the first $8,700 of wages will jump from 10 percent to 15 percent.

The Social Security payroll tax will pop back up to 6.2 percent from 4.2 percent under the deal approved Friday by Congress. And new Medicare taxes enacted as part of President Obama’s health-care initiative will for the first time strike high-income households.

The potential shock to the nation’s pocketbook is so enormous, congressional aides have dubbed it “Taxmageddon.” Some economists say it could push the fragile U.S. economy back into recession, particularly if automatic cuts to federal agencies, also set for January, are permitted to take effect.

Obama and congressional Republicans say they hope to avert the coming blow, which stands to suck roughly $500 billion out of the economy in 2013. But both sides are bracing for another epic showdown in the weeks after the November election, as Democrats prepare to use Taxmageddon to break the partisan impasse over taxes that has blocked action on an array of issues, from modernizing the nation’s infrastructure to taming the national debt.

“I see the framework of a big agreement in the lame-duck [congressional session] to finally put this divisiveness behind us,” said Rep. Richard E. Neal (D-Mass.), a senior member of the tax-writing House Ways and Means Committee. “Obama’s going to have great leverage to get something done.”

Since they took control of the House last year, congressional Republicans have needed nothing from Obama. They were the holdouts, demanding big cuts in federal spending in exchange for helping Obama keep the government open and raise the legal limit on government borrowing, known as the debt ceiling.

But in December, deadlock will cut the other way. Republicans need Obama if they want to prevent one of the biggest tax increases in U.S. history — nearly $5 trillion over the next decade, by official estimates — and block deep cuts to the Pentagon that could be triggered as part of last summer’s debt-ceiling accord.

The tax shock is set to occur after the Nov. 6 election but before the new Congress — and potentially a new president — take office two months later. While the outcome of the contest is likely to color the tax debate, Obama will either be freshly reelected or on his way out and, therefore, free to play hardball with Congress.

White House officials say Obama will not sign another full extension of the Bush tax cuts, as he did in December 2010. Obama is demanding a partial extension that would preserve the cuts for middle-class taxpayers but permit rates to rise on household income over $250,000.

“The president has made clear that he will veto any bill that extends the Bush-era tax rates for the wealthiest 2 percent of individuals,” White House spokeswoman Amy Brundage said. “We will continue to fight for tax relief for the middle class and those trying to get in it, while insisting on a policy that asks the wealthiest individuals to pay their fair share.”

Many Republicans and outside analysts say they doubt Obama would make good on his veto threat. Allowing all of the Bush tax cuts to expire would harm middle-class taxpayers, along with the wealthy, and carry grave risks for the economy.

“My forecast is that tax rates are not going to rise for everyone on January 1, 2013,” said Mark Zandi, chief economist for Moody’s Analytics, who predicted that Taxmageddon, combined with the cuts from the debt-ceiling deal, would slash economic growth by nearly three percentage points next year. “That would be pretty difficult for the economy to overcome.”

Still, Democratic spines may be stiffened by polls showing broad support for their latest tax strategy, which emphasizes higher taxes for millionaires rather than the merely well-off. A recent Washington Post-ABC News poll found that 72 percent of Americans support raising taxes on people with incomes over $1 million a year, in line with Obama’s call for a “Buffett Rule” that would require those families to pay an effective tax rate of at least 30 percent.

“The tax issue, for the first time in decades, has flipped so Democrats actually have the high ground,” said Sen. Charles E. Schumer (N.Y.), the No. 3 Senate Democrat and the man who came up with the idea of raising the income threshold. “Most Americans share our belief that, while the middle class should not pay an increase in taxes, the wealthiest among us should.”

He said Senate Democrats plan to press that advantage in the coming months, staging numerous votes on issues of tax “fairness.” Republican reluctance to target the rich is their “Achilles’ heel” politically, he said.

Schumer predicted that before November, Republicans would drop their opposition to tax increases for millionaires. “Politically, it’s going to be very harmful to say, ‘I’m not for something like the Buffett Rule, when even 60 percent of Republicans are for it,” he said.

Many Republicans maintain that they would never raise taxes on a group the GOP views as small-business owners and “job creators.” Besides, Republican strategists said, they are likely to have bargaining chips of their own in December.

For instance, without congressional action, nearly 30 million families will have to pay the alternative minimum tax, which adds thousands of dollars to the average tax bill, in April 2013. Congress typically protects those people through annual adjustments, and the latest “AMT patch” expired in December.

Another potential GOP tactical advantage: the debt ceiling. Treasury Secretary Timothy F. Geithner acknowledged in congressional testimony last week that Obama may need Congress to raise the legal limit on borrowing, now set at $16.4 trillion, before the end of the year.

“This idea that they hold all the cards? They don’t,” said a senior Republican Senate aide. “We’ve got more leverage than these crowing Democrats like to think.”

Then there’s the matter of the election itself. With control of both chambers of Congress and the White House all potentially in play Nov. 6, the voters could upend Democrats’ best-laid plans. If Republicans claim the White House and the Senate after an election waged in part over tax policy, demoralized Democrats might agree to extend all the Bush cuts without a fight.

“It depends on who’s president,” said Sen. Orrin G. Hatch (Utah), the senior Republican on the Senate Finance Committee. If Obama is reelected and Democrats hold the Senate, he said, “it makes it much more difficult” for Republicans to press for a full extension.

While some Republicans are ready to man the tax barricades, among others the GOP’s anti-tax orthodoxy is starting to crack. Forty Republicans in the House and 32 in the Senate have endorsed the concept of a grand bargain to tackle the national debt, which would require Republicans to raise taxes and Democrats to accept cuts in federal health and retirement benefits. With Obama continuing to call for a grand bargain, that group is working with Democrats behind the scenes to draft a plan able to win bipartisan support.

Meanwhile, House Armed Services Committee Chairman Howard “Buck” McKeon (R-Calif.) has said he would take higher taxes over defense cuts. And during unsuccessful debt-reduction talks last year, Sen. Patrick J. Toomey (R-Pa.), one of the Senate’s most ardent conservatives, drafted a plan that would have included $300 billion in new revenue over a decade.

“I think one of the reasons that you saw Pat Toomey offer what he did is a realization that we’re going to have a $5 trillion tax increase at the end of the year,” said Sen. Bob Corker (R-Tenn.). “Hopefully, this year we’ll actually do something constructive and work out something that’s sensible over the long haul.”

For more information please see Taxageddon looms at end of payroll tax holiday at the Washingtonpost.com

New IRS tax gap numbers highlight future audit areas

Monday, February 20th, 2012
From – Beyond415.com

The IRS’ recently released tax gap study, which measures data from 2006 returns, shows that the tax gap has increased from $345 billion dollars a year in 2001 to $450 billion in 2006. The majority of the tax gap (83%) can be attributed to underreporting, which includes understating income and overstating deductions. The IRS has several tools to narrow the underreporting tax gap, including pre-refund notices and return rejections, underreporter inquiries and, most significantly, audits.

The IRS will focus its limited audit resources in the following areas, which have the highest rates of misreporting.

On Jan. 26, the IRS also modified its online payment arrangement (OPA) application at IRS.gov to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.

Information reporting and disclosures

The IRS continues to use tax return disclosures and third-party information to better select taxpayers for audit. Specifically, look for the IRS to use information to address the following issues:

  • Misreporting stock basis: The IRS issued regulations under a new law that will require stock brokers and mutual fund companies to report basis and other information for most stock purchased in 2011 and all stock purchased in 2012 and later. Form 1099-B will report the information to investors and the IRS. The IRS will use the underreporter notice program and audits to correct perceived misreporting in this area.
  • Underreporting business income: Form 1099-K reporting is now required for recipients of payment card transactions or payments through third-party network arrangements, such as PayPal. The IRS expects to receive more than 56 million Forms 1099-K in 2012 that it can match against filed and unfiled tax returns.
  • Uncertain tax position reporting for large corporations: In 2011, certain large corporations were required to start disclosing an uncertain tax position (UTP) on their 2010 tax returns. A UTP is generally defined as a stance on a tax return in which the corporation sets aside a reserve to either pay the higher amount of tax later or litigate the matter in the future. The transparency in reporting a UTP allows the IRS to better select returns for audit.
  • Offshore tax disclosure compliance: The IRS and the Department of Justice are continuing to press foreign financial institutions, especially Swiss banks, to disclose US account holders. The IRS has embarked on its third voluntary disclosure program to allow taxpayers to disclose foreign assets and income.
  • Worker classification: The IRS is conducting a three-year National Research Program study of employment tax noncompliance. The tax gap study concluded that 17% of the tax gap can be attributed to underreporting and underpayment of employment taxes. The main issue is proper worker classification – that is, independent contractor or employee. The IRS knows there is noncompliance in this area. In fact, employment tax audits have a change rate of more than 86%. The IRS has a strategic motivation for reclassifying workers as independent contractors: Form W-2 recipients are 99% compliant, whereas the misreporting percentage of independent contractors and small business owners is 43%.

Small businesses

According to the IRS, small business underreporting makes up 40% of the tax gap, or about $179 billion a year. With a limited budget for 2012, the IRS will continue to focus on this area.

  • Cash-based businesses: Taxpayers who do not receive information statements, such as many small cash-based businesses, are the most noncompliant. An IRS study showed that information reporting and fear of an audit were important factors contributing to voluntary compliance, ranking directly after a taxpayer’s personal integrity. The IRS will continue to focus on retail, web and service businesses in audits to find unreported income.
  • Deduction of S corporation and partnership losses: In 2009, the Government Accountability Office (GAO) reported that 68% of all S corporation returns misreported at least one item. However, more alarming to the IRS were inaccurate S corporation losses taken on shareholder tax returns. The losses were most often inaccurate because of insufficient basis to deduct the loss. The average error per return was $21,600. Because more than 90% of all S corporations use a paid preparer, look for the IRS to leverage tax preparers to correct this misreporting and deter noncompliance by proposing preparer penalties in this area.
  • S corporation shareholder compensation: The same 2009 GAO study also concluded that S corporation shareholders are underpaying themselves to avoid employment taxes on wages. About 13% of S corporations are paying inadequate wage compensation and making payments in the form of distributions that are not subject to self-employment tax (unlike partnership distributions). The median misreporting adjustment for underpaid shareholder compensation was $20,127 – a loss of about $1.5 billion a year in unreported employment taxes. The IRS has already shown an interest in examining more 2011 S corporation returns.

For more information please see New IRS tax gap numbers highlight future audit areas at Beyond415.com