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Ten Facts on Filing an Amended Tax Return

Monday, April 22nd, 2013

originally posted on irs.gov April 19, 2013

Ten Facts on Filing an Amended Tax Return

What should you do if you already filed your federal tax return and then discover a mistake? Don’t worry; you have a chance to fix errors by filing an amended tax return. This year you can use the new IRS tool, ‘Where’s My Amended Return?’ to easily track the status of your amended tax return. Here are 10 facts you should know about filing an amended tax return.

1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended tax return. An amended return cannot be e-filed. You must file it on paper.

2. You should consider filing an amended tax return if there is a change in your filing status, income, deductions or credits.

3. You normally do not need to file an amended return to correct math errors. The IRS will automatically make those changes for you. Also, do not file an amended return because you forgot to attach tax forms, such as W-2s or schedules. The IRS normally will send a request asking for those.

4. Generally, you must file Form 1040X within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. Be sure to enter the year of the return you are amending at the top of Form 1040X.

5. If you are amending more than one tax return, prepare a 1040X for each return and mail them to the IRS in separate envelopes. You will find the appropriate IRS address to mail your return to in the Form 1040X instructions.

6. If your changes involve the need for another schedule or form, you must attach that schedule or form to the amended return.

7. If you are filing an amended tax return to claim an additional refund, wait until you have received your original tax refund before filing Form 1040X. Amended returns take up to 12 weeks to process. You may cash your original refund check while waiting for the additional refund.

8. If you owe additional taxes with Form 1040X, file it and pay the tax as soon as possible to minimize interest and penalties.

9. You can track the status of your amended tax return three weeks after you file with the IRS’s new tool called, ‘Where’s My Amended Return?’ The automated tool is available on IRS.gov and by phone at 866-464-2050. The online and phone tools are available in English and Spanish. You can track the status of your amended return for the current year and up to three prior years.

10. To use either ‘Where’s My Amended Return’ tool, just enter your taxpayer identification number (usually your Social Security number), date of birth and zip code. If you have filed amended returns for more than one year, you can select each year individually to check the status of each. If you use the tool by phone, you will not need to call a different IRS phone number unless the tool tells you to do so.

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Proposed regs. provide rules for whistleblower awards

Tuesday, December 18th, 2012

originally posted on journalofaccountancy.com – December 17

The IRS issued proposed regulations for whistleblower awards under Secs. 7623(a) and (b), as well as rules governing the disclosure of return information under Sec. 6103(h) to pursue these claims (REG-141066-09). The proposed regulations provide general rules for submitting information to the IRS, definitions of key terms, rules for administrative proceedings, and criteria for determining the size of an award.

Sec. 7623(a) permits the IRS to pay awards to whistleblowers at its discretion. Any amount payable under Sec. 7623(a) is paid from the proceeds of amounts collected by reason of the information provided, and any amount collected is available for these discretionary payments.

Sec. 7623(b) provides that qualifying individuals will receive an award of at least 15%, but not more than 30%, of the collected proceeds resulting from the action that the IRS proceeded on based on the information the whistleblower provided to the IRS.

Prop. Regs. Sec. 301.7623-1 provides the general rules for submitting information on underpayments of tax or violations of tax laws and filing claims for awards. This section lists the information required to be submitted to file the claim and the people who are ineligible to claim an award. The list of ineligible claimants includes Treasury Department employees, government officials, and individuals who are required by law to disclose the information. In the preamble to the regulations, the IRS specifically requests comments on whether others should be added to the list of ineligible claimants, and whether electronic filings should be permitted, and if so, how that should be accomplished.

Prop. Regs. Sec. 301.7623-2 defines key terms, including “administrative” and “judicial” actions, “proceeds based on” information provided by an individual, “related action,” “collected proceeds,” “criminal fines” (which are excluded from collected proceeds), and “computation of collected proceeds.” The IRS is requesting comments on each of the key terms, as well as whether and how the IRS could determine any amount of collected proceeds that arise as a result of a taxpayer’s use of tax attributes such as net operating losses.

Prop. Regs. Sec. 301.7623-3 contains the rules for administrative proceedings and administrative appeals of awards under Sec. 7623(a) and Sec. 7623(b). The administrative appeal for Sec. 7623(a) is generally limited to a letter the claimant can write if he or she disagrees with the IRS’s determination letter; the administrative review process is much more thorough for Sec. 7623(b) awards. The IRS is requesting comments about whether claimants should be given additional opportunities to participate in administrative proceedings, whether additional safeguards should be adopted to further protect taxpayer return information in whistleblower administrative proceedings, and whether starting a whistleblower administrative proceeding before a final determination of tax in the underlying taxpayer action provides a meaningful benefit for whistleblowers.

Prop. Regs. Sec. 301.7623-4 generally contains the criteria the IRS will apply in determining the size of the award under Sec. 7623, which is based in part on how substantial the claimant’s contribution was in obtaining the collected proceeds and whether the claimant was involved in the act that gave rise to the proceeds. The IRS requests comments on the efficacy of the fixed percentage approach in the regulations; whether there are additional positive factors, negative factors, or planning and initiating factors useful to determine the amount of awards; the threshold determination of whether a whistleblower planned and initiated an underlying act; whether the IRS should determine and pay multiple awards in cases in which two or more independent claims relate to the same collected proceeds, or only reward the first individual to come forward; and how to apply the eligible affiliated claimant rule.

Prop Regs. Sec. 301.6103(h)(4)-1 authorizes Whistleblower Office employees to disclose return information to the extent necessary to conduct whistleblower administrative proceedings. The regulations provide, among other things, that the Whistleblower Office should use confidentiality agreements to protect from unauthorized disclosures of information disclosed to claimants. The IRS requests comments on whether the proposals strike an appropriate balance between minimizing possible redisclosures of confidential return information and providing meaningful opportunities for claimants to participate in the administrative processing of their claims.

The IRS will consider all written or electronic comments received before it issues final regulations. A public hearing will be scheduled only if one is requested by someone when he or she submits written comments. The deadline for comments or requests for a hearing is Feb. 19, 2013.

The regulations are proposed to apply to information submitted on or after the date the final regulations are published or to claims that are open on that date. However, Prop. Regs. Sec. 301.7623-4 is not proposed to apply to claims under Sec. 7623(a) that are open on the date the final regulations are published, so that the IRS can continue to apply consistent rules to open claims under Sec. 7623(a). The IRS also requested comments on these proposed effective dates.

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Top 10 Payroll Mistakes Companies Make

Monday, June 4th, 2012

originally posted on AccountingToday.com on June 4, 2012

Keeping your clients from running afoul of IRS rules around payroll taxes will help them avoid stiff penalties.

Common Mistakes That Lead to Employment Tax Liability and Penalty Exposure

The Internal Revenue Service is focused on closing the tax gap. One way it hopes to do so is by collecting under-withheld employment taxes. As part of the Employment Tax Research Project (ETRP) launched in 2010, the IRS is reviewing the payroll practices of 6,000 employers in four main areas: worker misclassification, fringe benefits, executive compensation and payroll taxes. Once the research project is complete, the IRS will identify areas in which compliance errors routinely occur and focus audits on those issues. Companies not selected as part of the research project should look at their payroll practices and make any necessary corrections before the IRS comes knocking. We have already observed the IRS paying a lot more attention to employment tax issues and pursuing penalties with a diligence we have not previously witnessed in this area. Because we are seeing an expanded audit scope and depth of diligence by the IRS, we’ve put together a list of common payroll mistakes we’ve seen companies make. We recommend that companies, at a minimum, look at these issues:

1. Classification of Employees as Independent Contractors

Workers are generally classified as either employees or independent contractors. Getting this classification right is a big deal. Depending on the classification, how compensation gets reported to the IRS is different (Form W-2 vs. Form 1099). Whether the worker is entitled to benefits (like medical insurance coverage, retirement plan benefits and grants of equity compensation) can hinge on the worker’s status as an employee. Whether a worker is subject to federal income tax and employment tax withholding is also contingent on status. If there has been an improper classification, the Voluntary Classification Settlement Program (VCSP) allows eligible employers to voluntarily reclassify workers as employees on a prospective basis and get into compliance by paying 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.

2. Failure to Subject Vendor Payments to Backup Withholding

If a company issues a payment to a vendor without first obtaining a Form W-9, the payment could be subject to mandatory backup withholding at a 28 percent rate. Even when it is later determined that the vendor is not subject to backup withholding (for example, the vendor is later determined to be a corporation), if the company did not obtain a Form W-9 prior to issuing payment, there may still be an issue: on audit, the IRS has pursued the collection of a failure-to-deposit penalty on the amount that should have been withheld—because at the time of payment, the company did not know that the vendor payment was exempt from backup withholding.

3. Failure to Issue Form 1099s

A Form 1099 must generally be issued to vendors, including independent contractors, who provide more than $600 in services. Some entities, such as corporations, are not required to be issued a Form 1099. If a company fails to timely furnish a Form 1099, it can be subject to penalties.

4. Not Including the Fair Market Value of Gift Cards, Prizes and Awards in Employees’ Income

For federal income tax purposes, most prizes and awards are considered taxable fringe benefits subject to federal income and employment tax withholding. Gift cards are the equivalent of cash and should always be included in taxable wages regardless of amount. Certain items can be excluded from wages if they are de minimis in nature. However, cash equivalents are never de minimis.

5. Failing to Timely Deposit Withheld Taxes

Generally, a company is required to deposit taxes on a monthly or semi-weekly basis. When taxes reach certain amounts, they must be deposited the next business day. If a company doesn’t timely deposit these taxes, the company may be subject to late deposit penalties and interest. Penalty rates range from 2 to 15 percent, depending on how late the deposit is.

6. Failure to Timely Deposit Withholding Taxes on Vested Restricted Stock and Exercise of Stock Options

When an individual exercises stock options, employment taxes should be deposited within one day of the settlement date. The settlement date should not be more than three days after the date of exercise. However, when an employee is granted restricted stock, he or she generally recognizes income upon vesting. Income and employment taxes are required to be withheld on the fair market value of the shares less any amount the employee paid for such shares on that date. The income and employment taxes may be required to be deposited the next business day.

7. Incorrectly Excluding Expense Reimbursements from Reportable Wages

Whether expense reimbursements can be excluded from an employee’s wages depends on whether he or she is reimbursed pursuant to an accountable plan. An accountable plan is generally one under which expenses are reimbursed only if there is a business connection to the expenditure, there is an adequate accounting of the expenditure and any excess reimbursements are returned to the employer. If expenses are reimbursed under a policy or plan that does not meet these requirements, they must be included in taxable wages.

8. Failure to Include Nonqualified Deferred Compensation in Executives’ Incomes

If nonqualified deferred compensation plans have not been amended to comply with Internal Revenue Code Section 409A or have provisions that do not comply with 409A, the executives could have an income recognition event prior to the payment of the deferred amounts and could be subject to an excise tax. The Service has also established a correction program where taxpayers can obtain some relief with respect to certain operational failures. Only certain types of failures are eligible for correction, but taking advantage of this program can reduce the total amount of income inclusion and excise taxes.

9. Not Including the Appropriate Value of Taxable Fringe Benefits in Employees’ Income

Taxable fringe benefits can also include spousal travel, company-provided automobiles, country club dues and housing benefits. How a company values these fringe benefits for purposes of income and employment tax reporting and withholding can be a complicated issue. For example, there are three valuation methods for calculating the value of personal use of company-provided vehicles. Is your company calculating this correctly?

10. Excluding Travel and Commuting Expense Reimbursements from Employees’ Income.

Most of the time, travel and commuting expenses are not taxable income to an employee. However, if what started out as a short-term assignment is extended beyond a year, or if an employee is traveling to a permanent work site that is not in the same place as his or her permanent residence, those company-provided travel and commuting benefits may need to be included in the employee’s income.

While this list is not exhaustive, it provides a jumping off point for determining how well your company is doing. Companies should conduct a compliance review while they still have a chance to fix what’s wrong without having to negotiate penalties and interest with an IRS auditor at the same time.


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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.

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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.

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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

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‘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

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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

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Reid, Boehner spar over payroll tax

Monday, February 6th, 2012

From – The Hill

Senate Democratic leaders said Friday they were crafting a backup plan to extend the payroll tax cut for an entire year, in case the conference committee tasked with coming up with a deal falls short.

In a conference call, Senate Majority Leader Harry Reid accused congressional Republicans of gumming up the works on the payroll tax by trying to tack unrelated issues on to an extension.

“I have great confidence in our conferees, but I’m not going to stand by when the GOP slows the process,” the Nevada Democrat said.

Reid’s comments come as Democrats and Republicans on the conference committee, which includes 20 lawmakers, are widely seen to still be far apart on a variety of issues — including, perhaps most importantly, how to pay for whatever package they develop.

The statements also drew a quick rebuke from House Speaker John Boehner, with the Ohio Republican noting that the Senate has yet to pass its own full-year extension of the tax break, which would affect some 160 million Americans.

“It would seem those energies could be better directed toward the conference negotiations themselves, in which Senate Democrats have not actually presented a full plan,” Boehner said in a Friday statement. “You can’t have a ‘backup plan’ if you haven’t offered anything to back up.”

The House passed a yearlong extension in December, but it incorporated items that Democrats oppose and that Reid was presumably referencing with his Friday comments, including a delay of industrial boiler regulations and certain reforms to the federal unemployment insurance system.

GOP conferees would like to see some of those items tucked into a package extending the payroll tax cut for a full year.

The Senate passed a two-month extension of the tax break after being unable to pass a full year of the cut. House Republicans, after taking a political pounding, eventually accepted that idea, leading to the current conference committee.

In addition to the payroll tax cut, unemployment benefits for millions of Americans will also expire if lawmakers don’t act by Feb. 29, and doctors treating Medicare patients would see a 27 percent cut in their reimbursement rate.

For the most part, conferees have said they want to see those three items extended for a full year.

But the conference committee, which will meet again on Tuesday, has also spent much of its time discussing issues in other areas, such as the Keystone XL oil sands pipeline and expired tax provisions.

The two sides also have separate visions on how to pay for any extension, as illustrated by the Friday statements from Reid and Boehner.

Reid reiterated that a surtax on millionaires could be used to pay for the tax relief, an idea embraced by other Democrats but that has failed to make it out of the Senate on multiple occasions.

Boehner, meanwhile, noted that a federal pay freeze, one of the GOP’s preferred offsets, easily passed the House this week. FOr more information please see, Reid, Boehner spar over payroll tax on The Hill.

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IRS Issues Private Letter Ruling on Breakfast Cereals

Tuesday, January 24th, 2012

From – Accounting Today


The Internal Revenue Service has provided cereal maker Ralcorp Holdings with a private letter ruling related to the tax implications of the separation of its Post cereals business.

Ralcorp said Friday that the IRS ruling confirmed the tax-free nature of the distribution of at least 80 percent of the outstanding shares of common stock of Post Holdings, Inc. to Ralcorp shareholders and related transactions.

Based on certain facts, assumptions, representations and undertakings set forth in the ruling, the ruling concludes that for U.S. federal income tax purposes, the separation of the Post cereals business will qualify as a tax-free distribution to Ralcorp and to the holders of common shares of Ralcorp (except in respect of cash received in lieu of fractional shares).

Ralcorp also said that subject to the consummation of the separation, the common stock of Post Holdings, Inc. has been approved for listing on the New York Stock Exchange under the symbol “POST.”

In connection with the separation, Ralcorp anticipates receiving approximately $900 million from the Post spin-off. The Ralcorp board intends to use the proceeds to reduce its debt, aggressively pursue private-brand acquisitions and pursue additional share repurchases under the company’s remaining share repurchase authorization of approximately five million shares. In addition, Ralcorp said it expects to retain up to 20 percent of the outstanding shares of Post.

Ralcorp had announced last week that its board approved the separation of Post, subject to the satisfaction or waiver of certain conditions including, but not limited to, the Registration Statement on Form 10 (the “Form 10″) for Post common stock being cleared by the Securities and Exchange Commission, the receipt of an opinion of tax counsel, the completion of related financing transactions, and the other conditions summarized in the preliminary form of information statement included in Amendment No. 3 to the Form 10 filed by Post with the SEC. The transaction does not require approval from Ralcorp shareholders.

Amendment No. 3 to the Form 10 includes as Exhibit 2.1, a preliminary form of the Separation and Distribution Agreement, including the closing conditions. The filings are available at www.sec.gov. For more information please see, IRS Issues Private Letter Ruling on Breakfast Cereals on Accounting Today.

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