TaxAlerts – Free Tax Articles prior to 2010

December 2009

Loophole Closed for Claiming “Qualifying Children” on 2009 Returns

The refinements that were made to the Uniform Definition of a Qualifying Child as a result of the Emergency Economic Stabilization Act of 2008 take effect beginning with tax returns filed for 2009. Changes could impact the ability of many taxpayers to qualify to claim a child’s dependency exemption, the Head of Household filing status, the Child Tax Credit, the Dependent Care Credit, and the Earned Income Credit.

Under the new rules, two additional tests must be met:

  1. The child being claimed must be younger than the taxpayer claiming the child. (An exception exists if the qualifying child is disabled.)
  2. If a child’s parents are eligible to claim the child but choose not to do so, another taxpayer can claim the child only if his or her adjusted gross income (AGI) is higher than the highest AGI of either of the child’s parents.

The new tests are intended to close the loophole that allowed children who worked, lived at home, and were not full-time students to claim a dependency exemption for a sibling while also receiving the child tax and earned income credits. This strategy was used by high income families to claim benefits to which they otherwise were not entitled.

The other requirements for a qualifying child vary slightly depending on the tax benefit. In general, a qualifying child must bear the right relationship to the taxpayer, live in the same home for more than half the year, and be under age 19* or 24 if a full–time student. In addition, the child must not provide more than half of his or her own support** and cannot file a joint return unless the only reason for filing the return is to obtain a refund of taxes withheld.

*The child must be under 17 at the end of the year for Child Tax Credit and under 13 for the Child and Dependent Care Credit.

**The support test does not apply for Earned Income Credit.

November 2009

New Law Extends and Enhances Home Buyer Credit

With the passage of The Worker, Homeownership, and Business Assistance Act of 2009, millions more taxpayers may be eligible to receive a home buyer tax credit. The first–time home buyer credit has been expanded, and a new credit has been added for long–time homeowners who purchase a replacement principal residence during the extended time period. Both credits are refundable, which means the taxpayer receives the money whether or not they have a tax liability to offset it.

The First–Time Home Buyer Credit

The extended provision for first–time home buyers allows a credit of ten percent of a home’s purchase price, up to $8,000, for taxpayers who have not owned a principal residence during the three–year period preceding the purchase.

Set to expire at the end of this month, the credit now applies to homes purchased between January 1, 2009 and April 30, 2010. Purchases also qualify if a binding sales contract is signed by April 30, 2010, and the actual home purchase is completed by June 30, 2010. Service members have until May 1, 2011, or July 1, 2011, if they have a signed, binding contract by the due date.

For sales taking place after November 6, 2009, the modified adjusted gross income limits for receiving the full credit are increased to $125,000 for single taxpayers and $225,000 for married taxpayers filing jointly. The credit is gradually reduced for single taxpayers with incomes between $125,000 and $145,000 and for joint filers with incomes between $225,000 and $245,000. No credit is allowed when income is higher than the maximum phase out amounts. For sales taking place prior to November 6th, 2009, the previous phase–out ranges of $75,000 to $95,000 (single) and $150,000 to $170,000 (joint) still apply.

New Credit for Long–time Residents of the Same Principal Residence

Taxpayers who have owned and lived in their homes for five consecutives years out of the eight years prior to purchase may qualify for a credit of ten percent of the purchase price, up to $6,500, of a new principal residence that costs $800,000 or less. This credit applies only to purchases made after November 6th, 2010, and before April 30, 2010, unless there is a signed, binding sales contract on April 30th, 2010, and the home purchase is completed by June 30th, 2010. The income limits for the first–time home buyer credit also apply to this credit.

Election to Apply Credit to Previous Tax Year

Taxpayers can elect to apply the 2009 home buyer credit to their 2008 returns (or the 2010 credit to their 2009 returns). This accelerates the receipt of the credit and also provides a second chance to qualify if the credit is reduced or phased out in the year of purchase.

New Restrictions and Documentation Requirements

New restrictions apply to the credits. Dependents, individuals under the age of eighteen and taxpayers who purchase properties from certain related parties do not qualify for the credit. In addition, all taxpayers claiming the credit are required to attach a copy of their property settlement statements to their tax returns.

October 2009

What to Do If You Missed the October 15th Tax Filing Deadline

If you missed the October 15th filing deadline, it is still possible to file your tax return.

You will not be able to electronically file and will need to mail your return to the IRS. This is true whether you prepare the return yourself or have it prepared by a tax professional. It is a good idea to obtain proof of delivery when mailing in your return with certified mail and a return receipt.

The IRS will assess penalties for filing late if you have a balance due. If you have a refund, the IRS generally does not impose penalties, but please keep in mind that penalty assessment is at their discretion and it is possible that your refund could be reduced. The current penalties are:

  • 5% of the balance owed for each month or part of a month that the return is filed after the deadline
  • 0.5% of the balance owed for each month or part of a month that the balance is unpaid; and
  • 4% annual interest charge on the unpaid balance

If you are missing any of your tax documents, such as a W–2, 1099, or 1098, you can ask the IRS to send you a copy of your wage and income transcript by filling out a Form 4506–T, Request for Transcript of Tax Return.

September 2009

Offshore Bank Account Amnesty Program

The final deadline for special voluntary disclosures of unreported income from hidden offshore bank accounts is October 15, 2009. Taxpayers who come forward will escape harsher penalties and the possibility of criminal prosecution.

In August, Swiss Bank UBS agreed to hand over the names of more than four thousand wealthy Americans under suspicion of tax evasion by the U.S. government. Even though the secret account holders will have a chance to appeal the release of their information before the Swiss Federal Administrative Court, more than three thousand American UBS clients have already come forward as part of the voluntary disclosure program.

The United States government has plans to prosecute those individuals whose names are revealed by UBS but who do not disclose their accounts by October 15th. The IRS announced that there will be no extensions to this deadline.

August 2009

Should You Move Your Money to a Roth IRA?

Is it a good idea to move your retirement money to a Roth? Of course, that depends on your financial situation and goals. Through the end of 2009, converting from a pension or traditional IRA to a Roth IRA is not an option if your income is over $100,000, but beginning in 2010, this income limitation will no longer exist. And for 2010 conversions only, the IRS allows you to delay the income tax to 2011 and spread the liability over 2011 and 2012.

If you convert your retirement plan to a Roth, you will owe taxes on the amount converted (minus any basis you may have), but you will never again have to pay taxes on the money in the account, as long as you keep it in there for five years if you are under the age of 59 1/2. If you believe existing tax rates are destined to rise, paying taxes on your retirement funds now could be a good way of hedging your bets against the possibility of higher taxes when you retire.

If your goal is to leave as much tax–free money to your heirs as possible, a Roth IRA is a great choice because are no required minimum distributions as there are with traditional IRAs and employee pensions. If you don’t need the money for living expenses, you never have to touch it, though your beneficiaries will be required to withdraw the tax–free funds. With most account values unusually low due to the current state of the economy, the timing couldn’t be better to pay your taxes upfront and let your money grow tax–free for the rest of your life.

July 2009

Avoid Surprises at Tax Time: Review Your Withholding and Estimated Taxes Now

The American Recovery and Reinvestment Act of 2009 and other recent legislation could have a dramatic impact on the amount you need to pay throughout the year in withholding and estimated taxes. With the 2009 tax year more than half over, it’s important to find out where you stand and make any needed adjustments now. The list of new credits, deductions and rule changes is long, but here are a few that are most likely to affect your situation:

If your business had fewer than 500 employees, more than 50% of your gross income for 2008 was income from your small business and your adjusted gross income for 2008 was less an $500,000 ($250,000 for married taxpayers filing separately), your required estimated tax payment has been reduced to the lesser of 90% of your 2008 tax or 90% of your estimated 2009 tax.

Unemployment Compensation
The first $2,400 in unemployment compensation that you receive in 2009 is tax free for federal tax purposes. If you expect to receive more than that amount this year, consider making a request to have amounts withheld to cover any taxes you might owe on the income.

Increased Standard Deduction
You may be able to increase your standard deduction by amounts you paid for state or local real estate taxes and sales or excise taxes paid on purchases of new vehicles. Qualified disaster losses from federally declared disasters may also be claimed as an addition to your standard deduction if you do not itemize.

Making Work Pay Credit
If you are working or self–employed and your modified adjusted gross income is below a certain amount (see March Tax Alert below for details), you might be eligible for the Making Work Pay Credit. It’s important to keep in mind that the amount your employer is withholding from your paychecks has already been lowered to give you the credit throughout the year; if your preference is to receive the credit as a refund instead, ask your employer to switch back to the old withholding tables. If you received the one–time $250 economic recovery payment (paid to certain retirees and disabled veterans) or the “Special Credit for Certain Government Retirees,” your Making Work Pay Credit will be reduced by the amounts received under those programs.

Residential Energy Property Credits
If you are making or plan to make energy efficient improvements to your home this year, you might be eligible for a credit if you add insulation, energy efficient exterior windows or energy–efficient heating and air conditioning systems. Purchases of qualified solar hot water heaters, geothermal heat pumps and wind turbines are also eligible for a credit.

First–Time Homebuyer Credit
Principal residences purchased (with escrow closing) after April 8, 2008 and before December 1, 2009 are eligible for a tax credit of 10% of the home’s value, up to $8,000. This is a refundable credit, which means that it reduces your tax bill or increases your refund, dollar for dollar.

Changes to the education credits and a complete list of tax breaks for new vehicle purchases are included in the April and May Tax Alerts below.

June 2009

Beware of 1099–OID Tax Scheme

Promoters of a new tax scheme are holding seminars and selling kits that promise to teach people how to obtain large refunds by claiming false withholding credits using IRS Form 1099–OID. Proponents of the scheme often refer to it as the “1099–OID Redemption Process” and market it as a way for individuals to “regain sovereignty” and “reclaim” their “right to be free from rule.” It is also being advertised as a “remedy” for getting out of debt and reducing tax liabilities.

The new scam evolved from an older practice that gained popularity in the nineties and was based on the now discredited “strawman” argument. Although the scheme’s promoters claim that these are legitimate practices based on U.S. law, the courts have determined otherwise; punishment for violating federal and state laws by participating in these schemes can include heavy fines and even jail time.

Avoid getting caught up in tax schemes of any kind and be wary of anyone who promises to show you how to obtain a tax refund that you are not entitled to receive. The IRS has a unit dedicated to identifying fraudulent returns, stopping the payment of fraudulent refunds and referring identified fraudulent refund schemes to the Criminal Investigation field offices. TaxResources, Inc. will not provide audit defense services for any fraudulent tax return.

May 2009

ARRA Boosts Popular Education Credit

The Hope Credit was given a boost under the American Recovery and Reinvestment Act of 2009. The changes are so good that the credit has been renamed. For 2009 and 2010 the popular education credit will be known as The American Opportunity Credit.

For the next two years the American Opportunity Credit will be available to certain taxpayers who would not usually qualify for the Hope Credit. The credit will phase out between $80,000 and $90,000 in income for single filers, and between $160,000 and $180,000 for taxpayers filing jointly, up from $48,000 and $58,000 (single) and $96,000 and $116,000 (joint) for the Hope Credit.

While the Hope Credit was allowed for the first two years of higher education expenses only, the new credit can be claimed for the first four years of undergraduate work. In addition, expenses paid for books supplies, equipment and other required course materials that were not considered qualifying expenses for the Hope Credit will be allowed for calculating the American Opportunity Credit. The enhanced credit maxes out at $2,500 per student, up from $1,800 for 2008, and forty percent of the credit is now refundable, so even if you do not owe any taxes, you can receive up to $1,000 back as long as the student is not subject to Kiddie Tax.

April 2009

Tax Breaks for New Vehicle Purchases in 2009

If you’re in the market for a new car, consider the tax breaks that are available as you weigh your options regarding what and when to buy. Tax incentives are in place for just about any type of vehicle you might decide to purchase this year, as long as you buy during the specified time periods.

Purchase a new (not used) car, light truck, motorcycle or motor home, and receive a special deduction on your 2009 tax return. The deduction is for state and local sales taxes paid on up to $49,500 of the vehicle’s purchase price, and it is available even if you claim the standard deduction. However, there are income limitations. For a single filer to receive a credit, modified adjusted gross income must be below $135,000. Also, the credit is limited when income is between $125,000 and $135,000. For joint filers the phase–out range is between $250,000 and $260,000. This deduction applies to vehicles purchased after February 16, 2009 and before January 1, 2010.

Under the American Recovery and Reinvestment Act of 2009, you can receive a tax credit of 10 percent of the cost, up to $2,500, of a qualified motor scooter. Eligible purchases include low–speed vehicles that are propelled to a significant extent by rechargeable batteries with a capacity of at least 4 kilowatt hours. Also eligible are two– and three–wheeled vehicles propelled to a significant extent by rechargeable batteries with a capacity of at least 2.5 kilowatt hours. These credits apply to vehicles purchased after Feb. 17, 2009, and before January 1, 2012.

The Emergency Economic Stabilization Act of 2008 created a tax credit for four wheel vehicles drawing propulsion from a rechargeable traction battery with at least four kilowatt hours of capacity. The minimum credit is $2,500, and the allowable credit could be as high as $15,000, depending on the weight of the vehicle and the capacity of the battery. When 250,000 vehicles have been sold in the U.S. a phase–out period will begin for the credit; during that time the available credits will be reduced gradually to zero. The credit applies to vehicles purchased in tax years 2009 through 2014.

Off-road vehicles, such as golf carts, do not qualify for either of these plug–in credits.

The Alternative Motor Vehicle Credit dates to the Energy Policy Act of 2005 and continues through tax year 2009. The act created credits for four separate categories of vehicles:

  1. Fuel Cell Vehicles
    A qualified fuel cell motor vehicle is a vehicle that is propelled by power derived from one or more cells which convert chemical energy directly into electricity. There are currently two Honda vehicles that qualify for this credit: the 2009 Civic GX and the FCX Clarity Fuel Cell Model Year 2009.
  2. Advanced Lean Burn Technology Vehicles
    Advanced Lean–Burn Vehicles are passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel. The vehicles must also incorporate direct fuel injection technology and achieve at least 125 percent of the 2002 model year city fuel economy rating. Qualifying 2009 vehicles include certain cars manufactured by Audi, BMW, Mercedes and Volkswagen.
  3. Hybrid Vehicles
    These vehicles have drive trains powered by both internal combustion engine and a rechargeable battery. These credits are subject to phase–out periods based on the number of vehicles purchased from each manufacturer. Qualifying 2009 vehicles include certain models manufactures by Cadillac, Chevrolet, Chrysler, Dodge, Ford, GMC, Honda, Mazda, Mercury, Nissan and Saturn. (The credit is no longer available for the Toyota Camry Hybrid, the Toyota Prius, the Lexus RX 400h and the Lexus LS600h.)
  4. Alternative Fuel Vehicles
    For alternative fueled light and heavy duty vehicles to meet the requirements, the vehicles may be either new, original equipment installation vehicles or prior use vehicles that are converted to use an alternative fuel by an aftermarket installer. Qualified alternative fuel includes compressed natural gas, liquefied natural gas, liquefied petroleum gas (propane) and hydrogen. The vehicles may also operate on certain mixed fuels such as liquefied propane gas or liquefied natural gas and gasoline. An index to manufacturers of these vehicles is available at

March 2009

Coming Soon: The Making Work Pay Credit

The majority of American workers will be receiving more money in their paychecks beginning in April. This is part of our government’s latest effort to stimulate the economy, and it is known as the “Making Work Pay Credit.” Instead of receiving the credit in a lump sum, most eligible taxpayers will receive it gradually, by way of slightly lower federal withholding.

The credit gives back 6.2 percent of earned income, up to $400 per person per year, and a married couple is eligible to receive up to $800 even if only one spouse works. The credit is reduced when adjusted gross income is between $150,000 and $190,000 for married couples filing jointly and eliminated completely when income is above $190,000. For all other filers the credit is limited when income is between $75,000 and $95,000, and it is eliminated when income is above $90,000. Nonresident aliens are not eligible, regardless of income, and individuals who may be claimed as a dependent by another taxpayer are not eligible.

New tax–withholding tables that incorporate the credit have been published, and the IRS has asked employers to start using them no later than April 1. You will begin to receive your credit when your employer starts using the new withholding tables.

February 2009

The First–Time Homebuyer Tax Credit Just Got A Lot Better

Under the American Recovery and Reinvestment Act, signed by President Barack Obama on February 17, 2009, a tax credit of up to $8,000 is available for qualified first–time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009. Unlike the tax credit available for homes purchased in 2008, the new credit does not have to be paid back unless you do not use the home as your principal residence for 36 months.

In order to qualify for the First–Time Homebuyer Credit, you must have adjusted gross income below $95,000 for single filers and $170,000 for joint filers and purchased your personal residence in the United States after 4/8/08 and before 12/1/2009. Qualified purchases made between 1/1/09 and 12/1/09 may be treated as having been made on 12/31/08, allowing you to claim the credit on your original or amended 2008 tax return.

You are not eligible for the credit if you are a nonresident alien, dispose of the residence before the close of the tax year, or purchase the home from a close relative, such as a spouse, parent, grandparent, child or grandchild. Also, you cannot claim the credit if you have owned another principal residence in the U.S. in the three–year period prior to purchasing the new home. A principal residence is the home you live in a majority of the time.

If you have not owned a principal residence in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first–time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first–time buyer. Two unmarried individuals buying a principal residence may allocate the credit among the individual owners in any reasonable manner. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first–time home buyer.

January 2009

Make Your Home Energy Efficient While Reducing Your Taxes in 2009

The reinstatement of the Residential Energy Property Credit for tax year 2009 means it’s a great time to make energy–efficient improvements to your home. The credit is thirty percent of the amounts you pay for qualified energy improvements installed in your home during the tax year and the amount you spend on residential energy property for your home, up to $1,500.

Qualifying energy efficiency improvements include insulation, exterior windows (including skylights), exterior doors, and certain metal and asphalt roofs designed to reduce the amount of heat in your home. Residential energy property includes furnaces, heat pumps, hot water boilers, circulating fans, central air conditioners, and certain stoves that use renewable plant-derived fuel. To qualify for the credit, improvements and property must meet government efficiency standards. The credit applies to your principal residence only; purchases and improvements made for vacation homes and second homes do not qualify for the credit.

December 2008

Required Minimum Distributions Waived for 2009

If you are 70½ or older, you will not be required to take your normal required minimum distribution (RMD) from your tax–deferred retirement accounts in 2009. Signed into law by President George Bush on December 23rd, 2008, the Worker, Retiree, and Employer Recovery Act of 2008 provides for the suspension of RMDS in 2009 for IRAs, 401(k)s (traditional and Roth), 403(b)s, and other defined contribution plans. The waiver also applies to taxpayers under age 70½ with inherited IRAs or inherited retirement plan accounts that would otherwise be subject to RMDs.

The suspension does not apply to tax–deferred annuities or defined benefit plans. In addition, if you are taking regular distributions under Section 72(t), you are still required to take your required withdrawals, as the suspension applies only to taxpayers over 70½, and to IRA and defined benefit plan beneficiaries.

There was no suspension of the RMD for tax year 2008. If you turned (or will turn 70½) in 2009, your first distribution does not have to be taken until December 31, 2010.

Planning tip: In 2009, it may make financial sense to use money that you would have been required to withdraw to fund a Roth IRA. Mandatory distributions are not allowed to be used for funding Roths, but any distribution you take in 2009 will not be mandatory if all requirements are met.

November 2008

Make Cash Donations for Midwest Disaster Relief before December 31st, 2008

Qualifying cash contributions that you make in 2008 for disaster relief efforts in the Midwest could qualify for special tax treatment under the Heartland Disaster Tax Relief Act. Under the new law, the percentage–of–income limits that would normally apply for charitable contributions have been suspended.

If you itemize deductions, you may choose to deduct qualifying cash contributions up to 100 percent of your adjusted gross income, reduced by deductions for other charitable contributions. In addition, your qualifying contributions will not be treated as itemized deductions for purposes of the overall limitation on itemized deductions that applies when your adjusted gross income is above certain limits.

Your cash contributions may qualify for this special treatment if they are made to a public charity for disaster relief efforts related to areas in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin that were declared federal disaster areas on or after May 20 and before August 1st of this year as a result of severe storms, tornados or flooding. The areas must be designated for individual assistance from the federal government as a result of the damage caused by the disasters.

To receive this special tax treatment, you must make your contributions no later than Dec. 31st, 2008. The IRS requires that you substantiate your deduction with a written acknowledgment from the charity that your contribution was or will be used for relief efforts related to one or more of the Midwestern disaster areas. Do not submit this acknowledgement with your return, but keep it in your tax file in case you are audited.

NOTE: Qualifying cash contributions do not include payments to a supporting organization as described in section 509(a)(3) or for the establishment of a new, or maintenance of an existing, donor-advised fund.

October 2008

Bailout Bill Includes Extends Many Popular Tax Breaks for Individuals

On October 3rd, 2008, President George Bush signed the Emergency Economic Stabilization Act of 2008. In addition to providing $700 billion to the Treasury Department to bail out troubled financial institutions, the bill makes approximately three hundred changes to the Internal Revenue Code. While many of these changes are directly related to the bailout, the bill also includes an AMT patch, disaster relief, and the extension of many popular tax breaks and energy incentives for individuals.

The major changes affecting individuals are:

The AMT income exemption amounts for 2008 have been raised to $69,950 for joint filers and $46,200 for individuals. This increase will prevent 26 million taxpayers from an average tax increase of $2,200.

The bill extends through 2009 the state and local sales tax deduction. This deduction allows taxpayers who itemize to deduct general sales taxes or state and local income taxes, whichever is more beneficial. The primary beneficiaries of this deduction are taxpayers who live states such as Florida, Texas and Washington, where there is no state income tax.

The Tuition and Fees Deduction has also been extended through 2009. Taxpayers who qualify are allowed to deduct up to $4,000 in qualifying higher education expenses paid as an “above-the-line” deduction, which means that they do not have to itemize in order to take advantage of the deduction.

Elementary–and secondary–school teachers (K–12) can continue to deduct, above–the–line, out–of–pocket amounts paid for schools supplies through 2009.

The Housing Assistance Tax Act of 2008 created an additional standard deduction for real property taxes for taxpayers who do not itemize deductions. The bailout bill extended this deduction through tax year 2009.

Through 2009, taxpayers who are 70 ½ or older will be allowed to transfer up to $100,000 a year, tax-free, directly from their IRA accounts to a charitable organization. The amount transferred is not included in adjusted gross income, and there is no Schedule A itemized deduction for the donation. The distribution may be used to satisfy the taxpayer’s required minimum distribution (RMD) without increasing taxable income for the year.

The Mortgage Debt Relief Act of 2007 was the first bill of the financial crisis designed to help Americans facing foreclosure. It protects families from higher taxes by allowing them to exclude forgiven mortgage debt from taxable income. As one of the provisions of the bailout bill, this relief has been extended through 2012.

September 2008

IRS Grants Extensions and Other Relief to Taxpayers Hit by Ike and Gustav

The IRS has postponed until January 5, 2009, filing and payment deadlines for Louisiana and Texas taxpayers affected by Hurricanes Ike and Gustav. In addition, certain failure to deposit penalties will be waived or abated. The relief applies taxpayers who reside or have a business in the presidential disaster areas, which are listed below. Affected taxpayers in a presidentially declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year.


The January 5th, 2009, postponement applies to return filing, tax payment and certain other time-sensitive acts due on or after September 11, 2008, and before January 5, 2009, including individual estimated tax returns and corporate tax returns that were due Sept. 15, and extended individual returns due Oct. 15.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Sept. 11 and before Sept. 26, 2008, as long as the deposits are made on or before Sept. 26. This includes failure to deposit penalties on employment and excise tax deposits that were waived under previous relief for Hurricane Gustav.

The relief applies to affected taxpayers in the following Louisiana parishes: Acadia, Beauregard, Calcasieu, Cameron, Iberia, Jefferson, Jefferson Davis, Lafourche, Plaquemines, Sabine, St. Mary, Terrebonne, Vermilion and Vernon.

The following Texas counties have also been declared a presidential disaster area qualifying for individual assistance: Angelina, Austin, Brazoria, Chambers, Cherokee, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jasper, Jefferson, Liberty, Madison, Matagorda, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Trinity, Tyler, Walker, Waller and Washington.


The January 5th, 2009, postponement applies to return filing, tax payment and other time-sensitive acts otherwise due between Sept. 1, 2008, and Jan. 5, 2009. This includes:

  • Individual estimated tax payments due Sept. 15, 2008.
  • Corporate extended 1120 tax returns due Sept. 15, 2008.
  • Individual extended 1040 tax returns due Oct. 15, 2008.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Sept. 1, 2008, and on or before Sept. 16, 2008, as long as the deposits are made by Sept. 16, 2008.

The following parishes have been declared presidential disaster areas qualifying for the relief: Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Calcasieu, Cameron, Catahoula, East Baton Rouge, East Feliciana, Franklin, Evangeline, Grant, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, LaSalle, Livingston, Orleans, Plaquemines, Pointe Coupee, Rapides, Sabine, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Landry, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Vernon, Washington, West Baton Rouge, and West Feliciana.

August 2008

Highlights of the Housing Assistance Tax Act

The Housing Assistance Tax Act includes tax breaks for homeowners and new home buyers. There are also new restrictions on existing breaks and new rules for reporting the credit card transactions of merchants, which were added as “offsets” to help pay for the new credits and deductions. Here are some of the highlights:


The “first-time” homebuyer tax credit allows new home buyers a credit of up to $7,500 ($3,750 for married taxpayers who file separately), based on a percentage (10%) of the purchase price of the home. It is a refundable credit, which means that it does not merely offset tax liability like most credits, but will be paid out as a refund to taxpayers who owe no taxes at all. The downside is that any credit received must be paid back to the government over fifteen years, or sooner if the home is sold; if the home is sold, the amount received as credit must be returned up to the amount of gain.

This “interest-free loan” is expected to be an incentive for new home buyers to jump into the housing market and a boon to many cash-strapped new home owners. The new credit begins to phase out at adjusted gross incomes of $75,000 ($150,000 for married filers), and it is eliminated completely at $95,000 ($170,000). It is available for homes purchased on or after April 9, 2008 and before July 1, 2009.

For this credit, you are considered a “first time” home buyer if you did not own (or partly own) a principal residence during the three year period prior to the purchase of the new home.


Taxpayers who do not itemize will be allowed a deduction for state and local real property taxes on their 2008 tax returns. Qualifying taxpayers will have their standard deduction increased by the amount of real property taxes paid during the year or $500 ($1,000 for married filers), whichever is less. This deduction is available for 2008 only, so it may be over before it starts for those who don’t stay current on tax law changes. Homeowners with little or no mortgage interest are the taxpayers most likely to benefit from this new deduction.


The IRS is closing the loophole that allows owners of multiple homes to convert vacation homes and other investment properties to their primary residence in order to exclude the profits from their sales from taxation. Beginning in 2009, only gains attributable to periods that a property is used as a primary residence will be excludable from income, and gains that are attributable to “nonqualified” use will be taxable. The amount of nonexcludable gain will be determined using the following calculation:


Any nonqualified use that occurs prior to January 1st, 2009, which is the law’s start date, will not be counted in the calculation.


Banks and other processors of credit and debit card transactions, such as Pay Pal, will be required to report the annual gross payment receipts of merchants to the IRS. This is effective for sales taking place on or after January 1, 2011. There is an exception for merchants with receipts of less than $20,000 or fewer than 200 transactions. The government expects to raise more than 9.5 billion in revenue as a result of this new requirement.

July 2008

Do Not Respond to Phony “IRS” Emails and Faxes

The IRS has issued a warning about a new wave of “phishing” scams involving phony IRS emails and faxes. Beware of emails and faxes bearing the IRS name or logo. The IRS does not send unsolicited correspondence to taxpayers via email or fax, so if you receive one, do not respond, click any links, or download any files. If you do, the results could be disastrous.

The newest scam involves emails that inform recipients that they are eligible for an economic stimulus payment. The emails prompt recipients to enter personal and financial information, such as bank, credit card, and pin numbers, on an online form. A similar scam email notifies taxpayers that they are eligible for a refund. There is also a fax scam, in which the individual receives a signed letter from the “IRS” stating that certain information is needed and that faxing back the requested information, along with copies of the taxpayer’s driver’s license and passport, will result in a refund.

Scammers have been using the information they receive from unwitting taxpayers to empty bank accounts, run up credit card charges, and apply for loans, services and other benefits in the scammed individual’s name. Often, the perpetrators perform these activities from locations overseas.

Still other emails purporting to be from the IRS install malicious software (“malware”) on recipients’ computers when links are clicked and files are downloaded. In what the IRS refers to as the “Company Report Scam,” employees of companies are sent emails with instructions to click a link to download reports that the IRS has prepared about their companies. When they click the link, the malware is downloaded to their computers. Another email, appearing to be from the U.S. Tax Court, contains a court petition and instructs its recipients to download other files, which results in the transfer of the malware to their computers.

The IRS is attempting to track the phony emails and shut down these scams. If you receive an email that you believe is related to one of the scams described above, forward it to

IRS Extends Filing Due Date for Victims of Floods, Storms and Tornadoes

Individual and businesses in seven states that have been affected by natural disasters will have until August 29th to file certain tax returns, make certain tax payments and perform time-sensitive acts.

Storm, flood, and tornado victims in presidential disaster areas in Missouri, Indiana, Iowa, Illinois, Nebraska, West Virginia and Wisconsin will qualify for the extension. Penalties or interest will be abated only for taxpayers with original or extended filing, payment or deposit due dates, including extensions, that fall within the periods listed below:


June 1st to August 29th


May 30th to August 29th


May 25th to August 29th


June 1st to August 29th


May 22nd to August 29th

West Virginia

June 3rd to August 29th


June 5th to August 29th

Eligible taxpayers who receive a penalty notice from the IRS should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply.

June 2008

Poll Shows Opposition to Proposed IRS Tax Preparation System

A recent poll* found that taxpayers are opposed to the idea of government tax software, even if they do not have to pay to use it. The survey focused on taxpayers’ opinions about a plan the IRS is considering to develop its own online tax preparation system. All taxpayers could use the system to prepare their tax returns free of charge, and it would cost the government an estimated $150 million to produce. This would replace the current system, under which taxpayers in lower income brackets are provided access to privately developed software that they can use for free. Currently, there are no free filing options for taxpayers with adjusted gross incomes above $54,000. The majority of taxpayers surveyed believe that they would likely pay more taxes if they prepared their returns on an IRS sponsored website than if they used free, private tax software. Those polled did not believe that the IRS’s system would look out for their interests or maximize their refunds. When asked their opinion about the statement, “I trust the IRS to prepare my taxes for me,” sixty-eight percent of the taxpayers polled disagreed. Moreover, seventy-four percent believe it would be a conflict of interest for the IRS to both prepare and collect taxes.

*The poll was conducted by The Mellman Group, Inc. Findings were released by The Information Technology and Innovation Foundation

May 2008

Tax Free Withdrawals Available for Rebate Payments Directly Deposited into Tax-Favored Accounts

If your stimulus payment is directly deposited into your IRA or other tax-favored account, you will be able to withdraw the funds tax-free and penalty free. To qualify, the amount withdrawn must be less than or equal to your directly deposited stimulus payment, and it must be withdrawn from your account by April 15th, 2009. This applies to both Traditional and Roth IRA accounts. Other eligible accounts include health savings accounts (HSAs and Archer MSAs), education savings accounts (ESAs) and qualified tuition programs (QTPs or 529 Plans).

There will be special reporting for these withdrawals on your 2008 tax return. Instructions will be provided in the 2008 1040 Instructions Booklet. TurboTax and most other software programs will give you the option to indicate that your withdrawal was a tax-free distribution of your stimulus payment.

April 2008

Stimulus Payment Still Available for Certain Late Filers

If you filed for a six-month extension and have not yet filed your tax return, you can still receive a stimulus rebate check this year, as long as you file your 2007 return by October 15, 2008. If you file after that date, your payment will be calculated on your 2008 tax return.

If you do not have a filing requirement, you may still be eligible for a stimulus payment, but you will need to file a return to receive it. To qualify, you must have at least $3,000 in qualifying income, which includes earned income, nontaxable combat pay included in earned income, and certain income from Social Security, Veterans Affairs and Railroad Retirement.

Your stimulus payment will be directly deposited into the bank account listed on your tax return. If no bank account is listed, or if multiple accounts are listed, a paper check will be mailed to you. If you were not eligible this year, but your situation changes, you will have a second chance to qualify for the rebate on your 2008 return.

March 2008

New Incentives for Businesses under the Economic Stimulus Act of 2008

The Economic Stimulus Act of 2008 provides incentives for businesses to invest in new property. Bonus depreciation and enhanced Code Section 179 expensing may be used for eligible property purchased and placed in service beginning in 2008.

Under the new law, the amount of deductible Code Section 179 expensing is increased to $250,000, more than double the 2007 amount. The new threshold for reducing the deduction is $800,000, with the phase-out amount for this deduction increased to $1,050,000.

In addition, beginning in 2008, eligible taxpayers will have the option to take a fifty-percent first-year bonus depreciation deduction on qualifying business property. The property must be eligible for MACRS with a depreciation period of 20 years or less, and either water utility property, computer software (off-the-shelf) or qualified leasehold property.

The new law also allows for first-year bonus depreciation of up to $8,000 for a qualifying vehicle, increasing the limitation on first-year passenger auto depreciation from $3,060 to $11,060 ($11,260 for vans and trucks). The section 179 limitation of $25,000 for sport utility vehicles is still in effect.

February 2008

IRS to Begin Mailing Rebate Checks in May

In an effort to jump-start the economy, the federal government will be sending tax rebate checks to more than 130 million low– and middle–income Americans as soon as May. The government will borrow the money to pay for the rebates, adding $117 billion to the deficit over the next two years. The rebate amounts will range from $300 to $1200, and eligible households will receive an additional $300 per child.

To receive a rebate check, you must have paid taxes or received at least $3,000 in wages, Social Security or veteran’s disability benefits during 2007. In addition, your income must not have exceeded $87,000 if you are single or $174,000 if you are a married couple filing jointly with no children. If you have children, the income limits are higher by $6,000 for each child. You must file a 2007 tax return and include a social security number for each person on the return to be eligible.

Rebates will be calculated based on 2007 adjusted gross income. Adjusted gross income includes wages, interest, dividends, taxable pensions, royalties and farm or rental income; it does not include contributions to IRAs, 401k retirement plans, heath savings accounts and student loan interest payments.

Any rebate you receive is considered an advance payment on your 2008 refundable “recovery rebate credit.” The actual calculation for the credit will take place on your 2008 return. If you are entitled to a larger credit, you will receive the difference next year when you file. If you receive a rebate check that is greater than the amount calculated on your 2008 return, you will not be required to pay back the difference.

Your rebate will not reduce your regular tax refund, but will be in addition to it. The IRS will not allow you to offset your 2007 tax liability with your rebate, and you cannot apply the amount to your 2008 tax liability.

January 2008

IRS Audits to Increase Again in 2008

The IRS has been under increasing pressure from President Bush and Congress to reduce the nation’s “tax gap,” which is the difference between tax amounts that were voluntarily reported and paid on time and those that should have been paid. Audits are viewed as a source of additional revenue needed to offset recent tax relief legislation and the pending economic stimulus package, which alone is expected to cost $150 billion. In addition to the standard audit areas, the IRS will increase audits of taxpayer groups believed to have high rates of noncompliance. These include individuals with incomes over $100,000 (“high income” taxpayers), small businesses, and foreign athletes and performers who earn prize and product endorsements in the United States.

Although the IRS has announced several specific areas that they will focus on, everyone needs to be prepared. The number of individual and small business audits rose sharply in 2007 and will increase again in 2008.

December 2007

Bush Signs Mortgage Relief Bill into Law

On December 20th, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 into law. The new bill allows for discharges of mortgage debt up to $2 million to be excluded from taxation. To qualify, the debt must have been secured by and incurred in the acquisition, construction or substantial improvement of a principal residence. The relief is available for three years, and is retroactive to January 1, 2007. The bill includes relief for refinancing to the extent that the debt does not exceed the amount of the original indebtedness. Home equity that was not used for renovation (i.e., to payoff credit card debts, tuition, medical and other expenses) cannot be excluded.

November 2007

Standard Mileage Rates to Increase in 2008

The IRS has raised the standard mileage rates used to calculate the vehicle expense deduction for business, charitable, medical and moving purposes. Beginning January 1st, 2008, the standard mileage rates for cars, vans and pickup trucks will be:

  • 50.5 cents per mile for business miles.
  • 19 cents per mile for medical and moving miles
  • 14 cents per mile for miles driven in service of charitable organizations

The mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. The mileage rate for charitable purposes is set by law.

October 2007

The Tax Implications of Foreclosures and Short Sales

Many homeowners are not aware that losing a home to foreclosure can result in a hefty tax bill. Under the current law, an income tax is assessed on “forgiven debts,” which includes foreclosures and “short sales.”

In a foreclosure situation, the difference between your loan balance and the fair market value of your property at the time of foreclosure is considered ordinary income, taxable at ordinary income tax rates. Similarly, “phantom” taxable income is created when the bank allows you to do a “short sale,” accepting proceeds from your sale as payment in full even if the amount you receive for the property is less than the amount you owe on your mortgage. In both cases, you will receive IRS Form 1099C reporting income equal to the amount of mortgage that you did not pay.

If you receive Form 1099C, it may or may not have tax implications, depending on your state law. Common situations that allow taxpayers to avoid the tax are bankruptcy and insolvency. Also, in certain states, you will not have debt cancellation income if your home is financed entirely by “nonrecourse” debt. This generally means that the lender has a right to the value of the home only. Homeowners who have never refinanced their homes generally fall into this category.

September 2007

Don’t Be Fooled by Phishing Scams

On August 24th the IRS issued a warning about a new phishing scam involving a fake IRS email that promises $80.00 to taxpayers who complete an online customer satisfaction survey. If you receive such an email, the IRS urges you to ignore it. This is just the latest in a long series of scams involving emails that appear to have been sent by the agency.

The IRS does not initiate contact with taxpayers via email, so if you receive an email purporting to be from the IRS regarding a fraud or criminal investigation, or even a refund, do not be fooled. Responding to such an email could lead to theft of your personal information, and clicking links or opening attachments could expose your computer to harmful viruses.

August 2007

Certain Credits No Longer Allowed Under AMT

Every year, more and more taxpayers are affected by the Alternative Minimum Tax, otherwise known as the AMT. Even though The Tax Reconciliation Act of 2005 provided temporary AMT relief by increasing the exemption amount for individuals and allowing for certain credits under AMT, approximately 4 million taxpayers were subject to AMT for the 2006 tax year. Unless new laws are enacted before the end of this year, more than 70% of filers with income between $100,000 and $200,000 will fall under AMT for tax year 2007.

The increased susceptibility to AMT will be due in part to the changes that went into effect for tax year 2007. The exemption amount was decreased from $42,500 in 2006 to $33,750 for single filers, and from $62,550 to $45,000 for married taxpayers filing jointly and qualifying widowers. In addition, a number of credits will be no longer allowed under the AMT. This includes the Credit for Child and Dependent Care Expenses, the Credit for the Elderly or the Disabled, the Education Credits, the Mortgage Interest Credit and the District of Columbia First-Time Homebuyer Credit.

The new tax liability limit that applies for these credits is your regular tax minus any tentative minimum tax (figured without any AMT Foreign Tax Credit). This means that your credit is reduced or eliminated if the credit would lower your tax below the alternative minimum tax calculated for your situation.

While many taxpayers complain about the AMT, there is an upside to falling under this system: those who are affected by AMT are not paying the top federal tax rate. While AMT subjects taxpayers to a rate between 26 and 28 percent, under the regular system rates go as high as 35%. Whether or not you owe AMT depends on whether your AMT taxes are higher than the amount calculated under the regular tax system. So, if you owe more under the regular system you will not pay AMT: you will pay more.

July 2007

Random Tax Audits Beginning This October

As part of a new research project, the IRS will begin the first of a series of random audits this coming October. Thirteen thousand tax returns will be selected, with the majority of the audits leading to “in office” examinations requiring taxpayers or their representatives to meet in-person with IRS examiners.

Because the information gathered in these examinations will help to refine the formulas the IRS uses to select tax returns for audit, tax return items with low dollar amounts that might not be questioned in a regular audit situation may be examined solely for research purposes. In addition, many of the audits are expected to cover more areas of the tax return, even when there is no suspicion of inaccuracy or obvious audit targets.

In the last wave of random audits, forty-five thousand returns for the 2001 tax year were examined. The IRS claims that new data is now needed to account for changes in the stock market and the overall economy, as well as issues with executive compensation, hedge funds and business scandals relating to income and stock options. It is expected that the research will even further improve the likelihood that an audit will lead to an increase in the amount of taxes owed by a taxpayer under examination.

June 2007

IRS Provides Additional Guidance To Charities On 501 (C)(3) Political Activities Compliance

On June 1st, the IRS issued Revenue Ruling 2007-41, 2007-25 IRB to help guide charities away from prohibited political activities that could jeopardize their nonprofit status. The ruling includes twenty one examples of actual situations in which organizations were determined to be on either side of the line between permissible activity and impermissible political campaign interventions. The examples illustrate the difference between prohibited endorsement of candidates and permissible nonpartisan political activities.

The situations cover voter education, individual activities by organization leaders, candidate appearances, issue advocacy, business activities and linking nonprofit organization websites to other websites. The examples below illustrate some of the situations that have been determined to be prohibited activities.

Voter Education, Voter Registration and Get out the Vote Drives

Voter education and registration drives must be conducted in a nonpartisan manner. Activities that are carried out in such a way that they show bias toward or against one or more candidates are prohibited.

  • For example, representatives from a nonprofit organized to educate the public about environmental issues called registered voters before an upcoming election. During the calls voters were questioned about their views on environmental issues, and only if the voter agreed with the organization’s candidate’s position did the representatives remind them about the election and offer to provide transportation to the polls; if the voter seemed to be opposed to their candidate’s position, they ended the call. This kind of "get out the vote" drive was determined to be prohibited political campaign intervention.

Individual Activity by Leaders of Organizations

Leaders of organizations speaking for themselves as individuals are not restricted as to what they can say. As in the two examples below, problems arise when leaders make partisan comments at official functions of their organizations.

  • The ruling uses the example of a university president who endorsed a candidate in his alumni newsletter column then paid for part of the cost of that month’s issue in an attempt to circumvent IRS rules. Because the endorsement appeared in an official university publication, it was considered to be campaign intervention.
  • In another case of prohibited activity, the Chairman of the Board of Directors of a 501 (c)(3) that educates the public about conservation issues made remarks that indicated support for a specific political candidate during an official organization meeting.

Candidate Appearances

A nonprofit organization is allowed to invite political candidates to speak at official events; however, the organization must provide equal opportunities and similar forums to other candidates, and there must be no implied support of one candidate over the others.

  • In the IRS example situation, the minister of a church invited a Senate candidate to preach to her congregation the Sunday before an election. During the Senator’s remarks, he stated, "I am asking not only for your votes, but for your enthusiasm and dedication, for your willingness to go the extra mile to get a very large turnout on Tuesday." No other candidate was invited to speak to her congregation. Because these activities took place during official church services, and only one candidate was invited to address the congregation, the actions were determined to be political campaign intervention.

Candidate Appearances Where Speaking or Participating as a Non-Candidate

The presence of a political candidate at an event sponsored by a nonprofit organization does not by itself cause an organization to be engaged in a prohibited activity. The determination is made based on how the candidate is publicly recognized by the organization, whether the candidate speaks in a non-candidate capacity, and whether the atmosphere at the event is nonpartisan.

  • For example, a 501 (c)(3) symphony was considered to have engaged in political campaign intervention when at a free public concert the chairman of its board made this remark about the incumbent mayor up for reelection: "I am pleased to see Mayor G here tonight. Without his support, these free concerts in City Park would not be possible. We will need his help if we want these concerts to continue, so please support the Mayor in November as he has supported us."

Issue Advocacy versus Political Campaign Intervention

Section 501 (c)(3) organizations may take positions on public policy issues provided they do not directly or indirectly endorse a particular candidate in their public communications.

  • For example, shortly before a gubernatorial election, a section 501 (c)(3) organization that educates the public about the need for improved public education financed a radio advertisement calling for an increase in state funding for public education. While the ad did not explain the Governor’s position on the issue, it exhorted citizens to "Tell the Governor what you think about our under-funded schools." At the time of the advertisement, there was no vote on state funding of education scheduled in the state legislature. The organization was determined to have violated the political campaign prohibition because it identified the Governor, it aired shortly before an election in which he was a candidate, it was not part of an ongoing series of "substantially similar" advocacy ads on the same issue, it was not timed to coincide with a nonelection event such as a legislative vote, and finally, because it took a position on an issue that the Governor’s opponent used to set himself apart from the incumbent.
  • In another situation, a 501 (c)(3) organization was found to be in violation after its executive director took a position on a prominent campaign issue at an official function shortly before an election and exhorted the audience to use their power at the polls and cast their votes in the election for their state senator.

Business Activity

An organization must not show bias for or against political candidates when engaging in business activities such as renting mailing lists, leasing office space, or accepting paid political advertising.

  • For example, a theater is found to have intervened in a political campaign after it rented its mailing list to one candidate and declined similar requests from the candidate’s opponents.


Nonprofit organizations must not post information on its websites that favors or opposes a candidate for public office. Care should be taken when linking to candidate related websites and material; in determining whether website linking constitutes campaign intervention, some of the facts and circumstances considered are whether all candidates are represented and the directness of the links between the organization’s website and a web page containing material that favors or opposes a public office candidate.

  • In the IRS example a church was found to be in violation when it posted a message on its website urging readers to vote for a fellow parishioner in an upcoming town council election.

May 2007

IRS Gives Certain Taxpayers an Extension to File

Northeast Storm

Taxpayers who were affected by the severe storms and flooding that hit the Northeastern United States April 14-18, 2007, have been given until June 25th to file returns and pay taxes. This applies to those who live in the Presidential Disaster Area which consists of the following counties:

  • Bergen, Burlington, Camden, Essex, Gloucester, Hudson, Mercer, Middlesex, Morris, Passaic, Somerset and Union in New Jersey
  • Orange , Rockland and Westchester in New York and
  • Grafton, Hillsborough, Merrimack, Rockingham and Strafford in New Hampshire.

In addition, the IRS will waive the failure to deposit penalty for employment and excise deposits due on or after April 14, 2007, and on or before April 30, 2007, as long as the deposits were made by April 30, 2007.

If you were affected by the storm and you receive a penalty notice, the IRS advises that you call the number on the notice to request the abatement of any interest and late filing or late payment penalties that would otherwise apply during the period from April 14, 2007, to June 25, 2007 (April 14 to April 30, for failure to deposit penalties). No penalty or interest will be abated for taxpayers who do not have a filing, payment or deposit due date (including an extended filing or payment due date) during this period.

Mark your paper tax return with the words "April 16 Storm." If you e-file, use your software’s "disaster" feature, if available.

Virginia Tech Shooting

The Internal Revenue Service has granted a six-month tax filing and payment extension to those affected by the shootings at Virginia Tech. This applies to the victims, their families, emergency responders, students, and university employees.

The extension gives taxpayers affected by the events at Virginia Tech until October 15, 2007, to file and make payments associated with their 2006 individual tax returns originally due April 17. No filing and payment penalties will be due for those who qualify for this extension, as long as the returns are filed and payments are made by October 15, 2007.

To claim this relief, you must call the IRS at 1-866-562-5227 and identify yourself to the IRS before you file and or make payment.

April 2007

IRS Commissioner Mark Everson Resigns

After leading the IRS for nearly four years, Commissioner Mark Everson announced plans to leave the agency to become President and CEO of the American Red Cross. He is set to begin his new position on May 29th. Kevin Brown, who served as Everson’s deputy commissioner, has been selected to act as the interim commissioner, subject to President Bush’s approval.

During his term, Everson brought more of the Service’s emphasis back to enforcement, believing that the balance between enforcement and service had been lost after the IRS Restructuring and Reform Act of 1998. In an effort to close the tax gap, Everson spearheaded the campaign against tax shelters and increased audits of businesses and high income individuals.

Everson is also credited with shepherding the agency into the electronic age. When he became commissioner in 2003, most individuals filed paper returns, but as of March 23rd 2007, 72 percent of returned had been e-filed for the season.

March 2007

Penalty Increase for "Frivolous Tax Returns"

The Internal Revenue Service has just released an updated list of 40 frivolous positions that taxpayers should avoid on their income tax returns. These positions include (but are not limited to) the arguments that wages are not taxable income, that paying taxes are voluntary, that the Internal Revenue Code is not law, and that federal income taxes are unconstitutional. The position that taxpayers are allowed to buy or sell the right to claim a child for the Earned Income Credit is also on the list, along with the argument that a taxpayer can avoid tax on income by attributing the income to a trust.

The penalty for a "frivolous tax return" was increased from $500 to $5,000 as part of The Tax Relief and Health Care Act of 2006. The penalty also applies if a tax return contains positions not on the official list, but which have no basis for validity in existing law or reflect a desire to delay or impede federal tax laws. Taxpayers who file frivolous tax returns may also be subject to civil penalties of 20 or 75 percent of the underpaid tax, in addition to interest which accrues from the original due date of the tax return. An additional penalty of $25,000 will be assessed for those who pursue frivolous tax cases in court.

To see a complete list of Frivolous Positions, click here.

February 2007

Criminal Intent Indicated in Abusive Telephone Tax Refund


Since January, the IRS has been keeping a close watch on potential problems with the telephone tax excise tax refund, and they have found indications of criminal intent from tax preparers nationwide. In some instances, preparers are requesting thousands of dollars of refunds for their clients when their clients are entitled to only a small fraction of that amount. There are several cases in which refunds of $30,000 have been requested. In other instances, entire amounts of taxpayers’ telephone bills are being used to figure the credit instead of the three percent long-distance tax.

IRS criminal investigators served search warrants at tax preparation businesses in seven cities, temporarily closing businesses and seizing computers and documents. In addition, special agents and auditors from the agency have been visiting individual tax preparers throughout the country who are preparing returns with "questionable" telephone tax refund requests.

Taxpayers who are claiming a higher tax credit than they are entitled to receive will have their refunds held and will also be subject to an audit.

To make the credit easy to figure, a standard refund amount, based on personal exemptions, has been established. The amounts range from $30 to $60 and approximate the eligible amount for most individual taxpayers. To claim the standard refund amount, taxpayers have to fill out one line on their return, and they do not need to present proof to the IRS. Taxpayers who have phone bills and other records can request the actual amount of excise tax paid.

Billions More Annually If New IRS Budget is Approved

The Bush Administration has requested a budget of $11.095 billion for the IRS for Fiscal Year 2008. If Congress fully funds this request and works to enact certain legislative proposals contained in that request, IRS Commissioner Mark Everson says the IRS could collect at least 20 billion of additional annual revenue.

During the February 14th Senate Budget Committee Hearing, Senator Kent Conrad (D-N.D.) asked Everson if the IRS could absorb as much as $250 million more than the president’s request for enforcement and infrastructure activities, and called for "a far more aggressive approach" to closing the tax gap.

January 2007

If You File a Schedule C, Look Out!!!

Though some say the IRS has already been focusing on small businesses, Schedule C (Self Employed Income) filers should look out: The IRS says it’s ready to increase its focus on individuals who are filing 1040s and running unincorporated businesses.

In a recent telephone conference with CBS’s MarketWatch, IRS Commissioner Mark Everson said, “If you look at the tax gap, the biggest portion [of unpaid tax] is in under-reporting of income by individuals.  Typically, that’s individuals who are filing Schedule C.”

The theory is that the noncompliance rate among taxpayers who receive wages is low (about 1%) because employers as well as employees report the wages in a process the IRS calls third-party reporting.  Where there is no third-party reporting, such as for small, unincorporated businesses, the non-compliance rate is closer to 50%, according to Everson.  “Many individuals are understating their income,” he said.

It seems that the IRS has the support of the Congress.  Newly elected House Speaker Nancy Pelosi (D-Calif.) appeared on the January 7 edition of CBS’s Face the Nation and said that the federal government ought to go after the $300 billion in unpaid taxes when it seeks to balance the budget.

Schedule C audits can be very aggressive.  Auditors look for personal expenses deducted as business expenses, and can review your bank statements to find income that may have been omitted from your return.  If you are running small, unincorporated businesses, keep good records, report all of your income, and do not deduct personal expenses on your Schedule C, Profit or Loss from Business.

December 2006 - Special Report

President Bush Signs Extenders Bill

Several popular tax breaks that expired at the end of 2005 are being restored with the Tax Relief and Health Care Act of 2006.  President Bush signed the bill on December 20th, hailing it as “a good piece of pro-growth legislation that will extend tax relief to millions of American families and small businesses and add momentum to a growing economy.”

For individual taxpayers, the bill extends for two years the deduction for state and local sales taxes and the above-the-line deductions for teachers´ classroom expenses and tuition and fees for higher education.  The Earned Income Tax Credit for combat pay has also been extended, but only through 2007.  Business related credits and deductions that have been continued include the Research Credit, Work Opportunity Tax Credit/Welfare-to-Work Tax Credit, and the New Markets tax credit, as well as several energy-related incentives.

A number of non-extenders will provide relief to a wide range of taxpayers.  A new, refundable credit for taxpayers with long-term unused AMT credits has been included in the law to help ease the burden on taxpayers who have had high tax bills due to AMT income from incentive stock options.  For 2007 only, taxpayers will be allowed to deduct mortgage insurance premiums on qualified residences.  Also included in the bill are permanent “enhancements” for HSAs, which are intended to encourage more people to take advantage of Health Savings Accounts.  The new law allows employees who own flexible spending accounts to make a one time rollover from their FSA to an HSA, subject to limitations.  Also allowed will be a once-in-a-lifetime rollover of funds from an IRA to an HSA, intended to facilitate quick access to funds needed to pay medical expenses.

December 2006

IRS Reports $92.2 Million in Undeliverable Tax Refund Checks

Currently, the IRS has checks waiting to be claimed by 95,746 taxpayers whose refunds were returned as “undeliverable.”  If you missed your refund because you moved and did not notify the IRS or Postal Service of your new address, all you need to do to claim your check is update your address with the IRS.

It´s easier than ever to update your information and claim your refunds online.  The “Where’s My Refund?” feature on the home page of the website allows you to learn the status of your refund and update your mailing address if your refund was issued in the last 12 months and returned as undeliverable.  To gain access to your account you will need to enter your Social Security number, filing status and the refund amount shown on your 2005 income tax return.  In some cases the website will also provide instructions on resolving potential account issues.  You can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

You can avoid having your refund lost in the mail by signing up to have your refund directly deposited into your personal checking or savings account.  If you use direct deposit to receive your refund in 2007 for the 2006 tax year, you will have the option of using the new Form 8888 to select up to three financial accounts, including checking, savings, and retirement accounts, to deposit your refund.

November 2006

Standard Mileage Rates to Increase in 2007

Due to higher vehicle and fuel costs, the IRS has raised the standard mileage rates used to calculate allowable deductions for automobile usage.  The new rates, effective beginning January 1, 2007, will be 48.5 cents per business mile, 20 cents for medical and moving miles, and 14 cents for each mile driven in service to a charitable organization.

The new rates compare to 44.5 cents per business mile and 18 cents for medical and moving miles for 2006.  With the exception of miles driven for relief related to Hurricane Katrina, the mileage rate for charitable miles was the same in 2006.

New Rules and Rates for Foreign Earned Income

The maximum amount of Foreign Earned Income an eligible taxpayer can exclude from income for the 2006 tax year has been increased from $80,000 to $82,400.  At the same time, however, new rules have gone into effect for determining the tax rate of the non excluded income.  Beginning with the 2006 tax year, the amount of foreign earned income and foreign housing costs excluded from gross income will be used to determine the income tax rate and alternative minimum tax that applies to non excluded income.  For many individuals, this will result in a greater tax liability than they would have had under the old law.

October 2006

IRS Payment Agreement Application Now Available Online

Taxpayers who have an outstanding balance with the IRS now have the option to apply online for a payment agreement.  Through the new online application process, you will be able to pay in full, obtain a short-term extension, or set up a monthly payment plan.

In order to use the online application, you must already have filed all of your required tax returns.  To access it, use the “I Need To…” pull-down menu on the home page of the IRS website and select “Set Up a Payment Plan.”  To complete the application process, you will need to have your IRS Balance Due Notice available, as well as your Social Security number or Individual Taxpayer ID Number, to complete the application process.

September 2006

Tax Credit for Purchase of Toyota Hybrids Begins: Phase out

Toyota has reported that it sold its 60,000th qualified vehicle during the quarter that ended on June 30th, 2006, which means that the credit for purchasing a qualified hybrid or lean burn technology vehicle from this particular manufacturer will begin to phase-out on October 1st, 2006.

If you purchase a qualified Toyota vehicle on or after October 1, 2006, and on or before March 31, 2007, you will be entitled to a credit of 50 percent of the original credit amount.  If you buy your qualified vehicle on or after April 1, 2007, and on or before September 30, 2007, you will be entitled to 25 percent of the originally allowed credit.  As of this date, there is no provision for a credit for Toyota hybrids purchased after September 30, 2007.

Below are the credit amounts for the phase out periods:

October 1, 2006 – March 31, 2007:


2005 Toyota Prius


2006 Toyota Prius     


2006 Toyota Highlander 4WD Hybrid


2006 Toyota Highlander 2WD Hybrid  


2006 Lexus RX400h 2WD 


2006 Lexus RX400h 4WD


2007 Camry Hybrid


2007 Lexus GS 450h   


April 1, 2007 – September 30, 2007:


2005 Toyota Prius


2006 Toyota Prius


2006 Toyota Highlander 4WD Hybrid


2006 Toyota Highlander 2WD Hybrid;


2006 Lexus RX400h 2WD


2006 Lexus RX400h 4WD


2007 Camry Hybrid


2007 Lexus GS 450h


No More Penalty for Active Duty Reservists Taking Early Distributions from Retirement Plans

The new Pension Protection Act of 2006 allows military reservists called to active duty to take early distributions penalty-free from their qualified retirement accounts.  Reservists called to active duty for at least 180 days or an indefinite period after September 11, 2001 and before December 31, 2007 are eligible.

Reservists who have already paid this 10% additional tax for a year during the above period should file Form 1040X, Amended U.S. Tax Return, to claim a refund.  Reservists also have the option to re-contribute these distributions to an IRA; time limitations apply and there is no deduction available for these special contributions.

August 2006

New Rules for Charitable Donations Beginning in 2007

The Pension Protection Act of 2006 imposes new rules on the type of documentation you will need in order to deduct cash charitable donations.  It also puts into effect stricter requirements on the deductibility of donated household items.

Currently, the IRS takes you at your word when you deduct small gifts, such as the weekly $20 you give at church, as long as you have a written log of what you gave and to whom you gave it; the general rule is, you don’t need a receipt unless your donation is $250 or more.  Also, under the current law, the IRS allows you to deduct donated clothing and household items without having to prove that the items you gave were of real value.

Under the new law, you will need proof of any cash contribution that you deduct, regardless of the amount.  Also, any donated clothing and household items, such as furniture, electronics, appliances and linens, must be in “good” condition in order to be deductible.  However, items that are in “fair” condition may be deducted if they are worth $500 or more, and if you have an appraisal to prove it.  Food, paintings, antiques, objects of art, jewelry, gems and collectibles are not considered household items under the law.

Beginning in tax year 2007, you will need a canceled check, bank record or written receipt from the charity to substantiate all of your cash contributions.  As for the definition of “good condition,” the IRS has left that up in the air for the moment.  They have not yet indicated whether they will take your word for it, or whether the organization will have to indicate the condition of your donation on your receipt.

July 2006

Energy Tax Credits for Homeowners

Making your home more energy efficient can reduce your taxes dollar for dollar via tax credits.  The new Personal Energy Property Credit and the Personal Residential Energy Efficient Property Credits are available to homeowners for energy conscious purchases during 2006 and 2007 and apply to qualified energy efficiency improvements made to only your principal residence during the tax year.  All property must meet certification requirements prescribed by the Secretary of the Treasury in order to qualify, and the home must be located in the United States.

The Personal Energy Property Credit allows a credit of 10% of the amount you spend on qualifying improvements, plus 100% of amounts spent on energy-efficient building materials and equipment.  This credit has a $500 lifetime limit, with a $200 cap for windows.  Qualifying improvements include the installation of energy efficient insulation, roofs, exterior windows, doors and skylights.  Energy-saving heat pumps and water heaters will allow you a credit of $300 per item; furnaces and hot water boilers are good for $150, and the credit for fans is limited to $50.

The Personal Residential Energy Efficient Property Credit is a completely separate credit that allows you a credit of up to $2,000 for 30% of the cost of qualified solar water heating equipment and qualified electricity generating solar photovoltaic property.  Equipment used to heat pools and hot tubs does not qualify for this credit.

Another way to increase your tax savings is to use a home equity loan to purchase these items and/or materials.  Don´t forget that you can deduct the interest on a home equity line of credit up to $100,000; however, if the loan is used exclusively to improve your home, then the limit goes to the $1,000,000 home acquisition indebtedness limit.  And if you purchase any of these qualifying energy efficient building materials and equipment as part of a substantial addition to or major renovation of a home, you may be able to deduct the sales tax too, if congress reinstates that deduction for 2006.  That particular deduction expired December 31, 2005 and Congress has been discussing bringing it back for 2006, but it has not been passed as of this date.  Those are two more good reasons to make energy-conscious improvements to your home.

June 2006

IRS to offer Split Refunds Option in 2007

Taxpayers who use direct deposit to receive their refunds in 2007 for the 2006 tax year will have the option of using a new Form 8888 to select up to three financial accounts, including checking, savings, and retirement accounts, to deposit their refunds.  Exact details of the split-refund program, including a draft of Form 8888, are still being decided by the IRS.

Seven Honda Vehicles Certified for New Energy Tax Credit
If you purchased one of the following vehicles on or after January 1, 2006, you may qualify for the hybrid tax credit:



2006 Honda Civic Hybrid CVT


2005 Honda Civic Hybrid  (SULEV)  MT


2005 Honda Civic Hybrid (SULEV) CVT 


2005 Honda Insight CVT 


2006 Honda Insight CVT 


2006 Honda Accord Hybrid AT 


2005 Honda Accord Hybrid AT 


*2006 Honda Accord Hybrid AT without updated control calibration qualifies for a credit amount of $650.
The full credit is available only up until the end of the first quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle, so if you want to receive this credit you need to buy early, since the credit phases out; no credit is allowed after the fifth quarter after the 60,000th vehicle is sold.

May 2006

Several Key Tax Provisions Signed into Law by President Bush

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005.  Here are some of the highlights:

Extend Reduced Capital Gains and Dividend Rates
The new tax law extends the 15 percent rate on long–term capital gains and dividends for two additional years.  For low-income taxpayers, that rate will be 0 percent.
The reduced rates, which were scheduled to expire at the end of 2008, will run through 2010.  After 2010, the rates will revert to 20 percent for long–term capital gains (10 percent for those in the lowest tax bracket) and the individual taxpayer’s top income tax rate for dividends.

AMT Relief
For 2006 the AMT income exemption levels are increased from $40,450 to $42,500 for single filers, and from $58,000 to $62,550 for joint filers.
AMT is a separate tax system within the tax system that was put into place to make sure that taxpayers in higher income brackets are not able to avoid paying their “fair share” of tax.  Since the original levels have never been adjusted for inflation, millions of middle class taxpayers are now subject to this tax.

Increase Roth IRA Eligibility
The new bill allows all taxpayers to convert their traditional IRAs to Roth IRAs starting in 2010.  Currently, only those with modified adjusted gross income of $100,000 or less are eligible.

Kiddie Tax Extended
The bill also extends the “Kiddie Tax” cutoff from age 14 to age 18. The “Kiddie Tax” applies when a minor child’s investment income, such as interest, dividends, and capital gains, are taxed at the parent’s tax rates instead of the lower tax rates their children would qualify for.

The “Kiddie Tax” was established in 1986 in reaction to wealthy parents who were trying to avoid taxes on their investments by putting the investment assets in the names of their small children.  Originally the tax applied only to children under the age of 14 as of Dec. 31 of the year in question.  After that, a child would be taxed just like an adult.

The new “Kiddie Tax” rules allow a child under 18 to receive $850 in 2006 in investment income free of tax.  The next $850 is taxed at the child’s rate — presumably 10% or 15% for income and short-term capital gains, and 10% for long-term capital gains.  Any income over $1,700 typically is taxed at the parent’s top rate, which could be as high as 35% for 2006.

Telephone Tax Refund
Taxpayers will be eligible to claim a refund on their 2006 tax returns for all federal excise tax they have paid on long distance service billed to them after February 28, 2003.  Taxpayers will have the option to claim a refund for actual taxes paid or use a simplified method to be announced later this year.  The IRS will stop collecting this 3% tax on long distance service, which was first imposed in 1898.

April 2006

IRS Announces Plans to Hire Hundreds of New Field Auditors

The IRS announced plans to hire hundreds of new field auditors in its Small Business/Self-Employed Division.  In continuation of a trend that began in 2002, the IRS is increasing its staff, as well as audits, collections and criminal investigations.  During the 2005 fiscal year audits were up 21% over 2004.

Four Toyota and Two Lexus Vehicles Certified for the New Energy Tax Credit

If you purchased one of the following vehicles on or after January 1, 2006, you may qualify for the hybrid tax credit:



2005 Toyota Prius


2006 Toyota Prius     


2006 Toyota Highlander 4WD Hybrid 


2006 Toyota Highlander 2WD Hybrid  


2006 Lexus RX400h 2WD  


2006 Lexus RX400h 4WD  


The full credit is available only up until the end of the first quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle, so if you want to receive this credit you need to buy early, since the credit phases out; no credit is allowed after the fifth quarter after the 60,000th vehicle is sold.

March 2006

IRS Hires Independent Contractors to Collect Delinquent Tax Debt

In its first phase of a new debt collection project, the IRS awarded contracts to three private firms after a competitive bidding process.  Employees from the firms will participate in an IRS training program, and the firms will work under stringent taxpayer protection and privacy rules, according to the IRS.  The private firms will not be authorized for enforcement actions, such as liens, levies and seizures, nor will they be involved in offers in compromise, bankruptcies, hardship issues or litigation.  The IRS will begin to assign uncollected liabilities to the firms this summer.

This information is being provided to the taxpayer as required by the Internal RevenueService and follows the guidelines for best practices for tax advisors per Circular230 §10.33(a)(1–4), and § 10.35(b)(2), (8), and (10). As by definition, thiswritten statement may be considered to be a “covered opinion” as definedby the Internal Revenue Service. This statement(s), along with subsequent correspondences,is not intended or written to be used, and cannot be used by the taxpayer, for thepurpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service. The principal purpose of any stated tax advice includedhere has as its purpose to claim tax benefits in a manner consistent with the statutes and Congressional intent.

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