Fairfield CT Tax Information

WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

WASHINGTON—The Internal Revenue Service will be resuming issuing collections notices to taxpayers that were previously suspending during the COVID-19 pandemic, although a date on when they will begin to be sent out has not been set.

"Right now, we are planning for restarting those notices," Darren Guillot, commissioner for collection and operation support in the IRS Small Business/Self Employment Division, said May 5, 2023, during a panel discussion at the ABA May Tax Meeting. "We have a very detailed plan."

Guillot assured attendees that the plan does not involve every notice just starting up on an unannounced day. Rather, the IRS will "communicate vigorously" with taxpayers, tax professionals and Congress on the timing of the plans so no one will be caught off guard by their generation.

He also stated that the plan is to stagger the issuance of different types of notices to make sure the agency is not overwhelmed with responses to them.

"The notice restart is really going to be staggered," Guillot said. "We’re going to time it at an appropriate cadence so that we believe we can handle the incoming phone calls that it can generate."

Guillot continued: "We want to also be mindful of the impact that it will have on the IRS Independent Office of Appeal. Some of those notices come with appeals rights and we want to make sure that we give taxpayers a chance to resolve their issues without the need to have to go to appeal or even get to that stage of that notice. So, it will be a staggered process."

In terms of helping to avoid the appeals process and getting taxpayers back into compliance, Guillot offered a scenario of what taxpayers might expect. In the example, if a taxpayer was set to receive a final Notice of Intent to Levy right before the pause for the pandemic was instituted, "we’re probably going to give most of those taxpayers a gentle reminder notice to try and see if they want to comply before we go straight to that final notice. That’s good for the taxpayer and it’s good for the IRS. And it’s good for the appellate process as well."

Guillot also said the agency is going to look at the totality of the 500-series of notices and taxpayers and their circumstances to see if there is a more efficient way of communicating and collecting past due amounts from taxpayers.

He also stressed that the IRS has been working with National Taxpayer Advocate Erin Collins and she has offered "input that we’re incorporating and taking into consideration every step of the way."

Collins, who also was on the panel, confirmed that and added that the IRS is "trying to take a very reasonable approach of how to turn it back on," adding that the staggered approach will also help practitioners and the Taxpayer Advocate Service from being overwhelmed as well as the IRS.

Guillot also mentioned that in the very near future, the IRS will start generating CP-14 notices, which are the statutory due notices. This is the first notice that a taxpayer will receive at the end of a tax season when there is money that they owe and those will start to be sent out to taxpayers around the end of May.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The Internal Revenue Service will use 2018 as the benchmark year for determining audit rates as it plans to increase enforcement for those individuals and businesses making more than $400,000 per year.

The agency is "going to be focused completely on … closing the gap," IRS Commissioner Daniel said April 27, 2023, during a hearing of the House Ways and Means Committee. "What that means is the auditrate, the most recent auditrate, we have that’s complete and final is 2018. That is the rate that I want to share with the American people. The auditrate will not go above that rate for years to come because for the next several years, at least, we’re going to be focused on work that we’re doing with the highest income filers."

Werfel added that even if the IRS were to expand its audit footprint a few years from now, "you’re still not going to get anywhere near that historical average for quite some time. So, I think there can be assurances to the American people that if you earn under $400,000, there’s no new wave of audits coming. The probability of you being audited before the Inflation Reduction Act and after the Inflation Reduction Act are not changed at all."

He also noted that many of the new hires that will be brought in to handle enforcement will focus on the wealthiest individuals and businesses. Werfel said that there currently are only 2,600 employees that cover filings of the wealthiest 390,000 filers and that is where many of the enforcement hires will be used.

"We have to up our game if we’re going to effectively assess whether these organizations are paying what they owe," he testified. "So, it’s about hiring. It’s about training. And it’s not just hiring auditors, it’s about hiring economists, scientists, engineers. And when I [say] scientists, I mean data scientists to truly help us strategically figure out where the gaps are so we can close those gaps."

Werfel did sidestep a question about the potential need for actually increasing the number of audits for those making under $400,000. When asked about a Joint Committee on Taxation report that found that more than 90 percent of unreported income actually came from taxpayers earning less than $400,000, he responded that "there is a lot of mounting evidence that there is significant underreporting or tax gap in the highest income filers. For example, there’s a study that was done by the U.S. Treasury Department that looked at the top one percent of Americans and found that as much as $163 billion of tax dodging, roughly."

And while answering the questions on the need for more personnel to handle the audits of the wealthy, he did acknowledge that "a big driver" of needing such a large workforce to handle the filings of wealthy taxpayers is due to the complexity of the tax code, in addition to a growing population, a growing economy, and an increasing number of wealthy taxpayers.

Other Topics Covered

Werfel’s testimony covered a wide range of topics, from the size and role of the personnel to be hired to the offering of service that has the IRS fill out tax forms for filers to technology and security upgrade, similar to a round of questions the agency commissioner faced before the Senate Finance Committee in a hearing a week earlier.

He reiterated that a study is expected to arrive mid-May that will report on the feasibility of the IRS offering a service to fill out tax forms for taxpayers. Werfel stressed that if such a service were to be offered, it would be strictly optional and there would be no plans to make using such a service mandatory.

"Our hope and our vision [is] that we will meet taxpayers where they are," he testified. "If they want to file on paper, we’re not thrilled with it, but we’ll be ready for it. If they want the fully digital experience, if they want to work with a third-party servicer, we want to accommodate that."

Werfel also reiterated a commitment to examine the use of cloud computing as a way to modernize the IRS’s information technology infrastructure.

And he also continued his call for an increase in annual appropriations to compliment the funding provided by the Inflation Reduction Act. He testified that modernization funds were "raided" so that phones could be answered and to prevent service levels from declining while still being able to modernize the agency, more annual funds will need to be appropriated.

By Gregory Twachtman, Washington News Editor

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. 

The Supreme Court has held that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) does not apply where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Code Sec. 7602(a). The IRS had entered official assessments against an individual for unpaid taxes and penalties, following which a revenue officer had issued summonses to three banks seeking financial records of several third parties, including the taxpayers. Subsequently, the taxpayers moved to quash the summonses. The District Court concluded that, under Code Sec. 7609(c)(2)(D)(i), no notice was required and that taxpayers, therefore, could not bring a motion to quash. The Court of Appeals also affirmed, finding that the summonses fell within the exception in Code Sec. 7609(c)(2)(D)(i) to the general notice requirement.

Exceptions to Notice Requirement

The taxpayers argued that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. However, the statute does not mention legal interest and does not require that a taxpayer maintain such an interest for the exception to apply. Further, the taxpayers’ arguments in support of their proposed legal interest test, failed. The taxpayers first contended that the phrase "in aid of the collection" would not be accomplished by summons unless it was targeted at an account containing assets that the IRS can collect to satisfy the taxpayers’ liability. However, a summons might not itself reveal taxpayer assets that can be collected but it might help the IRS find such assets.

The taxpayers’ second argument that if Code Sec. 7609(c)(2)(D)(i) is read to exempt every summons from notice that would help the IRS collect an "assessment" against a delinquent taxpayer, there would be no work left for the second exception to notice, found in Code Sec. 7609(c)(2)(D)(ii). However, clause (i) applies upon an assessment, while clause (ii) applies upon a finding of liability. In addition, clause (i) concerns delinquent taxpayers, while clause (ii) concerns transferees or fiduciaries. As a result, clause (ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an official assessment of liability. Consequently, Code Sec. 7609(c)(2)(D)(i) does not require that a taxpayer maintain a legal interest in records summoned by the IRS.

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

An IRS notice provides interim guidance describing rules that the IRS intends to include in proposed regulations regarding the domestic content bonus credit requirements for:

• --the Code Sec. 45 electricity production tax credit,
• --the new Code Sec. 45Y clean electricity production credit,
• --the Code Sec. 48 energy investment credit, and
• --the new Code Sec. 48E clean energy investment credit.

The notice also provides a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies. Finally, it describes recordkeeping and certification requirements for the domestic content bonus credit.

Taxpayer Reliance

Taxpayers may rely on the notice for any qualified facility, energy project, or energy storage technology the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.

The IRS intends to propose that the proposed regs will apply to tax years ending after May 12, 2023.

Domestic Content Bonus Requirements

The notice defines several terms that are relevant to the domestic content bonus credit, including manufactured, manufactured product, manufacturing process, mined and produced. In addition, the notice extends domestic content test to retrofitted projects that satisfy the 80/20 rule for new and used property.

The notice also provides detailed rules for satisfying the requirement that at least 40 percent (or 20 percent for an offshore wind facility) of steel, iron or manufactured product components are produced in the United States. In particular, the notice provides an Adjusted Percentage Rule for determining whether manufactured product components are produced in the U.S.

Safe Harbor for Classifying Product Components

The safe harbor applies to a variety of project components. A table list the components, the project that might use each component, and assigns each component to either the steel/iron category or the manufactured product category.

The table is not exhaustive. In addition, components listed in the table must still meet the relevant statutory requirements for the particular credit to be eligible for the domestic content bonus credit.

Certification and Substantiation

Finally, the notice explains that a taxpayer that claims the domestic content bonus credit must certify that a project meets the domestic content requirement as of the date the project is placed in service. The taxpayer must also satisfy the general income tax recordkeeping requirements to substantiate the credit.

A taxpayer certifies a project by submitting a Domestic Content Certification Statement to the IRS certifying that any steel, iron or manufactured product that is subject to the domestic content test was produced in the U.S. The taxpayer must attach the statement to the form that reports the credit. The taxpayer must continue to attach the form to the relevant credit form for subsequent tax years.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

A married couple’s petition for redetermination of an income tax deficiency was untimely where they electronically filed their petition from the central time zone but after the due date in the eastern time zone, where the Tax Court is located. Accordingly, the taxpayers’ case was dismissed for lack of jurisdiction.

The deadline for the taxpayers to file a petition in the Tax Court was July 18, 2022. The taxpayers were living in Alabama when they electronically filed their petition. At the time of filing, the Tax Court's electronic case management system (DAWSON) automatically applied a cover sheet to their petition. The cover sheet showed that the court electronically received the petition at 12:05 a.m. eastern time on July 19, 2022, and filed it the same day. However, when the Tax Court received the petition, it was 11:05 p.m. central time on July 18, 2022, in Alabama.

Electronically Filed Petition

The taxpayers’ petition was untimely because it was filed after the due date under Code Sec. 6213(a). Tax Court Rule 22(d) dictates that the last day of a period for electronic filing ends at 11:59 p.m. eastern time, the Tax Court’s local time zone. Further, the timely mailing rule under Code Sec. 7502(a) applies only to documents that are delivered by U.S. mail or a designated delivery service, not to an electronically filed petition.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

Internal Revenue Service Commissioner Daniel Werfel said changes are coming to address racial disparities among those who get audited annually.

"I will stay laser-focused on this to ensure that we identify and implement changes prior to the next tax filing season," Werfel stated in a May 15, 2023, letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.).

The issue of racial disparities was raised during Werfel’s confirmation hearing an in subsequent hearings before Congress after taking over as commissioner in the wake of a study issued by Stanford University that found that African American taxpayers are audited at three to five times the rate of other taxpayers.

The IRS "is committed to enforcing tax laws in a manner that is fair and impartial," Werfel wrote in the letter. "When evidence of unfair treatment is presented, we must take immediate actions to address it."

He emphasized that the agency does not and "will not consider race as part of our case selection and audit processes."

He noted that the Stanford study suggested that the audits were triggered by taxpayers claiming the Earned Income Tax Credit.

"We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take," he wrote, adding that the agency has been studying the issue since he has taken over as commissioner and that the work is ongoing. Werfel suggested that initial findings of IRS research into the issue "support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population."

Werfel added that elements in the Inflation Reduction Act Strategic Operating Plan include commitments to "conducting research to understand any systemic bias in compliance strategies and treatment. … The ongoing evaluation of our EITC audit selection algorithms is the topmost priority within this larger body of work, and we are committed to transparency regarding our research findings as the work matures."

By Gregory Twachtman, Washington News Editor

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

The American Institute of CPAs expressed support for legislation pending in the Senate that would redefine when electronic payments to the Internal Revenue Service are considered timely.

In a May 3, 2023, letter to Sen. Marsha Blackburn (R-Tenn.) and Sen. Catherine Cortez Masto (D-Nev.), the AICPA applauded the legislators for The Electronic Communication Uniformity Act (S. 1338), which would treat electronic payments made to the IRS as timely at the point they are submitted, not at the point they are processed, which is how they are currently treated. The move would make the treatment similar to physically mailed payments, which are considered timely based on the post mark indicating when they are mailed, not when the payment physically arrives at the IRS or when the agency processes it.

S. 1338 was introduced by Sen. Blackburn on April 27, 2023. At press time, Sen. Cortez Masto is the only co-sponsor to the bill.

The bill adopts a recommendation included by the National Taxpayer Advocate in the annual so-called "Purple Book" of legislative recommendations made to Congress by the NTA. The Purple Book notes that IRS does not have the authority to apply the mailbox rule to electronic payments and it would need an act of Congress to make the change.

"Your bill would provide welcome relief and solve a problem that taxpayers have been faced with, i.e., incurring penalties through no fault of their own because they believed their filings or payments were timely submitted through an electronic platform," the AICPA letter states. This legislation would provide equity by treating similarly situated taxpayers similarly. It would also improve tax administration by eliminating IRS notices assessing unnecessary penalties when the taxpayer or practitioner electronically submits a tax return by the deadline regardless of when the IRS processes it.

Tax policy and comment letters submitted to the government can be found here.

By Gregory Twachtman, Washington News Editor

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

WASHINGTON—The Inflation Reduction Act Strategic Operating Plan was designed to be a living document, an Internal Revenue Service official said.

The plan, which outlines how the IRS plans to spend the additional nearly $80 billion in supplemental funds allocated to it in the Inflation Reduction Act, was written to be a "living document. It’s not meant to be something static that stays on the shelf and never gets updated, and just becomes an historic relic," Bridget Roberts, head of the IRS Transformation and Strategy Office, said May 5, 2023, at the ABA May Tax Meeting.

Roberts also described the plan as a tool to help bring the agency together and more unified in its mission.

"We intentionally wrote the plan to sort of break down some of those institutional silos," she said. "So, we didn’t write it based on business unit or function."

She framed the development of the plan a "cross-functional, cross-agency effort," adding that it "wasn’t like, ‘here’s how we’re going to change wage and investment or large business.’ It was, ‘here’s how we’re going to change service and enforcement and technology. And those pieces touch everything."

Roberts also highlighted the need for better data analytics across the agency, something that the SOP emphasizes particularly as it beings to ramp up enforcement activities to help close the tax gap.

"We are never going to be able to hire at a level that you can audit everybody," she said. "So, the ability to use data and analytics to really focus our resources on where we think there is true noncompliance," rather than conducting audits that result in no changes. "That’s not helpful for taxpayers. That’s not helpful for the IRS."

By Gregory Twachtman, Washington News Editor

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

The IRS Independent Office of Appeals, in coordination with the National Taxpayer Advocate, has invited public feedback on how it can improve conference options for taxpayers and representatives who are not located near an Appeals office, encourage participation of taxpayers with limited English proficiency and ensure accessibility by persons with disabilities. Taxpayers can send their comments to ap.taxpayer.experience@irs.gov by July 10, 2023.

Appeals resolve federal tax disputes through conferences, wherein an appeals officer will engage with taxpayers in a way that is fair and impartial to taxpayers as well as the government to discuss potential settlements. Additionally, taxpayers can resolve their disputes by mail or secure messaging. Although, conferences are offered by telephone, video, the mode of meeting with Appeals is completely decided by the taxpayer. Recently, appeals expanded access to video conferencing to meet taxpayer needs during the COVID-19 pandemic. Further, taxpayers and representatives who prefer to meet with Appeals in person have the option to do so as, appeals has a presence in over 60 offices across 40 states where they can host in-person conferences.

Lawmakers have departed Washington to campaign before the November 6 elections and left undone is a long list of unfinished tax business.  In many ways, the last quarter of 2012 is similar to 2010, when Congress and the White House waited until the eleventh hour to extend expiring tax cuts. Like 2010, a host of individual and business tax incentives are scheduled to expire.  Unlike 2010, lawmakers are confronted with massive across-the-board spending cuts scheduled to take effect in 2013.

Lawmakers have departed Washington to campaign before the November 6 elections and left undone is a long list of unfinished tax business.  In many ways, the last quarter of 2012 is similar to 2010, when Congress and the White House waited until the eleventh hour to extend expiring tax cuts. Like 2010, a host of individual and business tax incentives are scheduled to expire.  Unlike 2010, lawmakers are confronted with massive across-the-board spending cuts scheduled to take effect in 2013.

Unfinished business

Since the start of 2012, the list of tax measures waiting for Congressional action has remained unchanged. Among the individual tax provisions scheduled to expire after 2012 are:

• Reduced individual income tax rates
• Reduced capital gains and dividend tax rates
• Temporary repeal of the limitation on itemized deductions and the personal exemption phaseout for higher income taxpayers
• Reduced estate, gift and generation-skipping transfer tax rates
• Enhancements to many education tax incentives, such as the American Opportunity Tax Credit, Coverdell education savings accounts, and more.

Also scheduled to expire at the end of 2012 is the payroll tax holiday.  The employee share of Social Security taxes is 4.2 percent rather than 6.2 percent, up to the Social Security earnings cap of $110,100 for 2012.  Self-employed individuals benefit from a similar reduction.

Additionally, many so-called tax extenders for individuals expired after 2011.  They include the state and local sales tax deduction, the teachers' classroom expense deduction, and more.  The most recent alternative minimum tax (AMT) "patch" expired after 2011.

The list of expiring or expired tax incentives for businesses is just as long.  They include:

• Enhanced Code Sec. 179 expensing (after 2012)
• 100 percent bonus depreciation (generally after 2011)
• 50 percent bonus depreciation (generally after 2012)
• Research tax credit (after 2011)
• Production tax credit for wind energy (after 2012)
• Enhanced Work Opportunity Tax Credit (WOTC) for veterans (after 2012)
• Regular WOTC (after 2011)
• A lengthy laundry list of business tax extenders, such as special expensing rules for television and film productions, the Indian employment credit, and more (after 2011).

Along with all of the expiring provisions are even more pending proposals. They include proposals by the White House to enact tax incentives to encourage employers to hire long-term unemployed individuals, impose a minimum tax on overseas profits and more. The likelihood of any of these proposals being enacted before year-end is slim, but they could be revisited in 2013 depending on the outcome of the November elections. Comprehensive tax reform, including any reduction in the individual tax rates below their 2012 levels and a reduction in the corporate tax rate, is also expected to wait until 2013 or beyond.

Behind the scenes talks

The lame-duck Congress, which will meet after the November elections, may tackle some or all of the expiring tax incentives, or it could do nothing and punt them to the next Congress.  Behind the scenes, some Democrats and Republicans in Congress are reportedly talking about a short-term extension of the expiring/expired provisions, for six months or one year, which would give lawmakers and the White House more time to reach an overall agreement.  However, the dynamic could and likely will change if the GOP takes the White House and wins control of the Senate.

In the Senate, Sen. Kent Conrad, D-ND, has told reporters that he and several other senators from both parties have been discussing whether or not to extend the expiring tax cuts. Conrad, who is retiring at the end of 2012, has acknowledged that Democrats and Republicans are far apart on revenue raisers and spending cuts.  Reports of informal talks among the members of the House Ways and Means Committee have also circulated but no concrete proposals have so far been revealed.

Sequestration

The imminent spending cuts (called sequestration) are the result of the Budget Control Act of 2011.  The 2011 Act imposes approximately $110 billion in spending cuts, impacting defense and non-defense spending, for 2013.  Almost every area of federal spending, including tax enforcement, will be affected. 

In recent months, some lawmakers have proposed to mitigate the spending cuts by raising revenues elsewhere.  One area targeted for tax increases is the oil and gas industry.  However, several attempts to repeal tax preferences for the oil and gas industry failed in Congress in 2012. 

Any extension of the expiring tax breaks will have to take into account the looming across-the-board spending cuts. Tax reform and debt reduction will go hand-in-hand.  However, it is unclear if debt reduction will drive tax reform or vice-versa.  Our office will keep you posted of developments.

Please contact our office if you have any questions about pending federal tax legislation.

In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.

In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.

Specified thresholds

For an individual, the tax will apply to the lesser of the taxpayer's NII, or the amount of "modified" adjusted gross income (AGI with foreign income added back) above a specified threshold, which is:

• $250,000 for married taxpayers filing jointly and a surviving spouse;
• $125,000 for married taxpayers filing separately;
• $200,000 for single and head of household taxpayers.

Examples. A single taxpayer has modified AGI of $220,000, including NII of $30,000. The tax applies to the lesser of $30,000 or ($220,000 minus $200,000), the specified threshold for single taxpayers. Thus, the tax applies to $20,000.

A single taxpayer has modified AGI of $150,000, including $60,000 of NII. Because the taxpayer's income is below the $200,000 threshold, the taxpayer does not owe the tax, despite having substantial NII.

For an estate or trust, the tax applies to the lesser of undistributed net income, or the excess of AGI over the dollar amount for the highest tax rate bracket for estates and trusts ($11,950 for 2013). Thus, the tax applies to a much lower amount for trusts and estates.

Application of tax

The tax applies to interest, dividends, annuities, royalties, and rents, and capital gains, unless derived from a trade or business. The tax also applies to income and gains from a passive trade or business.

Other items are excluded from NII and from the tax:  distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible 457 plans, for example. Items that are totally excluded from gross income, such as  distributions from a Roth IRA and interest on tax-exempt bonds, are excluded both from NII and from modified AGI.

The tax does not apply to nonresident aliens, charitable trusts, or corporations.

Tax planning techniques

Taxpayers are concerned about having to pay the tax. One technique for avoiding the tax is to sell off capital gain property in 2012, before the tax applies. This can be particularly useful if the taxpayer is facing a large capital gain from the sale of a principal residence (after taking the $250,000/$500,000 exclusion from income). Older taxpayers who do not want to sell their property may want to consider holding on to appreciated property until death, when the property gets a fair market value basis without being subject to income tax.

The technique of "gain harvesting" may be even more attractive if tax rates increase on dividends, capital gains, and AGI in 2013, with the potential expiration of the Bush-era tax cuts. However, the status of these tax rates will not be determined until after the election, potentially in a lame-duck Congressional session. It is also possible that Congress will simply extend existing tax rates for another year and "punt" the decision until 2013, as tax reform discussions heat up.

Taxpayers may also want to change the source of their income. Investing in tax-exempt bonds will be more attractive, since the interest income does not enter into AGI or NII. Converting a 401(k) account or traditional IRA to a Roth IRA will accomplish the same purpose. Income from a Roth conversion is not net investment income, although the income will increase modified AGI, which may put other income in danger of being subject to the 3.8 percent tax. Increasing deductible or pre-tax contributions to existing retirement plans can also lower income and help the taxpayer stay below the applicable threshold.

Trusts and estates should make a point of distributing their income to their beneficiaries. A trust's NII will be taxed at a low threshold (less than $12,000), while the income received by a beneficiary is taxed only if the much higher $200,000/$250,000 thresholds are exceeded.

Uncertainty

There was some uncertainty about the tax taking effect because of litigation challenging the health care law providing the tax, but a June 2012 Supreme Court decision upheld the law. The application of the tax is also uncertain because the Republican leadership has vowed to pursue repeal of the health care law if the Republicans win the presidency and take control of both houses of Congress in the November 2012 elections. But this is speculative. In the meantime, the Supreme Court decision guarantees that the tax will take effect on January 1, 2013.

These can be difficult decisions. While economic considerations for managing assets and income are important, it also makes sense for a taxpayer to look at the tax impact if the certain asset sales or shifts in investment portfolios are otherwise being considered.

When disaster strikes, a casualty tax loss may provide some comfort. A casualty is the damage or destruction of property resulting from an identifiable event that is sudden, unexpected, or unusual. Damage resulting from the progressive deterioration of property through a steadily operating cause would not be a casualty loss. A deductible loss can result from a number of events, such as fire, flood, storm (including hurricanes and tornadoes), or earthquake. Storm losses can involve damage from flooding or wind, for example. Other “sudden and unexpected events,” such as an automobile accident, also qualify as a casualty for tax purposes.

When disaster strikes, a casualty tax loss may provide some comfort. A casualty is the damage or destruction of property resulting from an identifiable event that is sudden, unexpected, or unusual. Damage resulting from the progressive deterioration of property through a steadily operating cause would not be a casualty loss. A deductible loss can result from a number of events, such as fire, flood, storm (including hurricanes and tornadoes), or earthquake. Storm losses can involve damage from flooding or wind, for example. Other “sudden and unexpected events,” such as an automobile accident, also qualify as a casualty for tax purposes.

According to the most recent reading of the U.S. Drought Monitor and other indicators, moderate to exceptional drought covered approximately 60 percent of the contiguous U.S. as of the end of August and is being compared to the droughts of the 1930’s, 1950’s and the summer of 1988. Unless a loss attributable to drought occurs in a trade or business or a for-profit transaction, however, it is generally not deductible. A loss must occur within a short period of time, for it to be deductible as a casualty loss. The IRS has said that most droughts lack the suddenness necessary for a casualty loss deduction. The conventional tax wisdom has been that, as a practical matter, a casualty loss should not be claimed unless there has been an officially declared water emergency or some general drought designation by the IRS. For example, a casualty loss deduction was allowed for structural damage to a house because of subsoil shrinkage in a 1977 Missouri drought that was declared a federal disaster. So far, the IRS has not spoken to the drought of 2012 but some guidance is expected to be announced in the near future.

Taxpayer has burden of proof

To deduct a casualty loss, the taxpayer must be able to show that there was a casualty loss and to justify the amount taken as a deduction. A taxpayer should be able to show: the type of casualty and its date of occurrence; that the loss was a direct result of the casualty; that the taxpayer owned the property (or was liable for the damage to the owner of the property); and whether there is a claim for reimbursement with a reasonable expectation of recovery.

Business property

The allowable deduction for business property destroyed in a casualty is usually different from the loss of personal property. If the property is used in a trade or business or other activity conducted for profit, the allowable deduction is the lesser of the property’s adjusted basis (before the casualty) or its decline in value because of the casualty. If business property is completely destroyed, the deduction is the full amount of the property’s adjusted basis, reduced by any insurance recovery, even if the basis exceeded the property’s value before the casualty.

Personal-use property

If property owned outside of the business or investment setting, like a personal residence, is damaged, the loss is the lesser of the property’s decline in value or its adjusted basis, reduced by insurance proceeds or other reimbursement. Unlike business property, if personal property is completely destroyed, the loss cannot exceed the decline in value from the casualty, even if this is less than the basis. Furthermore, the loss must be reduced by $100 per casualty, and is deductible only to the extent that net casualty and theft losses exceed 10 percent of the taxpayer’s adjusted gross income. Unlike businesses, however, individuals have the option of treating a casualty loss as occurring in the immediately prior year, thereby often allowing for a quick refund through filing an amended return.

“Timely” insurance claim

To deduct a personal casualty loss, the taxpayer must have filed a timely insurance claim. The loss may be disallowed if the taxpayer fails to file a claim. Any portion of the loss that is not covered by insurance is not subject to this rule.

A recent court case discusses the requirement to file a timely insurance claim. A homeowner suffered loss of his home from fire. The homeowner immediately notified his insurance company of the loss, was assigned a claim number, and had the insurance company inspect the damage. However, the insurance company denied the claim. One reason it gave was that the homeowner failed to provide a statement as to proof of loss within 60 days, as required under the policy. After the insurance company denied the claim, the homeowner took a casualty loss deduction on his amended tax return.

Taxpayer deduction upheld

The IRS denied the casualty loss deduction, claiming that the taxpayer had failed to file a “timely insurance claim” as required by the tax code. The Federal Court of Claims rejected the IRS’s action and allowed the claim. The court said it was clear that the homeowner had filed a claim with the insurance company and that this was sufficient to comply with the tax code. The company’s ultimate denial of the claim under the terms of the policy was not relevant.

If you have suffered a casualty, it is important that you claim the full amount of the tax deduction to which you are entitled. If you have any questions about casualty losses, please contact our office.

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA). The new IRS DTR is available through the website www.fafsa.gov.

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA). The new IRS DTR is available through the website www.fafsa.gov.

The FAFSA form is necessary for college-bound students and their parents who are applying for numerous federal government education programs or subsidies, such as the Pell Grant, low-interest federal student loans, and the Federal Work Study Program. Eligible taxpayers may use the tool for either the initial or the renewal FAFSA.

Completion of the FAFSA requires certain federal tax information such as the student and parents’ adjusted gross income, tax, and exemptions. The free IRS DTR tool enables applicants to automatically transfer their tax return information onto the FAFSA form. The tool will also increase the accuracy of the income information reported on the FAFSA form and minimize processing delays. Taxpayers who are eligible to use the DRT can access it one to two weeks after the federal income tax return is filed if the return is filed electronically. In the cases of a paper tax return, taxpayers may access the tool approximately six to eight weeks after filing.

Who can use the DRT?

To use the DRT to complete the 2012–2013 FAFSA, taxpayers must meet several prerequisites:

1. They must have filed a federal 2011 tax return;
2. Have a valid SSN;
3. Have a valid Federal Student Aid PIN; and
4. Have not changed marital status since December 31, 2011.

What if I don’t have a PIN?

If an individual does not have a Federal Student Aid PIN, he or she may apply for one beforehand through the FAFSA application process. An online application is available at www.pin.ed.gov.

What if I can’t use the DRT?

In some cases the IRS DRT is unavailable. The tool is not accessible for completion of the 2012-2013 FAFSA if either the student or parents:

1. Filed an amended 2011 tax return or did not file a 2011 tax return;
2. Filed their 2011 tax return as married, filing separately; or
3. Filed a foreign tax return or Puerto Rican tax return.

If a student cannot or chooses not to use the IRS DRT, that student, his or her parents or spouse can verify income information submitted to the Financial Aid Office through a tax transcript from the IRS. Applicants may request a transcript on IRS Form 4506-T, Request for Transcript of Tax Return. Transcripts may be requested online through www.irs.gov or by phone at 1-800-908-9946.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. The IRS will refund the overpayment when you file your return, but it will not pay interest on it. In other words, by overpaying tax to the IRS, you are in essence choosing to give the government an interest-free loan rather than invest your money somewhere else and make a profit.

When do I make estimated tax payments?

Individual estimated tax payments are generally made in four installments accompanying a completed Form 1040-ES, Estimated Tax for Individuals. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Am I required to make estimated tax payments?

Generally, you must pay estimated taxes in 2012 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return.  There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of Social Security taxes for the self-employed.

Suppose I owe only a relatively small amount of tax?

There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if I realize I have miscalculated my tax before the year ends?

An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can I do?

If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

Determining estimated taxes can be complicated, but the penalty can be avoided with proper attention. This office stands ready to assist you with this determination. Please contact us if we can help you determine whether you owe estimated taxes.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

Dependents

One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.

The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.

Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.

A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.

Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.

Alimony

Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.

Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.

There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.

Property

Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.

Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.

Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.

Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.

Retirement

When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.

Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.

Tax Prepayment and Joint Refunds

When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.

Legal and Other Expenses

To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.

Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Keeping it all in the family

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

"Reasonable compensation"

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The Electronic Federal Tax Payment System (EFTPS) is a simple way for businesses to make their federal tax payments. It is easy to use, fast, convenient, secure and accurate. It also saves business owners time and money in making federal tax payments because there are no last minute trips to the bank, no waiting lines, no envelopes, stamps, couriers, etc. And best of all, tax payments are initiated right from your office!

What is the EFTPS?

EFTPS is an electronic tax payment system through which businesses can make all of their federal tax deposits or payments. The system is available 24 hours a day, seven days a week for businesses to make their tax payments either through the use of their own PC, by telephone, or through a program offered by a financial institution.

What federal tax payments are covered by EFTPS?

Some taxpayers mistakenly assume that EFTPS applies only to the deposit of employment taxes. EFTPS has much broader reach. It can be used to make tax payments electronically for a long list of payment obligations:

• Form 720, Quarterly Federal Excise Tax Return;
• Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return;
• Form 941, Employer's Quarterly Federal Tax Return;
• Form 943, Employer's Annual Tax Return For Agricultural Employees;
• Form 945, Annual Return of Withheld Federal Income Tax;
• Form 990-C, Farmer's Cooperative Association Income Tax Return;
• Form 990-PF, Return of Private Foundation;
• Form 990-T, Exempt Organization Business Income Tax Return Section 4947(a)(1) Charitable Trust Treated as Private Foundation;
• Form 1041, Fiduciary Income Tax Return;
• Form 1042, Annual Withholding Tax Return for U.S. Sources of Income for Foreign Persons;
• Form 1120, U.S. Corporation Income Tax Return; and
• Form CT-1, Employer's Annual Railroad Retirement Tax Return.

How can I get started using EFTPS?

To enroll in EFTPS, the taxpayer must complete IRS Form 9779, Business Enrollment Form, and mailing it to the EFTPS Enrollment Center. To obtain a copy of IRS Form 9779 a taxpayer or practitioner can call EFTPS Customer Service at 1-800-945-8400 or 1-800-555-4477. The enrollment form may also be requested from the IRS Forms Distribution Center at1-800-829-3676.

After you complete and mail the enrollment form, EFTPS processes the enrollment and sends you a Confirmation Packet, which includes a step-by-step Payment Instruction Booklet. You will also receive a PIN under separate cover. Once the Confirmation Packet and the PIN are received, you can begin to make tax payments electronically.

What flexibility is available within the EFTPS for payment options?

There are two primary ways to make payment under EFTPS - directly to EFTPS or through a financial institution. If you wish to make payments directly to EFTPS, the "ACH debit method" should be selected on the enrollment form. Deposits and payments are made using this method by instructing EFTPS to move funds from the business bank account to the Treasury's account on a date you designate. You can instruct EFTPS by either calling a toll-free number, and using the automated telephone system, or by using a PC to initiate the payment.

If you instead elect to make payments through a financial institution, the "ACH credit method" should be chosen on the enrollment form. This method works by using a payment system offered by the financial institution through which you instruct the institution to electronically move funds from your account to a Treasury account.

Although the ACH debit and the ACH credit methods are the primary payment methods for EFTPS, a taxpayer may also choose the Same Day Payment Method. You should contact your financial institution to determine if it can make a same day payment.

If I provide the IRS with access to my bank account, can it access my account for any other purposes?

It is important to note you retain total control of when a payment is made under EFTPS because you initiate the process in all instances. In addition, at no time does the government or any other party have access to your account from which the deposits are made. The only way to authorize deposits or payments from your account is through use of the PIN that is given to you upon enrollment.

Many businesses have recognized the convenience of voluntary participation in the IRS's EFTPS program. If you are interested in discussing whether your business would also benefit from this program, please contact the office for a consultation.

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up. How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home?

If you are considering selling a home you've owned for years and have a lot of equity in - for example, you would like to move to a smaller place - you will want to figure out how much your potential capital gain will be on the sale. Moreover, perhaps you'd also like to know if you'll pay more taxes because you are moving to a less expensive home.

The homesale exclusion

First, you will not be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain. Under Code Sec. 121, $500,000($250,000 for single individuals and married taxpayers filing separately) in gain from the sale of a principal residence is generally excluded from income. Remember, however, that under the Economic Recovery Act of 2008, periods of "nonqualifying use" will reduce the amount of gain you can exclude from income.

Determining basis

In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence. The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be added to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

If you are considering selling your home, it pays to know in advance what the tax ramifications may be. If you need assistance determining the basis of your personal residence, please contact the office for more guidance.