New Tax Law Changes

On May 25th 2007, President Bush signed into law H.R. 2206 – the "U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007." The bill included a $120 billion emergency war supplemental funding bill for the current wars in Iraq and Afghanistan as well as numerous tax related law changes. Among the numerous provisions contained in H.R. 2206 are the "Fair Minimum Wage Act of 2007," and the "Small Business and Work Opportunity Tax Act of 2007" – a $4.84 billion small business tax relief package. Below are brief summaries of the important tax law changes.

IRS Liability Notices
The new law increases the time from 18 to 36 months in which the IRS has to notify individuals about a tax liability before interest and penalties are enforced. Therefore the IRS must cease charging interest and filing related penalties on a taxpayer’s liability if the IRS fails to notify the taxpayer about a liability within 36 months after the taxpayer filed the return.

Tax Return Preparer Penalties
This provision broadens and toughens tax return preparer penalties for returns prepared next year. It expands the scope of the penalty to include all types of tax returns and increases the penalty for irresponsible tax return preparation to a $1,000.00 fine or 50% of the income derived by the tax preparer for preparing the claim.

Levies to Collect Federal Employment Tax
The act provides that the rules requiring notice and a hearing opportunity before the IRS can issue a levy do not apply to disqualified employment tax levies, which are any levies to collect employment taxes for any period if the taxpayer requested a hearing for unpaid employment taxes.

Erroneous Refund Claims
The new law adopts a new penalty for filling erroneous refund claims and applies to all claims filed for the 2007 tax year. The act establishes a punishment for taxpayers claiming a refund for an excessive amount, and establishes a penalty of 20% of the excessive amount.

Bad Checks and Money Orders
The provision changes the penalty for bad checks and money orders and goes into effect for all checks and money orders received after May 25, 2007. The new penalty for passing bad checks or money orders less then $1,250.00 is a $25.00 fee or the amount of the check or money order whichever is less.

"Kiddie Tax" Changes
The new law expands the impact of the "kiddie tax" by raising the age for which it applies from under 18 to under 24 if a student.

Spouse Partnership May Elect Out of Partnership
The new rule allows unincorporated businesses owned jointly by a married couple to file their tax returns individually and not be treated as a partnership for tax purposes. All items in the taxpayer’s returns are divided between the spouses according to their respective interests in the venture, and each spouse’s share of income or loss from the business is taken into account in determining the spouse’s net earnings.

FICA Tip Credit
The new law modified the FICA Tip Credit so that the credit is determined based on a minimum wages of $5.15 per hour, allowing employers to receive the full tip credit despite of the Federal minimum wage increase. The provision also states that as the minimum wage increases, the amount of the credit will not be reduced.

Corporate Estimated Tax
The act increases the corporate estimated tax payment due in July, August, and September 2012 from 106.25% to 114.25% of the payment otherwise due.

Work Opportunity Credit
The passage of the new bill extends the credit by forty-four months. Now the credit is valid through August 31, 2011 for most targeted groups.

Disabled Veterans
There is an enhancement in the Work Opportunity Credit for employing certain disabled veterans who begin working for an employer after the passage of the bill.

WOTC and Tip Credit Offset by AMT
This new provision allows for use of the Work Opportunity Credit and the FICA Tip Credit to offset the Alternative Minimum Tax.

Section 179 Expensing
In addition to extending it through 2010, the provision increases the minimum amount a taxpayer can deduct annually as a Section 179 expense from $100,000.00 to $125,000.00. It also increases the $400,000.00 phase-out level to $500,000.00.

For more information on the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007 you can read the Senate Finance Committee’s summary, the House of Representatives’ technical explanation, or the Senate’s legislative text.