I can File Late, I've got a Refund Coming Anyway

Yesterday afternoon a colleague of mine sent me a link to this article from Roth & Company’s Tax Update Blog explaining how important it is to file your tax return on time, even if you are expecting a refund. Check out their article below, with an example of a Pennsylvania woman who had to learn the hard way that you should never wait to file a return.

Cynthia Doyle had a refund coming of $12,785.02 for 2002, including $10,000 she paid with an extension request. If she ever filed her 2002 return, the IRS had no record of receiving it, and Ms. Doyle apparently had no evidence that she had filed. The IRS contacted her in October 2006 asking for her return - conveniently after the statute for limitations for a 2006 refund had expired.

While the taxpayer said she had filed on time and had asked for the overpayment to be applied to her 2003 taxes, the IRS said it was up to her to prove it:

However, absent being eligible for an exception under § 7502, a taxpayer's own uncorroborated testimony to show timely mailing is not enough to establish a presumption of delivery under any view of the law.

In this case, plaintiff does not allege she used either registered or certified mail when she sent her original 2002 Tax Return. See Complaint at Paragraph 47 ("I have never sent tax returns certified mail..."). Absent proof of such mailing, plaintiff is ineligible for the § 7502(c) exception to the physical delivery rule... In view of the fact that plaintiff cannot establish that she timely mailed an original 2002 Tax Return, the physical delivery rule dictates that plaintiff's 2002 Tax Return was deemed filed when it was received by the IRS on October 30, 2006.

We can take away two things:

- If Ms. Brown thought she didn't have to file because she was overpaid, she was horribly mistaken.

- If Ms. Brown did file on time, spending an extra $5.10 for certified mail, return receipt requested would have really paid off.

Interest in the Cash for Clunkers Program Diminishing Already?

Just barely a week after launching, it looks like the public’s interest in the new Cash for Clunkers program is already fading. Although car dealerships and showrooms were overwhelmed with traffic earlier last week, when sales reportedly topped 250,000.

"We see that interest dying down," Edmunds.com Senior Analyst Michelle Krebs said in an interview on the consumer auto industry resource group's analysis of buyer intentions. "It's still high. It's better than pre-clunker levels, but it's off its peak."

Krebs said the original $1 billion funding for the program was "very low in relation to the size of the auto market." This, she said, created a "Gold Rush" mentality where consumers stormed dealers at the end of July and in the first days of August to cement discounts with rebate funding running low.

The "clunker" initiative offers rebates of up to $4,500 when consumers trade in older cars for more fuel efficient new ones. Dealers say buyers are trading in mainly sport utilities, pickups and other U.S.-made vehicles for fuel stingy foreign-made passenger cars.

Automakers credited "clunker" trade-ins for boosting July sales to the best annualized rate for 2009, a year in which carmakers have contended with a devastating decline in business. The horrid, recession-driven sales environment contributed to bankruptcies at General Motors Co and Chrysler this spring.

US, Swiss Cement Deal On Secret UBS Bank Accounts

From Huffington Post.com:

The Swiss and U.S. governments announced a deal Wednesday to settle American demands for the identities of suspected tax dodgers, despite Switzerland's vaunted bank secrecy. However, they kept all details under wraps, including how many of the 52,000 names sought by the IRS from banking giant UBS AG will be revealed.

Depending on the scale of the deal, it could be a new blow to Switzerland's reputation as a safe place to hide assets from the taxman back home.

Switzerland has long been under pressure from European neighbors and the U.S. to open its bank records for foreign tax authorities. The IRS case against UBS has been partly credited with pushing the Swiss government to agree in March to comply with tax investigation rules from the 30-nation Organization for Economic Cooperation and Development. UBS earlier this year named about 300 American clients in a separate case.

William Sharp, a Florida tax lawyer who represents American UBS clients, said he expects the agreement to allow Swiss authorities to interpret bank secrecy laws more broadly and allow a "substantial handover" of names.

"I would guess that the U.S. would not enter into this agreement in the absence of a major fine and penalty without having at least several hundred if not thousands of names turned over," Sharp said.

The IRS in February asked U.S. District Judge Alan S. Gold in Miami to force Zurich-based UBS to turn over names of some 52,000 American clients believed to be hiding nearly $15 billion in assets in secret accounts. UBS and the Swiss government had resisted, arguing that to do so would violate Swiss banking confidentiality laws that date back centuries.

The Swiss and U.S. governments announced in late July they had agreed in principle on major issues but released no details. They had hoped to present a final deal at a hearing Aug. 7, but resolving the differences took longer.

On Wednesday, lawyers for the U.S. and UBS told the judge in a brief conference call they had sealed the deal.

One Small Step for Federal Taxation, One Giant Leap for Same-Sex Equality

Earlier in the week the Tax Prof published a new blog entry explaining the recent revision to Section 2702 of the IRS code to apply to same sex couples. The article quotes the conclusion from a recent publication by Matthew Fry titled “One Small Step for Federal Taxation, One Giant Leap for Same-Sex Equality: Revising Section 2702 of the Internal Revenue Code to Apply Equally to All Marriages.” Check out the quote below.

This Comment suggests the revision of one specific provision of the federal wealth transfer taxation scheme as one small step in the direction of equality for all married couples, regardless of sexual orientation. It is true that this suggested change would be an economic setback for same-sex couples that currently use GRITs as a means of transferring wealth within their economic unit while avoiding tax liability. In the grand scheme of equality, however, many same-sex taxpayers might be grateful for the hint of federal recognition that has, for so long, been denied to their marriages and civil unions. Eventually every provision of the Internal Revenue Code should be revised to guarantee equal treatment of same-sex couples based upon the foundational principles of horizontal equity, taxation of the economic unit, and a recognition of--and taxation based upon--economic reality rather than labels and politics. Revision of the Internal Revenue Code in pursuit of legislators' guiding principles will result in a tax code with integrity, a code that treats all taxpayers under it equally and is not influenced by the political zeitgeist.

For more information on LGBT tax issues check out these two blog entries I published earlier this year: Taxes 101 For Domestic Parents & Same-Sex Couples and Top 9 Tax Tips for the LGBT Community.

Former Rabbi Charged in $35M Tax Fraud Scheme

From Web CPA:

A former Chicago rabbi and nine others were charged in a $35 million tax fraud conspiracy, accused of filing 3,300 false tax returns in the names of federal prison inmates.

Marvin Berkowitz, 62, who had moved to Israel in 2003 to avoid earlier tax fraud charges, was arrested in Jerusalem, while two of his sons and a son-in-law were detained in Chicago and Los Angeles. They and six other defendants were charged in the scheme to file the phony refund claims, causing the IRS to issue refunds totaling more than $1.5 million, while various states issued tax refunds totaling more than $2.5 million. Berkowitz directed the fraud ring from Jerusalem and allegedly caused at least $800,000 in tax refunds to be paid to, or for the benefit of, at least eight members of his family, according to prosecutors.

The 10 defendants were charged by a Chicago grand jury in a 41-count indictment that was returned in February and unsealed Monday. The indictment remained sealed since February to coordinate the investigation and arrests with Israel.

Nevada Renews Push to Poach Businesses From CA

In this economy, many states are beginning to play hardball in order to generate more revenue. A prime example is Nevada’s recently renewed ad campaign to “poach” business owners looking to move from California. According to one of their commercials business owners can “get the monkey off your back relocate to Las Vegas. No corporate income tax, no personal income tax and low workers compensation fees. Kiss California red tape and high taxes goodbye.” Check out the following article from the Associated Press on Nevada’s newest efforts to entice business owners.

Talk about kicking a neighbor while he's down: Nevada is spending $250,000 for an ad campaign that compares California legislators to talking chimps and tells business owners they can "kiss their assets goodbye" if they stay put.

It's the latest salvo in a generally friendly rivalry that's taken on a harder edge with both states among the recession's hardest-hit areas and desperately fighting to stay afloat — California recently had to issue more than $1 billion in IOUs to survive a prolonged budget crisis while trying to slash a $26.3 billion debt.

Nevada leaders paint their clever but biting campaign — aimed at California business owners considering a move — as simply a matter of helping the Silver State fight high unemployment and diversify an economy heavily dependent on struggling casinos and tourism. Nevada business advocates are pitting their state's low taxes against rising workers' compensation rates and fears of bankruptcy in California.

But there is clearly a certain amount of grim glee at getting under the skin of their Golden State counterparts. Las Vegas Mayor Oscar Goodman said he can't wait for the new ads and a chance to needle California leaders about picking off companies and jobs.

"It's going to drive them bonkers," Goodman said. "We're going to crush them."

He and others say they want to erect one billboard outside California's state Capitol building in Sacramento.

Watchdog Says Bad Assets Still Threaten Banks

Despite numerous reports that the TARP program had stabled U.S. financial institutions, a new congressional watchdog report has been published asserting that many banks are still holding onto billions of dollars in bad loans. The report claims that a sharp rise in unemployment or a drop in the real estate values could cause the entire banking system to loose its footing once again.

“In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses - as many economists fear - the banking system could again lose its footing, the panel says in a report to be released Tuesday.”

"The financial system (remains) vulnerable to the crisis conditions that (the bailout) was meant to fix," the panel wrote in a draft copy of Tuesday's report.

The Congressional Oversight Panel was created as part of the Troubled Asset Relief Program, or TARP. It is designed to provide an additional layer of oversight, beyond the Special Inspector General for the TARP and regular audits by the Government Accountability Office.

The report says many of the Obama administration's financial stability efforts are working - including infusions of new capital for banks, heightened scrutiny of capital ratios, "stress-testing" of large financial firms. It also pointed to a public-private investment plan designed to buy up bad assets that has yet to get off the ground.

Continued here…

Dollar Adds to Gains As Investors Mull U.S. Jobs Data

From MarketWatch.com:

"This past Friday may have been a turning point in that relationship and we need to be alert to more traditional fundamental factors coming back to drive foreign exchange," said Brian Dolan, chief currency strategist at Forex. "A brightening U.S. outlook may increasingly begin to support the dollar."

The dollar index, a measure of the greenback against a trade-weighted basket of currencies, rose to 79.365 from 78.940 in late North American trading on Friday.

The euro traded at $1.4135 versus the dollar, down from $1.4179 Friday.

Since the credit crisis reached its peak, the dollar has tended to lose ground on favorable economic news and rallying equity markets, while rising on bouts of safe-haven buying on negative news and falling equities.

The U.S. currency rose on Friday along with equities, indicating a correlation directly to the economic outlook may be reasserting itself. More typically, the dollar rises along with positive economic news -- and the potential for rising interest rates, boosting yields on the country's bonds -- as those qualities make a nation's currency more attractive compared to other countries where the growth outlook and interest rates may not be as appealing to investors.

In that regard, the U.S. looks more likely to emerge from the recession before both Europe and Japan, making the dollar more attractive than the euro and yen.

"If currencies were to trade on cyclical differences from here on, the U.S. dollar would be set for clear outperformance," said currency strategists at Citigroup. The firm expects the U.S. economy to grow 2.1% in 2010, which the euro-zone grows just 0.5%.

All markets are also on edge before the Federal Reserve's monetary policy meeting on Tuesday and Wednesday. Analysts expect little change to officials' statement about leaving interest rates unchanged for an extended time. See story on Fed rate policy.

Even As Kids Pack to Go to College, It's Not Too Late For Aid

Earlier today I came across this great USA Today article reminding students and parents that even this close to school season, financial aid is still available for students. The article also offers several helpful tips on how to finance higher education in the tough economy, check it out below.

Few things are more demoralizing than receiving a bill that exceeds the amount of money in your bank account. Especially if your child's future hangs in the balance.

That's the predicament facing many cash-strapped parents of college students as bills for the upcoming semester start to arrive in the mail.

Fortunately, even at this late date, you have options. Among them:

Extended-payment plans. These plans let you pay your tuition bill in monthly installments instead of one lump sum. You'll typically pay a fee of $50 to $100 to set up a payment plan. The plans are provided through colleges and universities, so contact your school's financial aid office for more information.

You don't have to put the entire amount you owe on a payment plan, says Thomas Blair, director of financial aid at Roanoke College in Salem, VA. But paying even a small amount of the balance in monthly installments will reduce the amount you have to borrow, he says.

Federal student loans. Unsubsidized federal Stafford loans are available to all full-time students, regardless of financial need. They carry a fixed rate of 6.8%. For the 2009-10 academic year, dependent students can borrow up to $5,500 for their freshman year. Sophomores can borrow up to $6,500 and juniors and seniors can borrow up to $7,500.

To qualify for a federal student loan, you must fill out the federal Free Application for Federal Student Aid, or FAFSA. You can find the form online at www.fafsa.ed.gov.

PLUS loans. If federal loans won't cover all of your costs, you can apply for a federally guaranteed Parent Loan for Undergraduate Students to fill in the gap. Parents are responsible for repaying the loans, but have the option of deferring payments until the child finishes school. PLUS loans carry a fixed rate of 8.5%.

A Deeper Look at the Cash for Clunkers Program

The Federal government’s new “Cash for Clunkers” program has been getting a lot of attention over the past week. The phrase was trending on Twitter most of last week, and even car dealerships are beginning to use the phrase in commercials and billboards. However, with rumors of a depleted budget, and myths about qualifying, many taxpayers are getting frustrated and confused. To help readers of my blog better understand the program, and see if they qualify, I have put together the following helpful article.

What is It?

Officially known as the Car Allowance Rebate Systems – or "CARS" – the programs was signed in to law by President Obama on June 24th, 2009. Taking examples from similar programs through out Europe, the American version was designed to encourage taxpayers to trade in their high gas-mileage (less than 18 mpg) vehicles for more efficient new automobiles. Depending on how high the new vehicles mileage is the rebate is either $3,500 or $4,500.

Not a Tax Credit

Unlike the Federal incentives for first time home buyers, the Cash for Clunkers program is not a tax credit or deduction. In fact, it is being managed the U.S. Department of Transportation, not the Internal Revenue Service. When a qualifying taxpayer goes to buy a car, the dealership will automatically credit the rebate towards the purchase price. You do not need to claim it on your income tax return, you do not need to request the rebate; the dealership should handle everything.

Who Qualifies?

Qualifying for the Cash for Clunkers program actually has more to do with the car than the car owner, as it turns out. Generally speaking, to qualify your car must have a gas mileage of less than 18 mpg, and be no more than 25 years old. However, CARS has put together a list of the specific vehicles on the market that qualify for the program, click here to download it in PDF. You will also need to provide proof that you were both the registered owner and had insurance on the vehicle for one full year.

New Vehicle Restrictions

If your old vehicle is eligible for the credit, and you can provide proof of ownership and insurance, then you are now ready to begin looking for your new ride! However, remember that you new car needs to meet specific restrictions as well. It must be a new 2008-2010 model, cost no more then $45,000, and it must be a car or truck (i.e. no motorcycles, mopeds, etc.)

Tax Debate

In addition to confusion over taxpayers claiming the rebate, many dealerships have also been confused about the taxes related to the Cash for Clunkers program. In the initial bill, lawmakers apparently forgot to specify whether dealerships had to pay taxes on Cash for Clunkers car deals. Luckily, the mistake was fixed quickly, and car dealerships were disappointed to learn that Cash for Clunkers rebates would indeed need to be considered taxable income. For consumers though, the rebate does not need to be counted as taxable income.

Extension from Congress

Last week there was a lot of speculation that the program had ran out of funds only a few days after it’s launch. However, although the initial $1 billion approved by the President reportedly did not run out, congress has already added another $2 billion to the program. The decision to add more funding to this highly popular rebate system was quick, and mostly bipartisan.

Premature Car Sales

Although the sales made during the Cash for Clunkers program will stimulate car dealerships instantly, some experts warn that these sales were ones that would have been made in the coming months anyways. Meaning that auto sales would likely drop once the program expires. Some bloggers suggest that although the "adrenaline shot" of recovery is certainly useful, the sudden drop in sales a few months away could hurt the slowly recovering economy.

Stimulated Automakers

In addition to encouraging Americans to get behind the wheels of more efficient vehicles, one of the biggest purposes of the Cash for Clunkers programs was to stimulate the struggling auto industry. Thousands of American taxpayers are employed by the auto industry, and by increasing care sales the government is hoping that it will help with unemployment problems. There has been debate about which car manufacturers are being stimulated, since cars produced by Toyota and Honda (both Japanese automakers) both have vehicles making the top list of Cash for Clunkers trade-ins. However, it is important to remember that even though these companies are based out of the country they do employ thousands of American workers in assembly plans and dealerships. Furthermore, Ford and GM both made up a majority of the top 10 list.

Is it Truly Eco-Friendly?

The main goal of this program was supposedly to lower American fuel emissions by encouraging taxpayers to buy more efficient vehicles. However, many argue that it is not having the desired effect. According to CNN, private reports show that most people receiving a Cash for Clunker rebate use it to buy a truck or SUV. Additionally, research for the University of Berkeley shows that most of the “clunkers” being traded in were not being used as primary vehicles. Instead, families are trading in their secondary vehicles which they rarely use.

Little, if any Help for Low Income Americans

Although the Cash for Clunkers rebate system was designed to help low income Americans, many suggest it is having the opposite effect. When a vehicle is traded in under the program, it must be recycled and NOT resold. Therefore, the inventory of used vehicles will decline and many predict that prices of user cars will increase as a result. Since you cannot buy a new car for only $4,500, and many low income families buy used vehicles, many are worried that the program will have a negative impact on struggling Americans. Additionally, according to the Heritage Foundation found that “the average income of those purchasing new cars under the program was $57,700--only slightly below the $61,000 for all new car buyers.”

Questions for the Tax Lady: August 10th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an e-mail, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Do you know if the government is planning to do any type of first time home buyer tax credit next year like they did this year?

This is a very tricky question to answer because no one really can predict exactly what changes Congress will make to the tax code. Currently to be eligible for the credit you must purchase a home before December 1^st, 2009 and there has not been any serious mention of extending. Additionally, as signs continue to roll in that the housing market crisis is leveling off, funding another huge tax credit tax credit for home buyers probably is not the Federal government’s top priority.

Question #2: If I sold my house in 2007 will I be eligible for the first time homebuyer’s credit?

No. Unfortunately, the credit is only available to taxpayers who did not own a home three years prior to the closing date on the new home. However, if you do buy a house you will be eligible to deduct some of your closing cost, points, fees, etc., and remember that you can also deduct your mortgage interest.

Question #3: How do I know if my car qualifies for the Cash for Clunkers rebate?

First of all in order to qualify for the Cash for Clunkers program you need to have a clear title, and have proof that you were both the registered owner and had insurance on the vehicle for one full year. The program also only applies to a specific list of cars. Click here to download a PDF from Cars.gov of the vehicles that qualify.

Prepare Audit-Ready Tax Returns

Last week a new article I penned for WomenEntrepreneur.com titled “Prepare Audit-Ready Tax Returns: Getting audited is unlikely, and you can reduce the chances further by steering clear of IRS 'red flags' was published in their Money and Finance section. In the column I explain the three different types of audits the IRS conduct, and how you can prepare returns that will stand up to an audit. Check out the introduction of the article below, or read the full version here.

"Audit."

It just might be the most terrifying word in the English language. It can strike fear in the heart of even the most diligent taxpayer. But listen up, ladies. Audits are not the life-shattering events everyone thinks they are. The more you know about the audit process, the less you have to fear.

An audit is simply the process of the IRS closely reviewing your tax return and backup documentation as part of the agency's compliance checking. Think of it as a government quality-control tool, much like the quality-assurance checking you do in your own business.

What If Cash for Clunkers Was a Tax Credit?

While auto dealerships and consumers continue to enjoy the benefits of the Cash for Clunker’s program, Gerald Prante of The Tax Foundation Blog has put together a new post explaining what would happen if the program were a federal tax credit. Check out the text of his post below.

Critics of the "Cash for Clunkers" program are out in full force, claiming that its problems are evidence that government is inefficient and that it is further proof that government shouldn't get involved in something as important as health care.

But suppose that instead of the government providing $4,500 in outlays per qualifying car in a program that is being administered by the Department of Transportation, the Congress instituted a $4,500 refundable income tax credit that met the exact same qualifying criteria as the current program, yet was administered by the IRS. Would the tax credit be good fiscal policy merely because it's mostly classified as a tax cut as opposed to an "outlay?"

The economic difference between these two scenarios is zero (except for possibly differences in administrative costs). Both policies would be financed by deficits, leading to either lower spending in the future or higher taxes in the future.

Despite this fact, it's likely that many of these same critics of the $4,500 cash for clunker outlay who are citing its problems as proof government doesn't work would have supported such a $4,500 cash for clunker tax credit merely because it would have been classified as a "tax cut" instead of an "outlay."

For these people, tax policy is all about semantics instead of understanding the economic effects of differing fiscal policies.

Geithner Asks Congress to Increase Federal Debt Limit

From the Wall Street Journal:

U.S. Treasury Secretary Timothy Geithner asked Congress to increase the $12.1 trillion debt limit on Friday, saying it is "critically important" that they act in the next two months.

Mr. Geithner, in a letter to U.S. lawmakers, said that the Treasury projects that the current debt limit could be reached as early mid-October. Increasing the limit is important to instilling confidence in global investors, Mr. Geithner said.

The Treasury didn't request a specific increase in the letter.

"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Mr. Geithner said in a letter to lawmakers.

Mr. Geithner said that it is "clearly a moment in our history" that requires support from both Democrats and Republicans for the increase.

"Congress has never failed to raise the debt limit when necessary," Mr. Geithner said.

The non-partisan Congressional Budget Office said Thursday the federal government's budget deficit reached $1.3 trillion through the first ten months of fiscal 2009, on track to reach a record high of $1.8 trillion for the 12-month period.

Good News on Unemployment Rates

As foreclosures begin to stabilize in certain parts of the country, it looks like there is finally some good news on the unemployment front. According to new reports from the Labor Department, claims for state unemployment insurance fell 38,000 to a seasonally adjusted 550,000 in the week ended August 1 from 588,000 the prior week.

A Labor Department official described the period under review as "uneventful" and said it appeared the distortions to the weekly data caused by the auto plant closures were out of the way. Analysts polled by Reuters had forecast new claims to edge down to 580,000 last week.

U.S. stock index futures extended gains on the data, while government bond prices slipped.

"The claims data are another sign that the recession could be behind us," said Kevin Flanagan, fixed-income strategist at Global Wealth Management, Morgan Stanley in Purchase, New York.

"I am optimistic that a recovery is in the process of beginning, but we will need to see continued improvement in claims going through (below) the 500,000 level before the consumer is willing to come on board and be part of the recovery."

Analysts said the report also bodes well for July non-farm payrolls data due on Friday.

"We should see a decline of 300,000. It's a big step in the right direction in the labor market," said Lindsey Piegza, market analyst at FTN Financial in New York.

Credit Card Defaults Should Not Result in DOI Income

A few weeks ago I posted an entry titled The Hidden Problems with Forgiven Credit Card Debt that explained how forgiven credit card debt is actually considered taxable income in the eyes of the IRS. In the entry I explained how this issue has created unnecessary financial hardship for many, and it looks like the issue is finally gaining more attention. Yesterday I came across an interesting study by Richard C.E. Beck of New York Law School via the Tax Professor. Beck’s publication is titled “The Tax Treatment of Cancelled Interest and Penalties on Consumer Debt” and it explains why forgiven debt is taxable, and what can be excluded. Check out the abstract below, or click here to download the full PDF.

When defaulted credit card debt is cancelled, only the forgiven principal is taxable as COD income. Cancelled interest and penalties is not taxable income unless the items would have been deductible, and thus the Tax Court's recent decisions in Payne v. Commissioner, T.C. Memo. 2008-66, and Hahn v. Commissioner, T.C. Memo. 2007-75, are erroneous. Cancelled penalties are not taxable because the borrower has received no loan proceeds, and cancelled interest is not taxable because it is in effect simply a price adjustment for the use of money. Currently required 1099-C reporting is defective because it does not require splitting out cancelled principal. Taxpayers are being unjustly overtaxed because forgiven credit card debt often consists of amounts of interest and penalties which are equal or greater than the amount of principal.

Small Business Tax Mistakes to Avoid

Yesterday the Roni Deutch Tax Center – Tax Help Blog posted an entry with the top 10 small business tax mistakes to avoid. I’ve included a few items from the list below, or click here to see all 10 items on the list.

Independent Contractors

Since payroll taxes can add up quickly, some business owners will do everything they can to avoid them. However, this is a big mistake, and can lead to fines and penalties. One tactic that is commonly used is to hire all staff as independent contractors, even when they should be classified as wage earning employees. However, too many independent contractors is a huge red flag to the IRS, and in order to avoid penalties you will need to prove to the IRS that they all meet the rules for the classification. Even if the employees agree to the situation, the IRS may still call your bluff and audit you.

Payroll Taxes

Speaking of payroll taxes, as a business owner you need to understand how payroll taxes work, and how to stay compliant with the IRS in how you withhold and pay them. Since you take taxes out of your employees’ paychecks, it is then your duty to pay them to both the IRS and your states tax department.

Calculations, Calculations

Even if you avoid the rest of these mistakes, making a simple miscalculation can cause a lot of problems. It is of the utmost importance to be correct when calculating your tax payments and yearly tax return. Even if you do calculate the correct amount, the numbers all need to be typed or neatly written on all forms. If you do make a miscalculation on a quarterly payment, then you are going to have to pay the difference to the IRS when you file your full return in April.

Throwing Out Receipts

One of the biggest mistakes a small business owner can make is to throw away receipts for business expenses. Although regular wage earning taxpayers can throw out any receipts they wish, business owners need to be able to verify any purchases you deduct from your taxable income.

Improper Budgeting and Banking

You need to remember to keep your business and personal finances separate. One of the biggest tax mistakes you can make as a business owner is to intermingle your business and personal bank accounts, expenses, or finances. The IRS can monitor your bank accounts, and if they see you are not keeping your business and personal purchases then they are going to want to examine each one during an audit.

US Food Stamp List Tops 34 Million for First Time

From Forbes.com:

For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression

Enrollment surged by 2 percent to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.

It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2 percent.

Food stamp enrollment is highest during times of economic stress. The U.S. unemployment rate of 9.5 percent is the highest in 26 years.

Average benefit was $133.65 in May per person. The economic stimulus package enacted earlier this year included a temporary increase in food stamp benefits of $80 a month for a family of four.

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Budget Cuts Devastate California Higher Education

From the Associated Press:

When California college students return to campus this fall, they'll find crowded classrooms, less access to faculty and counselors, fewer campus services and more difficulty getting classes they need to graduate — all while paying higher fees.

The state's financial crisis is battering its world-renowned system of higher education, reducing college opportunities for residents and threatening California's economic recovery.

Faced with steep declines in tax revenue, states are reducing funding to public colleges and universities across the country. That could hamper the nation's rebound from a deep recession and undermine President Barack Obama's goal of making the U.S. the world leader in college graduates by 2020, experts say.

"It's going to be harder for me to continue to be in school," said Nancy Santana, 25, a single mother who attends San Diego's Miramar College and worries her financial aid will be reduced. "I may be forced to cut school and find a job without a degree."

No state is cutting more deeply than California, which has more than 3 million students attending college.

To close its massive budget deficit, the state has slashed funding to its 110 community colleges, the 23-campus California State University and the 10-campus University of California, one of the nation's leading research institutions.

The schools have responded by boosting fees, turning away record numbers of students, expanding class sizes, eliminating programs, laying off staff, and furloughing professors and other employees.

Missouri Sales Tax Holiday this Weekend

As I blogged about recently, back to school sales tax holidays are happening in states across the country. This weekend nearly a dozen states have their own programs, including: Iowa, Oklahoma, Alabama, Louisiana, Missouri, New Mexico, North Carolina, South Carolina, Tennessee, and Virginia. If you see your state on the list then be sure to check out my blog entry to find out what items are eligible.

KasasCity.com wrote up a helpful reminder of Missouri’s sales tax holiday and have also included information about a few communities in Missouri who have chosen not to participate this yea. Check out their article below.

Missouri’s sales tax holiday will run from 12:01 a.m. Friday through midnight Sunday. During the holiday, certain back-to-school purchases, such as clothing, school supplies and computers, are exempt from sales tax. The sales tax holiday applies to state sales taxes and local sales taxes, if the municipality chooses to participate.

However, several Kansas City area communities have opted out this year, including Claycomo, North Kansas City, Oak Grove, Peculiar, Platte City, Platte Woods, Riverside and Sugar Creek. Those cities will still collect local sales taxes.

Ray County also has opted out.

Battle on the Home Front

The ABA Journal put together an-depth piece on families and individuals dealing with foreclosure, bankruptcy, and debt settlement because of the recession. The article starts by telling the story of Paul Vachon and his wife, who were forced both file for bankruptcy and let their house foreclose without any other options.

For 12 years, Paul Vachon lived with his wife and son in a four-bedroom bungalow in one of the nicer suburbs of Detroit. And he had a good job, selling higher-end furniture.

Then, in mid-2007, the U.S. economy collapsed. Detroit was hit particularly hard, as was Vachon’s business. “People in the area, if they are worried about the future of the auto industry,” he says, “are much less likely to spend $700 to $800 for a bedroom set.”

Soon Vachon, 50, had trouble paying his bills. “I was falling behind each month,” he says. “My wife and I were cutting back on our expenses, but I had to keep going into my savings to pay my mortgage. Then my savings ran out.” He says the bank started sending threatening letters after he missed his mortgage payment in February 2008.

Vachon says he couldn’t get the bank to seriously consider a modification of his mortgage loan, and he couldn’t ask any other lenders to refinance his mortgage because the market value of his house had plummeted to less than the value of his home loan.

In the face of their mounting finan­cial burdens, Vachon and his wife, Sheryl, filed for bankruptcy in February. It was a bitter pill.

Continue reading at ABA Journal.com…

Does the IRS Owe You Money?

The IRS sent out some helpful tips to their subscribers yesterday, reminding taxpayers to file late returns in order to claim potential refund money from the IRS. There is a three-year deadline to collect your refunds, so time may be running out. Check out the text of the IRS’ newsletter below.

Who couldn’t use a little extra cash this summer! The IRS may have some money for you.

If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should contact the IRS to check the status of your refund and confirm your current address.

Unclaimed Refunds

Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

• To collect this money a return must be filed with the IRS no later than three years from the due date of the return.
• If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
• There is no penalty assessed by the IRS for filing a late return qualifying for a refund.
• Current and prior year tax forms and instructions are available on the Forms and Publications web page of IRS.gov or by calling 800-TAX-FORM (800-829-3676).
• Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov.

Undeliverable Refunds

Were you expecting a refund check but didn't get it?

• Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
• You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.
• You can also ensure the IRS has your correct address by filing Form 8822, Change of Address, which is available on IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).
• If you do not have access to the Internet and think you may be missing a refund, you should first check your records or contact your tax preparer. If your refund information appears correct, call the IRS toll-free assistance line at 800-829-1040 to check the status of your refund and confirm your address.

IRS Alerts Public to New Identity Theft Scams

The IRS has recently become aware that a handful of new tax scams have popped up using their official logo, name, and even website URL to trick taxpayers into believing they are dealing with a federal agency. Unfortunately, after being fooled these taxpayers will have their identities stolen, which can quickly turn into an expensive mistake. To help American taxpayers the IRS has put out this new press release with details on these new scams, and advice on how to avoid them. Since their article is so in-depth and informative, I wanted to make sure all of my readers had a chance to learn from it. Check out details of the various scams the IRS is warning about below.

Making Work Pay Refund

This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit.

Inherited Funds / Lottery Winnings / Cash Consignment

In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.

Form W-8BEN

In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include nationality, passport number, bank account and PIN numbers, spouse’s name and mother’s maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or may make up a new form number, such as W-4100B2.

They either e-mail or fax the form or letter. If only a letter, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer.

In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information.

Fraudulent First-Time Homebuyer Credit Leads to Prosecution

As I have mentioned before, the IRS has been aggressive in going after people who are falsely claiming the first-time homebuyer credit. In fact, yesterday they announced their first successful prosecution related to the fraud. They are hoping that in doing so they can send out a warning message to taxpayers across the country.

According to the IRS, on Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.

Foreclosures Stabilize In California, Florida, and Arizona

There is more hope that the worst of the recession is over as new evidence shows foreclosures in California, Arizona, and Florida are finally stabilizing. The three states were among those hit hardest by the real estate crisis, which makes their rebound all the more exciting. Check out the following snippet from an Associated Press story on this new data.

Even as Americans suffer rising unemployment, foreclosure rates in three states hit hardest by the housing bust -- California, Arizona and Florida -- stabilized in June, offering hope that the worst of the real estate crisis is over, according to The Associated Press' monthly analysis of economic stress in more than 3,100 U.S. counties.

The latest results of AP's Economic Stress Index show foreclosure and bankruptcy rates held steady from May in some states. Yet mounting unemployment is hampering an economic recovery in some regions, especially the Southeast and industrial Midwest.

The AP calculates a score from 1 to 100 based on each county's unemployment, foreclosure and bankruptcy rates. The higher the score, the higher the economic stress. The average county's Stress score rose to 10.6 in June, up from 10 in May, mainly because of rising unemployment.

In June 2008, the average county's Stress score was 6.7. The pain was lower then because the economy was still expanding. In fact, the second quarter of 2008 was the last time the economy grew.

Bankruptcy and IRS Tax Issues

Every month thousands of taxpayers call my law firm for help with IRS back tax debts. We get hundreds and hundreds of questions on a weekly basis, but one of the most common is whether tax debts can be discharged through bankruptcy or not. Although the exact “yes” or “no” answer will depend on your unique financial situation, the attorneys of my law firm have put together the following helpful article on bankruptcy and IRS tax issues.

Chapter 7 vs. Chapter 13

The two common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (readjustment of debts). Although each are governed by their own set of requirements and conditions, tax debts are generally treated similarly under both proceedings. However, the basic concepts behind each bankruptcy type will dictate how the debts are settled.

In general – under Chapter 7 –if the debts meet all of the conditions below, then they can be discharged during the bankruptcy proceedings, but if even one qualification is not met, then the debts will remain after the bankruptcy. However – under Chapter 13 – there is almost always a distribution to creditors. Therefore, the court appointed trustee must negotiate with the IRS and decide on a settlement.

Qualifications for Discharge

Although many taxpayers are under the impression that tax debts cannot be discharged, some actually can! However, in order for tax debts to qualify to be discharged, they must meet a hefty list of requirements. According to bankruptcy laws, the follow conditions must be met:

1. Tax Return Filed

Even if you are unable to pay the taxes due, you must still file a tax return before a tax debt can be considered for discharge. Additionally, the tax return for the tax debt that you want discharged must have been filed at least two years prior to the bankruptcy filing, regardless of when the returns were originally due.

Continued at Roni Deutch.com…

10 Tips for Anyone Hoping to Open a Business in Today's Economy

Starting up your own business is stressful enough with out having to worry about the poor economy. However, you should not let a bad economy stop you from going after your dreams. With the right guidance and preparation, your dreams of being an entrepreneur can still become reality.

I opened my law firm 18 years ago and my franchising business 3 years ago. My franchising business, the Roni Deutch Tax Center, has helped Americans successfully open and operate their own tax preparation businesses since opening its own doors. Everywhere I go people always ask me advice on how they too can become an entrepreneur, and to help all of you looking for some advice on the topic I have put together the following list of tips for any one hoping to open a business in today’s economy.

1. Business Plan

No matter what sort of business you are starting, even if it is a franchise concept, a well-written business plan is a must. It should outline the details of your start-up plan, and contain a detailed outline of your projected first year or two in business. It should include estimates of all costs related to your business, and how you plan to turn a profit. Preparing an in-depth business plan is one of the most important first steps you can take on your journey, but putting one together is much easier said then done. If you are new to business then you might want to check out a few books on the topic, or even take a business class at a local community college.

2. Know your Market

Before you begin looking at locations for your business, you need to make sure you research the industry thoroughly. Are other similar concepts thriving or failing in the current economy? What are the average success rates? How can you make sure your business stands apart from the competition? These are all questions you should ask your self while researching your industry.

3. Put in the Time

Opening and growing a new business is no easy task, and once you commit to the concept you need to remember that it is going to take a lot of effort on your part. If you are used to working a regular eight-hour shift at your job, then you are going to be in for a big surprise. Even to this day, I still put in the occasional 12-hour workday. When it’s your business there is no time card to punch, and you need to be able to commit to putting in tons of time if you want your business to be a success.

4. Properly Calculate Costs

Before you purchase any expensive new equipment for your new business, you need to make sure you estimate all of the costs you are going to need to get your business off the ground. If you over spend in the first few weeks, then you may find yourself without enough money for rent a few months down the line.

5. Start at Home

If you are hoping to open a business that does not require your clients to come in to your store or office, then consider starting a home business. Without having to pay rent for an office you can save money, and you might also be able to qualify to claim a home office deduction. It may not be as grand as renting out a high-rise office, but it will help cut costs and allow you to expand in the future. Eighteen years ago I started my law firm as a home based business and today it is the largest law firm in the nation of it’s kind.

6. Take your Time with Loans

Getting a small start-up loan is not uncommon, but you want to be sure and take your time before signing any papers. You will want to wait until you have a complete business plan so that you do not underestimate your total costs. Additionally, you might even qualify for a small business grant that can help reduce the amount you need to borrow.

7. Hire in Steps

Hiring a full work force before you even open your front door is almost always a bad idea. Although you do not want to get caught off guard with an insufficient working force, having to pay employees who have nothing to do can quickly drain your bank account. Hire slowly to avoid taking on too much too soon. You could even hire independent contractors to help out until you have the need for a part or full time employee.

8. Pamper First Clients

Your first few customers are very important, and you will want to be sure to take extra special care of them. You should also feel free to ask them for feedback, and if they seem interested you can even request a testimonial about your product and/or services.

9. Wait to Incorporate

In getting your business off the ground, you need to make sure to never get ahead of yourself. Incorporating your business can be exciting, but it might not always be the best financial move for you. Stay small as long as you can, and before deciding to change your business structure make absolutely sure it will benefit you in the long run.

10. Always Look for Ways to Cut Costs

Opening a business in today’s economy is likely to be difficult, and my best advice for new entrepreneurs is to always be on the look out for ways to save money. When you book a hotel or business related travel, always ask for a discount. When you are looking to hire a contractor or make a large purchase, always do your research and get multiple estimates. If you commit to being frugal now, then it will help you expand and grow your business in the future.

Questions for the Tax Lady: August 3rd, 2009

Good morning everyone! Since today is Monday I have looked through questions being asked on Twitter and Avvo and selected a few to answer. As I have mentioned before, I am making a weekly effort to answer tax related questions that I come across. I am also encouraging people to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Is there a statute of limitations on Federal income taxes owed?

Yes, generally the IRS statute of limitations is 10 years, unless they renew it. Check out article on statutes of limitations from my website.

The Statute of Limitations on Collections is the amount of time that the Internal Revenue Service (IRS) has to collect a tax liability from a taxpayer. The date that taxes expire is referred to as the “Collection Statute Expiration Date” (CSED). According to the Internal Revenue Code, Section 6502, the IRS generally must collect the tax owed “within 10 years after the assessment of the tax.” Depending on the taxpayer, the assessment of tax may be the date a taxpayer files a tax return with a balance owing or the date that the IRS files a tax return on behalf of a non-filer taxpayer. Thus, the statute of limitations will begin once the tax has been “assessed” by the IRS.

Although the IRS generally has just 10 years to collect on an outstanding tax liability, there are certain events or transactions that may extend or suspend the statute from expiring. A variety of laws affect the CSED. For example, if a taxpayer files bankruptcy” or files an Offer in Compromise, the statute of limitations is generally suspended during the time the bankruptcy or Offer in Compromise is under review. Also, additional assessments of tax owing may extend the amount of time that the IRS is allowed to collect. Therefore, if the IRS is going to collect taxes owed, they must do so within the time frame permitted by law.

Question #2: I have a home in foreclosure. I bought it for $172,000 and owe $302,000 how much taxes will I get hit with?

Although the total canceled debt will total around $130,000 you will not need to claim it as income on your tax return. Although canceled credit card debt IS taxable income, this is not the case with mortgage related debt. Your lender may send you a 1099 form next January, but if they do then just file an IRS Form 982.

Question #3: Is there such a thing as a consolidated tax return? Or, at least a return that allows you to combine multiple states?

Although there is something called a “consolidated tax return” it is actually something used for corporate taxes. For your personal income taxes you are going to need to file a return with each state you earned income in. Unfortunately, since every state has their own revenue departments you are going to have to file a specific form for each. However, if you hire a professional tax preparer, then they should easily be able to get you compliant with all states rather easily.

Obama to Raise Taxes on Middle America?

Although his biggest tax related campaign promise was NOT to raise taxes on anyone making under $250,000, it looks like the administration may be planning to do so anyway. According to new reports, Obama's treasury secretary warned that he could not rule out the idea of higher taxes on middle-class Americans as part of their health care reform package.

As the White House sought to balance campaign rhetoric with governing, officials appeared willing to extend unemployment benefits. With former Federal Reserve Chairman Alan Greenspan saying he is "pretty sure we've already seen the bottom" of the recession, Obama aides sought to defend the economic stimulus and calm a jittery public.

Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers both sidestepped questions on Obama's intentions about taxes. Geithner said the White House was not ready to rule out a tax hike to lower the federal deficit; Summers said Obama's proposed health care overhaul needs funding from somewhere.

"There is a lot that can happen over time," Summers said, adding that the administration believes "it is never a good idea to absolutely rule things out, no matter what."

During his presidential campaign, Obama repeatedly vowed "you will not see any of your taxes increase one single dime." But the simple reality remains that his ambitious overhaul of how Americans receive health care -- promised without increasing the federal deficit -- must be paid for.

"If we want an economy that's going to grow in the future, people have to understand we have to bring those deficits down. And it's going to be difficult, hard for us to do. And the path to that is through health care reform," Geithner said. "We're not at the point yet where we're going to make a judgment about what it's going to take."

Settlement Near in UBS Tax Evasion Case

According to the Associated Press the U.S. and Swiss government are close to reaching a deal over recent allegations that American taxpayers were using accounts to avoid paying taxes on the funds. The Federal government had planned to take UBS (the largest Swiss bank) to trial, but a Florida judge has canceled the trial after word broke that negotiations between the governments had been fruitful.

Justice Department attorney Stuart Gibson said Friday in a conference call with the judge that major issues have been resolved. He did not disclose details.

U.S. District Judge Alan S. Gold agreed to cancel a trial that was supposed to begin Monday.

The dispute involves about 52,000 Americans the U.S. believes are hiding billions of dollars of assets in UBS accounts. The bank and Swiss government say the names cannot be disclosed without violating long-standing Swiss bank secrecy laws.

U.S. Secretary of State Hillary Clinton and Swiss Foreign Minister Micheline Calmy-Rey are scheduled to discuss the issue Friday in Washington.

Cage & Diamond: Two More Celebrity Tax Offenders

The IRS must be getting more aggressive in their collection of taxes from celebrities. Last week I made two posts about half a dozen new celebrities who had their tax delinquencies made public, and over the weekend two more offenders were identified.

Nicholas Cage

Cage, who ironically starred in a movie where unpaid taxes was a major part of the plotline (National Treasure: Book of Secrets), reportedly owes the IRS more then $6.2 million in unpaid taxes 2007. The IRS even issued a lien on Cage's $3.55 million haunted mansion in New Orleans.

Dustin Diamond

Saved by the Bell star Dustin Diamond has also been accused of neglecting to pay his taxes. According to gossip site TMZ, Diamond owes $21,015.62 in unpaid taxes to the state of Wisconsin. Apparently a lien was filed against his property, and the courts claim that no settlement has been reached.

Wall Street Profits from Trades with Fed

From FT.com:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilize the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”