Friday, December 3, 2010

White House’s Deficit Commission issues Moment of Truth

The White House's deficit-reduction commission has issued its report. To read a copy of the published report, click one of the links below.

Here are two summaries of the report.
The Tax Foundation:
Texas Society of CPAs Federal Tax Policy Blog:

Sunday, November 28, 2010

Is tax deferred saving a bad idea?

The concept is appealing. Save money using pre-tax dollars in a special account. You can use the tax savings to put more money to work. The earnings in the account will not be taxed, and you will have bigger balance years from now than if you had saved after tax dollars in a taxable account. You will pay taxes on your withdrawals, but you may be subject to lower tax rates. You will be much better off than if you save after tax dollars in a taxable account. It sounds too good to be true.

I cannot tell you whether tax deferred accounts make sense for you. That decision should be based on your particular situation. However, before you automatically assume that it is a good idea to put money into tax deferred plan such as an IRA, SEP, 401(k), 403(b), or 457 plan, it makes sense to examine three basic assumptions.

Tax savings means a bigger balance
This may is true. However the tradeoff is that withdrawals will be taxable. Whether deferring tax will give you more after tax income is dependent on current and future tax rates. The biggest reason that balances are larger is that if a person was going to save $100, then he or she would have to earn $139 at a 28 percent tax rate to have $100 to save. The assumption is that people who would save $100 after tax dollars will save $139 pretax dollars. That assumption is not always true.

Tax deferred plans reduce your tax
This may also be true; however the statement is based on several assumptions. If the assumptions are false, which is possible, then tax deferred plans may not reduce your tax bill. They may even increase it. The blanket statement that tax deferred plans will reduce tax burdens is based on an assumption that tax rates will be lower when funds are withdrawn than when the income is deferred. There are several reasons that this might not be true.

One reason is that lifetime earnings follow a predictable pattern. People at the beginning of their careers tend to make less than people later in their careers. A healthy portion of the balance from a tax deferred savings plan is likely to have been set aside when income was relatively low. With progressive tax rates, lower income taxpayers pay tax at lower marginal rates. Of course the argument is that the money will be withdrawn at retirement and income will be necessarily lower. That argument is contrary to the reasons that people save for retirement. The income withdrawn from tax deferred plans will be taxable. If the taxable income is lower, then the plan did not accomplish the objective of accumulating a large enough balance to provide a replacement income.

Another reason that tax deferred plans may not reduce your tax is actually a collection of reasons under one heading: Tax is too complex a subject to make blanket assumptions. Here are just a few of the issues:
  • Future tax rates are unpredictable.
  • Social Security taxation is tied to other taxable income.
  • AMT is usually difficult to plan around.
  • If you experience a windfall, then you are likely to have higher income later, and that may mean higher tax rates.
  • If you save a lot, then you may have higher income later.
  • You may be living in a state with an income tax and plan to retire to a state without an income tax.
  • Tax deferred account earnings are taxed as ordinary income at withdrawal. This is true even if the earnings are the result of long-term capital gains or qualified dividends which may be taxed at lower rates.
  • Tax rate comparisons assume that alternative investments are taxable investments. This ignores tax-free investments. 
A question of control
In addition to the two assumptions explored above, there is also the question of control. The implicit assumption whenever a person uses a tax deferred vehicle is that he or she remains in control of the investment. This is true even though nearly all people know about age limits for penalty free withdrawals. The withdrawal limitations are a reasonable tradeoff for the tax deferral.

Control of funds in tax deferred accounts is actually a much bigger question than withdrawal limitations. There are two. The first is related to age. Tax deferred plans typically have some sort of required minimum distribution. This means that you will be required to withdraw some portion of your account regardless of your need for funds, and you will be required to pay income tax on the amount you withdraw. This is a huge amount of control to cede in exchange for tax deferral, and it is much more significant than having to reach a minimum age.

The second control question relates to how tax deferred accounts fit into your estate planning. This is a complex topic well beyond the scope of this article. However, the time to find out that tax deferred accounts may not be the best instruments for your estate plan is before you start putting a lot of money into them.

Is tax deferred saving a bad idea?
The answer to this question is dependent on a variety of factors. Tax deferred plans are neither good nor bad. Instead, they are tools that work well in some situations and not so well in other situations. If you are contemplating a tax deferred plan, ask yourself some question such as these:
  • What do you anticipate your income will be over your lifetime?
  • When do you expect to earn more or earn less?
  • What are your expectations about your future tax rates?
  • What does your expectation about your earnings and tax rates mean to you?
  • How important is it to you to be able to control your withdrawals in the future?
  • Do you have estate planning concerns? 
What should you do?
 The first thing you should do is to consider your situation. Ask yourself what you are trying to accomplish. If your objective is to shift income and defer tax, then use a tax deferred plan. If your objective is simply to save for some purpose, explore all of your alternatives and weigh the pros and cons of each. If a tax deferred plan is your best option, the use it. You may find that investing after tax income in a taxable account is your best option. It is likely that you will determine that you need some combination of tax deferred and taxable accounts.

If you are not sure what to do, seek advice from a professional. A CPA or financial planner should be able to explain your options and help you decide. If you have estate planning questions, then be certain that you seek advice from an attorney skilled in that area. If your situation is complex, you may want to involve several advisors with different skill sets.

Sunday, November 21, 2010

Have you prepared your 2010 taxes yet?

Even though there is more than a month left in 2010 and tax deadlines are well in the future, it is not too soon to get started cleaning up your books and preparing to file your taxes. Getting started now can help you by reducing the amount that you spend on bookkeeping, accounting, and tax services, and it could reduce the size of your tax bill. If you begin reviewing your tax situation now, you will also have some time for last minute tax planning for 2010.

Getting started
The first thing you need to do is to get your books in order. Whether you have a full-time bookkeeper or simply save everything in a shoebox for your CPA, a little organizing can go a long way. If you need more guidance than this brief article provides, contact your bookkeeper or CPA. They will be happy to tell you how to improve the way you organize your records. What you pay for an hour or two of consulting will be more than offset by the money that you can save by being organized. Your CPA or bookkeeper might even provide the consultation for free. You may even decide that working more closely with your professional accountant will give you more time to spend on the rest of your business.

Separate business and personal
Make sure that your personal and business lives are separate. This seems obvious, but every year small business owners or employees with unreimbursed expenses turn over business records comingled with personal records. It may be too late for 2010, however you should make sure that you have different bank accounts and credit cards for your business and personal lives. You may not need special business accounts, but you should make certain that they are separate.

Get your books in order
There are a couple of important parts to this step. The first step is to organize your records the way that CPAs and bookkeepers do. Figure out all of your sources of income and group them into logical categories. Then organize all of your expense. Business owners tend to focus on expenses because they worry about cash flow. However most people used to working with money are accustomed to seeing revenue, then expense, then net income. It is not a bad idea for you to think in that order also. If you think about it, the success of your business depends on money coming in the door, not just your ability to control expenses. Income and expense groupings are not just for business. If you organize your personal records this way, you will find your personal record keeping easier. An added bonus to organizing your records this way is that bankers also expect to see your financial statements in this order. If you ever need to complete a credit application, it will be easier for you to find the information that you need.

Once you have grouped your records into the two large categories of income and expense, further categorize the records by type. How you do this will depend on the type of business you own. If you have W-2 income then keep that apart from business income. You will want to group business income by whether it was for services or goods. A quick note about employee business expenses is in order at this point. If you are organizing your records because you have employee business expenses, you will want to sort out any payments that you received for expenses by whether they were taxable or nontaxable. Your employer should be able to tell you this.

After you have categorized your income, do the same with your expenses. If you already have a bookkeeping system with a set of accounts, then simply use those accounts. This is a good time to review your chart of accounts for completeness and accuracy. If you do not already have a way to categorize your expenses, take a look at your previous tax returns and see how your CPA divided up your expenses. Your CPA may even have a tax organizer that you can use. Depending on the arrangement that you have with your bookkeeper of CPA, this process could be as simple as organizing your receipts and statements, or it could include entering the expenses into your bookkeeping system. If all of this is getting unwieldy for you, then this is a good time to talk to your CPA or bookkeeper about how they can help you manage your books.

What about records that you do not yet have?
You will not receive some statements or reports until the end of the year or even until January or February. No problem. Set up folders for the statements or reports that you expect to receive later. Then when you receive them, simply add them to the appropriate folder.

How this helps
This may seem like a lot of work that could just as easily wait until later. However, by beginning now, you will be more likely to have everything you need later when you take your files to your CPA. In addition, having complete and well organized records makes your CPA’s task easier so that he or she can work faster. That will save you money. In addition, complete and well organized records will make it less likely that your CPA will miss something, and in the event that your return is selected to be audited, good documentation will make the audit much easier for you.

Friday, October 29, 2010

IRS Consumer ALert

The IRS does not send taxpayers unsolicited e-mails about their tax accounts, tax situations or personal tax issues. If you receive such an e-mail, most likely it's a scam. IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites and particularly e-mail.

Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some e-mail scams contain attachments or links that, when clicked, download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or Web site.

Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS Web site, However, such sites have no connection to the IRS.

For more information on scams and what to do if you're subject to one, see our Problem Alerts page, Online Scams that Impersonate the IRS, Suspicious e-Mails and Identity Theft and How to Report and Identify Phishing, E-mail Scams and Bogus IRS Web Sites.

Reposted from,,id=97322,00.html

Thursday, July 29, 2010

AICPA Supports Repeal of Burdensome Tax Information Reporting Measure

AICPA Supports Repeal of Burdensome Tax Information Reporting Measure
The American Institute of Certified Public Accountants told members of Congress recently they should repeal the section of the new health care law that requires businesses to report to the Internal Revenue Service any purchase from a vendor of goods or services worth $600 or more during the calendar year.

The AICPA said it will be burdensome and costly for small businesses to compile the data and prepare the Form 1099-MISC information return. Furthermore, the AICPA said the information collected on the 1099 forms will not be very helpful to the IRS in collecting any unpaid taxes that should have been paid by the vendor because it will be difficult to reconcile payments reported on the forms and income reported by the vendor.

The reporting requirement is included in the Patient Protection and Affordable Care Act and is effective for purchases made in 2012 that will be reported on 1099 forms filed in 2013.

A copy of the AICPA’s letter to members of the U.S. Senate is pasted below. An identical letter was sent to members of the U.S. House of Representatives.

If you would like to speak to someone about the AICPA’s letter, please contact Shirley Twillman, AICPA senior manager for media relations, at 202-434-9220 or

To read the entire article and a copy of the letter, please click the link above.

Monday, July 12, 2010

IRS help with Gulf oil spill issues

The IRS has created a Gulf Oil Spill Information Center, and set up a Dedicated Phone Line for Gulf Oil Spill Victims, 866-562-5227.

The IRS is also planning a Special Assistance Day, July 17th in four states:

  1. Alabama: Mobile.
  2. Florida: Panama City and Pensacola.
  3. Louisiana: New Orleans, Houma and Baton Rouge.
  4. Mississippi: Gulfport.

 According to the IRS,
The IRS continues to have a number of ways to help taxpayers dealing with oil spill issues or other economic hardship issues, including:
  • Assistance of the Taxpayer Advocate Service for those taxpayers experiencing economic harm, who are seeking help resolving tax problems that have not been resolved through normal channels.
  • Postponement of collection actions in certain hardship cases.
  • Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
  • IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise.
  • Accelerated levy releases for taxpayers facing economic hardship.

Sunday, July 11, 2010

Repost from CNN/ IRS starts mopping up Congress's tax-reporting mess

IRS starts mopping up Congress's tax-reporting mess
By Neil deMause, contributing writerJuly 9, 2010: 11:18 AM ET

NEW YORK ( -- With a new mandate looming that will require business owners to file millions more tax forms, the Internal Revenue Service has begun the daunting process of figuring out how to turn the law's sweeping demands into actual rules for taxpayers.

To read the rest of the article click here. IRS starts mopping up Congress's tax-reporting mess

Tuesday, July 6, 2010

IRS provides a web page with help for homebuyer tax credit extension

The IRS has created a web page with information about the extension of the homebuyer tax credit.,,id=225078,00.html The deadline for the credit was extended from June 30, 2010 to September 30, 2010.

Here are some important exceprts from the page.
The IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties' names and signatures if required by local law, the property address, the purchase price, and the date of the contract.
Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:
  • A copy of the settlement statement showing all parties' names and signatures if required by local law, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
  • For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
  • For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
Besides providing a tax benefit to first-time homebuyers and purchasers who haven’t owned homes in recent years, the law allows a long-time resident of the same main home to claim the credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Homebuyers claiming this credit can avoid refund delays by attaching documentation covering the five-consecutive-year period:
  • Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
  • Property tax records or
  • Homeowner’s insurance records.
There are three options for claiming the credit on a qualifying 2010 purchase:
  • If a 2009 return has not yet been filed, claim it on Form 1040 for tax-year 2009. Though these returns cannot be filed electronically, taxpayerscan still use IRS Free File to prepare their return. The returns must be printed out and sent to the IRS, along with all required documentation. The IRS urges taxpayers claiming refunds to choose direct deposit.
  • If a 2009 return has already been filed, claim it on an amended return using Form 1040X.
  • Whether or not a 2009 return has been filed, wait until next year and claim it on a 2010 Form 1040.
For details, check out the complete page.,,id=225078,00.html

Friday, July 2, 2010

Re-post from Collecting unpaid taxes four pennies at a time

The article below is reposted from AccountingWEB. It describes a collection effort by the IRS.
Aaron Zeff is the owner of Harv’s Metro Car Wash in Sacramento, California. Imagine his surprise when, one day last March, federal agents showed up at his business demanding payment of an amount owed from tax year 2006.

Just how much did Zeff need to cough up? Four pennies.
Check out the article for the entire story.
Collecting unpaid taxes four pennies at a time

Friday, June 25, 2010

Update on the Estate Tax from the Tax Policy Blog

This is the latest on the estate tax from the Tax Foundation's Tax Policy Blog. The Obama proposal, included in the FY 2011 budget essentially makes the 2009 law permanent. This sets a top tax rate of 45% with a $3.5 million exemption for individuals and twice that for couples. There are also other proposals to establish top rates as high as 65% for some estates. Click the link below to read the article.

Harkin, Whitehouse and Sanders Are Pushing an Estate Tax Proposal That Might Be Called the Die Abroad Act

Thursday, June 17, 2010

Update on the IRS' PTIN database

The TSCPA participated in a teleconference with the IRS on June 15, 2010. One of the topics was the new PTIN database. Information from that teleconference was reported on the TSCPA Federal Tax Policy Blog.

Here's is part of what the post describes.
The new online Preparer Tax Identification Number (PTIN) database, scheduled to open September 1, 2010 gives the Office of Professional Responsibilities (OPR) a much-improved vehicle for tracking paid preparers’ compliance with the filing and payments of personal, corporate and payroll tax returns.
Click on this link to read the entire post on the Federal Tax Policy Blog. New PTIN Database Tracks Paid Preparers’ Tax Obligations

Monday, June 7, 2010

TSCPA Federal Tax Policy Blog: IRS to Require PTIN Holders to Reregister with the New System this Fall

IRS to Require PTIN Holders to Reregister with the New System this Fall

The Texas Society of CPA's Federal Tax Policy Blog posted an article about the new PTIN registration requirements.
Beginning in September, the IRS will demand all paid tax return preparers to register with its new online system and obtain Preparer Tax Identification Numbers (PTINs). Preparers with current PTINs will be able to keep their assigned number, but will have to reregister and pay a user fee (amount TBD). PTIN holders may be subject to periodic checks for compliance with personal and business tax filing and payment obligations.

To read the entire post, click here.

Tuesday, June 1, 2010

House Passes Tax Extenders Bill

From the Journal of Accountancy:
Friday, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act (HR 4213) by a vote of 215–204. The bill now goes to the Senate, which will not take it up for consideration until after it returns from its Memorial Day recess on June 7.

The bill as passed by the House extends a large number of expired tax provisions through 2010. These include the IRC § 41 research credit, the standard deduction for state and local property taxes, and the deduction for state and local sales tax.
To read the rest of the article, click on the link below.

House Passes Tax Extenders Bill

Monday, May 31, 2010

Tax Information for Members of the Armed Forces

Happy Memorial Day!

If you are a veteran or are on active duty, thank you! I thought I would take this opportunity to post the link to an IRS page dedicated to providing information to members of the armed forces.,,id=97273,00.html

Also here are links to Publication 3, Armed Forces' Tax Guide. There is an online version and a PDF.

If you would like a paper copy of the document, contact the IRS by telephone. 1-800-829-3676

401k and IRA Rollovers Provide Tax-Free Business Start-Up Funding (Sounds like a good idea, but . . .)

Have you heard of Rollovers for Business Startups or ROBS? It sounds like a great idea, except for one small problem which I will get to in a minute. With ROBS, you use a 401(k) or IRA distribution to fund a new business and avoid taxes and penalties on 401(k) or IRA distributions. The idea is to form a new corporation, set up a new 401(k), rollover the funds into the new 401(k), and then use the funds to purchase stock in the new corporation.

Sounds like a great idea doesn’t it? Here is the small problem I mentioned earlier. The IRS is examining these plans, and in October 2008 even issued a memo saying that some of these plans may violate tax law. The plans may also violate some rules affecting pensions, so the IRS and Department of Labor are working together.

Read this article posted on the Tax Prof Blog for more details.

401k and IRA Rollovers Provide Tax-Free Business Start-Up Funding

Thursday, May 27, 2010

TX Society of CPAs Federal Tax Policy Committee Issues Letter to IRS Regarding Uncertain Tax Positions

The Texas Society of CPAs Federal Tax Policy Committee sent a letter May 27, 2010 to IRS Commissioner Doug Shulman concerning Announcement 2010-9, Uncertain Tax Positions – Policy of Restraints (and related Announcements and Instructions).

The six page letter outlines concerns with the policy draft. If you would like more information or to read the letter, see the post on TSCPA's Federal Tax Policy blog.

Wednesday, May 26, 2010

Tax Foundation launches 13-part series on Bush tax cuts

Frequently Asked Questions About the Bush Tax Cuts

The Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937, has launched a 13-part series about the Bush tax cuts on the Tax Policy Blog. The cuts are scheduled to expire at the end of 2010.

The series explores likely outcomes if the cuts expire, are extended or made permanent, or if President Obama's budget, which includes a combination of expirations and extensions, is adopted. To read about the series click the link above, or click here to read the articles in the series.

Monday, May 24, 2010

Next IRS Open House Is June 5th

Saturday June 5, The IRS is having a nationwide open house to help small businesses and individuals solve tax problems. The IRS will open approximately 200 IRS offices. There will be at least one in every state. Each office will be open from 9:00 a.m. until 2:00 p.m. local time. Here is a state by state list directory of participating offices.

Friday, May 21, 2010

IRS to offer guidance for charities that missed the May 17 filing deadline

Commissioner Doug Shulman issued a statement on the filing deadline for small charities. He said in part:
Now that the May 17 filing deadline has passed, it appears that many small tax-exempt organizations have not filed the required information return in time. These organizations are vital to communities across the United States, and I understand their concerns about possibly losing their tax-exempt status.

. . . many of these smaller organizations are just now learning of the May 17 deadline. I want to reassure these small organizations that the IRS will do what it can to help them avoid losing their tax-exempt status.
Commissioner Shulman went on to say that the IRS will be providing additional guidance in the near future and that organizations should go on and file their information returns even though the May 17, 2010 deadline has passed. It is easier for small organizations (annual receipts of $25,000 or less) to file than they may realize. They can fill out the electronic notice Form 990-N (e-Postcard).

For more information about filing requirements, see Annual Electronic Filing Requirement for Small Exempt Organizations - Form 990-N (e-Postcard) on the IRS website.

Sunday, May 9, 2010

Still no tax refund?

Have you been waiting for more than eight weeks?
The IRS says,
If it's been more than 8 weeks since you filed your amended return and you haven't received your refund, please contact a customer service representative by calling 800-829-1040. From outside the U.S., call 215-516-2000. TTY/TDD: 800-829-4059.
You can also use Where's My Refund? tool on the IRS website.
According to the IRS you can get information about your refund 72 hours after they acknowledge receipt of your e-filed return or three to four weeks after mailing a paper return. (You cannot use Where's My Refund? for an amended return.)

You will need to provide the following information from your return to identify yourself.
  • Your Social Security Number (or Individual Taxpayer Identification Number)
  • Your Filing Status
  • The exact whole dollar amount of your refund
If you need to file a claim if your refund check was lost, stolen, or destroyed, the Where's My Refund? tool can provide you with instructions. You may also be able to change your address.

Monday, May 3, 2010

Saturday May 15, IRS open house for small businesses and individuals with tax problems

Saturday May 15, The IRS is having a nationwide open house to help small businesses and individuals solve tax problems. The IRS will open approximately 200 IRS offices, at least one in every state, Saturday May 15 from 9 a.m. to 2 p.m. local time. According to IRS Commissioner Doug Shulman, “Our goal is to resolve issues on the spot so small businesses and individuals can put any issues they have with the IRS behind them. If you have a problem filing or paying your taxes or resolving a tough tax issue, we encourage you to come in and work with us.”

According to the IRS,
. . . a taxpayer who cannot pay a tax balance due can discuss with an IRS professional whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.

At the March 27 Open House, 88 percent of the taxpayers who came in for help had their issues resolved the same day.
To find the locations in your state, click here.

Saturday, May 1, 2010

Costly IRS Mandate Slipped into Health Bill

A recent post by Chris Edwards on the Cato Institute Blog, Costly IRS Mandate Slipped into Health Bill, reviews a mandate included in the recent health care bill that increases reporting requirements for businesses.
A few wording changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year.
The current law requires businesses to issue 1099's to contractors, however the new law purchases to the requirements. As described by RIA, a firm that provides tax information, and quoted by Edwards,
The 2010 Health Care Act adds “amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services.
Edwards quotes Chris Hesse of LeMaster Daniels PLLC as saying, "Under the new law, businesses will be required to send a 1099 to other businesses for virtually all purchases."

The requirements are already being challenged. Representative Dan Lungren (R-Calif.) introduced legislation repealing the requirement. As reported by the On the Money, the Hill's blog on finance and the economy, Lungren thinks that the burden is not particularly wise.
"It is just one of the dumber things I have seen in Congress," he said, adding, "Imagine this: Goods and services purchased by a small business, from a supplier ranging from component parts of every American product, to phone and internet service, to the shipping service of Fed Ex or UPS, will now give rise to a new paperwork burden at tax time."
The proposal is apparently now waiting for the Ways and Means Committee.

Friday, April 30, 2010

High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010

The latest post on the Tax Policy Blog is High-Income Taxpayers Should Maximize Charitable Contributions, Itemized Deductions in 2010. It is the latest in a series that the Tax Foundation has written about the expiration of the Bush tax cuts. This post is about the likely expiration of  PEP and Pease, popular names for the personal exemption phase-out and a similar phase-out of itemized deductions for higher income filers. The post notes:
PEP and Pease have created significant problems, raising marginal tax rates and adding to tax complexity. In some cases, PEP and Pease push the marginal tax rate up substantially. Next year, under President Obama's budget, a married couple filing jointly with combined AGI of $254,550 would pay a 28 percent rate without PEP and Pease, but a 30.5 percent rate with PEP and Pease.
For more details, read the post, or check out the Tax Policy Foundation or the Tax Policy Blog.

Thursday, April 29, 2010

How to fix an error on your individual income tax return

Does this sound familiar?
  • You filed the return.
  • You cashed the refund check, or you wrote out the check for the taxes you owed.
  • When you were filing all of your tax paperwork you discovered you left something off of your return, or you received a notice from the IRS.
  • You panicked.
Good news. There is no need to panic. File an amended return. If your CPA completed your return, call your CPA and ask him or her to amend the return. If your return is simple, you can probably do it yourself.

What you will need
Whether you prepare the amended return yourself or send it to your CPA, you will need a few things before you can get started.

  • A copy of your return and instructions for the forms. (If you need prior year forms and instructions, you can call 1-800-TAX-FORM (1-800-829-3676). You can also download them from
  • Form 1040X and instructions (Do not simply re-file a new 1040, 1040A, or 1040EZ!)
  • Any additional supporting documents
  • Any letters or notices you received from the IRS
How to get started
The first step is to organize your documents. It is a good idea to group your documents into categories such as income, deductions, or credits. You’ll want to separate out documents that go with specific schedules. Once you have done that review the original instructions for the forms you filed. This should help you be certain that you understand the changes that you want to make.

The 1040X is a multi-purpose form. Taxpayers have many reasons for amending returns. This means that you may not need to complete all of the lines on the form. Be sure to check the instructions.

The simplest way to make your changes is to make notes in the margins of your original return. Once you have made all of your changes and reviewed them, you can enter the changes onto the Form 1040X. If you use tax software, be careful to follow the directions provided by the software company. Typically you will make a copy of the original file and modify the copy instead of working on the original. The software will also have an option to prepare an amended return.

Once you file the amended return, file it and all of your supporting documents with your other important papers. If you have a CPA, you may also want to send a copy of the amended return to him or her to keep in your files.

File Form 1040X only after you have filed your original return. It is important to realize that the interest and penalty clock rarely stops ticking. If your changes result in a higher tax liability, then you should file an amended return and pay the tax as soon as you possibly can so that you can avoid additional penalties.

If your changes result in a lower tax liability, then you may be due a refund. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after you paid the tax, whichever is later. There are some exceptions to this time limit for people who are unable to manage their own affairs. Check with your CPA or review Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund

Wednesday, April 28, 2010

Free online training from the IRS

Did you know that the IRS offers free online presentations and webinars? Check out the IRS Video Portal  for
  • Archived versions of live panel discussions
  • Archived webinars
  • Video clips
  • Audio archives of tax practitioner phone forums
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Wednesday, April 21, 2010

Are you ready for the 2010 Alternative Minimum Tax? Get out your wallet.

The 2009 Publication 17 Your Federal Income Tax for Individuals contains this interesting note in a section titled, "What's New for 2010."
Alternative minimum tax (AMT) exemption amount decreased. The AMT exemption amount is scheduled to decrease to $33,750 ($45,000 if married filing jointly or a qualifying widow(er); $22,500 if married filing separately).
The exemption amounts for 2009 were $46,700 ($70,950 if married filing jointly or a qualifying widow(er); $35,475 if married filing separately). This is not really news. The exemptions were scheduled to revert to this amount beginning in 2009, but Congress raised the exemption. A report by the US Treasury, "Tax Relief in 2001 through 2011" provides some explanation.

The AMT was a parallel tax system designed to make certain that very high income taxpayers would not be able to avoid paying income tax. A similar tax called the Minimum Tax was passed in 1969 after it was determined that a group of taxpayers with incomes over $200,000 paid no tax in 1966. Changes over time have lead to the tax now called the Alternative Minimum Tax. Testimony provided to Congress by a treasury official in 2007 explains the tax and its problems in more detail.

The problem with the AMT is that the calculations used to determine the tax base have not changed over time; or rather the law governing the calculations has not changed over time. Instead Congress has opted to pass temporary modifications each year. This creates a huge amount of uncertainty for taxpayers. In addition, even though Congress has opted to adjust the exemption amounts, more and more taxpayers pay AMT. A brief by the Tax Policy Center indicates that while the temporary 2009 exemption meant that only 4 million taxpayers paid the AMT that number will jump to 27.4 million if the exemption reverts to the lower amount. Assistant Secretary for Tax Policy Eric Solomon said it well in 2007 when he spoke to the Ways and Means Committee.
In many respects, the AMT illustrates how a good-faith attempt to address an issue in the income tax system can have enormous unintended and undesirable consequences. Today the AMT is imposing burdens on millions of taxpayers who were not its intended targets.
Write your senator or congressman and tell him or her that you want something done about the AMT. The web pages below contain links to help you find and write your elected representatives.

You may find these IRS publications helpful. The resources below are for 2009. The 2010 versions will not be available until later in the year.

2009 Publication 17
2009 Form 1040 Instructions
2009 Form 1040A Instructions
2009 Form 6251 Alternative Minimum Tax—Individuals
2009 Form 6251 Instructions
2009 Form 8801 Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts
2009 Form 8801 Instructions

Monday, April 19, 2010

Take a look at the first 1040. The form and instructions are only four pages long.

The first Form 1040 was produced in 1913 after the 16th Amendment was ratified. The amendment said,
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
The 1913 Form 1040 was three pages long, and it was accompanied by one page of instructions. The normal tax rate was one percent.
The normal tax of 1 per cent shall be assessed on the total net income less the specific exemption of $3,000 or $4,000 as the case may be. (For the year 1913, the specific exemption allowable is $2,500 or $3,333.33, as the case may be.)
There was also an additional or super tax on taxable income above $20,000 as shown below.

on the
and not

Saturday, April 17, 2010

How to calculate estimated taxes

If you owed tax additional tax this year, it is possible that you should pay estimated taxes. If you are self employed it is very likely that you should pay estimated tax. This is what the IRS has to say about the topic in Publication 505.

General Rule
In most cases, you must pay estimated tax for 2010 if both of the following apply.
  1. You expect to owe at least $1,000 in tax for 2010, after subtracting your withholding and refundable credits.
  2. You expect your withholding and refundable credits to be less than the smaller of:
  • 90% of the tax to be shown on your 2010 tax return, or
  • 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.
You can use a worksheet to make a more accurate calculation. If all of your income is subject to withholding, you probably do not need to pay estimated tax. You will want to review your withholding with your employer.
You do not have to pay estimated tax for 2010 if you meet all three of the following conditions.
  1.  You had no tax liability for 2009.
  2. You were a U.S. citizen or resident alien for the whole year.
  3. Your 2009 tax year covered a 12-month period.
 There are special rules for farmers, fishermen, certain higher income taxpayers, aliens, and estates and trusts.
  • Farmers and Fishermen
  • Higher Income Taxpayers (The percentage of 2009 AGI changes from 100% to 110%.)
  • Aliens (Resident aliens should refer to Publiciation 505. Nonresident aliens should review Publication 519 for more information about Form 1040-ES (NR))
  • Estates and Trusts (use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax.)

Friday, April 16, 2010

Do you think the tax system is fair?

A CNN poll conducted by Opinion Research Corporation asked the question, "How fair do you think our present federal tax system is? Overall, would you say that our tax system is very fair, moderately fair, not too fair or not fair at all?"

Some press reports have reported that the results indicate the country is evenly divided on the issue with 49% responding that the system is fair and with 50% saying opining that it is not fair. The details hint otherwise though. Here are the results.

Very fair 
Moderately fair 
Not too fair 
Not fair at all 

A more complete picture of the results gets interesting outside of the 75 percent of respondents in the middle. Five times as many people responded "Not fair at all" than responded "very fair." These numbers do not appear to have changed much over the last 25 years.

What has changed is the way people feel about the taxes they paid. The poll asked, "Are you very angry about the amount of federal incomes taxes you or your family paid last year, or fairly angry, or fairly satisfied, or very satisfied -- or don't you have any particular feeling one way or the other about the amount of federal income taxes you or your family paid last year?" The responses from this poll and from similar LA Times polls in 1985 and 1986 were:

Very angry 
Fairly angry 
Fairly satisfied 
Very satisfied 
No feeling 

This is an increase in angry responses from 27/33 percent in 1985/1986 to 40 percent.
Taxpayers do not seem to want to take their frustrations out on the IRS though. Respondents were asked, "Do you think the Internal Revenue Service should be abolished, or don't you feel that way?" A majority of people did not think that the IRS should be abolished. The results in this poll and in a 1998 CNN/Time poll were:

Should not
No opinion 

The survey was conducted by Opinion Research Corporation and CNN April 9-11, 2010. The margin of sampling error for results based on the total sample is plus or minus 3 percent. To see the entire survey, go to

Wednesday, April 14, 2010

Do you have too many bank or investment accounts?

I’ve prepared many returns over the last few years, and I’ve been surprised at the number of 1099 forms that clients bring in with their files. Multiple checking and savings accounts and investment accounts are easy to accumulate. People often open new accounts when they apply for auto loans and mortgages or home equity loans. Some people like the idea of banking with a large bank, but they still like to have accounts in local banks or credit unions. Sometimes people change banks to chase rates and don’t close old accounts.

Why is it a problem to have a lot of accounts? It may not be a problem. It makes sense to have separate accounts for personal and business items. It also makes sense to have accounts for special purposes. It becomes a problem when there are too many accounts and there is not a good reason to have them. Here’s why.

Confusion: It is difficult to keep track of many accounts

Cost: Financial institutions often have balance requirements that determine fees. Spreading assets around may mean that individual account balances are too small to qualify for fee waivers. Investment and brokerage accounts, for example, a typically base commission charges on account balances.

Reduced returns: Many financial institutions use account balances to help determine the rates of return they will pay on account balances.

Complications: Having more accounts than necessary adds to the complexity of financial transactions. This leads to increased bookkeeping fees and tax preparation costs.

Take a look at your statements. Does it look like you have too many accounts?

Friday, April 9, 2010

Need tax help? Ask the IRS. Really.

People love to hate the IRS. It is a government bureaucracy. It collects taxes. It enforces tax laws. (Congress writes the laws, but that is another topic.) It makes mistakes. What is there to like?

Actually there is a lot to like. The IRS’ mission statement is to, “Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” That is a tough job. According to the IRS:

This mission statement describes our role and the public’s expectation about how we should perform that role.
  • In the United States, the Congress passes tax laws and requires taxpayers to comply.
  • The taxpayer’s role is to understand and meet his or her tax obligations.
  • The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.
One thing the IRS does very well is provide information, lots of information. Sometimes the information is overwhelming. Sometimes it is contradictory. Sometimes it is late. (In defense of the IRS, it promulgates rules and writes instructions according to laws passed by Congress. That has a lot to do with conflicting rules and with delay. For good examples of this, read up on the AMT and the Estate Tax.)
Another thing the IRS does well is make it easy to get help. You can call, write, e-mail, fax, or even stop by a local office. If that does not get you the help you need, you can even contact the Taxpayer Advocate Service. (If you have ideas about how to make the process better, the IRS even has a way for you to provide feedback and submit ideas for improvement, the Taxpayer Advocacy Panel.)

Here are five ways to get help from the IRS.
  1. Call the IRS: (800) 829-1040
  2. Call the Web Site Help Desk: United States and Canada (800) 876-1715 / International (319) 464-3291
  3. E-mail the Web Site Help Desk:
  4. Check out the Frequently Asked Questions (FAQ) page:  
  5. Stop by your local office or Taxpayer Assistance Center. Click here to find out how to contact your local Center.  

For other help, check out the directory at 

Thursday, April 8, 2010

Wondering about your tax refund? Look it up online!

You can find out about the status of your tax refund by using the Where's My Refund? tool on the IRS website.

The IRS says that you can get information about your refund 72 hours after IRS acknowledges receipt of your e-filed return or three to four weeks after mailing a paper return.

You will need to provide the following information from your return to identify yourself:

  • Your Social Security Number (or Individual Taxpayer Identification Number)
  • Your Filing Status
  • The exact whole dollar amount of your refund

Wednesday, April 7, 2010

Save Energy! Save Money! What you need to know about Energy Tax Credits

Saving energy in your home is green in more ways than one. Saving energy can help you save the planet. It can also save you money by lowering your energy bills and reducing your taxes. This is what you need to know about the residential energy provisions of the American Recovery and Reinvestment Act of 2009.

Taxpayers have two ways to reduce their tax bills.
  1. Residential Energy Property Credit
  2. Residential Energy Efficient Property Credit

Residential Energy Property Credit
This credit allows taxpayers to take a credit for 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. These improvements include items such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems. Homeowners contemplating renovations should check to make sure that their improvements will qualify for the credit.

Residential Energy Efficient Property Credit
This energy tax credit will help individual taxpayers pay for "qualified residential alternative energy equipment." This includes solar hot water heaters, solar electric systems, geothermal heat pumps and wind turbines. The law allows for a credit equal to 30 percent of the cost of qualified property. There is no cap on this credit.

How to claim the credits
  • The first step in claiming the credits takes place before doing any improvements. Check with suppliers and contractors to make sure that your plans will qualify. Be certain that windows, roofing material, or other efficiency upgrades meet the applicable requirements. You can check with the Energy Star progam.
  • Keep records and all of your receipts. You should keep the product labels.
  • File Form 5695 when you file your tax return.
  • Enjoy your energy improvements and your tax credits.

How to save money on accounting fees!

Many people are surprised at how much it costs for their CPA to prepare their returns. Hiring an expert to do your taxes is a good idea, and most of the fees are money well spent. However, some habits may be costing you a lot of money, and they could lead to errors. What are these habits?
  • Disorganization
  • Sloppy bookkeeping
  • Unresponsiveness
This is how those habits cost you and what you can do about them.


It is amazing how many people simply gather up any documents that they think might somehow be related to their income tax, stuff them in folders or large envelopes, and send them to their CPA. The CPA will review and make copies of everything. Many of the documents will turn out to be unnecessary. Even so, once their CPAs start going through the files, they find that many important items are not included. The CPA will then have to contact the client and ask for the missing documents. This adds to the expense of preparing the return because the accountant spends additional time and expense on the unnecessary items and them spends extra time tracking down the missing items.

A few common examples are listed below.

Housing related items

Taxpayers that own homes may be eligible to deduct mortgage interest, PMI, and property taxes. The only documents that the accountant needs are the mortgage interest statements from the holder of the mortgage and property tax receipts. It is generally not necessary to provide monthly statements for the mortgage or tax notices. Taxpayers should be sure to let their accountants know what they paid, and in instances where they may not have paid an item (such as delaying a property tax payment) what they have not paid.
Taxpayers that sold or purchased a home should generally provide the settlement statements to their accountants. This will help the accountant evaluate whether there are deductible expenses related to the transaction, and it will help confirm whether the taxpayer qualifies for gain exclusions. If the home was converted to or from rental use or vacation property, then it is especially important to provide this information.

Clients with home offices should keep additional records.

Bank and brokerage accounts

Clients with bank and brokerage accounts will often provide monthly, quarterly, and annual reports. Clients may, or may not, provide the relevant 1099s. The CPA will review all of the documents. If the 1099's are not provided, the CPA will contact the client and ask for them. It is especially important for clients that receive stock based compensation and clients that do a lot of trading to review their documents and make sure that the CPA has what he or she needs to complete the return, and that unnecessary information is not included in the file.

Business expenses

Unless your accountant set up and maintains your bookkeeping, he or she has no way of knowing the details of your expenses. Clients frequently bring folders and envelopes full of receipts to their CPA. All that is really necessary is a set of financial statements and a summary of expenses. The reason that this increases the cost of the return is that the accountant will have to organize the receipts, and this takes time. It is much less expensive to organize expenses than it is to pay the accountant to organize them for you.
Clients who use automobiles for business should keep records and provide them to their accountant.

Childcare expenses

Clients with children who pay for childcare should provide information about the care provider including the address, tax ID number and the amount paid. If the client used a flexible spending account, or if the employer provided a childcare benefit, then the client should provide that information as well.

Sloppy (or no) bookkeeping

Many business owners try to save money by limiting their record keeping. When the do decide to keep detailed records, they often consist of spreadsheets. Once the records get to complex for spreadsheets then business owners will buy a bookkeeping program. In the long run, none of this saves money. If the books are not well organized then the accountant may have to virtually redo them in order to prepare the tax return. This adds to the cost of the return, and it is more expensive than it would have been to have had the books properly prepared before bringing them to the CPA for tax filing.
Another thing that adds to the cost of preparing tax returns is when accounts are set up incorrectly. When accounts are set up correctly, then they can be configured in a way that makes it simple to produce reports in standard formats. These formats include tax reporting formats as well as formats designed to help manage a business.

A final problem for many taxpayers is failing to separate personal and business expenses. Ideally, business owners will have different bank accounts for business and personal use. If that is not possible, then at the very least, they should keep personal items out of their business records by flagging them appropriately so that they can be identified and excluded from reports.


Many clients do not respond when their accountant tries to contact them. The reason the accountant is calling is either to find missing information or to clarify something that is not clear. When clients do not respond, their returns remain unfinished. Tax preparers have to set the return aside and wait for the additional information. When the client does respond, sometimes weeks later after several emails or telephone calls, the preparer will reopen the file and begin working on the return. Unfortunately, it will probably not be fresh in the preparer's mind, and it will take longer to complete than if the missing information had been available sooner. Unresponsiveness increases the cost of preparing your return because it is difficult to work with missing information and it takes longer to prepare the return. In addition, every one of those phone calls and emails take time.

What you can do to save money

The most important thing is to be away of habits that may be costing you money. Once you know what they are, change them!

Get organized!

Talk to your CPA or the professional that prepares your filing. He or she can tell you exactly what you need to do in order to simplify your tax filing and to make it less expensive to prepare your return. Take advantage of the checklists and organizers your accountant provides. Spend a little time reviewing your documents before you take them to your accountant.

Keep records throughout the year, and organize them so that they will be ready for your accountant. If you drive an automobile for work, get one of those auto record books and keep it. Keep your business and personal records separate.

Organize your records. Think about buying a bookkeeping program. Consider hiring a bookkeeper.

It is worth your time to talk to your CPA or to a bookkeeper to learn how to set up your records. If you have a small business, seriously consider purchasing bookkeeping software such as QuickBooks or Peachtree. If you do, it is worth your while to ask your accountant or bookkeeper to help you set up your books. If you simply don't want to organize your own records, or if they are too complex, then hire a bookkeeper. The cost of paying a bookkeeper to do your books throughout the year will be less than the cost of asking your accountant to do it a month before your taxes are due.

Return your calls! Respond to email!

When the CPA calls or emails, assume it is important and respond! If you do not return your calls or answer your email, then one contact becomes two or three or more. Your CPA will be able to complete your return faster and for less cost if you respond when he or she tries to contact you.

Monday, April 5, 2010

Surprised by the size of your tax refund? Adjust your withholding.

Every year during tax filing season people complete their income tax returns and discover one of three things.
  1. They owe tax,
  2. They paid just the right amount during the year, or
  3. They will receive a refund.
In the US tax system, employers withhold a variety of taxes, including income tax from employees' pay. Self-employed individuals, and people who have income from sources other than an employer, are supposed to make estimated tax payments throughout the year. Ideally, if the withholding is calculated correctly or if the estimated taxes are figured accurately, the amount forwarded to the government during the year will equal the amount that will be due. If the amount sent is more than the tax that will be due, then the taxpayer has made an interest free loan to the government. If the amount sent is too small, then the taxpayer may be subject to penalties.

There are many reasons that people may choose to have a larger than necessary amount withheld. For example, some people like the idea of the receiving a large refund and think of it as a forced savings plan. Another reason is that people may have an uncommon amount of deductions or credits. There may also be many reasons that withholding amounts are too small. Employees that have several jobs may find that their employers may not withhold enough. Employees may also have income from other sources. In either case, employees should either adjust their withholding or make estimated tax payments.

If your refund was too big or too small, then you should adjust your withholding or recalculate your estimated taxes. Follow the instructions that accompany the W-4. You can also use the IRS' Withholding Calculator. If you need more detailed information, it is available in Publication 919.

Overwhelmed? Afraid you won’t make the April 15, 2010 filing deadline?

File an extension. Individuals may qualify for an automatic 6-month extension of time. File Form 4868, Application for Automatic Extension of Time to File U.S. Income Tax Return. The extension only extends your filing deadline. It does not extend the deadline for paying taxes that you owe.
If you:
  • Live outside the United States,
  • Are out of the country when your extension expires, or
  • You are serving in a combat zone or other qualified hazardous duty area
Special rules may apply.
Corporations, partnerships, and other entities such as trusts are subject to different rules.

Sunday, April 4, 2010

It is not too late to contribute to an IRA or Roth IRA for 2009.

If you have not already made your contributions to an IRA or a Roth IRA for 2009, you still have time. The deadline for contributing to an IRA is the due date for filing your return, not including extensions. For most people, that means the due date is April 15, 2010. If you make your contribution for 2009 in 2010, be sure to designate your contribution as a 2009 contribution.

Be sure to talk to your CPA and your financial institution before April 15th. If you want to read all the details for yourself, check out IRS Publication 590.

You may also qualify for a Savers Credit. Check out Form 8880 when you complete your 1040 or 1040A.

Saturday, April 3, 2010

Incredible tax statistic: Nearly 1.4 million people did not file 2006 returns, and they are owed as much as $1.3 billion!

The IRS estimated that the median return that was not claimed for 2006 is $604. People may not have filed because their income levels were below the level that required them to file even though their employers may have withheld taxes from their wages.

Taxpayers may be due a larger refund than they realize. In 2006 many taxpayers qualified for a refund of between $30 and $60 based on excise taxes included in phone bills between March 2003 and July 2006. Some low income tax payers may also be able to claim the Earned Income Tax Credit (EITC).

If you have not filed your 2006 return, be sure to file by April 15, 2009. The law generally provides a three-year window for claiming a refund.

Ask your CPA or tax advisor for details. You can also find information on the IRS web site.

Friday, April 2, 2010

Home Buyer Tax Credits

If you purchased a home in 2008, 2009 or 2010, you may be able to take advantage of the first-time homebuyer credit. Here's what you need to know:
  • The credit only applies to homes used as a taxpayer's principal residence.
  • It reduces a taxpayer's tax dollar for dollar.
  • The credit is refundable. This means the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.
You will need to file a Form 5405 with your return. If you have already filed and did not take advantage of the credit, you can amend your return with a Form 1040X. You will also need to provide documentation such as a HUD-1 or settlement statement. Be sure to check with your CPA or tax advisor.

For more details, check out this page on the IRS website.