Russ Merrick, EA & Associates

By using the “Where’s My Refund” tool on the IRS website, Taxpayers can check on the status of their federal income tax refunds seven days after they e-filed their return. If they file a paper return, they can check four to six weeks after mailing their return.

“Where’s My Refund” is easy to use and is the fastest way to check on a refund. Even taxpayers who file Form 1040EZ-T just to claim the telephone excise tax refund can utilize “Where’s My Refund.”

Taxpayers can check their refund status online anytime from anywhere. It is available 24 hours a day, 7 days a week, worldwide, only by visiting IRS.gov.

Taxpayers can securely access their personal refund information by entering their Social Security number, filing status and the exact amount of their refund. These shared secrets, known only to the taxpayer and IRS, verify the person is authorized to access the account.

For the first time this year, taxpayers who chose direct deposit can split their refunds among as many as three accounts held by up to three different U.S. financial institutions. Split refunds offer taxpayers the opportunity to manage their money by sending part of their refund to one account for immediate needs and another part to a savings or investment account. “Where’s My Refund” will include a message confirming the refund was split and the expected deposit date. It will not specify the amount of individual deposits or the accounts to which the deposits were made.

It’s a moment many taxpayers dread. A letter arrives from the IRS and it’s not a refund check. But don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

• What you should do – Is immediately mail or Fax the correspondence to this office so it can be reviewed and timely responded to.
  
  
• What you should not do – Is to set it aside until later. Notices that are not responded to cause additional notices to be issued and each additional notice brings with it additional complications and make it more difficult to resolve the problem.

Most notices are computer-generated after comparing the income items reported on your return with those reported by the payers. For example, your employer sends you a W-2 every year and also sends a copy to the government so that your wages are on the IRS computer. Your bank sends the 1099INT to the IRS showing how much interest you earned. Your brokerage firm reports your dividends and gross proceeds of sale from security transactions with 1099DIV and 1099B forms. If you are self-employed, those who pay you $600 or more during the year are required to send you a 1099-MISC. If you are retired and collecting a pension or drawing on your own IRA, a 1099R will be sent to you. Lenders report how much interest you paid on your home loan during the year. If you are lucky enough to hit it big in Vegas, you will receive a 1099G for your winnings. The list goes on and on, and if what you reported on your return doesn’t match what is on the IRS computer, you will receive a computer generated notice.

One big problem that has developed over the years is the IRS willingness to allow payers to use substitute forms that are unrecognizable as income-reporting documents. Many of the brokerage firms are now providing their substitutes in letter size documents printed front and back on multiple sheets that almost takes a financial expert to understand. This results in frequent errors.

There are times when you may receive an income item and it appears to be taxable to the IRS when in fact it is not. Here are some frequently encountered situations:

• Sold a security with no profit – Whenever you sell a security, the brokerage house will report the gross proceeds of sale to the IRS. In other words, the IRS has on their computer what you sold it for. They have no clue what you paid for it, which means you must report the sales on Schedule D on your tax return. If you fail to report it, the IRS treats the entire sales price as a profit. Let’s say you sold 200 shares of stock which originally cost you $5,050 for $5,000. You actually have a loss of $50. Unless you report the transaction and show that you paid $5,050 for the shares, the IRS is going to assume you had a $5,000 profit. This frequently occurs when taxpayers overlook a transaction or simply omit it because there was no profit. If this is what caused the notice, you will need to respond to the IRS to explain the mistake and provide verification of the stocks’ original cost.
  
  
• Rollovers – Another frequent error is when you rollover an IRA, 401(k), etc. from one plan to another or one trustee to another. If you don’t show on the tax return that the distribution was rolled over, the IRS assumes the entire amount to be taxable. If these funds are transferred between trustees, a 1009R is not supposed to be issued but sometimes they still are. It is better to make sure. On the other hand, if you take possession of the funds and then redeposit them into another IRA a 1099R will be issued and the rollover must be accounted for on the return. If this is what caused the notice, you will need to provide a verification of the rollover to the IRS with your response.
  
  
• Shared accounts – Generally, banks and other financial institutions only have the capability of having one taxpayer ID on an account as the primary owner even though it may be a joint account with others. These financial institutions will issue the 1099 on other reporting documents under the social security number of the primary owner and the total will be reported to the IRS under that social security number. This also will affect married or separated taxpayers who do not file jointly. When responding to the IRS notice, you will need to provide the names, addresses and social security numbers of the other owners and a statement to the fact that they each reported their appropriate share.

The foregoing are just a few of the more common examples of computer mismatches that can cause computer generated notices. Even though the IRS feels the notices are readily understandable, experience has show that taxpayer can become confused and that the experienced eye of a tax professional is usually required to decipher the notices. That is why we highly recommend that this office review them prior to you taking any action or responding.

A Word of Caution – The IRS routinely provides state tax agencies with the results of the correspondence audits. Generally, the results of the correspondence audit will need to be dealt with on the state level through an amended state return or wait to receive the state notice. However, if you wait for the state notice, additional interest and penalties may possibly accrue for the state return.

The Internal Revenue Service (IRS) recently released its 2006 Data Book which describes activities conducted by the IRS from October 1, 2005, through September 30, 2006, and includes information about returns filed and taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce.

During Fiscal Year (FY) 2006, the IRS collected more than $2.2 trillion in tax and processed over 228 million returns. Over 80 million returns, including 54.3 percent of individual income tax returns, were filed electronically in FY 2006. Over 108 million individual income tax return filers received tax refunds totaling $243 billion. In FY 2006, IRS spent an average of 42 cents to collect each $100 of tax revenue.

IRS examined nearly 1,283,950 individual income tax returns in FY 2006, more than double the number examined in FY 2000. Examinations of business tax returns grew for the second year in a row, reaching over 52,000 in 2006.

What are the chances of being examined? Based nearly 1.3 million audits of the 132.2 million returns filed the odds of being audited are about .98% which is a little more than double the prior year. Because it is so susceptible to fraud, 517,617 return claiming Earned Income Tax Credit (EIC) were audited accounting for over 40% of the return audited.

The IRS through is various information reporting requirements for payers and businesses combined with its computer matching programming has become very sophisticated in conducting correspondence audits which are more cost effective for the IRS and amounted to over 76% of the audits. The balance amount and bulk of the audits were conducted by revenue agents, tax compliance officers, and tax examiners.

The following table shows the chances of being examined in fiscal year 2006 as compared to fiscal year 2004. The figures include correspondence examinations, office examinations and field examinations. The data is classified by types and amounts of income, type of returns, etc.

Payments that you receive from your IRA or qualified retirement plan before you reach age 59½ are normally called ‘early’ or ‘premature’ distributions. These funds are subject to an additional 10 percent tax and must be reported to the IRS.

There are a number of exceptions to the age 59½ rule if you make an early withdrawal. Some exceptions apply only to IRAs, some only to qualified retirement plans, and some to both.

In addition to the 10 percent tax on early distributions, you generally must include the distribution in your income. If you received a distribution from an IRA, other than a Roth IRA, to which you made any nondeductible contributions, the portion of the distribution attributable to those contributions is not taxed. If you received a qualified distribution from a Roth IRA, none of the distribution is taxed. If you received a distribution from any other qualified retirement plan, the portion of the distribution attributable to your cost, not including pre-tax contributions, is not taxed.

A ‘rollover” is a way to avoid paying tax on early distributions. Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to another eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.

We highly recommend that you consult with this office prior to taking any distribution from and IRA or any other qualified retirement plan without first consulting with this office. The tax penalties from a distribution prior to age 59-½ can result in taxes and penalties in excess of 40% of the funds withdrawn and if you reside in a state with state taxes the amount can be close to half. Not a good financial move unless there are no other options. Please call first!

As hard as you and your tax return preparer may try to file a complete and accurate tax return by the due date, circumstances such as the following may work against your efforts:

• Investment firms frequently send out corrected 1099 forms and annual statements.
  
• Some 1099s arrive after the filing due date.
  
• You may have rolled over an IRA account or sold a stock at a loss and forgot to have it reported on your tax return.
  
• A significant deduction may have been overlooked, which is easy these days with the added complications of our tax code.
  
• The unexpected K-1 from your aunt’s estate that you were unaware of.

Whatever the reason may be, your returns can be amended to reflect the correct information or amounts.

If you are amending for a refund, then the amended return must be filed before the statute of limitation expires on the return being amended. That is generally three years from the April due date of the return.

Thus, the statute only applies to refund returns and no refunds will be issued for returns filed after the statute has expired.

If tax is owed as a result of amending the return, file it as soon as possible to limit the interest and penalties that can accrue.

If you have unreported income from 1099s, W-2s, K-1s, etc., and wait for the inevitable notice from the IRS, you are taking the risk that they will not consider all the factors that might weigh in your favor since you have allowed the interest and penalties to build up. It may take the IRS one or two years to make the match between you and the missing income.

Does Amending Increase the Audit Liability? The fact that you amend a return does not in itself increase your chances of being selected for an audit. In fact, it might actually reduce your chances, especially if you are fixing something they will find later anyway. What concerns many about amending returns is that an IRS employee must compare the amended return changes with the original. If back-up documentation cannot be provided, the IRS may want to dig deeper.

That is why it is so important to provide proof or back-up documents to justify the changes being made. Let’s say you forgot to claim a $2,000 church donation. In this scenario, you definitely want to include documentation supporting the increased deduction.

If you have questions about amending your returns, please call us to discuss what steps need to be taken.

Are you doing your spring cleaning and wondering if you can throw out some of those old tax records? If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why you keep the records in the first place.

Generally, we keep “tax” records for two basic reasons: (1) we need to keep the records in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) we need to keep track of the tax basis of our capital assets so when we actually dispose of them we can minimize the tax liability.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute.

Examples - Sue filed her 2004 tax return before the due date of
April 15, 2005. She will be able to dispose of most of her records safely after April 15, 2008. On the other hand, Don filed his 2004 return on June 2, 2005. He needs to keep his records at least until June 2, 2008. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

• Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
  
  
• Stock and mutual fund statements – Where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale.
  
  
• Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

To make sure the notice is a CP-2000, look on page one on the upper right-hand corner. It will be identified with the symbol CP-2000. If it is some other type of notice, a different type of action will be required.

The notice informs you of the proposed changes to income, payments, credits or deductions and the amount due to the IRS (or possibly a refund due to you). It is normally a five- to six-page letter. The size of the notice varies according to the number of issues identified in your notice.

The first page of the CP2000 is called the "Summary Page." It provides a brief summary of the notice and instructions on what you should do to determine if you agree or disagree with the proposed changes.

You are provided with the changes proposed by the IRS, the amounts shown on your return, the amounts reported to the IRS and the increase or decrease in income. The notice computes the tax liability based on the income changes. It can propose additional tax owed to the IRS or it may show a refund due to you.

The notice summarizes the income, payments, credits and deductions reported to the IRS by the payers, but not identified or fully reported on your income tax return. It provides you with the name of the payer, the payer's identifying number, what kind of document was issued, such as a Form W–2 or 1099, and the social security number of the person it was issued to. Be sure that you review this information carefully to verify its accuracy.

A taxpayer response page is also included. It has boxes for you to indicate whether you agree or disagree with the proposed changes. It also has an area for you to authorize someone in addition to yourself to discuss and give information to the IRS pertaining to the proposed changes. This page should be attached to your response.

If you agree that the tax changes are correct, sign the response and return it in the enclosed envelope. You may pay the amount you owe within 30 days from the date of notice to avoid further interest charges, or you may send the signed consent without payment. IRS will bill you for the amount due plus additional interest. You may request a payment arrangement to pay the proposed amount you owe the IRS. If you wish to pay in installments, please complete and return the installment request form enclosed in the notice and return it with your response page. You will be contacted later with payment information. If an installment agreement is approved, you will be charged a fee.

If you DO NOT agree with part or any of the notice, DO NOT SIGN THE NOTICE. Instead, check Option 2 or 3 on the response page, explain why you do not agree in a signed statement, attach the statement and any supporting documents to be considered to the response page, and send it to the IRS. Include your phone number with area code and the best time of day to call.

Do not file an amended return to correct items you do not agree with. These are only proposed changes and the tax liability is not yet assessed. However, if a Form 1040X is appropriate, return it with your response page.

You must respond within 30 days of the date of the notice. If you live outside of the United States, you must respond within 60 days of the date of the notice. An envelope will be enclosed for your convenience. Please use this envelope for your response. If you lose the envelope, please send your response to the address listed in the upper left hand corner on page 1. Send your responses (including Form 1040X) to the address on the notice and please attach a copy of the notice (CP 2000, CP 2501 or a statutory notice of deficiency) to your response.

If the IRS does not hear from you within the 30- or 60-day period, a statutory notice of deficiency will be issued and additional interest will be charged.

After responding to the notice, if your tax matter has not been resolved to your satisfaction, you may contact the IRS Underreporter Office by calling the number listed on your notice.

The IRS may be auditing fewer returns but they are getting smarter about choosing those they do audit. Their goal, of course, is to focus scrutiny on the most "audit worthy" returns-those with potential for big adjustments. As taxpayers, all of us would like to avoid an audit. But how does one avoid being "chosen"? While there's no sure way, experts do offer advice on what to look for to help cut audit risk.

Are deductible expenses out of line with income? When a return goes through the IRS computer, it's "graded" with a score that indicates how that return differs from an IRS norm for other returns in the same income level. For example, if your income was $32,000 and you claimed charitable contributions of over $20,000, the IRS system would very likely show more than a slight bleep when your return was processed. The chance of an audit would go up appreciably!

Where's the hidden income? The IRS questions how savings can go up without a general increase in income from all sources. Thus, returns that show low income but indicate ever-increasing amounts of interest and dividend income can be high audit risk.

Do we have a mismatch? The IRS is expert in matching information on tax returns to what has been reported to them by employers, banks, brokerages, etc. To head off unwanted correspondence with the government, your tax return needs to accurately reflect the 1099s and W-2s you receive. Keep careful records of your accounts to ensure against mismatches.

Does the IRS understand your business better than you think? The IRS now has special audit guides that help their personnel understand the ins and outs of various kinds of businesses. If you're in an occupation targeted by one of the guides, an audit may be more likely. Dozens have already been published zeroing in on a variety of occupations including truckers, innkeepers, lawyers, musicians, taxi drivers, and many others.
Are you a sole proprietor? If so, watch out. Sole proprietors stand out over others when it comes to being audited. Those with incomes over $100,000 "enjoy" a high audit rate. However, business owners with less than $25,000 annual income has one of the highest audit rates. One in twenty are "favored."

If you get an IRS Notice: If you ever receive any communication from the IRS, don't panic. However, your timely response will be one of the main keys to finding a satisfactory solution. To be certain, call us at once. Together, we will determine exactly what course of action needs to be made.

An IRS tax audit can come in a number of forms. The most demanding are the face-to-face audits, which require sitting down with an auditor and reconciling income and deductions. Others are the less demanding correspondence audits where the IRS has reason to believe that the taxpayer failed to include reported income or has overstated deductions.

Correspondence Audits – Employers, banks, lending institutions, schools, brokerage firms, escrow companies and others all feed data to the IRS, which the IRS, in turn, matches by computer the information reported on your tax return. If there is a significant discrepancy, the IRS will correspond with the taxpayer. Sometimes these discrepancies will result in additional tax liability, while other times a simple explanation will satisfy the IRS and make the problem go away. Here are some examples of typically-encountered discrepancies:

• Unreported Pension Income – Whenever a taxpayer takes money out of one IRA account and rolls it over within the 60-day statutory limit into another IRA or qualified plan, the income is not taxable. However, the financial institution from which the funds were withdrawn will issue a 1099R and report to the IRS that you made a withdrawal. To show the rollover, a taxpayer must report on their tax return that the distribution was in fact rolled over. All too frequently, taxpayers will fail to bring the distribution to their return preparer’s attention thinking that they have met the 60-day rollover requirement. Because the rollover is unreported, it will result in a correspondence audit. Generally, when moving an IRA from one institution to another, making arrangements for a direct transfer will avoid these types of audits. However, that is not universally true, because some institutions will still issue a 1099R, which must be reported on the tax return.
  
  
• Gross Proceeds of Sale – When real estate, stock or other securities is sold, the IRS computer knows what it sold for. Even if there is no gain or loss, it still needs to be reported on the tax return. Otherwise, the IRS will assume the entire sales price (gross proceeds of sale) is taxable profit. By reporting the sale on the return, the taxpayer is able to show what he or she paid for the sold investment, thus minimizing or even reporting a deductible loss.
  
  
• Alimony Paid or Received – A taxpayer who pays alimony is able to deduct the amount he or she paid. On the other hand, the recipient of that alimony must report that amount as taxable income. The IRS computer checks to make sure the amounts match; otherwise, a correspondence audit will be initiated by the IRS. This is an area of frequent mismatch because there is a lot of confusion with what constitutes alimony, child support and property settlements.
  
  
• Home Mortgage Interest – Each of your mortgage lenders will report to the IRS the interest paid on your mortgage for the year and issue you a 1098 for the same amount. If these amounts don’t reconcile, expect a correspondence audit. Where this frequently becomes an issue is when the loan is from a private party and the paying taxpayer must report on his or her tax return the name and social security number of the individual to which the interest was paid, thus allowing the IRS to make sure the private lender is reporting the income. Another frequently encountered area of mismatch is when two or more individuals are on the same loan, but lenders report the interest paid only under one of the borrower’s social security numbers. Here again, a notation must be made on the return showing the individual who actually received the income, so the IRS can make sure they are not claiming 100% of that interest and that the total reported paid by all parties does not exceed the total reported paid on the loan.
  
  
• Tuition Paid – Because of the Hope and Lifetime education tax credits that can be claimed for paying tuition to a qualified education institution, the IRS requires those institutions to report the tuition received to the IRS and issue the 1098-T to the taxpayers. Thus, the IRS has the ability to verify the tuition paid during the year, and any mismatch could result in a correspondence audit.
  
  
• Interest and Dividends – The IRS allows many financial institutions to issue substitute 1099s, i.e. forms that are not in the traditional standard 1099 format. These substitute forms can often be misinterpreted by an untrained eye with various types of interest and dividends reported separately and spread throughout lengthy annual account statements. To make matters worse, many brokerage firms have been issuing amended 1099 statements late in the tax filing season due to their errors in determining the allocation of a taxpayer’s earnings between dividends, qualified dividends, capital gains dividends, and original issue discount interest. Thus, if the taxpayer has already filed, the changes are significant, and if the taxpayer does file an amended return, they will probably receive a correspondence audit.
  
  
• Non-Taxable Interest Beginning in 2006 – Interest from municipal obligations are tax-free for purposes of computing federal tax. However, tax-free municipal interest income is added to income for purposes of computing taxable social security income. It is also counts as income for purposes of determining whether a taxpayer qualifies for earned income credit (EIC). Thus, beginning in 2006, payers of tax-free municipal interest must report the interest paid to the IRS and issue a 1099 to the taxpayer so that the IRS can match the tax-free income to the computation of taxable social security and EIC disallowance. Taxpayers should pay particular attention to this new matching program.
  
  
• Cash Contributions Beginning in 2007 – Beginning for the 2007 tax year, regardless of the amount of cash contributed, the contribution must be backed up with either a bank record or written communication from the donee organization showing the: (1) name of the donee organization, (2) date of the contribution, and (3) amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records.
  
  What this means is that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Donations by debit or credit card can be substantiated by bank records. These new rules will give the IRS the ability to audit taxpayer’s charitable contributions via correspondence audits since all contributions must be backed by written receipt or bank record.
  
  Don’t assume that just because you received a notice that the IRS is correct. They are frequently wrong. Please call this office before responding to any IRS notice. Tax laws are complicated, and the notices are not always easily understood.

Face-to-Face Audits – The more demanding face-to-face audit is rarely encountered by wage-earning taxpayers who report all their income and have deductions that are within the general norms. Self-employed, high-income taxpayers, those who have omitted substantial income, or those who repeatedly fail to show income to support their lifestyle are more likely to be subject to these types of audits.

You can appear for the audit yourself, but that is probably a bad idea since you are not trained in the rules and regulations regarding audit procedures and what limits the IRS’s incursion into your private life. You can authorize your tax professional to handle it without you. Often, this is the best way to prevent the audit from escalating beyond the original areas that attracted the IRS's interest in the first place. Practitioners experienced with IRS audits are less likely to become emotional or to make statements that would lead to additional IRS questioning.

Caution: It is strongly recommended that you contact this office immediately upon receipt of any inquiry from the IRS. Don’t procrastinate, because that only leads to further action on the part of the IRS.

Correspondence from the IRS has a tendency to escalate a taxpayer’s pulse rate. However, most of the communication received is not the feared “come on down” letter that requests an appearance for a face-to-face audit, but instead may only require a written explanation.

Generally, all types of income (wages, interest, dividends, etc.) are reported by the payer to the IRS, who in turn, matches the reported income to the recipient’s tax return based on Social Security number (SSN). Over the past few years, the IRS has become very proficient in using their computer matching programs to pick up unreported income and other discrepancies on tax returns. Discrepancies will generate an IRS inquiry, so take note of the following items which are frequently monitored by the computer matching programs:

• Dependent SSN – The IRS allows only one taxpayer to claim the exemption for a dependent. Frequently, a dependent will claim the exemption themselves, or in other cases, separated or divorced individuals will both attempt to claim the dependent. Expect correspondence when the exemption for any SSN has been claimed twice.
  
  
• Gross Proceeds of Sale – All brokerage firms are required to report security sales to the IRS as “gross proceeds of sale” on Form 1099-B. The 1099-B copy provided to the account owner is generally combined with interest and dividend reporting requirements and included in a consolidated 1099 statement. These statements can be confusing, and the “gross proceeds of sale” is frequently buried in the multi-page statements. If a taxpayer fails to report these security sales, the IRS will treat the gross proceeds as all profit, recompute the tax owed and send a bill.
  
  
• Pension and IRA Rollovers – Unless it is direct (trustee-to-trustee) rollover, the plan administrator is required to issue a Form 1099-R whenever a taxpayer withdraws funds from an IRA or other type of qualified plan. If the 1099-R income is not properly accounted for on the tax return, the IRS may treat it as unreported pension income and issue a revised tax bill. Even if it is directly rolled over, ALWAYS bring rollovers to our attention.
  
  
• Alimony – The person paying alimony must include the recipient’s name, address and SSN with the deduction claimed for alimony payments. The IRS will match the payments to income reported by the recipient. If the two amounts are not the same, the IRS will initiate correspondence to both parties.
  
  
• Home Sales – Technically, escrow companies are not required to issue 1099-S forms to taxpayers who sell their primary residence for less than the home sale gain exclusion amount and certify that they meet the exclusion qualifications ($250,000 for a single taxpayer and $500,000 for married taxpayers). Despite this, many escrow companies choose to issue them, making it necessary to report the home sale and avoid IRS correspondence.
  
  
• Home Mortgage Interest – Since all lenders who are in the business of lending money are required to report home mortgage interest, the IRS can verify the amount claimed as deductible mortgage interest on the Schedule A of a tax return, and any significant discrepancy can lead to IRS correspondence. If a private party holds the loan (not the course of business), Form 1098 is not required to be filed, but the taxpayer claiming the mortgage interest as a deduction is required to include that party’s name, contact information and SSN on Schedule A. The IRS can then match the claimed interest deduction to the amount reported by the private party as interest income.
  
  
• Education Benefits – Schools are now required to report the tuition payments qualifying for the Hope or Lifetime Learning tax credit or the tuition and fees deduction that were made during the year on Form 1098-T. Educational lenders report the amount of student loan interest paid on Form 1098-E. Both are used to match against claimed deductions and credits on the tax return.

Should you receive a notice, it is generally best to contact this office. Don’t just pay the revised tax the IRS proposes. Frequently, the IRS notice is in error and attempting to respond to the notice without professional advice may create additional problems.

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. For instance, the IRS could:

• Seize and sell property that you hold (such as your car, boat or house), or
  
  
• Levy property that is yours but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance or commissions).

Collection Due Process – Generally, the IRS can levy only after these three requirements are met:

• The IRS assessed the tax and sent you a Notice and Demand for Payment;
  
  
• You neglected or refused to pay the tax; and
  
  
• The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) at least 30 days before the levy. The IRS may give you this notice in person, leave it at your home or your usual place of business or send it to your last known address by certified or registered mail with a return receipt requested. Caution: The IRS will generally take your state income tax refund first and then provide you with a Notice of Levy on Your State Tax Refund and Notice of Your Right to Hearing after the levy.

You may ask an IRS manager to review your case, or you may request a Collection Due Process hearing with the Office of Appeals by filing a request for a Collection Due Process hearing with the IRS office listed on your notice. You must file your request within 30 days of the date on your notice. Some of the issues that may be discussed include the following:

• You paid all that you owed before the IRS sent the levy notice,
  
  
• The IRS assessed the tax and sent the levy notice when you were in bankruptcy and subject to the automatic stay during bankruptcy,
  
  
• The IRS made a procedural error in an assessment,
  
  
• The time to collect the tax (called the statute of limitations) expired before the IRS sent the levy notice,
  
  
• You did not have an opportunity to dispute the assessed liability,
  
  
• You wish to discuss the collection options, or
  
  
• You wish to make a spousal defense.

At the conclusion of your hearing, the Office of Appeals will issue a determination. You will have 30 days after the determination date to bring a suit to contest the determination. Refer to IRS Publication 1660, Collection Appeal Rights, for more information. If your property is levied or seized, contact the employee who took the action. You also may ask the manager to review your case. If the matter is still unresolved, the manager can explain your rights to appeal with the Office of Appeals.

Levying Your Wages, Federal Payments, State Refunds or Your Bank Account

• Wage Levies - If the IRS levies your wages, salary or federal payments, the levy will end when:
  o The levy is released,
  o You pay your tax debt, or
  o The time expires for legally collecting the tax. Generally, under IRC §6502, the statute of limitations is within 10 years after the assessment tax. It can be longer in certain circumstances. This is a complicated area where you may need professional assistance.
  
  
• Bank Account Levies - If the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS. To discuss your case, you should call the IRS employee whose name is shown on the Notice of Levy.
  
  
• Property Liens - Once the due process requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that the IRS had a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate. The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business). Caution - Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card or sign a lease. Therefore, it is important that you work to resolve your tax liability as quickly as possible, before lien filing becomes necessary.
  
  
• Property Exempt From Seizure - By law, some properties cannot be levied or seized. The IRS may not seize any of your property unless they have determined that the IRS expects there to be net proceeds to apply to the liability. In addition, they may not seize or levy your property on the day you attend a collection interview because of a summons. Other items that the IRS may not levy or seize include:
  o School books and certain clothing,
  o Fuel, provisions, furniture, and personal effects for a household totaling $7,430,*
  o Books and tools you use in your trade, business, or profession totaling $3,710,*
  o Unemployment benefits,
  o Undelivered mail,
  o Certain annuity and pension benefits,
  o Certain service-connected disability payments,
  o Workmen's compensation,
  o Salary, wages, or income included in a judgment for court-ordered child support payments,
  o Certain public assistance payments, or
  o A minimum weekly exemption for wages, salary, and other income. Use Publication 1494 to determine the amount exempt from Levy.
  
  *These amounts are indexed annually for inflation (amounts shown are for calendar year 2006).

Releasing a Lien – The IRS will issue a Release of the Notice of Federal Tax Lien:

• Within 30 days after you satisfy the tax due (including interest and other additions) by paying the debt or by having it adjusted, or
  
  
• Within 30 days after they accept a bond that you submit, guaranteeing payment of the debt.
  
  In addition, you must pay all fees that a state or other jurisdiction charges to file and release the lien. These fees will be added to the amount you owe. Refer to IRS Publication 1450, Request for Release of Federal Tax Lien. Usually 10 years after a tax is assessed, a lien releases automatically if the IRS has not filed it again. If the IRS knowingly or negligently did not release a Notice of Federal Tax Lien when it should be released, you may sue the federal government, but not IRS employees, for damages.

Applying for a Discharge of a Federal Tax Lien - If you are giving up ownership of property, such as when you sell your home, you may apply for a Certificate of Discharge. Each application for a discharge of a tax lien releases the effects of the lien against one piece of property. Note that when certain conditions exist, a third party may also request a Certificate of Discharge. If you are selling your primary residence, you may apply for a taxpayer relocation expense allowance. Certain conditions and limitations apply. Refer to Publication 783, Instructions on How to Apply for a Certificate of Discharge of Property from the Federal Tax Lien.

What is a non-filer? “Nonfiler” is the term used in the tax industry for someone who has failed to file the required tax returns for one or more years. Whether you are simply a procrastinator, owe money and can’t pay, have marital problems or for whatever reason did not file, it is important for you to know that there are ways to remedy the situation.

Not filing on time can lead to a variety of problems, least of which is not sleeping at night. Don’t listen to those who tell you that you’re headed for jail. That simply is not true! The IRS is more than willing to work out some type of arrangement. And who knows, you might even have a refund which will be lost if you don’t file within the three-year statute of limitations.

It is always better to file a return even if you cannot pay any portion of the tax liability. Here are some of the consequences of not filing your tax return:

• Late Filing Penalty – The IRS imposes a penalty of 5% of the return balance due for each month the return is late, up to a maximum of 25% of the balance due. You can avoid this penalty simply by filing your return on time whether the balance due is paid or not.
  
  
• Return Prepared By IRS – The IRS may use information (W-2s, 1099s, etc.) that they have to prepare a return for you. The biggest drawback with this scenario is that they won’t apply any dependent exemptions, deductions, credits or other tax benefits you may be entitled to. They will simply tax you on your gross income and send a notice and tax bill.
  
  
• Statute Does Not Run - Generally, the statute of limitations on an individual tax return begins to run later of the return due date (generally, the April 15 due date) or the date the return is actually filed. Therefore, putting off filing your return also grants the IRS an extension of time to question you on the return.

So what happens if you can’t pay your tax liability? Keep in mind that if you have the ability to pay (at least if the IRS thinks so), they will not be inclined to settle for less than what you owe. Consider the following options:

• Payment Plan - For taxpayers who cannot pay all their taxes at once, there is the installment agreement option. IRS Form 9465 is used to request a monthly installment plan. Generally, you can have up to 60 months to pay off the liability. Depending upon how much you owe, the IRS may investigate your ability to pay before granting an installment agreement. The IRS cannot refuse your installment agreement request if:
  o You owe $10,000 or less, and
  o The IRS determines that you cannot pay the tax owed in full when it is due and you give the IRS any information needed to make that determination, and
  o You agree to pay the full amount you owe within 3 years and to comply with the tax laws while the agreement is in effect, and
  o During the past 5 tax years, you (and your spouse if filing a joint return) have timely filed all income tax returns and paid any income tax due, and have not entered into an installment agreement for payment of income tax.

But before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan, home equity loan or other sources of funds. The IRS will charge a $43 fee and you will continue to pay interest on the balance, which is generally higher than bank rates.

• Offer-In-Compromise – Where the taxpayer does not have the means to pay the tax liability, IRS will also consider an offer-in-compromise. An offer-in-compromise allows those who qualify to pay an amount less than the actual tax liability. Applying for an offer-in-compromise requires full financial disclosure and the amount of the compromise will be based in part on the taxpayer financial resources and the ability to pay. The IRS will also consider an offer-in-compromise on any of the following grounds:
  o Where a taxpayer is unable to pay the tax,
  o Where there is doubt as to the taxpayer's liability for the tax,
  o Where collection of the full amount would cause economic hardship for the
  taxpayer, or
  o Where compelling public policy or equity considerations exist that provide a
  sufficient basis for compromise.

And what happens if you just ignore the issue? It will only get worse. The IRS could seize your bank accounts, garnish your wages and place a lien on your property. Bottom line: face the music and work out what you owe with the IRS.

The U.S. tax system is built on the premise that all taxpayers are expected to report their tax liabilities accurately and pay them on time. However, the Internal Revenue Code gives the IRS the authority to “compromise” (i.e., settle based on a taxpayer’s adverse economic circumstances) a tax liability for less than its stated amount.

Do you qualify for an offer-in-compromise? Generally, if you can pay your tax liability in full, even if it takes a few years, you won’t qualify for an offer-in-compromise. On the other hand, if your financial circumstances are such that you will never be able to pay off the debt, there is doubt as to the liability for the tax or there are special circumstances, the IRS is allowed to compromise in these instances:

• Doubt exists as to the liability - This means that there is doubt that the assessed tax is correct. If you do not think that you owe the tax liability, then you may submit an OIC for “Doubt as to Liability.” You must submit a detailed written statement explaining why you believe you do not owe the tax that you want to compromise. You are not required to submit a collection information statement if you are submitting an offer based on doubt of liability alone.
  
  
• Doubt exists as to the liability’s collectibility - Doubt exists that you could ever pay the full amount of tax owed. Before the IRS can consider a doubt as to collectibility offer (absent special circumstances), the taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement guidelines. You must submit the appropriate collection information statement along with all required supporting documents.
  
  
• It would advance effective tax administration to settle the liability - This means that the taxpayer does not have any doubt that the tax is correct and there is no doubt that the full amount of tax owed could be collected, but an exceptional circumstance exists that would allow the IRS to consider your offer. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable. If you are requesting an ETA offer, you must submit: a collection information statement with all appropriate attachments and a written narrative explaining your special circumstances and why paying the tax liability in full would create an economic hardship or would be unfair and inequitable.
  
  Note: Although the IRS may compromise any civil or criminal case arising under the Internal Revenue Code, once IRS sends a case to the Department of Justice, the latter gains jurisdiction over its outcome.
  
  Additional limiting factors – Except for offers based solely on “doubt as to liability,” your offer-in-compromise cannot be processed and will be returned by the IRS if:
  
  1. You currently have an open bankruptcy proceeding. Note: You should consult your Bankruptcy Attorney if you are not certain or if you are contemplating bankruptcy.
  
  2. If you have any unfiled federal tax returns that you are required to file. All tax returns that you were legally required to file prior to submitting an offer-in-compromise must be filed, including but not limited to: All Income Tax, Employment Tax and Excise Tax returns, along with all required Partnership, Limited Liability Corporations or closely held Sub-Chapter S Corporation returns.
  
  3. If you are a business with employees, and you failed to timely make any required federal tax deposits for the current quarter and the two immediate preceding quarters.

If you think you qualify for an offer-in-compromise, please give us a call so we can discuss what is needed and set up an appointment.

When married taxpayers file jointly, they become “jointly and individually” responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later separate or divorce.

Joint filers remain “jointly and severally liable” even if a divorce decree states that a former spouse is responsible for any amounts due on previously filed joint returns. The IRS will use all means to collect the tax from either or both of the spouses. One spouse may be held responsible for all the tax due, even if all the income was earned by the other spouse. However, a spouse may in certain cases be relieved of responsibility for tax, interest, and penalties on a joint return under special relief rules. There are three types of relief available:

1. Innocent spouse relief
2. Separation of liability
3. Equitable relief

INNOCENT SPOUSE RELIEF - To qualify for innocent spouse relief, a taxpayer:

1. Must have filed a joint return with an “understatement of tax” (i.e., the difference between the amount of tax that should have been shown on a return vs. the tax actually shown) that was due to “erroneous items” of his/her spouse;

2. Must establish that at the time he/she signed the joint return, he/she didn’t know (and had no reason to know) that there was an understatement; and

3. Accounting for all the facts and circumstances, it would be unfair (i.e., inequitable) to hold the taxpayer liable for the understatement of tax.

Erroneous Items are either:

• Unreported income that was received by the non-innocent spouse and isn’t reported on the return, or
  
  
• Incorrect deductions, credits, or basis claimed by the non-innocent spouse which are improper or for which there is no basis in fact or law.

Indicators of Unfairness are determined based on the facts and circumstances of each individual case. To decide unfairness, the IRS will check several factors, which include:

• Whether the “innocent spouse” received significant direct or indirect benefit from the understatement of tax. A significant benefit is one which is excessive in terms of normal support. Example: In March 2006, Jenna received $20,000 from Terence, her spouse of 10 years. The funds were traced to Terence’s lottery winnings in 2004. No winnings were reported on the couple’s joint federal return in 2004. The couple’s normal monthly household operating budget was around $4,000. More than likely, the IRS would rule that Jenna had received a significant benefit due to the $20,000 gift, even though it was received in a year other than the one in which the unreported income occurred.
  
  
• Desertion of the innocent spouse by the non-innocent spouse.
  
  
• Divorce or separation of the spouses.
  
  
• Innocent spouse received a benefit on the return from the understatement.

RELIEF BY SEPARATION OF LIABILITY - To file a claim for this type of relief, the understatement of a joint tax liability (including interest and penalty) must be allocated (separated) between spouses (or former spouses). Since this form of relief is for unpaid liabilities resulting from understatements of tax, the relief doesn’t generate refunds.

To request relief by separation, a taxpayer must have filed a joint return and meet either of the following when the application is filed:

• Be divorced or legally separated from the spouse with whom the joint return was filed (widowed counts the same as divorced or legally separated), OR
  
  
• Not be a member of the same household as the spouse with whom the joint return was filed during the 12-month period ending on the date Form 8857 is filed. Note: The reason for living apart must be due to estrangement, not temporary absence.
  
  Limitations - Innocent spouse relief by separation won’t be granted in these situations:
  
  1. IRS proves that the spouses transferred assets to each other fraudulently.
  
  2. IRS shows that the “innocent spouse” had actual knowledge of erroneous items at the time of signing the joint return. NOTE: A victim of domestic abuse who had actual knowledge of errors may still qualify for relief if the abuse happened before signing the joint return and fear prevented the abused spouse from challenging treatment of return items.
  
  3. The “non-innocent” spouse transfers property to the “innocent” spouse to avoid taxes. A transfer to avoid tax is presumed if made within one year before the date on which the IRS sent its first letter of proposed deficiency. However, this presumption doesn’t apply if the transfer is made under a divorce decree or separate maintenance agreement, nor does it apply where a taxpayer can establish that the main purpose of the transfer was not tax avoidance.

EQUITABLE RELIEF - If a taxpayer doesn’t qualify for the two other forms of innocent spouse relief, the IRS will automatically consider whether equitable relief is suitable to the situation. A taxpayer may qualify for equitable relief if all of the following are met:

1. The taxpayer doesn’t qualify under one of the other forms of relief (e.g., separation of liability);

2. The spouses didn’t transfer assets to each other fraudulently or for the purpose of avoiding tax payment;

3. The taxpayers’ return wasn’t fraudulently filed;

4. The taxpayer did not pay the tax owed (although a refund may be available for certain installment payments made after Form 8857 is filed);

5. The taxpayer can establish that it would be unfair (inequitable) to hold him/her responsible for the tax liability;

6. The income tax from which the taxpayer seeks relief is attributable to the “non-innocent” spouse, unless one of the following exceptions apply:

a. The item is partly or totally attributable to the taxpayer under community law.
b. An item titled in the taxpayer’s name is attributable to the taxpayer unless rebutted by facts and circumstances.
c. The taxpayer had no knowledge, or reason to know, that the “non-innocent” spouse misappropriated the funds that were intended to pay the tax.
d. The taxpayer establishes being an abuse victim before signing the return, and because of prior abuse, didn’t challenge the treatment of items on the return for fear of retaliation by the spouse.

INDICATORS OF UNFAIRNESS - The IRS considers all facts and circumstances to determine if it is unfair to hold the innocent spouse responsible for an underpayment or understatement of tax. The following factors are examples of items weighed by the Service in equitable relief cases:

Favorable Factors:

• Separation or divorce of the involved spouses
• Economic hardship
• Abuse
• Lack of knowledge of the innocent spouse
• Non-innocent spouse’s obligation under a divorce decree to pay the tax
• The tax owed is attributed to the non-innocent spouse.

Unfavorable Factors:

• No economic hardship if relief is not granted.
• Innocent spouse had knowledge of the understated items.
• Innocent spouse received significant benefit from the unpaid tax.
• Lack of good faith effort to comply with the tax law by the innocent spouse.
• Innocent spouse has an obligation to pay the tax under a divorce decree.
• Tax for which relief request is made is attributable to the innocent spouse.

Spousal Notification – Be aware that the law requires the IRS to inform your spouse or former spouse of the request for relief from liability. The IRS is also required to allow your spouse or former spouse to provide information that may assist in determining the amount of relief from liability. The IRS will not provide information to your spouse or former spouse that could infringe on your privacy. The IRS will not provide your current name, address, information about your employer, phone number or any other information that does not relate to making a determination about your request for relief from liability.

If you believe you qualify for relief under innocent spouse, separation of liability or equitable relief, you will need to complete IRS Form 8857 and include a written statement explaining why you would qualify for relief. You should also complete and attach IRS Form 12510 (Questionnaire for Requesting Spouse), which may help speeding up the processing. Generally, you can expect the IRS to request additional information before making their final determination.