Tax Relief Blog

Subsidiary's employment tax liability cannot be collected from the parent corporation [Chief Counsel Advice 200913052]:

The IRS Office of Chief Council has expressed its opinion in a new Chief Council Advice (CCA) that the employment tax liability of a subsidiary corporation in a consolidated group cannot be collected from the parent corporation.

A "subsidiary" is defined under Reg. § 1.1502-1(c) as a corporation that is a member of a consolidated group, but is not the common parent of the group. In a consolidated group, (1) the parent corporation must directly own at least 80% of the total voting power and 80% of the total value of the stock in at least one other "includible" corporation in the group, and (2) one or more of the other includible corporations in the group must directly own at least 80% of the stock (by vote or value) in each of the remaining includible corporations.

In the CCA, the IRS acknowledges that all members of the consolidated group are severally liable for the entire income tax owed on the corporate income tax return, but it believes that each member of the group only owes its own employment tax obligations.

Resolve your employment tax problem by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES

IRS announces settlement offer for those that voluntarily disclose unreported offshore income

Mike Habib, EA Tax Relief & Tax Resolution Services

IRS Commissioner Doug Shulman has announced what is in effect a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, 20% of the highest asset value of an account anytime in the past six years. However, those who come forward on a timely basis will not face criminal prosecution.

Highlights of the offer. As explained in a memorandum written by Linda E. Stiff, Deputy Commissioner for Services and Enforcement and addressed to the Commissioners for the Large and Mid-Size (LMSB) and Small Business/Self-Employed () Divisions, the tax liabilities related to offshore issues of taxpayers that make "voluntary disclosure requests'" will be settled as follows:

• Taxes and interest due going back 6 years will be assessed. The taxpayer must file or amend all returns, including information returns, and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)).
• IRS will assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied).
• In lieu of all other penalties that may apply (including FBAR and information return penalties), IRS well assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value. The penalty is reduced to 5% if, with respect to the accounts or entities formed: (a) the taxpayer did not open them or cause them to be opened or formed; (b) there has been no activity during the period the accounts/entities were controlled by the taxpayer; and (c) all applicable U.S. taxes have been paid on the funds in the accounts/entities (where only the earnings have escaped U.S. taxes).

The above terms will apply only to taxpayers that "fully cooperate with the IRS both civilly and criminally," for all voluntary disclosure requests that are submitted to IRS, and are not yet resolved. The terms will remain in effect only for six months from Mar. 23, 2009 (the date that the Deputy Commissioner for Services and Enforcement released the memorandum on voluntary disclosure requests). IRS Commissioner Doug Shulman says that after that time, IRS would reevaluate all of its options, and warned that for those "who continue to hide their heads in the sand, the situation will only become more dire."

Related memoranda to the SBSE and LMSB Directors describe various penalties that may apply in offshore cases, revoke the "Last Chance Compliance Initiative" as of Mar. 23, 2009, and explains how voluntary disclosure cases are to be routed within IRS.

Those coming forward will avoid criminal prosecution. IRS Commissioner Doug Shulman's Statement on Offshore Income says that those taxpayers who hid money offshore can avoid criminal prosecution by timely complying with the terms of the offer.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: Offshore IRS settlement, tax relief services, IRS tax settlement, Offshore tax problem, UBS IRS tax problem, Swiss account tax problem, IRS Tax Help

Linked trusts were eligible to be S shareholders PLR 200912005

Mike Habib, EA Tax Relief & Tax Resolution Services

IRS has privately ruled that a trust having a second trust as a remainder beneficiary could choose to be treated as an electing small business trust (ESBT) and thus was eligible to be a shareholder of an S corporation. IRS also concluded that the second trust was not a charitable remainder trust. As a result, the second trust will be eligible to be treated as an ESBT when it becomes a potential current beneficiary of the first trust.

Facts. Trust 1, which was created under Will 1, is the sole shareholder of Company, a C corporation. Company intends to elect to be treated as an S corporation. Trust 1 has individual beneficiaries and remainder beneficiaries. The remainder beneficiaries of Trust 1 are all individuals except for Trusts 2 and 3, which were created under Will 2. Trust 3 is a tax-exempt Code Sec. 501(c)(3) organization. Trust 2 has individual beneficiaries. Upon the death of the last of them, Trust 2 will terminate and the trust estate will be added to Trust 3.

Trust 2 is required to pay, not less often than annually, either a sum certain (not less than 5% nor more than 50% of the initial net fair market value (FMV) of all property placed in trust), or a fixed percentage (which is not less than 5% nor more than 50%) of the net fair market value of its assets, valued annually, to one or more persons.

Trust 1 has not made an election to be a qualified subchapter S trust (QSST) and is not exempt from income tax. All current beneficiaries of Trust 1 received their trust interests by inheritance and not by purchase.

Rulings sought. Trust 1 asked IRS to rule that it is eligible to be an ESBT under Code Sec. 1361(e), and is thus eligible to be an S corporation shareholder under Code Sec. 1361(b)(1)(B) and Code Sec. 1361(c)(2) . It also asked IRS to rule that Trust 2 is not a charitable remainder trust under Code Sec. 664(d).

Background. An S corporation is a small business corporation for which an election under Code Sec. 1362(a) is in effect for a tax year. (Code Sec. 1361(a)(1)) A small business corporation cannot have as a shareholder a person (other than an estate, a trust described in Code Sec. 1361(c)(2), or an organization described in Code Sec. 1361(c)(6)) who is not an individual.

An ESBT may be an S shareholder. (Code Sec. 1362(c)(2)(A)(v)) An ESBT must meet the following requirements:

(1) The trust must not have any beneficiaries other than individuals, estates, or charitable organizations described in Code Sec. 170(c)(2) through Code Sec. 170(c)(5) (relating to various charitable organizations, war veterans organizations, fraternal lodges, and cemetery organizations). Nonresident aliens may be beneficiaries (but not potential current beneficiaries). Organizations described in Code Sec. 170(c)(1) (i.e, state governments, U.S. possessions, political subdivisions of states or U.S. possessions, and the U.S. and the District of Columbia) may also be ESBT beneficiaries. However, they may only hold contingent interests and may not be potential current beneficiaries. (Code Sec. 1361(e)(1)(A)(i))

(2) No interest in the trust may have been acquired by purchase. (Code Sec. 1361(e)(1)(A)(ii)) (3) An election to be an ESBT must apply to the trust. (Code Sec. 1361(e)(1)(A)(iii)) (4) A QSST election must not have been made with respect to any stock held by the trust. (Code Sec. 1361(e)(1)(B)(i)) (5) The trust must not be a tax-exempt trust, a charitable remainder annuity trust (CRAT), or a charitable remainder unitrust (CRUT). (Code Sec. 1361(e)(1)(B)(ii), Code Sec. 1361(e)(1)(B)(iii))

Reg. § 1.1361-1(m)(1)(ii)(A) provides that for purposes of Reg. § 1.1361-1, a beneficiary includes a person who has a present, remainder, or reversionary interest in the trust. Under Reg. § 1.1361-1(m)(1)(ii)(B), a distributee trust is the beneficiary of the ESBT only if the distributee trust is an organization described in Code Sec. 170(c)(2) or Code Sec. 170(c)(3). In all other situations, any person who has a beneficial interest in a distributee trust is a beneficiary of the ESBT. (Reg. § 1.1361-1(m)(1)(ii)(B))

A distributee trust is a trust that receives or may receive a distribution from an ESBT, whether the rights to receive the distribution are fixed or contingent, or immediate or deferred. (Reg. § 1.1361-1(m)(1)(ii)(B))

A potential current beneficiary is, with respect to any period, any person who at any time during such period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent such power remains unexercised at the end of such period). (Code Sec. 1361(e)(2)) For purposes of determining whether a corporation is a small business corporation, each potential current beneficiary of an ESBT generally is treated as a shareholder of the corporation. (Reg. § 1.1361-1(m)(4)(i)) No person is treated as a potential current beneficiary solely because that person holds any future interest in the trust.

Reg. § 1.1361-1(m)(4)(iv) contains the rules for determining who are the potential current beneficiaries of an ESBT if a distributee trust becomes entitled to, or at the discretion of any person, may receive a distribution from principal or income of an ESBT. If the distributee trust is not a trust described in Code Sec. 1362(c)(2)(A), then the distributee trust is the potential current beneficiary of the ESBT and the corporation's S corporation election terminates. (Reg. § 1.1361-1(m)(4)(iv)(B))

If the distributee trust is a trust described in Code Sec. 1362(c)(2)(A), the persons who would be its potential current beneficiaries if the distributee trust were an ESBT are treated as the potential current beneficiaries of the ESBT. (Reg. § 1.1361-1(m)(4)(iv)(C)) For this purpose, a trust will be deemed to be so described if it would qualify for a QSST election or an ESBT election if it owned S corporation stock. (Reg. § 1.1361-1(m)(4)(iv)(D))

A charitable remainder trust () is a trust formed to make current distributions to one or more noncharitable income beneficiaries and to pay the entire remainder to charity or use it for a charitable purpose. A CRT must be either a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). A CRAT is a trust which is to pay its income beneficiary or beneficiaries a specified sum each year that can't be less than 5% nor more than 50% of the initial net FMV of all property placed in trust. A CRUT is a trust which is to pay the income beneficiary or beneficiaries a fixed percentage each year, not less than 5% nor more than 50% of the net FMV of its assets, as valued annually. Some variations are permitted.

Ruling 1. IRS concluded that Trust 2 is a distributee trust. Therefore, its beneficiaries will be treated as the beneficiaries of Trust 1 for ESBT qualification purposes. Consequently, Trust 1 is eligible to elect to be treated as an ESBT and is thus eligible to be an S shareholder.

Ruling 2. IRS concluded that Trust 2 is not a charitable remainder trust. Therefore, Trust 2 will not be ineligible to be treated as an ESBT when it becomes a potential current beneficiary of Trust 1. Consequently, Trust 2 will qualify for deemed Code Sec. 1361(c)(2)(A) treatment under Reg. § 1.1361-1(m)(4)(iv)(D).

Get tax relief and resolve your tax problems by retaining the tax firm of Mike Habib, EA.

IRS wage garnishment levy and IRS bank levy tax relief

Collecting tax revenue in the face of recession has been - and will continue to be - a challenge for the IRS. There is an increase in the number of taxpayers unable to pay their back taxes due to loss of main income and other such economic hardships. Are you one of these people? Don't worry - there's IRS collection help, wage and bank levy release, and other tax relief assistance available for you from this website. Mike Habib has the expertise to help affected taxpayers like you defend their rights and take advantage of the appropriate IRS tax relief options.

Wage and bank levy release

When wage garnishment, wage levy occurs, the employer keeps a sizeable part of an employee's salary or wage in order to pay the employee's tax debts. So what debts qualify for a wage garnishment? The most common ones are unpaid taxes, unpaid court fines, child support, unpaid student loans, and many more. If the person has more than one debt, then there is a big chance that his salary won't be able to cover them all. What the employer does is to prioritise which debt demands solutions first. In most cases, of course, the federal tax would be paid first.

A tax levy (more commonly known as IRS bank levy, or IRS wage levy) is another collection procedure that forces "wilful compliance" on the IRS' part. The IRS can seize your possessions, whether you like it or not. Everything from your bank account, your car, or even your home can be seized in order to pay off your back taxes. Tax levy is typically a last resort after all methods have been exhausted. You have 30 days to reach a collection agreement with the IRS before they can start seizing your assets. The only instances when the IRS cannot issue a levy are (a) when you file for bankruptcy, or (b) if you are awaiting a court decision regarding a possible payment alternative.

Wage garnishments, bank levies and tax liens not only affect your chances of qualifying for loans; it can also put your reputation in jeopardy and make it difficult for you to seek employment in the future. If you do not know your rights, you are at a disadvantage.

Luckily, tax expert Mike Habib can arrange for a wage and bank levy release. Avoid the stressful - not to mention humiliating - ordeal of these IRS collection tactics. We can stop the wage garnishment and stop the bank levy. He has years of successful experience in IRS collection help. Mike Habib knows your rights as a taxpayer, and he can help. Stop further collection action and call our tax help line now at 1-877-78-TAXES.

Get the tax help you need - now

Obviously, nobody wants to be the target of wage garnishment or a bank levy. However, many US citizens end up being the subject of these humiliating collection tactics because they choose to ignore rather than solve their tax problem. Fortunately, there are viable options that you can turn to in order to achieve tax relief. One of these methods is to seek the help of a qualified tax professional like Mike Habib to obtain that much-needed wage and bank levy release for you.

Licensed by the IRS, Mike Habib has the right experience and qualifications to provide you with the best IRS collection help. The firm takes immediate action because tax problems only get worse the longer you ignore them. Mike Habib will also personally help you organize and file your unfiled tax returns, negotiate an appropriate payment plan for you, obtain release of wage garnishments and tax levies, and seek a negotiated settlement so you can pay off your taxes without being financially ruined for life.

Retaining the services of Mike Habib also prevents you from running into other tax problems in the future, so you can enjoy the rest of your life with peace of mind and financial stability.

Nationwide IRS Wage Garnishment Levy Release & IRS Bank Levy Release and IRS Tax Help Serving: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.

Solve Your 941 Payroll Tax Problems

It's fairly common for businesses - no matter what size - to struggle with some sort of 941 tax issue or another. Even companies that use good payroll software to sort out their entire payroll related taxes are still prone to errors. The IRS implements strict guidelines when it comes to filing and paying payroll taxes in a timely manner. Are you a business owner with 941 payroll tax problems? It's going to be difficult to obtain tax relief if you have been found guilty of deliberately failing to meet your obligations.

Late filing and payment

Late payment of payroll taxes causes your business to incur penalties and additional fees, which can be a huge problem especially if your business is already contending with cash flow issues to begin with. Small businesses, for instance, rarely have ample capital to run their operations, so when unexpected fees like these come up, cash flow is compromised.

The issue gets worse if you fail to file your payroll returns on time, as you're incurring penalties for that error as well. Each monthly delay on filing can cost you 5% of your whole tax debt - and that doesn't include other penalties resulting from late payments. Tax help usually comes in to negotiate these fees but unless you get it from a reliable and licensed professional, you wouldn't be able to get anywhere as far as tax relief is concerned.

Trust fund recovery penalty

As an employer, it is your responsibility to deduct federal tax dues from your employees' paychecks and pay it to the IRS on time. Failure to do so will result in a 100% penalty and enforced collection on the responsible person, the owner of the business or an officer of the corporation. The IRS can also put a levy on your company's assets, including bank accounts and receivables until you pay for the payroll tax debt.

Handling payroll tax errors

The best ways to avoid payroll tax problems is to timely file and pay your taxes. Make sure that your payroll is current. You may want to source this work to a professional so you make sure that all the payroll taxes and withholdings are properly accounted for.

It's natural to make mistakes. To avoid messy payroll tax problems, you want to review your records every year and be on the lookout for these errors. Doing so will help you handle discrepancies as they come instead of tackling all of them two to three years later, when errors have gotten out of hand.

Know your rights!

In order to get the best tax relief possible, it is important for you to know what your rights are. The IRS will then assess you penalties according to your willfulness - that is, your awareness that a lapse in payment has taken place. It pays to have a tax professional with you so you can assess whether or not you're eligible for certain tax relief help options such as installment payments, offer in compromise, and other alternatives.

Solve your payroll tax problems now

Mike Habib can offer reliable tax relief help. Contact him through this website to obtain a free consult and assess your options.

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How small businesses can use the new longer NOL carryback to achieve maximum tax savings

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial changes for businesses. A key provision in the new law which is designed to help struggling eligible small businesses cope with the economic downturn is a temporary elective extension of the carryback period for certain net operating losses (NOLs) from 2 years to up 5 years. The longer NOL carryback period gives small businesses that experienced losses the ability to get immediate refunds of income taxes paid in earlier years. The refunds can be used to fund capital investment or other expenses.

Important decisions must be made for an eligible small business to achieve maximum tax savings from this provision. The IRS has issued favorable guidance on this provision and says that it will act quickly to get refunds to businesses carrying back losses under the new rule. But, in addition to making correct choices, a business must follow certain filing procedures to qualify for this important tax break and, in some cases, must do so before Apr. 18, 2009.

Details of the new longer NOL carryback period. In general, NOLs may be carried back 2 years and forward 20 years (different rules apply for certain specialized types of losses and the carryback period may be waived). For NOLs arising in a tax year beginning or ending in 2008, the Recovery Act permits eligible small businesses (ESBs) to elect to increase the NOL carryback period from 2 years to 3, 4, or 5 years. For calendar year businesses, the election is available only for 2008. A fiscal-year taxpayer whose year ends in 2008 can make the election either for its fiscal year ending in 2008 or its fiscal year beginning in 2008 and ending in 2009, but not both.

An ESB is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less for the three-tax-year period (or shorter period of existence) ending with (as clarified in the IRS guidance) the tax year in which the loss arose (as opposed to the tax year before the year of the loss, as some had read the statutory language). The IRS interpretation generally is more favorable to taxpayers because, for example, more calendar year taxpayers would qualify using 2008 receipts rather than 2005 receipts, when economic conditions were much better. In determining whether a partnership, S corporation, or sole proprietorship qualifies as an ESB, the gross receipts test applies at the partnership, S corporation, or sole proprietorship level but the election is made by the partner, S shareholder or owner or the sole proprietorship, as the case may be.

Deadlines for making the election. A taxpayer that already filed a 2008 return may still make the election to use a 3-, 4- or 5-year carryback by the later of: (A) six months after the due date of the return (determined without extensions), or (B) Apr. 17, 2009. A taxpayer that previously elected to waive the normal 2-year carryback period may undo it and make a new election no later than Apr. 17, 2009. A taxpayer that has not filed a return for the year of the loss, has until the later of: (A) the due date (with extensions) of the return for the year of the loss, or (B) Apr. 17, 2009 to make the election. Thus, in some cases, action is required by Apr. 17, 2009.

Deciding which choice or choices to make. ESBs with a qualifying NOL must decide whether to waive the carryback period or to use a 2-, 3-, 4- or 5-year carryback period. Fiscal year filers have the added choice of which year to use. These choices are quite complex and require a detailed examination of your tax picture. The key factor in deciding whether to elect to carry an NOL back 3, 4, or 5 years should be which election will result in the largest tax savings. For example, if the NOL is more than or at least equal to your combined income for the third, fourth, and fifth years before the year in which it arose, then the loss should be carried back to the fifth year so that it can be used in all three years. We can help you make the choice or choices that will achieve maximum tax savings for you. It is especially important to make the right choice because once made, the choice is irrevocable.

Getting a quick refund. Corporations making the election can get a quick refund by filing Form 1139. Individuals use Form 1045 to get a quick refund. The IRS has supplied detailed instructions as to what information must accompany these forms. We can handle all of that.

Ponzi scheme losses. In separate guidance, the IRS says losses from Ponzi schemes, like the Madoff situation, may be deducted as theft losses and because theft losses are treated as business losses for NOL purposes, the individual suffering such losses is considered a sole proprietor. This means that the individual may be able to use the 3-, 4- or 5-year carryback period for his or her 2008 Ponzi scheme losses.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: Obama tax relief, tax help for businesses, tax relief for businesses

IRS Tax Penalties in Detail

Mike Habib, EA Tax Relief & Tax Problem Resolution

The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion.

If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.

Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).

This fact sheet is the 22^nd in the Tax Gap series. It provides additional guidance to taxpayers regarding civil penalties and the consequences for understating income and overstating expenses.

Estimated Tax-Related Penalties

Employees have taxes withheld from their paychecks by their employer. When you have income that is not subject to withholding you may have to make estimated tax payments during the year.

This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount being withheld from your salary, pension, or other income is not enough to pay your tax liability.

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may have to pay a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Penalties for filing or paying taxes late

The most common penalties are for filing late or paying taxes late.

Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).

If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return.

Paying tax late: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

Combined penalties: For any month both the penalty for filing late and the penalty for paying late apply, the penalty for filing late is reduced by the penalty for paying late for that month, unless the minimum penalty for filing late is charged.

Accuracy Related Penalties

The two most common accuracy related penalties are the "substantial understatement" penalty and the "negligence or disregard of the rules or regulations" penalty. These penalties are calculated as a flat 20 percent of the net understatement of tax.

Penalty for substantial understatement

You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000for individuals. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10 percent (or if greater, $10,000) or $10,000,000.

You may avoid the substantial understatement penalty if you have substantial authority for your tax treatment of the item or through adequate disclosure. To avoid the substantial understatement penalty by adequate disclosure, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position.

To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged. This means that the position must be more than just arguable. There must be some authority supporting the position.

Penalty for negligence and disregard of the rules and regulations

"Negligence" includes (but is not limited to) any failure to:

• make a reasonable attempt to comply with the internal revenue laws
• exercise ordinary and reasonable care in preparation of a tax return or
• keep adequate books and records or to substantiate items properly

This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.

Civil Fraud penalty

If there is any underpayment of tax on your return due to fraud, a penalty of 75 percent of the underpayment due to fraud will be added to your tax. The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.

Negligence or ignorance of the law does not constitute fraud.

Typically, IRS examiners who find strong evidence of fraud will refer the case to the Internal Revenue Service Criminal Investigation Division for possible criminal prosecution. Keep in mind that both civil sanctions and criminal prosecution may be imposed.

Frivolous Tax Return penalty

You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. If you jointly file a frivolous tax return with your spouse, both you and your spouse each may have to pay a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.

You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.

This penalty is added to any other penalty provided by law.

Penalty for bounced checks

If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.

The bottom line is that you must report all your income, file your return and pay your tax by the due date to avoid interest and penalty charges.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

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Summary of IRS tax penalty rules

Mike Habib, EA Tax Relief & Tax Problem Resolution

Taxpayers who do not file their tax return and pay their tax by the due date may have to pay a penalty. Here are seven things you should know about failure-to-file and failure-to-pay penalties.

• 1. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.
  2. The penalty for filing late is usually 5 percent of the unpaid taxes for each month of part of a month that a return is late. This penalty will not exceed 25 percent of the taxpayer's unpaid taxes.
  3. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  4. You will not have to pay a failure-to-file penalty if you can show that you failed to file on time because of reasonable cause and not because of willful neglect.
  5. You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.
  6. If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty.
  7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: IRS penalty, avoid IRS penalty, tax penalty abatement

IRS giving relief to some Madoff investors

By MARCY GORDON, AP Business Writer

WASHINGTON - The Internal Revenue Service issued guidelines Tuesday that will allow tax relief and refunds for some Bernard Madoff victims who were levied for investment earnings that turned out to be nonexistent.

IRS Commissioner Douglas Shulman told Congress the guidelines are for taxpayers who have suffered losses from Ponzi investment schemes such as the massive Madoff swindle.

Madoff investors should have reported earnings from their investments with him through the years and thus paid taxes on those earnings. Given that some of those were "phantom" profits, investors have said they should be entitled to refunds of the taxes they paid.

Investors in some of these cases are entitled to a "theft-loss" deduction, not subject to the limits on normal capital losses from investments, according to the IRS guidelines, Shulman testified at a Senate Finance Committee hearing.

The theft-loss deduction can be taken in the year a fraud is discovered, except to the extent an investor has a "reasonable prospect" of recovering the lost money, Shulman said.

Determining the amount and timing of losses from Ponzi schemes is "factually difficult" and it can take years to determine the prospects for recovering the lost money, he noted.

In Ponzi schemes, early investors are paid returns from money put in by later investors.

"Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years," Shulman testified. The new IRS guidelines do not address that argument, he said.

Sen. Charles Schumer, D-N.Y., a member of the Finance Committee who has been pushing for tax relief for victims of Ponzi schemes, said that with the new guidelines the IRS "has done the right thing here."

"In most every area where there was a major dispute, they have sided with the victims," Schumer said. "These victims were not only sophisticated financial professionals, but also ordinary people who believed they were making safe, responsible investments for their future. The steps announced today mean victims won't owe taxes on income they never received."

To date, about $1 billion in assets have been identified for Madoff investors, a tiny portion of the $65 billion he told his 4,800 investors that he had on hand in November. Authorities say they believe the figure included what would have existed if much smaller original investments had grown for decades.

By some estimates, the IRS could be out as much as $17 billion in lost tax revenue from refunds to investors who earned fictitious profits in the Madoff scheme.

The 70-year-old disgraced money manager and former chairman of the Nasdaq Stock Market has been living in a small cell at the Metropolitan Correctional Center in lower Manhattan since he pleaded guilty Thursday to securities fraud, perjury and nine other charges. He could be sent to prison for up to 150 years at a June sentencing.

The Securities Investor Protection Corp., the industry-funded organization that steps in when brokerage firms fail, has begun sending out the first checks to Madoff victims. Investors are eligible for up to $500,000 from the organization and have until July to file claims.

Around $1.6 billion or so is currently available to SIPC.

Shulman said that investors should deduct the $500,000 they receive from SIPC from the amount they claim as a "theft loss" from their Madoff investment.

The IRS expects that statements provided to investors by Madoff's fund, showing the amounts they invested, should be sufficient documentation to establish losses for filing tax claims, he told the hearing.

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Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

What are your chances for being audited? IRS's 2008 data book provides some clues IR 2009-22

Mike Habib, EA Tax Relief & Tax Problem Resolution

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2008 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits), and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections.

What are the chances of being examined? A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).

Of the total number of returns audited, 503,755 (36.2%) were selected on the basis of an earned income tax credit (EITC) claim (down slightly from the 36.5% rate for FY 2007).

Only 22.3% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.7%) were correspondence audits. These percentages are about the same as they were in FY 2007.

About 1.36 million individual returns were farm returns that showed gross receipts from farming (Schedule F). Of this group, only 7,542 (0.5%) were audited in 2008.

The no-change rate (returns accepted as filed after examination) was 11% for individual returns examined by revenue agents, tax compliance officers, or tax examiners, and 15% for correspondence exams.

Here's a roundup of selected audit rates from IRS' latest databook. Following are the audit rates for individual nonbusiness returns that didn't claim the earned income tax credit:

• For "selected nonbusiness returns" (includes returns without a Schedule C (nonfarm sole proprietorship), Schedule E (supplemental income and loss), Schedule F (profit or loss from farming), or Form 2106 (employee business expenses), 0.4% (same as for FY 2007).
• For returns with Schedule E or Form 2106 (excludes returns with a Schedule C, nonfarm sole proprietorship, or Schedule F, profit or loss from farming), 1.3% (up from 1.2% for FY 2007).
• For nonfarm business returns by size of total gross receipts: under $25,000, 1.2% (down from 1.3% for FY 2007); $25,000 under $100,000, 1.9% (down from 2% for FY 2007); $100,000 under $200,000, 3.8% (down from 6.2% for FY 2007); and $200,000 or more, 0.6% (down from 1.9% for FY 2007).

The audit rates for entities were as follows:

• Fiduciary (estate and trust income tax returns), 0.1% (the same as for FY 2007);
• Corporations with less than $10 million of assets, 1.0% (up from 0.9% for FY 2007);
• Corporations with $10 million or more of assets, 15.3% (down from 16.8% for FY 2007);
• S corporations, 0.4% (down from 0.5% for FY 2007);
• Partnerships, 0.4% (same as FY 2007);
• Estate tax returns, 8.1% (up from 7.7% for FY 2007); and
• Gift tax returns, 0.4% (down from 0.6% for FY 2007).

On the corporation side, there were a total of 783,864 civil penalty assessments (up from 762,718 for FY 2007), 82.6% for either failure to pay or underpayment of estimated tax.

Offers in compromise. In FY 2008, 44,000 offers in compromise were received by IRS, and 11,000 (25%) were accepted. Over recent years, these numbers have been dropping; in 2007 for example, 46,000 offers in compromise were received by IRS, and 12,000 (26%) were accepted.

Criminal cases. IRS initiated 3,749 criminal investigations in FY 2008. There were 2,785 referrals for prosecution and 2,144 convictions. Of those sentenced, 80.9% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2007, IRS initiated 4,211 criminal investigations, there were 2,837 referrals for prosecution, and of those sentenced, 81.2% were incarcerated.

Information returns. IRS received a total of 1.883 billion information returns in FY 2008, including Forms 1098 (mortgage interest, student loan interest, and tuition), 1099 (interest, dividends, etc.), 5498 (individual retirement arrangement and medical savings account), W-2 (wages), W-2 (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 2.8% were submitted on paper.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: IRS tax problem, IRS tax audit, offer in compromise, surviving an audit, IRS tax help, IRS tax relief, IRS tax examination

Pasadena, CA March 13, 2009 - The current recession offers the best opportunity for individuals and businesses to address their tax issues and effectuate a tax settlement with the IRS. The Internal Revenue Service has announced its willingness to resolve and settle delinquent tax accounts; this will help those taxpayers who've been struggling for years to fulfill their tax obligations. Tax relief is going to be easier for those who are also facing huge medical bills, recent job loss as well as those who are relying on Social Security.

"This is a very difficult period for the whole country but most specially to individuals who are heavily burdened by the financial obligations that they have to meet," says Mike Habib, an Enrolled Agent who specializes in providing expert tax help to individuals and businesses. "With the IRS promising to be more flexible, the current conditions are giving rise to an opportunity for Americans to resolve their tax concerns and get proper help."

The IRS has changed its policies for tax payments in response to the ongoing recession. It has taken on a more humane approach when it comes to addressing people who are finding it difficult to pay their taxes due to financial burdens. IRS employees are now provided with greater authority to be able to suspend collections particularly in situations where individuals are incapable of making their payments because of emergencies such as job loss or substantial medical bills.

"This doesn't mean that you can stop paying your taxes," Habib points out, "but it only shows that it's now easier to get tax relief when you really need it."

The IRS would consider accepting a lesser amount to settle delinquent accounts for those taxpayers who qualify to settle their tax matters for less than they owe. But this kind of tax help is only applicable to those who are really making an effort to do something about their tax problems. These settlement programs are particularly for those taxpayers who are unable to pay their taxes because of their current financial crisis.

Those who are applying for tax relief have the option of directly contacting the IRS. However, it is advisable that they go through a trusted tax professional who personally offers tax help through negotiated tax settlements. "The IRS requires full financial disclosure if your tax debts amount to over $25,000 so you're going to need an experienced tax professional to handle the negotiations for you," Habib explains. "This will allow you to land on a more agreeable settlement that you can easily work with."

About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS tax problems. He is licensed to represent taxpayers in all 50 states. He personally handles and negotiates each case to make sure that clients get the best possible resolution for their particular tax situation.

-END-

CONTACT:

Mike Habib, EA

3452 E. Foothill Blvd., Suite 1010

Pasadena, California 91107 USA

Toll Free: 1-877-78-TAXES

http://www.myirstaxrelief.com

Get your CA FTB withheld tax refund today by contacting Mike Habib, EA at 1-877-78-TAXES (1-877-788-2937)

CA Tax Rates

According to the California State Franchise Tax Board (FTB), partnerships that are not based in California should file withholding tax on the sale of real estate in the state. The CA tax rate is at 3 1/3 percent of the proceeds from the sale or 9.3 percent of the gain. The board also increased the alternative withholding rates for real estate sales by S corporations. These groups are now subjected to a 10.8% rate for the sale of real property. On the other hand, financial S corporations are subjected to withholding rates of 12.8%.

For installment sales

For real property acquired on installment, the buyer is now required to file a tax withheld on the principle portion for the payment of installment sales. This applies to California real estate properties that are sold under a clear installment structure. The FTB modified Form 539-I to accommodate this change.

Steps in withholding real estate CA tax

It's important to note that withholding CA tax is mandatory for all types of transfers of CA real property ownership. This rule is still subject to exemptions as per the board's guidelines.

According to the law, anyone who buys real property in the state of California should withhold taxes. He or she can request the escrow officer of their real estate transaction to do so on their behalf. For this, the escrow officer should go through the following procedures:

• Send a written notification of withholding requirements to the buyer using the FTB Publication 1016 as basis.
• Provide the seller with a copy of the FTB593 booklet that comes with the Forms 593-C and 593-E.
• Withhold as required.
• Complete the forms and furnish the seller with a copy of the forms.
• Send the accomplished documents along with the payment for taxes withheld by the 20^th day of the month after the escrow closes.

Errors to avoid

Just like any other type of tax return that needs to be filed, errors cannot be avoided. You want to be more mindful of these potential mistakes to ensure that you don't run into trouble later on. For instance, make sure that you accurately complete all the needed forms. It's important for you to answer all the fields as they apply and indicate a telephone number where you can be contacted in case the tax board finds errors in your form. Make sure that you include the right identification numbers on your withholding ID documents. Check out everything that is required and refrain from sending unnecessary documentation to the tax board.

Get your CA FTB withheld tax refund today by contacting Mike Habib, EA at 1-877-78-TAXES (1-877-788-2937).

To get help on California Real Estate Tax withholding laws, contact Mike Habib, EA (http://www.myirstaxrelief.com). Mike Habib will personally look into your tax case so you can get proper representation and avoid excessive tax penalties due to improperly filed tax returns.

TIGTA audits effectiveness of the Federal Payment Levy Program [Audit Report No. 2009-40-031]:

Mike Habib, EA Tax Relief & Tax Problem Resolution

An IRS program to collect delinquent taxes through the use of levies needs some changes in order to reduce taxpayer burden, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit.

IRS is permitted to continually levy against certain types of federal government payments issued to taxpayers and contractors with outstanding tax debts. For tax debts, a levy is the legal process by which IRS orders a third party to turn over property in its possession that belongs to the tax debtor. This is done through the Federal Payment Levy Program (FPLP).

The program is an automated system that matches IRS records against those of the Federal Management Service--the Treasury Department bureau charged with implementing the government's delinquent debt collection program--to locate federal payment recipients who have delinquent income tax debts. In fiscal year 2004, IRS collections on delinquent taxes through the FPLP totaled $114 million. In FY 2007, the amount collected rose to $345 million.

"However, even with this growth, IRS management still could do more to reduce the cost of collection and maximize tax collections through the FPLP while preventing hardships on low-income taxpayers," TIGTA said. The audit identified areas in which the FPLP needed improvement and highlighted that "some low-income Social Security beneficiaries are experiencing hardship due to the FPLP." This was attributable, in large measure, to the complete removal of an income threshold that previously had been in place, TIGTA said.

Tax Relief Services

Filing tax returns is a necessary hassle, and everyone - even prudent individuals - are prone to errors. Tax delinquency is becoming a common problem as the harsh economy renders more people incapable of paying their taxes for various reasons.

Luckily, resolving delinquent tax liabilities need not be traumatic. If you're one of the many individuals faced with circumstances that hinder the prompt payment of your taxes, don't worry - all is not lost.

Get tax relief fast

Millions of people seek tax relief annually, and you are not alone. There are a variety of tax relief programs that you can explore, as the IRS gives you a chance to redeem yourself. Even for those who have outstanding tax debt, various options for payment are still available, usually tailored according to the individual's financial situation. Here are some of them. Offer in compromise

The most popular tax relief option is arriving at a payment compromise. You can do this through the assistance of a tax professional, or by yourself, or seek a third-party tax service provider. He will negotiate with the IRS to settle your tax debt for the lowest amount allowed by law.

The offer in compromise agreement is designed as a last resort; thus, to qualify for this option, you must have exhausted all other possible means of paying your taxes. If you are qualified, you may negotiate a settled amount less than the total amount you owe to clear the tax debt. Because this is treated as a court of last resort when it comes to tax options, offer in compromise has strict qualifying conditions. You must fit a certain criterion in order to qualify for this option. For instance, you need to prove doubt as to collect ability; that is, your current circumstances hinder you from being able to pay off your tax debts.

Installment and IRS Collection Appeal

Have you received an IRS Tax Levy notification or a notice that a Federal Tax Lien has been filed against you? Then you need to protect your assets - money in your bank account, your home, car, your paychecks, etc. - or the IRS may seize them immediately. We can help you negotiate an installment agreement to help you pay your taxes over a more manageable period of time.

Innocent / Injured Spouse

Are you having problems with the IRS because of your spouse or ex-spouse's actions? We can help you apply for 'innocent spouse' status.

Expiration Of Statute

The IRS can only go after unpaid taxes and penalties within 10 years from the date of assessment. Unless you have allowed the IRS to formally extend their collection period, they cannot anymore collect tax liabilities that have expired under the 10-year statute. If the IRS is trying to collect an expired tax liability from you, we can help file an expiration of statute and have the IRS write off these expired tax liabilities.

Get professional assistance

You are better off hiring an experienced tax relief professional to get the most of these tax relief settlements, or you risk either getting rejected and/or paying more than you should.

There are certain factors that you need to consider when selecting a professional to provide you with tax relief help.

For starters, you want to work with a tax relief professional who is credible, always insist to speak with the licensed professional who will actually resolve and negotiate your case. Verify his/her credentials through related organizations in the tax industry, and consult the Better Business Bureau. Remember that at this point, you don't have a lot of money to spare, and you can't afford mistakes when it comes to hiring someone to help you.

Reliable tax relief services

Let renowned tax expert Mike Habib, EA (http://www.myirstaxrelief.com) help you today. He will design a delinquent tax resolution tailored to your unique circumstances. Take advantage of his free consultation at 1-877-78-TAXES.

Homeowners whose debt is forgiven under Treasury's "Making Home Affordable" initiative may be entitled to tax relief

Relief for Responsible Homeowners: Treasury Announces Requirements for the Making Home Affordable

Mike Habib, EA Tax Relief & Tax Problem Resolution

On Mar. 4, Treasury release the first details on two programs designed to offer mortgage relief to struggling homeowners, "Home Affordable Refinance" and "Home Affordable Modification." Although the focus of the latter program is to reduce interest rates on at-risk loans and thereby reduce mortgage payments, one possible modification is a reduction of home loan debt. Fortunately, under a law enacted late in 2007, reduction of qualified home mortgage debt shouldn't have tax consequences to the homeowner.

Mortgage debt forgiveness relief. In general, a taxpayer realizes income when debt is forgiven. There are several exceptions and exclusions that may result in all or part of a taxpayer's income from the cancellation of debt being nontaxable. Under the Mortgage Relief Act (P.L. 110-142), which was initially effective for indebtedness discharged on or after Jan. 1, 2007 and before Jan. 1, 2010 and which was later extended three additional years, through 2012, by the Emergency Economic Stabilization Act of 2008), taxpayers may exclude up to $2 million of qualified principal residence debt. (Code Sec. 108(a)(1)(E)) The exclusion is claimed by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and attaching it to the taxpayer's applicable income tax return.

Qualified principal residence indebtedness is acquisition indebtedness under Code Sec. 163(h)(3)(B) with respect to the taxpayer's principal residence, but with a $2 million limit ($1 million for married individuals filing separately). (Code Sec. 108(h)(2)) "Principal residence" has the same meaning as under the homesale exclusion rules of Code Sec. 121. (Code Sec. 108(h)(5)) Acquisition indebtedness of a principal residence is indebtedness incurred in the acquisition, construction, or substantial improvement of an individual's principal residence that is secured by the residence. It includes refinancing of debt to the extent the amount of the refinancing doesn't exceed the amount of the refinanced indebtedness. (Joint Committee on Taxation JCX-86-07)

The basis of the taxpayer's principal residence is reduced by the excluded amount, but not below zero. (Code Sec. 108(h)(1))

If any loan is discharged, in whole or in part, and only part of the loan is qualified principal residence indebtedness, the mortgage forgiveness exclusion applies only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before the discharge) which is not qualified principal residence indebtedness. (Code Sec. 108(h)(4))

The exclusion doesn't apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer's financial condition. The exclusion also doesn't apply to a taxpayer in a Title 11 bankruptcy. (Code Sec. 108(h)(3)) An insolvent taxpayer (other than one in a Title 11 bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the Code Sec. 108(a)(1)(B) exclusion for insolvent taxpayers. (Code Sec. 108(a)(2))

In IR 2008-17, IRS noted that debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, can qualify for the Code Sec. 108(a)(1)(E) relief. But, debt forgiven on second homes, rental property, business property, credit cards or car loans doesn't qualify for this tax-relief. In some cases, however, other kinds of tax relief (e.g., based on insolvency) may be available.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: tax relief, tax debt relief, tax help, irs tax help, help with tax debt, irs relief, irs tax relief, how to get tax relief

Fifth Circuit finds tax-exempt hospital's chairman liable for trust fund penalty

Verret v. U.S., (CA 5 2/26/2009) 103 AFTR 2d ¶2009-576

Mike Habib, EA Tax Relief & Tax Problem Resolution

In an unpublished per curiam decision, the Court of Appeals for the Fifth Circuit has affirmed a district court's finding that the chairman of the board of a tax-exempt hospital was a responsible person liable for the Code Sec. 6672(a) trust fund penalty. The chairman, who could have ensured that the hospital paid its taxes, chose instead not to exert any authority over its business affairs.

Caution: The case once again demonstrates the perils faced by a taxpayer who becomes involved in a financially distressed company. As this case illustrates, the fact that a company is a tax-exempt entity will not shield a taxpayer who fails to carefully exercise his duties to make sure employment taxes are paid to IRS.

Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. (Code Sec. 6672(a))

Facts. The primary business of Community Healthcare Foundation (Foundation), a Code Sec. 501(c)(3) tax-exempt organization, was the operation of Doctors Hospital (Hospital). Under Hospital's by-laws, the Foundation provided that the Board of Trustees, which was comprised of voluntary and unpaid members of the community, would act as the governing body of Hospital. The by-laws also provided for a Chairman of the Board and a Chief Administrative Executive Officer (CEO).

Stephen Verret served in various capacities on Hospital's board during a 26-year tenure, including as Chairman of the Board from '99 until his departure in 2002. In addition, a company in which Verret was a majority stockholder performed electrical services for Hospital, and his wife was employed by Hospital as Chief Operating Officer from January through March 2001. Verret also contracted with, and was paid by, a business involved in the operation and management of hospitals to help recruit specialized physicians and increase the hospital's revenues.

Hospital failed to remit employment withholding taxes during the first part of 2001. While this outstanding tax liability was ultimately satisfied with borrowed cash appropriated to buy medical equipment, Hospital's Executive Director David Cottey was informed by Verret, individually, and by the Board, collectively, that the payment of employment withholding taxes was of paramount importance. Under no circumstances, he was told, was he to fail to pay these taxes again. However, contrary to his repeated assurances throughout 2001, in November of 2001, Cottey told Verret and the Board that the income and FICA taxes for the employees were delinquent for the third and fourth quarters of 2001.

IRS found Verret, Cottey, and Hospital's Controller and Chief Financial Officer to be liable as responsible persons. Cottey settled with IRS. Verret paid the assessment and sought a refund in the district court.

District court's decision. The district court concluded that Verret clearly qualified as a responsible person under Code Sec. 6672. The by-laws clearly stated that the Board of Trustees had the final responsibility for Hospital's administrative activities and professional services and for its operation. The uncontested facts showed that Verret: (1) served approximately 26 years in various capacities on Hospital's Board; (2) held the position of Board Chairman during the relevant periods; (3) negotiated and personally guaranteed a $500,000 working capital loan for Hospital; (5) took steps to ensure payment of delinquent withholding taxes on the previous occasion after Cottey had failed to do so; (6) actively participated in recruiting physicians and developing a new source of revenue for Hospital; (7) conversed with Cottey on almost a daily basis; (8) signed Hospital's Form 990 for '99 and 2000; (9) possessed, along with the Board, the authority to hire and fire high level employees; and (10) was a signatory on all of Hospital's checking accounts.

The district court also concluded that his failure to pay taxes was willful. If Verret didn't know of Cottey's failure to pay the tax liability during the third and fourth quarters of 2001, it was because he chose not to know. He could have exercised substantial control over the decision-making process to ensure that Hospital paid its taxes, but instead he chose not to.

Further, since the chairman wasn't serving solely in an honorary capacity, the district court found that he didn't qualify for the protection given voluntary board members under Code Sec. 6672(e).

Appellate court. The Fifth Circuit, affirming the district court, found that Verret was a "responsible person" under Code Sec. 6672. He became aware in November 2001 that the Hospital's payroll withholding taxes for the third and fourth quarters of 2001 were outstanding and unpaid. He was not only Chairman of the Hospital's Board of Directors but was also an essentially salaried and active paid consultant of the Hospital at a rate of $70,000 to $80,000 a year. He continued to receive this compensation and Hospital continued to pay its employees and creditors while he was aware that the Hospital's third and fourth quarter withholding taxes were still outstanding. The Court noted that Verret didn't argue on appeal that he was exempted from liability under Code Sec. 6672(e).

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: payroll tax problem, payroll tax relief, trust fund tax problem, trust fund tax relief, trust fund tax help, trust fund tax resolution, trust fund penalty help, irs tax help

Licensed real estate agent's activities count for PAL qualifying real estate professionals' exception

Agarwal, TC Summary Opinion 2009-29

Mike Habib, EA Tax Relief & Tax Problem Resolution

In a Summary Opinion, the Tax Court has held that a licensed real estate agent's activities counted for purposes of the Code Sec. 469 passive loss exception for qualifying real estate professionals. She didn't have to be licensed as a real estate agent to be treated as engaged in the real estate brokerage trade or business. Because she met the material participation standard for qualifying real estate professionals, the agent and her husband could claim losses they incurred on two rental properties they owned.

Background. Under Code Sec. 469(c)(1), the passive activity loss disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Reg. § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer's participation in the activity. (Code Sec. 469(c)(2)) However, the Code Sec. 469(c)(2) per se rule for rental activities doesn't apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if:

(1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and

(2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B))

Observation: A taxpayer who is a qualifying real estate professional isn't automatically entitled to treat a real estate rental activity as non-passive. He must meet the general material participation standard with respect to that activity in order to use its losses or credits to offset non-passive activity income.

The term "real property trade or business" is defined as "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business." (Code Sec. 469(c)(7)(C)) In determining whether a taxpayer meets the material participation standard, the participation of his spouse is taken into account. (Code Sec. 469(h)(5))

Facts. During 2001 and 2002, Mr. and Mrs. Agarwal owned two rental properties. Mr. Agarwal worked full-time as an engineer and his wife worked full time as a real estate agent for a brokerage firm under an independent contractor arrangement. For those years, Mrs. Agarwal was licensed as a real estate agent only under state law (), not as a broker. Together the spouses spent approximately 170 hours managing one of their rental properties and approximately 170 hours managing the other rental property. They were the only persons who managed their rental properties. Mrs. Agarwal spent a total of 1,400 and 1,600 hours managing the couple's rental properties and selling real estate in 2001 and 2002, respectively. On their Schedule E for 2001, they claimed a $40,000 loss from their rental properties; for 2002, they claimed a $19,600 loss.

IRS disallowed the losses on the ground that Mrs. Agarwal was a licensed real estate agent, not a licensed real estate broker. It argued that under California law, she couldn't be engaged in a brokerage trade or business, and therefore, was not engaged in a real property trade or business as defined by Code Sec. 469(c)(7). Since her activities didn't count as a real property trade or business, the Agarwals didn't meet the PAL exception for qualifying real estate professionals who meet the material participation standard in Code Sec. 469(c)(7)(B). The Agarwals, on the other hand, maintained that Mrs. Agarwal was in the real property trade or business because as an agent she brought together buyers and sellers.

Real estate agent's activities count for PAL real estate exception. The Tax Court found that Congress is presumed to have defined the term "brokerage" in its common or ordinary meaning, and that for PAL purposes, the "business" of a real estate broker includes, but is not limited to:

(1) selling, exchanging, purchasing, renting, or leasing real property; (2) (2) offering to do the activities in (1), above; (3) negotiating the terms of a real estate contract; (4) listing of real property for sale, lease, or exchange; or (5) procuring prospective sellers, purchasers, lessors, or lessees.

Whether Mrs. Agarwal is characterized as a broker or a salesperson for State purposes was irrelevant for federal income tax purposes, the Tax Court said. Rather, the test is whether she was engaged in "brokerage" within the meaning of Code Sec. 469. Consistent with her real estate salesman's license and pursuant to her contract with the brokerage firm, Mrs. Agarwal was engaged in "brokerage"; i.e., she sold, exchanged, leased, or rented real property and solicited listings. Therefore, she was engaged in a "brokerage" trade or business within the meaning of Code Sec. 469(c)(7).

The Tax Court concluded that because Mrs. Agarwal owned an interest in rental property, performed more than one-half of her personal services in real property trades or businesses in which she materially participated, and performed more than 750 hours of services in real property trades or businesses in which she materially participated, she was a qualifying real estate professional for PAL purposes. Because she materially participated with respect to each rental property owned by the Agarwals, they were entitled to deduct their 2001 and 2002 Schedule E losses.

Get tax relief and resolve your tax problems by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: real estate agent tax problems, real estate tax relief, realtor passive losses, realtor tax problems, realtor tax relief, real estate passive activity losses, real estate agent tax help

IRS has a check for you

Mike Habib, EA Tax Relief & Tax Problem Resolution

IR-2009-16, March 3, 2009

WASHINGTON -- Unclaimed refunds totaling approximately $1.3 billion are awaiting over a million people who did not file a federal income tax return for 2005, the Internal Revenue Service announced today. However, to collect the money, a return for 2005 must be filed with the IRS no later than Wednesday, April 15, 2009.

Especially in these tough economic times, people should not lose out on money that is rightfully theirs," said IRS Commissioner Doug Shulman. "People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets."

The IRS estimates that half of those who could claim refunds for tax year 2005 would receive more than $581. Some individuals may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2005 returns, the window closes on April 15, 2009. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2005 refund that their checks will be held if they have not filed tax returns for 2006 or 2007. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2005. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Generally, unmarried individuals qualified for the EITC if in 2005 they earned less than $35,263 and had more than one qualifying child living with them, earned less than $31,030 with one qualifying child, or earned less than $11,750 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

Current and prior year tax forms and instructions are available on the Forms and Publications web page of IRSFORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov. Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.

How small businesses can take maximum advantage of the new longer 2008 NOL carryback

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009, signed into law on Feb. 17, 2009 ( P.L. 111-5 , the "Recovery Act") allows qualifying small business to choose a three- four- or five-year net operating loss (NOL) carryback period for certain losses instead of the usual two-year period. This article explains the details of this new provision and the planning that should be undertaken to ensure that a qualifying business chooses the carryback period that will yield maximum tax benefits for the business, taking into account the carryback itself and its tax picture for this year and previous years.

Background. A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

Different rules apply for certain types of losses. For example, a three-year carryback is allowed for an eligible loss, including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. A five-year carryback is allowed for a farming loss, a qualified disaster loss, and certain amounts related to specified disasters.

New law. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 NOL (the "applicable NOL") from 2 years to any whole number of years which is more than 2 and less than 6. (Code Sec. 172(b)(1)(H), as amended by Act Sec. 1211(a))

Observation: In other words, an eligible business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.

A small business for this purpose is a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (under Code Sec. 448(c), as modified) for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose are $15 million or less.

Observation: The increased carryback period can generate a refund for a small business because it allows the taxpayer to offset income that has already been taxed. Under pre-Recovery Act law, a taxpayer couldn't use the NOL to offset the taxable income for the fifth, fourth, and third tax years preceding the NOL year, and so couldn't have received a refund of the tax paid on those amounts.

Illustration 1: ABC, Inc., an eligible small business, has an "applicable NOL" for 2008. It had taxable income for 2005 (and paid the applicable federal income tax), but not for 2006 or 2007. ABC elects a 3-year carryback for the NOL, and carries it back to 2005. The NOL wipes outs ABC's 2005 taxable income, entitling it to a refund of the tax it paid on that income. Under pre-Act law, the NOL could have been carried back only 2 years, to 2006 and 2007. Because ABC had no taxable income for either year, the carryback wouldn't have resulted in a refund. ABC would have had to wait until later years when it had taxable income to get any tax benefit from the NOL.

Recommendation: The small business should use the tentative (or "quick") carryback procedures (under which taxpayers can recover a refund attributable to an NOL carryback before IRS processes the return filed for the year the NOL arises to expedite the recovery of the refund. That way, the taxpayer won't have to wait until IRS processes the return for the NOL year to get the refund. Presumably, the taxpayer will have to indicate the increased carryback election on the claim form (Form 1045 for individuals, Form 1139 for corporations).

Observation: The key factor in deciding whether to elect to carry an NOL back three, four, or five tax years should be which election will result in the largest tax savings. Thus, if the NOL is more than or at least equal to the taxpayer's combined income for the third, fourth, and fifth years before the year in which it arose, then the loss should be carried back to the fifth year so that it can be used in all three years (see Illustration (2), below). On the other hand, if the NOL is less than the combined income for those three years, the taxpayer should try to carry it back to the year(s) in which his income was taxed at the highest rate so as to get the highest refund (see Illustration (3), below). In some cases, it may be better to not make the election because the largest tax savings will come from carrying the NOL back to the second year before the year in which the NOL arose (see Illustration (4), below).

Illustration 2: Taxpayer, a calendar-year C corporation, has an NOL of $200,000 for its 2008 tax year. It had taxable income of $50,000 in 2003, $50,000 in 2004, and $100,000 in 2005. It had taxable income of $25,000 in both 2006 and 2007. Taxpayer paid federal income taxes of $7,500 on its 2003 income, $7,500 on its 2004 income, $22,250 on its 2005 income, and $3,750 on its income for both 2006 and 2007. If Taxpayer elects to carry its 2008 NOL back five years, the NOL will completely offset its income for 2003, 2004, and 2005 ($50,000 + $50,000 + $100,000 = $200,000), and it will be entitled to a refund of $37,250 (the sum of the taxes it paid for those three years).

If Taxpayer carries the NOL back only four years, it will completely offset its income for 2004, 2005, 2006, and 2007 ($50,000 + $100,000 + $25,000 + $25,000 = $200,000), and will also result in a refund of $37,250 (the sum of the taxes paid for those four years), but it will mean that the income for 2007 will not be available to offset any NOL taxpayer may possibly have in 2009.

If Taxpayer carries the NOL back only three years, it will completely offset its income for 2005, 2006, and 2007 ($100,000 + $25,000 + $25,000 = $150,000), and $50,000 ($200,000 − $150,000) of the loss can be carried forward to 2009. However, it will result in a refund of only $29,750 (the sum of the taxes paid in those three years).

Illustration 3: Assume the same facts as in Illustration (2), except that in 2005, Taxpayer had taxable income of $300,000 on which it paid federal income taxes of $100,250. If Taxpayer elects to carry the NOL of $200,000 back five years, it will completely offset the income of $50,000 for 2003 and 2004, and $100,000 of the income for 2005. Because the income for 2005 above $100,000 is taxed at a rate of 39%, this will result in a refund of $39,000 (39% of $200,000 [$300,000 − $100,000]) for that year and a total refund of $54,000 ($7,500 for 2003, $7,500 for 2004, and $39,000 for 2005).

However, if Taxpayer carries the NOL back only three years to 2005, it will be entitled to a refund of $78,000 (39% of $200,000, the taxable income for 2005 over $100,000).

Observation: Because in Illustration (3), the income for 2003, 2004, and 2005 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2005 if carrying it back to that year will result in the largest tax refund.

Illustration 4: Assume the same facts as in Illustration (2), except that Taxpayer had taxable income of $300,000 in 2006. Taxpayer will get the largest refund if it does not elect to carry the NOL back beyond two years. By carrying it back to 2006, it will get a refund of $78,000 (39% of the taxable income for 2005 over $100,000). If Taxpayer elected to carry the NOL back five years, it would get a refund of only $37,250 as shown in Illustration (2). If it carries the NOL back four years, it would get a refund of $49,250 ($7,500 for 2004, $22,250 for 2005, and $19,500 [39% of $50,000] for 2006). If it elected to carry the NOL back three years, it would get a refund of $61,250 ($22,250 for 2005 and $39,000 [39% of $100,000] for 2006).

Observation: Because in Illustration (4), the income for 2006 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2006 if carrying it back to that year will result in the largest tax refund.

What is an "applicable 2008 NOL"? An applicable 2008 NOL is the taxpayer's NOL for:

• any tax year ending in 2008, or,
• at the taxpayer's election, any tax year beginning in 2008. (Code Sec. 172(b)(1)(H)(ii)(II))

An election under Code Sec. 172(b)(1)(H), made in the manner prescribed by IRS, must be made by the due date (including extensions) for filing the taxpayer's return for the tax year of the NOL. (Code Sec. 172(b)(1)(H)(iii)) Any such election is irrevocable. Additionally, any carryback election under Code Sec. 172(b)(1)(H) may be made only with respect to one tax year. (Code Sec. 172(b)(1)(H)(iii))

Excess interest losses. If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an "excess interest loss" (i.e., interest allocable to the CERT) for a "loss limitation year," the loss is an NOL. It's subject to the regular NOL carryback and carryover rules, except that it can't be carried back to a tax year before the year in which the CERT occurred. The "loss limitation year" is generally the tax year in which the CERT occurred (the "CERT year") and each of the next two tax years.

Under the Recovery Act, if an eligible small business makes a Code Sec. 172(b)(1)(H) election to increase the carryback for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines "loss limitation year") is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of "two." (Code Sec. 172(b)(1)(H)(i)(II))

"Eligible losses." Code Sec. 172(b)(1)(F) prescribes a 3-year NOL carryback for "eligible losses," including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. The Recovery Act provides that Code Sec. 172(b)(1)(F) doesn't apply to an applicable 2008 NOL for which a small business taxpayer has made a Code Sec. 172(b)(1)(H) election. (Code Sec. 172(b)(1)(H)(i)())

Alternative tax net operating loss. An alternative tax net operating loss deduction (ATNOLD or ATNOL deduction) is allowed for alternative minimum tax () purposes instead of the regular NOL deduction.

Observation: The regular tax NOL deduction and the ATNOLD are governed by a single carryback period. Thus, the increased carryback elected for the 2008 NOL also applies for the ATNOLD in computing AMTI.

Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:

• any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
• any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
• any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.

Anti-abuse rules. Act Sec. 1211(c) gives IRS authority to issue rules necessary to prevent the abuse of the purposes of Act Sec. 1211, including anti-stuffing rules, anti-churning rules (including rules relating to sale--leasebacks), and rules similar to the rules under Code Sec. 1091 relating to losses from wash sales.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

GAO report says noncompliance with 1099-Misc reporting requirements contributes to the tax gap [GAO-09-238]:

Mike Habib, EA Tax Relief & Tax Problem Resolution

A "significant problem" may exist regarding the extent to which third party payers fail to submit required Form 1099-MISC information returns, the Government Accountability Office (GAO) said in a report released on Feb. 27.

According to GAO, for tax year 2005, 8% of some 50 million businesses with assets under $10 million submitted the form, but IRS cannot say how many of the remaining 92% of businesses were required to report payments and failed to do so. "If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099-MISCs could be missing with significant amounts of unpaid taxes by payees." GAO said.

The report noted that various impediments may stand in the way of Form 1099-MISC compliance, "including complex reporting requirements and an inconvenient submission process." IRS compares what payees report on their tax returns with what payers report on Form 1099-MISCs, but the agency does not pursue all mismatches its computers discover, GAO said.

"IRS does not systematically collect information on the causes of mismatches or whether they could be prevented," GAO added.

The report is available at http://www.gao.gov/new.items/d09238.pdf

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

President's budget proposal includes funds to improve IRS:

Mike Habib, EA Tax Relief & Tax Problem Resolution

President Obama's fiscal year 2010 budget proposal, totaling $3.6 trillion, includes funding "for a robust portfolio of IRS international tax compliance initiatives," according to budget documents released on Feb. 26.

The new administration also wants "to improve the quality of taxpayers' experience when they interact with the IRS." To achieve this, the agency must improve "relationships with critical third-party stakeholders, such as tax preparers, volunteers and practitioners, as well as enhancing electronic filing capabilities."

The administration's "end goal envisions an IRS that correctly answers a taxpayer's questions the first time asked, through the most efficient and taxpayer-friendly means."

The budget outline was sparse in detail but the White House is expected to release the traditional comprehensive budget document by early April.

To access the budget, in total or by sections, go to http://www.whitehouse.gov/omb/budget/

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

How individuals are affected by tax changes in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial tax changes for individuals. However, most of them are temporary in nature, that is, unless extended by future legislation, they apply for 2009 only or in some cases for 2009 and 2010. Here's a review of the more widely applicable provisions that could have an impact on you and your family.

New Making Work Pay Credit. Individuals who work generally get a credit of up to $400 ($800 for joint filers). The credit is refundable, meaning you get it even if you owe no income tax. This change applies for 2009 and 2010. The credit is the lesser of 6.2% of your earned income or $400 ($800 on a joint return). The credit is phased out for joint filers with modified adjusted gross income between $150,000 and $190,000 and other taxpayers with modified AGI between $75,000 and $95,000.

You won't be getting a separate check from the IRS, as you did with last year's Stimulus payment. Rather, your employer will automatically adjust your withholding so that you will get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that too much is not taken out. If you are self-employed, you can effectively receive the credit in advance by reducing your estimated tax payments.

One-time $250 payment or credit for others. The Recovery Act provides a one-time payment of $250 in 2009 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. It also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The Making Work Payment credit is reduced by any $250 payment or credit received.

New sales tax deduction for vehicle purchases. For 2009, there is a new deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize deductions on Schedule A or claim the standard deduction.

The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.

If you itemize and choose the option to deduct state sales taxes in lieu of state income taxes, you don't get the new deduction. This prevents you from getting a double deduction for the sales taxes on the vehicle but it also involves some tricky planning considerations because different rules apply to the optional deduction and the new deduction. For example, the new deduction but not the optional deduction is allowed against the alternative minimum tax. Additionally, the optional deduction is subject to a limitation that caps the deduction for sales tax on a motor vehicle to the general sales tax rate.

Improved first-time homebuyer credit. Last year's Housing Act included a refundable tax credit for first-time homebuyers equal to the lesser of 10% of the purchase price or $7,500 for qualifying purchases after Apr. 1, 2008 and before July 1, 2009. The credit is essentially an interest-free loan because it has to be paid back to the government over 15 years.

The Recovery Act has improved the credit for 2009 purchases by (1) eliminating the requirement to pay it back (subject to exceptions), (2) increasing the maximum credit to $8,000, and (3) making it available for purchases through November 2009.

You can treat a 2009 purchase as having been made on Dec. 31, 2008 and thus get an immediate refund when you file your 2008 taxes by the Apr. 15, 2009 filing deadline. Even if you have already filed your 2008 taxes, you can file an amended 2008 return to get the credit for a 2009 purchase.

You are considered a first-time homebuyer if you or (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

The first time homebuyer credit, whether claimed in 2008 or 2009, phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers).

AMT relief. In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. Exemption amounts were scheduled to drop and fewer tax credits were to be available to offset AMT for 2009. The Recovery Act provides AMT relief for 2009 by (1) increasing the exemption amounts above last year's levels and (2) allowing nonrefundable credits to offset AMT as well as regular tax.

College tax breaks. The Recovery Act expands tax breaks for individuals seeking a college education. For 2009 and 2010, it gives taxpayers a new "American Opportunity" tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. You receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is available for the first four years of post-secondary education in a degree or certificate program. Forty percent of the credit is refundable. The credit is phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Section 529 Education Plans are tax-advantaged savings plans that can be used to pay qualified education expenses, including: tuition, room & board, mandatory fees and books. Under the Recovery Act, for 2009 and 2010, qualified education expenses under these plans include computer technology and equipment, as well as Internet access and related services.

Tax break for the unemployed. Unemployment compensation benefits ordinarily are fully taxable. However, under the Recovery Act, an individual does not have to pay tax on up to $2,400 in unemployment benefits received in 2009.

Limited subsidy for COBRA continuation coverage of unemployed workers. The Recovery Act provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009. Workers who were involuntarily terminated between Sept. 1, 2008 and Feb. 17, 2009, but failed to initially elect COBRA because it was unaffordable, must be given an additional 60 days to elect COBRA and receive the subsidy. The subsidy is not taxable when received, but higher income recipients--those with modified adjusted gross income above $125,000 ($250,000 for joint filers)--will have to pay back part or all of it at tax return time.

Refundable child credit expanded. A taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. Before the Recovery Act, this credit was refundable only to a limited extent. The Recovery Act makes the child credit refundable to a much greater extent for 2009 and 2010.

Bigger earned income tax credit (EITC). The Recovery Act makes various changes to the earned income tax credit for 2009 and 2010. These changes will result in a bigger EITC for some taxpayers. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45% of earnings up to $12,570, resulting in a maximum credit of $5,656.50.

Increased transit and vanpool transportation fringe benefits. For months beginning on or after Mar. 1, 2009 and before Jan. 1, 2011, the Recovery Act increases the monthly exclusion for employer-provided transit and vanpool benefits from $120 to $230. This figure is adjusted for inflation each year and could go up in 2010.

Improved energy tax breaks. The Recovery Act includes a number of provisions that are designed to promote the creation and use of alternative forms of energy including these new or improved energy tax breaks for individuals:

• The Recovery Act extends the tax credit for energy-efficient improvements to existing homes through 2010 and modifies it in various ways so that a larger credit is possible after 2008.
• Under pre-Recovery Act law, individuals could claim a 30% tax credit for qualified solar water heating property (capped at $2,000), qualified small wind energy property (capped at $500 per kilowatt of capacity, up to $4,000), and qualified geothermal heat pumps (capped at $2,000). For tax years beginning after 2008, the Recovery Act removes these individual dollar caps. As a result, each of these types of improvements is eligible for an uncapped 30% credit.
• The Recovery Act modifies and increases the existing new qualified plug-in electric drive vehicle credit.
• For vehicles bought after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles.
• For property placed in service after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% credit, up to $4,000, for the cost of converting any motor vehicle into a qualified plug-in electric drive motor vehicle.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com