Tax Relief Blog

Employee vs. Independent Contractor - Ten Tips for Business Owners

IRS Tax Tip

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding - with the IRS.

10. You can learn more about the critical determination of a worker's status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Federal & State tax debt relief and IRS tax problem resolution is our specialty. Call us today for reliable tax debt relief, or a state tax debt relief at 1-877-78-TAXES

California - Multiple Taxes: Wildfire Relief Extended to Taxpayers in Three More Counties

For taxes and fees they each administer, the California State Board of Equalization (BOE) and the Employment Development Department (EDD) have extended relief to qualifying taxpayers and fee payers who have been affected by wildfires in the counties of Los Angeles, Monterey, and Placer. Both agencies have recently extended similar relief for those affected by wildfires in Santa Cruz and Yuba counties, as reported.

EDD Relief

Employers in Yuba County who were directly affected by the damage resulting from the fire may request up to a 60-day extension of time from EDD to file their state payroll reports and/or deposit state payroll taxes without penalty or interest. Written request for extension must be received within 60 days from the original delinquent date of the payment or return to file or pay. Related information is available on the EDD Web site at http://www.edd.ca.gov/Payroll_Taxes/.

BOE Relief

For taxes and fees it administers, the BOE is giving extensions for filing, audits, billing, notices, and assessments, and relief from subsequent penalties to any individual or business that, as a result of the recent wildfires in Los Angeles, Monterey, and Placer counties, cannot meet tax filing and payment deadlines. A state of emergency was declared in each of the counties due to the wildfires.

Affected taxpayers and fee payers can get special relief in the form of a one-month extension of time to file or pay taxes and fees. Deadlines also are extended for filings that were delayed by the disruption of the normal activities of the U.S. Postal Service or other private mail and freight companies.

Relief from interest and penalties may be provided for those persons who are unable to file their returns or pay taxes and fees in a timely manner. Business owners and fee payers also can replace copies of BOE tax records at no charge.

Relief from the interstate user tax under the International Fuel Tax Agreement applies only to California tax. Also, any claim in either county for property tax relief must be filed with the county assessor's office.

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CA state tax debt relief and CA tax problem resolution is our specialty. Call us today for reliable IRS tax debt relief, and or state tax debt relief at 1-877-78-TAXES

CEO of Long Distance Phone Service Reseller Personally Liable for Unremitted Taxes (Brinskele, FedCl)

An individual who was the chairman, president and CEO ("the CEO") of a company that resold long distance telephone service had to pay the IRS an assessed penalty plus interest. The term "markup," in the context of the litigation, referred to the margin between the price at which the company purchased long distance minutes and the higher price at which it resold them. The assessed penalty amount represented the portion of the Code Sec. 4251 communications excise tax collected by the company from its customers on the markup.

In the court's previous opinion (2006-2 USTC 70,261), it held that the company had an obligation to pay over to the IRS any monies it collected for long distance telephone service even if that service was improperly taxed. Here, the "overwhelming evidence," indicated that the company did in fact collect the Code Sec. 4251 tax on the markup but failed to remit it to the IRS. Further, the CEO was a responsible person for purposes of Code Sec. 6672. In addition to being the company's CEO, he was its founder, at times its controlling shareholder, and for a period of time signed many of its checks. Finally, the CEO acted willfully in failing to pay the Code Sec. 4251 tax to the IRS; therefore, he was personally liable for the unpaid taxes. He both knew of his obligations to remit the tax collected on the markup and showed a reckless disregard of the company's tax responsibilities by failing to do so.

Related opinion at 2006-2 USTC ¶70,261.

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Federal tax debt relief and IRS tax problem resolution is our specialty. Call us today for reliable tax debt relief, or a state tax debt relief at 1-877-78-TAXES

Clarification of the "Cash for Clunkers" Tax Rules

September 2009 - The federal "Cash for Clunkers" program has generated a lot of interest among consumers and we have received many inquires about the tax implications of this popular program. As a result, we are clarifying state tax rules for people who trade in their used vehicle under the "Cash for Clunkers" program.

The "Cash for Clunkers" program, Federal law, H.R. 2346, The Consumer Assistance to Recycle and Save Program, allows qualifying consumers to receive a $3,500 or $4,500 voucher from the federal government when they trade in qualifying old vehicles and purchase or lease a new one. This federal law provides the value of the voucher received by the consumer is not considered as gross income of the purchaser for purposes of the federal income tax.

California law does not conform to H.R. 2346. For state income tax purposes trade-ins are treated as normal sales or exchanges, and in some cases the value of the voucher received may be subject to state tax. That is to say, the person subtracts his or her basis (generally the cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher amount, plus any other salvage value the dealer offers as part of the exchange) to determine whether a gain or loss was realized on the disposition of the used vehicle. For example, if the family car was originally purchased for $19,500 and traded in for a $4,500 discount under the "Cash for Clunkers" program, there is no taxable gain. The $15,000 difference is a personal loss under tax law and may not be deducted for tax purposes. However, if the family car was purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to be reported as income for state tax purposes.

Different tax rules apply for vehicles used in a person's trade or business. For example, when a person trades in the old company truck for a new company truck, under the "Cash for Clunkers" program, the gain or loss could be postponed for tax purposes under the "like-kind exchange" rules.

Any scrap value received by the consumer for the trade-ins is also used in computing the gain or loss from these sales or exchange transactions.

We will provide instructions about how to report taxable gains for the "Cash for Clunkers" program in its tax return instructions when the 2009 tax forms are published later this year. Taxpayers and practitioners can check FTB's website at ftb.ca.gov for tax forms and other helpful information.

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CA state tax debt relief and state tax problem resolution is our specialty. Call us today to release a state tax levy, or a state tax garnishment at 1-877-78-TAXES

IRS May Mine Mortgage Data To Flush Out Tax Cheats

Source: Dow Jones

WASHINGTON -(Dow Jones)- The Internal Revenue Service might scrutinize mortgage interest data more closely to help catch tax cheats, after prompting from an IRS auditor.

The tax collector said it will study whether it should make greater use of mortgage interest data provided to the IRS by banks, to target audits against individuals who do not file tax returns, according to a letter released Monday by the Treasury Inspector General for Tax Administration.

However, a stepped-up IRS focus on homeowners whose reported income falls below their mortgage interest obligations could attract criticism at a time when many have fallen behind on mortgage payments.

TIGTA said in a Monday report that tens of thousands of homeowners who paid more than $20,000 in mortgage interest in 2005 either did not file a tax return or reported income that appears insufficient to cover their mortgage interest and basic living expenses.

Based on a sample of these returns, non-filers and potential under-reporters identified by TIGTA could have owed a combined total of $1.4 billion in tax, penalties in interest, the auditor said.

Banks report data on mortgage interest paid by individuals to the IRS and to the homeowner, using IRS Form 1098.

Through an existing program, the IRS already sends notices to non-filers that it believes, based on income and mortgage interest data, should have filed a tax return. Through that program, the IRS has assessed an additional $276 million in taxes for tax year 2005.

But TIGTA said the IRS should boost scrutiny of mortgage interest data in selecting cases for individual audits.

The IRS said it will expand a regional research project, known as a Compliance Initiative Project, on mortgage interest to a nationwide level by December 2011.

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Tax relief and IRS tax debt relief options are available for taxpayers with back taxes and cannot pay. Call today to see if you could settle your tax debts 1-877-78-TAXES

IRS Sends $122,783 Check by Mistake

House Cleaner Sensed it was an Error and Returned Check; IRS won't Comment

SOURCE: CBS

A Denver-area house cleaner could hardly believe her eyes when she opened up the mail. She was expecting to pay the Internal Revenue Service, but instead she received a refund check for more than $100,000.

Laura Schultz readily admits she's not a wealthy woman. Her job with Sunshine Maids does not put her in the category that would bring a refund in the hundreds of thousands of dollars; but the IRS sent her a check for $122,783.51.

"It didn't make sense," Schultz said.

It certainly was a real check.

"I didn't feel I was owed that much money, so I called the IRS," Schultz said. "They told me to void it."

CBS4's Rick Sallinger asked the IRS what would happen if somebody decided to keep a mistaken $122,000 check. An official said if they were caught they'd have to pay it back, plus interest.

Schultz voided the check as the IRS requested.

"I feel pretty good about turning it in."

The IRS says it cannot comment on what caused the error, but Schultz still has to pay the $80 she owed.

IRS to Receive Unprecedented Amount of Information in UBS Agreement

WASHINGTON -- The Internal Revenue Service and the Department of Justice today announced the successful negotiation of an agreement that will result in the IRS receiving an unprecedented amount of information on United States holders of accounts at the Swiss bank UBS.

As a result of this agreement, the IRS will receive substantially all of the accounts that it was interested in when it initiated the John Doe summons against UBS.

Under the agreement, the IRS will submit a treaty request to the Swiss government describing the accounts for which it is requesting information. The Swiss government will then direct UBS to initiate procedures to turn over information on thousands of accounts to the IRS. The IRS will receive information on accounts of various amounts and types, including bank-only accounts, custody accounts in which securities or other investment assets were held and offshore company nominee accounts through which an individual indirectly held beneficial ownership in the accounts.

Also, the agreement retains the U.S. Government's right, if the results are significantly lower than expected and other measures fail, to seek appropriate judicial remedies, including resuming actions to enforce the John Doe summons.

The agreement involves a number of simultaneous legal actions:

* The judicial enforcement of the John Doe summons will be dismissed. While this enforcement motion will be withdrawn, the underlying summons remains in effect.

* Upon receiving the treaty request, the Swiss government will direct UBS to notify account holders that their information is included in the IRS treaty request. It is expected that these notices will be sent on a rolling basis with some being sent over the coming weeks and others over the coming months. Receipt of this notice will not by itself preclude the account holder from coming into the IRS under the Voluntary Disclosure Program.

In addition, the Swiss Government has agreed to review and process additional requests for information for other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Information provided to the IRS through this process will be thoroughly examined for all potential civil and criminal tax violations. The IRS will assess any additional tax, interest and a number of applicable penalties. This includes the penalty for the willful failure to file an FBAR. This penalty can be up to 50 percent of the value of the account for each year an FBAR was not filed.

The IRS will also recommend criminal prosecution in those cases where the facts warrant such an action. To date, the IRS and the Department of Justice have successfully prosecuted four United States customers of UBS whose information was provided to the IRS by UBS as part of the Deferred Prosecution Agreement.

Individuals whose information is obtained by the IRS through this process will, by longstanding policy, not be eligible for the voluntary disclosure program.

Resolve your offshore tax matters today, criminal actions by the IRS are imminent. Tax relief services by Mike Habib, EA at 877-78-TAXES

Kentucky Severe Storms and Flooding Victims May Qualify for IRS Disaster Relief

Indianapolis -- Victims of recent severe storms flooding in Kentucky may qualify for tax relief from the Internal Revenue Service.

Following severe storms, flooding and straight-line winds on Aug. 4, 2009, the President declared Jefferson county a federal disaster area qualifying for individual assistance.

As a result, the IRS is postponing until Oct. 5, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between Aug. 4, 2009, and Oct. 5, 2009.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Aug. 4, 2009, and on or before Aug. 19, 2009, as long as the deposits were made by Aug. 19, 2009.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the Postponement Period.

IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.

Covered Disaster Area

The counties listed above constitutes a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Oct. 5, 2009, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after Aug. 4, 2009, and on or before Oct. 5, 2009.

The IRS also gives affected taxpayers until Oct. 5, 2009, to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007), that are due to be performed on or after Aug. 4, 2009, and on or before Oct. 5, 2009.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise deposits due on or after Aug. 4, 2009, and on or before Aug. 19, 2009, provided the taxpayer made these deposits by Aug. 19, 2009.

Casualty Losses

In 2008, a change was made to the tax law that provides relief to individual taxpayers whose personal-use property was damaged or destroyed by a casualty in a federally declared disaster area. Under prior law, individuals who suffered casualty losses as a result of a federally declared disaster were required to reduce the loss from each casualty event by $100 and reduce the total of their casualty losses for the tax year by 10 percent of their adjusted gross income. In addition, these individuals were required to claim their casualty losses as an itemized deduction.

In 2009, as a result of the new law, individuals who suffer a casualty loss as a result of a federally declared disaster are required to reduce the loss from each casualty event by $500. The new law removes the 10 percent of adjusted gross income limitation for net disaster losses and allows individuals to claim the net disaster losses even if they do not itemize their deductions. Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year.

Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.

Affected taxpayers claiming the disaster loss on last year's return should put the Disaster Designation "Kentucky/Severe Storms, Flooding, and Straight Line Winds" at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Tax relief and relief from taxes are our tax practice primary focus. We represent taxpayers before the IRS in all tax controversy matters.

California - Personal Income Tax: 2009 Tax Rate Schedules, Exemption and Other Amounts Released

According to figures obtained from California Franchise Tax Board's Tax Practitioner Liaisons Office, there will be decreases in the indexed 2009 California personal income tax rate schedules, return filing thresholds, standard deduction amounts, itemized deduction limitation amounts, personal exemption amounts, credit amounts, and alternative minimum tax exemption amounts. These figures are based on the negative 1.5% inflation rate, as measured by the California Consumer Price Index (CCPI) for all urban consumers from June of 2008 to June of 2009.

Tax Rate Schedules

For 2009, the indexed personal income tax rates, which includes the 0.25% surcharge, for single taxpayers and married taxpayers filing separately range from 1.25% of the first $7,060 (formerly, $7,168) of taxable income to 9.55% of taxable income over $46,349 (formerly, $47,055). For married taxpayers filing jointly and surviving spouses with a dependent child, the rates range from 1.25% of the first $14,120 (formerly, $14,336) of taxable income to 9.55% of taxable income over $92,698 (formerly, $94,110). For taxpayers filing as heads of households, the rates range from 1.25% of the first $14,130 (formerly, $14,345) of taxable income to 9.55% of taxable income over $63,089 (formerly, $64,050).

Return Filing Thresholds

For the 2009 taxable year, a single taxpayer or head of household taxpayer must file a return if the taxpayer's adjusted gross income (AGI) exceeds an amount ranging from $11,698 to $21,008 (formerly, $11,876 to $30,731), or if the taxpayer's gross income exceeds an amount ranging from $14,622 to $23,932 (formerly, $14,845 to $33,700). A surviving spouse taxpayer with dependents must file a return if the taxpayer's AGI exceeds an amount ranging from $14,965 to $21,008 (formerly, $22,176 to $30,731), or if the taxpayer's gross income exceeds an amount ranging from $17,889 to $23,932 (formerly, $25,145 to $33,700). The corresponding AGI and gross income thresholds requiring married couples to file a return range from $23,396 to $37,606 (formerly, $23,752 to $47,557), and from $29,245 to $43,455 (formerly, $29,690 to $53,495), respectively. The number of dependents and the taxpayer's age (under 65, or 65 or older) determine the filing threshold level that applies.

Standard Deduction

For 2009, the standard deduction decreases from $3,692 to $3,637 for single taxpayers and married taxpayers filing separate returns, and from $7,384 to $7,274 for married taxpayers filing jointly, surviving spouses, and heads of households.

Itemized Deduction Limitation Amounts

The AGI thresholds that activate the reduction of California itemized deductions for 2009 are $160,739 (formerly, $163,187) for single taxpayers and married taxpayers filing separately, $321,483 (formerly, $326,379) for married taxpayers filing jointly and surviving spouses, and $241,113 (formerly, $244,785) for heads of households.

Personal Exemptions

Personal exemption amounts for 2009 decrease to $98 (formerly, $99) for single taxpayers, married taxpayers filing separately, and heads of households, and to $196 (formerly, $198) for married taxpayers filing jointly and surviving spouses. The dependent exemption amount for 2009 decreases to $98 (formerly, $309) for each dependent claimed.

The adjusted gross income (AGI) thresholds that activate the reduction of California personal exemption credits for 2009 are $160,739 (formerly, $163,187) for single taxpayers and married taxpayers filing separately, $321,483 (formerly, $326,379) for married taxpayers filing jointly and surviving spouses, and $241,113 (formerly, $244,785) for heads of households.

Credit Amounts

The joint custody head of household credit and dependent parent credit are indexed for 2009 to the lesser of $387 (formerly, $393) or 30% of net tax.

The qualified senior head of household credit is indexed for 2009 to 2% of taxable income of up to $62,874 (formerly, $63,831), up to a $1,185 (formerly, $1,203) maximum credit amount.

The maximum AGI amounts for the renter's credit are indexed for 2009 to $34,412 (formerly, $34,936) for single filers and $68,824 (formerly, $69,872) for joint filers.

Alternative Minimum Tax Exemption Amounts

The alternative minimum tax exemption amounts for 2009 are decreased to $59,114 (formerly, $60,014) for single or unmarried taxpayers, $39,407 (formerly, $40,007) for married taxpayers filing separately and estates and trusts, and $78,817 (formerly, $80,017) for married taxpayers filing jointly and surviving spouses. Exemption phaseouts begin at the following alternative minimum taxable income levels for 2009: $221,674 (formerly, $225,050) for single or unmarried taxpayers, $147,781 (formerly, $150,031) for married taxpayers filing separately and estates and trusts, and $295,564 (formerly, $300,065) for married taxpayers filing jointly and surviving spouses.

Watchdog Growls At IRS' Audits By Mail

Source: forbes.com

A new report from the Treasury Inspector General for Tax Administration lends support to growing complaints about the Internal Revenue Service's big audit-by-mail program.

The IRS has increasingly relied on these correspondence audits, focused on one or two narrow issues, to maintain its audit coverage of normal taxpayers as its auditor corps has shrunk. Taxpayers are sent a letter that, for example, says their charitable or un-reimbursed employee business deductions will be denied and a certain amount of extra taxes assessed unless they provide acceptable documentation supporting the deductions within 30 days.

But the TIGTA report concludes that the correspondence audit results reported by the IRS are "inaccurate and overstated" and that there are operational problems with the program, including significant mail processing delays. These delays can cause taxpayers who respond with documentation within the required time to be assessed extra taxes because their responses don't get to the right IRS employee in time. Eventually, they may be able to get those taxes abated through an "audit reconsideration," but the average time to conclude one of those is 159 days, TIGTA estimates.

A new mail-handling system was scheduled to be implemented by the IRS by October 2009, but it might be delayed until the end of fiscal 2010, according to the report. In its response to the report, the IRS was vague: "We have a team studying the possibility of a comprehensive mail sorting process."

Correspondence audit foul-ups have drawn loud complaints from accountants and "enrolled agents" who handle tax disputes with the IRS for many taxpayers.

"One IRS agent told me, 'You send us something, you'd better call to make sure we got it,' " reports Claudia Hill, an enrolled agent in Cupertino, Calif. who is editor of CCH's Journal of Tax Practice and Procedure. Hill has heeded that advice and says she recently spent 24 minutes on hold waiting to confirm that information she sent had arrived. (See "Ten Tips For Taming The Tax Cops.")

One hopeful sign Hill notes: The IRS has added fax machines to accept taxpayer information. "The problems aren't going to go away," she concludes. "It's just a matter of whether they can make things better."

TIGTA isn't the first government watchdog to hone in on problems with the program.

In her last annual report to Congress, National Taxpayer Advocate Nina Olson cited difficulties responding to correspondence audits as one of the most serious problems taxpayers encounter.

Even as the complaints have mounted, the number of correspondence audits has steadily increased. The IRS did 1.1 million correspondence audits in fiscal year 2007, up from 440,000 in fiscal year 2000. The bulk of by-mail audits concern the Earned Income Tax Credit.

The new TIGTA report deals with a subset of by-mail audits, the "discretionary" correspondence conducted by the IRS' wage and income division, which is responsible for the 123 million individual taxpayers who don't have self-employment, farm or rental real estate income. Discretionary audits don't deal with the EITC. Instead, the items challenged in these letters are typically un-reimbursed employee business expenses, and charitable and mortgage interest deductions. In fiscal year 2007, the division conducted 234,508 of these audits, more than double the 107,382 in fiscal year 2004. (The IRS is using correspondence audits in the self-employed and small-business division too to challenge items on Schedule Cs, reporting self-employment income, and Schedule Es, for investment real estate.)

Practitioners say one big problem with the wage and investment division letters is that many go to taxpayers who don't owe anything, but are so scared of the IRS that they send in money anyway. "It seems like the IRS is trying to raise money by plucking low-hanging fruit from frightened taxpayers," says William Stevenson, a Merrick, N.Y., tax accountant who counsels his clients to call him immediately upon getting an IRS notice.

Over the past four years, the percentage of folks whose cases resulted in no change--meaning after they sent in their documents the IRS agreed they didn't owe anything extra--ranged from 17% in fiscal year 2007 to 26% in fiscal year 2005. Taxpayers agreed to pay the deficiency in 36% of the total cases, representing only 24% of the dollars assessed in audits. In an astonishing 46% of cases in fiscal year 2007, representing 72% of the dollars assessed by wage and income correspondence audits, folks either didn't respond or the IRS' mail was undeliverable. It's not clear how much the IRS later collects in such cases.

While the IRS reported it assessed $785 million through the discretionary audits in 2007, TIGTA says that number is inflated because it includes the 10% of cases where the IRS later agrees to reconsider the audit on the basis of documentation it hadn't been sent (or had misplaced) before.

In fiscal year 2007, about 20,000 audit reconsideration cases were closed. Based on a sample of cases, TIGTA found that in 78% of them, the IRS reduced or threw out its own assessment, leading to 68% of the assessed tax dollars in closed cases to be abated. TIGTA estimates that of the $785 million in assessments the IRS credited to the discretionary audits, $44 million was later wiped out during audit reconsiderations.

"The group charged with correspondence audits has completed their work; they've charged the assessment; the problem is there are so many bad assessments in there, it's not fair to the taxpayers," says Hill.

In reviewing the sample of audit reconsideration cases, TIGTA found that in 8% there was a record of complaints from taxpayers or their representative that documents had been misplaced by the IRS. Moreover, in 4% of the cases, the files contained multiple copies of requested documents, each having different IRS stamp dates.

Morality and Charlie Rangel's Taxes

It's much easier to raise taxes if you don't pay them.

Source: WSJ

Ever notice that those who endorse high taxes and those who actually pay them aren't the same people? Consider the curious case of Ways and Means Chairman Charlie Rangel, who is leading the charge for a new 5.4-percentage point income tax surcharge and recently called it "the moral thing to do." About his own tax liability he seems less, well, fervent.

Exhibit A concerns a rental property Mr. Rangel purchased in 1987 at the Punta Cana Yacht Club in the Dominican Republic. The rental income from that property ought to be substantial since it is a luxury beach-front villa and is more often than not rented out. But when the National Legal and Policy Center looked at Mr. Rangel's House financial disclosure forms in August, it noted that his reported income looked suspiciously low. In 2004 and 2005, he reported no more than $5,000, and in 2006 and 2007 no income at all from the property.

The Congressman initially denied there was any unreported income. But reporters quickly showed that the villa is among the most desirable at Punta Cana and that it rents for $500 a night in the low season, and as much as $1,100 a night in peak season. Last year it was fully booked between December 15 and April 15.

Mr. Rangel soon admitted having failed to report rental income of $75,000 over the years. First he blamed his wife for the oversight because he said she was supposed to be managing the property. Then he blamed the language barrier. "Every time I thought I was getting somewhere, they'd start speaking Spanish," Mr. Rangel explained.

Mr. Rangel promised last fall to amend his tax returns, pay what is due and correct the information on his annual financial disclosure form. But the deadline for the 2008 filing was May 15 and as of last week he still had not filed. His press spokesman declined to answer questions about anything related to his ethics problems.

Besides not paying those pesky taxes, Mr. Rangel had other reasons for wanting to hide income. As the tenant of four rent-stabilized apartments in Harlem, the Congressman needed to keep his annual reported income below $175,000, lest he be ineligible as a hardship case for rent control. (He also used one of the apartments as an office in violation of rent-control rules, but that's another story.)

Mr. Rangel said last fall that "I never had any idea that I got any income'' from the villa. Try using that one the next time the IRS comes after you. Equally interesting is his claim that he didn't know that the developer of the Dominican Republic villa had converted his $52,000 mortgage to an interest-free loan in 1990. That would seem to violate House rules on gifts, which say Members may only accept loans on "terms that are generally available to the public." Try getting an interest-free loan from your banker.

The National Legal and Policy Center also says it has confirmed that Mr. Rangel owned a home in Washington from 1971-2000 and during that time claimed a "homestead" exemption that allowed him to save on his District of Columbia property taxes. However, the homestead exemption only applies to a principal residence, and the Washington home could not have qualified as such since Mr. Rangel's rent-stabilized apartments in New York have the same requirement.

The House Ethics Committee is investigating Mr. Rangel on no fewer than six separate issues, including his failure to report the no-interest loan on his Punta Cana villa and his use of rent-stabilized apartments. It is also investigating his fund raising for the Charles B. Rangel Center for Public Service at City College of New York. New York labor attorney Theodore Kheel, one of the principal owners of the Punta Cana resort, is an important donor to the Rangel Center.

All of this has previously appeared in print in one place or another, and we salute the reporters who did the leg work. We thought we'd summarize it now for readers who are confronted with the prospect of much higher tax bills, and who might like to know how a leading Democrat defines "moral" behavior when the taxes hit close to his homes.

IRS Urgent Letters and Notices That YOU MUST ATTEND TO

Mike Habib, EA

IRS Audit & Examination Letters

Letter 525 - General 30 Day Letter

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 531 - Notice of Deficiency

This letter is notice of the Commissioner's determination that you owe additional tax or other amounts for the tax year(s) identified in the letter. The Internal Revenue Code authorizes the Commissioner to send this notice. The letter explains how to dispute the adjustments in the notice of deficiency if you do not agree. To dispute the adjustments without payment, you file a petition with the Tax Court within 90 days from the notice date.

Letter 692 - Request for Consideration of Additional Findings

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 15 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 1153 - Trust Funds Recovery Penalty Letter

This letter explains that the IRS's efforts to collect the federal employment or excise taxes due from the business named on the letter have not resulted in full payment of the liability. Therefore, the IRS proposes to assess a penalty against you. If you agree with this penalty for each tax period shown, you are asked to sign Part 1 of the enclosed Form 2751 and return it to the person/office that sent you the letter. If you do not agree you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how you file a protest. You need to file your protest within 60 days from the date of the letter in order to appeal this decision with the Office of Appeals.

Letter 1389 - 30 Day Letter, Tax Shelter Activity

This letter accompanies a report giving you a computation of the proposed adjustments the IRS made to your tax return because of your tax shelter activity. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how you file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3016 - IRC Section 6015 Preliminary Determination Letter (30 Day)

This is a preliminary letter giving you 30 days to appeal the determination for innocent spouse relief under IRC Section 6015. The letter explains that if you do not agree with the determination you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how you file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3391 - 30-Day Nonfiler Letter

This letter advises you the IRS believes you are liable for filing tax returns for the periods identified in the letter. It includes a report giving you a computation of the proposed adjustments to your tax return and explains the adjustments. The letter explains that if you agree with the adjustments, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3727 - 30-Day Letter Notifying Taxpayer No Change to Original Report Disallowing EIC Based on Failure to Meet Residency Test for Children Claimed

This letter explains why the IRS will not allow your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3728 - 30-Day Letter Notifying Taxpayer No Change to Original Report Partially Disallowing EIC Based on Failure to Meet Residency Test for 1 Child

This letter explains why the IRS can only give you part of your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

IRS Tax Debt Collection Letters

Letter 11 - Final Notice of Intent to Levy and Notice of Your Right to a Hearing

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the proposed action with the Office of Appeals.

Letter 1058 - Final Notice Reply Within 30 Days

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 1085 - 30-Day Letter Proposed 6020(b) Assessment

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 3172 - Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

This letter is to notify you the IRS filed a notice of tax lien for the unpaid taxes. If you do not agree you can request appeals consideration within 30 days from the date of the letter. The letter and publications explain how to request a hearing from Appeals. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your lien notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Notices

CP 90 - Final Notice of Intent to Levy

CP 90 notifies you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 92 - Notice of Levy upon Your State Tax Refund

CP 92 notifies you that the IRS levied your state tax refund to pay your unpaid federal taxes. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 242 - Notice of Levy upon Your State Tax Refund

CP 242 notifies you that the IRS levied your state tax refund to pay your unpaid federal tax. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 523 - IMF Installment Agreement Default Notice

CP 523 notifies you that the IRS intends to terminate your installment agreement in 30 days. You have the right to request an appeal if you do not agree by following the instructions in the notice.

CP 2000

You receive this letter when the IRS receives income, deduction or credit information that does not match your return. You are provided a computation of the proposed adjustments to your tax return based upon this information. If you agree, you sign and return the agreement forms. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

If you are serious about resolving your tax problem and getting tax relief, then do not compromise on your representation. Call Mike Habib, EA today at 1-877-78-TAXES or online at http://www.myirstaxrelief.com

Tax Relief

No one looks forward to the tax filing season. This period is associated with endless paperwork and sorting through receipts and other documents to get your tax accounts in order. And even with the use of tax programs, you are still at risk of encountering errors that can get you in the spot light as far as the IRS is concerned. Your problem grows worse once you have the misfortune of owing the IRS monies or getting your return picked out for audit. You can only pray that you have managed to get every entry properly accounted for.

So what should you do?

In case you do find yourself and your tax return subjected to inquiry by the IRS, you need to get proper representation to help you get tax relief. The concept of using a licensed tax representative has risen in popularity over the years as more and more individuals and businesses are beginning to find it more difficult to justify the entries in their tax returns for some reason or come up with the monies to pay their mounting tax debts.

Getting tax resolution through a licensed professional allows individuals and companies to stay on top of every issue that has to do with getting their tax returns properly straightened and settling their tax matters with the IRS.

Advantages of proper tax representation

As a general rule, working with someone who comes with sufficient experience and know-how on taxes and relief programs will make it easier for you to plead your case. The services of a reputable and experienced tax relief firm are especially important for those who owe more than $10,000 worth of back taxes to the IRS. A good tax representative works as a middleman to represent the individual or business with the IRS and plead for a more favourable tax resolution program to help clients pay off what they owe or they might qualify to settle their tax debt for less than they owe.

Tax relief services can help you negotiate with the IRS so you can qualify for a repayment program that will suit your budget. An efficient tax resolution strategy will be drafted so you don't stand to suffer a lot from the consequences of back taxes or improperly recorded entries.

How it works

Tax problem resolution services works as to represent you the taxpayer with the IRS in order to settle and resolve your tax debt that you owe the government. The tax representative will guide you through the process of filling out the right forms to appeal your case and represent you in ongoing negotiations. He will brief you on your options, the steps that you need to take for each and the potential setbacks for each program. By reviewing your current financial status and where you stand as far as the IRS is concerned, you and your partner representative will be able to come up with a more effective resolution to tax debt.

Heads up

The idea of tax representation and the services that go with it are still fairly new to Americans in the United States. However, some unscrupulous tax relief companies have already faced class-action lawsuits because of false advertising and claims that they are able to get their clients free from IRS debts. Be wary of unscrupulous tax relief companies who make claims such as "pennies on the dollar" and then get your case denied by the IRS. As such, it's important to make sure that you choose the right company and the right tax professional to represent you.

Some companies are just in for the money, failing to qualify you for the offer in compromise program or follow the guidelines that the IRS has set for filing claims and other paperwork as necessary and further taking your money even before they can really qualify their clients for favorable resolution. This is where informed choices become important.

If you're going to get tax representation, better work with somebody who is highly qualified and specializes in this industry. Mike Habib will go through your case personally to help you find the right resolution for your tax issues according to your specific needs and your financial condition.

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IRS Tax Audits and Examination

The US Internal Revenue Service organizes audits and examinations on tax returns to ensure tax compliance by both individuals and businesses. But because it's virtually impossible to actually audit and examine every ITR for discrepancies, the audits are mostly randomized so your chances of getting picked for a particular year is just as high as getting overlooked. Many taxpayers manage to survive every tax season without undergoing an IRS tax audit but there are those that are not as lucky.

The audit selection process

What are the odds that you will get picked anyway? The IRS selects participants for audits through a number of methods. For instance, an IRS examination may be conducted on returns that are linked to individuals and corporations that have already been reported for tax avoidance transactions. Large corporations, on the other hand, typically undergo audits for their Form 1120 every year. There are also those that come up as a result of information matching in relation to payer reports or those that have been involved with transactions with other individual taxpayers or business partners that have also been picked out for the audit.

Individual audits

To ensure that you survive the IRS tax audit practically unchanged, you want to make sure that your Form 1040 is always accurate. The IRS offers a number of opportunities for tax breaks but you are responsible for keeping your records updated in case the IRS requests for proof of your deductions. It would be easier to prepare your return for potential audits if you keep your records properly organized throughout the year. This will help you establish a proper defense in case the IRS actually challenges this year's return.

Here are some tips on how you can survive the IRS' tax exam and keep yourself out of trouble during the audit in case you do get picked.

• Keep at least three years' worth of your tax returns and related records
• Don't throw your checkbook stubs
• Categorize your receipts from your purchases made the whole year
• Track the costs and the basis for expenses incurred when you make taxable investments or for various investments
• Keep your deductible items in a journal and make sure to record them as they occur
• Save your bills and proof of payments accordingly

These are actually the same tips that you need to take note of to make it easier for you to get your Form 1040 in order so even when you don't really get audited, it would still be in your best interests to follow these guidelines.

For corporations

As earlier mentioned, many large and multinational conglomerates undergo IRS examination every year so keeping their affairs in order is practically like second nature. But for smaller companies, there's always the chance that you will get overlooked. But before you get too complacent, you want to take note of certain elements in your Form 1120 that could actually attract the attention of the IRS and merit an audit.

• Large deductions for charity
• Too many business expenses incurred and reported
• Excessive deductions that were itemized
• Prior tax issues
• Complex transactions for investments during the year
• Tax shelter losses

How to deal with your audit

If you suddenly find yourself chosen for a tax audit, it pays to be prepared for it. What you need to do is you need to go over the details of your return and make sure that you understand it so you can effectively answer the questions that IRS may throw at you. It would also help to seek the help of a licensed tax professional. Mike Habib, for instance, can help you go through tax audits so you don't have to deal with the IRS on your own.

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IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits

WASHINGTON -- With 2009 now half over, the Internal Revenue Service reminds taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).

The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

First-Time Homebuyer Credit

The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009.

Taxpayers who didn't own a principal residence during the past three years and purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.

New Vehicle Purchase Incentive

ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010.

Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.

Energy-Efficient Home Improvements

The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010.

Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

Tax Credit for First Four Years of College

The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

Certain Computer Technology Purchases Allowed for 529 Plans

ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

Making Work Pay and Withholding

The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. Failure to adjust your withholding could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675, and 79 percent of all returns received a refund.

Related Information

For more on the Recovery provisions that may apply to individual taxpayers see the ARRA page on IRS.gov