Tax Relief Blog

Music composer tax related capital gain treatment

IRS Temp reg describes how and when to elect capital gain treatment for self-created musical works

T.D. 9379, 02/07/2008, Reg. § 1.1221-3T; Preamble to Prop Reg 02/07/2008, Prop Reg § 1.1221-3

IRS has issued a temporary reg on the time and manner for making an election under Code Sec. 1221(b)(3) to treat gain or loss from the sale or exchange of certain musical compositions or copyrights in musical works as gain or loss from the sale or exchange of a capital asset. The text of the temporary reg also serves as the text of the proposed reg.

Background. The Tax Increase Prevention and Reconciliation Act of 2005 provided an exception to the rule that copyrights or literary, musical or artistic compositions, letters or memorandums or similar property are not capital assets or Code Sec. 1231 capital gain-ordinary loss assets. For sales or exchanges in tax years beginning after May 17, 2006, a taxpayer may elect to treat a sale or exchange of musical compositions or copyrights in musical works created by the taxpayer's personal efforts--or having a basis determined by reference to the basis in the hands of a taxpayer whose personal efforts created them--as the sale or exchange of a capital asset. ( Code Sec. 1221(b)(3) ) Although this exception was originally a temporary measure, it was later made permanent by the Tax Relief and Health Care Act of 2006.

Observation: As a result, a composer who sells his copyrighted composition in a sale and makes this election will pay tax at the lower rates that apply to capital gain.

Making the election. The temporary reg, which is retroactively applicable to sales and exchanges in tax years beginning after May 17, 2006, provides that a taxpayer makes the election by treating the sale or exchange as the sale or exchange of a capital asset, in accordance with the applicable form and its instructions. The taxpayer must make a separate election for each musical composition (or copyright in a musical work) sold or exchanged during the tax year. The election is made on Schedule D, Capital Gains and Losses, of the appropriate tax form (e.g., Form 1040, U.S. Individual Income Tax Return; Form 1065, U.S. Return of Partnership Income; Form 1120, U.S. Corporation Income Tax Return). The taxpayer must make the election on or before the due date (including extensions) of his return for the tax year of the sale or exchange. (Reg. § 1.1221-3T(b))

Revoking the election. An election to elect capital gains treatment is revocable with IRS's consent. To request that consent, a taxpayer must submit a request for a letter ruling under the appropriate revenue procedure (e.g., Rev Proc 2007-1, 2007-1 CB 1 (as updated annually). Alternatively, an automatic 6 month extension from the due date of a taxpayer's return (excluding extensions) will be granted to revoke an election if the taxpayer timely filed his return and, within the 6-month extension period, files an amended return that treats the sale or exchange as the sale or exchange of property that isn't a capital asset. (Reg. § 1.1221-3T(c))

The election of capital gain treatment for self-created musical work.

Mike Habib, EA
MyIRSTaxRelief.com

Employment tax penalty abatement, Payroll tax problem, Abate tax penalty

Court says bank error (not employee error) may be reasonable cause to abate employment tax assessment

Mike Habib, EA

Don Johnson Motors, Inc. v. U.S., DC TX, 101 AFTR 2d 2008-370, Civil Action No. B-06-047, 12/21/07

Employment tax problem? Get representation today!

A Texas U.S. district court has ruled that employment tax penalties and interest for the 1999-2002 tax years could not be abated due to reasonable cause, even though the taxpayer was unaware that its in-house accountant and its office manager had failed to perform their payroll tax duties. However, there may be reasonable cause to abate an employment tax assessment for the 2003-2004 tax years because of a bank error.

Employee Errors
Facts. From 1999 to 2002, Don Johnson Motors, Inc. (Don Johnson) delegated its payroll tax functions to an in-house accountant, Michael Ezequiel, who performed his role under the supervision of the company's office manager. Ezequiel prepared the company's employment tax returns and was also in charge of monitoring the payroll accounts and the information included on Forms 940 and 941. At some point in 1999, for reasons not explained, Ezequiel stopped paying portions of the company's payroll taxes to the IRS. As a result, Don Johnson Motors made incomplete deposits to the IRS from 1999-2002. The executives of Don Johnson Motors were unaware of this problem until December 2002. Shortly thereafter, the IRS assessed penalties against the company for failure to file employment tax returns and to timely pay taxes.

Law. IRC §6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to "reasonable cause" and not willful neglect. Don Johnson Motors requested an abatement of the aforementioned penalties based on IRC §6651(a) .

Ruling. The district court denied the taxpayer's abatement request. In issuing its ruling, it noted that other federal courts have consistently held that the failure of a taxpayer's employee to file or pay taxes does not establish reasonable cause (e.g., see McMahan v. Commissioner, 114 F. 3d 366 (1997), and Conklin Bros. of Santa Rosa, Inc. v. U.S., 986 F. 2d 315 (1993)).

The district court also distinguished the current ruling from In the Matter of American Biomaterials Corporation, 69 AFTR 2d 92-611 (1992). In American Biomaterials, the Third Circuit Federal Court of Appeals ruled that there may be reasonable cause to abate employment tax penalties when corporate officers commit criminal acts (e.g., embezzlement) against the corporation. The district court distinguished the current ruling from that one by pointing out that Don Johnson Motors had never presented any evidence that its in-house accountant and its office manager had engaged in any criminal action. The district court said that the employment tax deficiencies incurred by Don Johnson Motors simply resulted from having "lax internal controls or failing to secure competent external auditors that even the court in American Biomaterials stated was insufficient to establish reasonable cause."

The district court also rejected the taxpayer's argument that there was reasonable cause to abate the penalties because of the lack of notification from the IRS that the company was falling behind in its tax obligations. The court cited IRC §6151 and said that the IRS was under no obligation to provide taxpayers with notice that they failed to file their returns or pay their taxes.

Bank Error
The IRS also assessed penalties against Don Johnson Motors for untimely employment tax deposits for the 2003 and 2004 tax years. The company was required to pay its taxes electronically using the Electronic Federal Tax Payment System (EFTPS). The company was provided with new software by its bank for EFTPS transactions. The bank sent one individual over to Don Johnson to train the company on the software. The trainer had been employed with the bank for two days. The software required the tax period to be entered in two separate fields or the deposit would not be made by the bank. This fact was not mentioned to company employees. Consequently, the bank did not make any of the taxpayer's employment tax deposits for the period in question.

The IRS assessed penalties against Don Johnson Motors for failing to make its deposits on a timely basis. An IRS revenue officer reviewed this situation and determined that the assessment was proper. Don Johnson Motors appealed the ruling to the district court.

The district court said that there may be reasonable cause to abate the penalties because none of the previous rulings on this matter had considered the bank's concession that it had failed to properly train Don Johnson employees. The court also noted that: (1) Don Johnson had provided the bank with the information necessary to make the company's employment tax deposits in a timely manner, and (2) there were sufficient funds in the company's bank accounts to make the deposits. According to the EFTPS handbook, these two facts provide sufficient evidence to establish reasonable cause. As a result, the court remanded the case back to the IRS for further consideration as to whether the penalties should be abated.

Employment / Payroll tax problem? Get representation today!

As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia 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 D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

S corporations tax challenges by the IRS and other taxing authorities

Tax Advocate's Report highlights S corporation issues

Despite the fact that Subchapter S corporations are the most common corporate entity (over three million S corporations filing returns in fiscal year 2006), the National Taxpayer Advocate's 2007 Annual Report notes that IRS is still struggling to develop an effective and comprehensive strategy to address noncompliance by S corporations. The Report focuses on some of the challenges in this area, including insufficient data to assess compliance risks and undue taxpayer burden because of the S corporation election process and Schedule K-1 matching errors. In particular, the Report examined the avoidance of employment taxes by means of treating shareholder wages as distributions.

Background. S corporations are incorporated entities with many of the same attributes as traditional C corporations, including limited liability, transferable ownership, and unlimited life. But unlike C corporations, S corporations are generally not subject to income tax. Instead, the business's profit or loss is passed through to the shareholders, who report it on their individual returns. To qualify, a corporation must elect S corporation status and meet a number of requirements. It can have no more than 100 shareholders, and only certain types of taxpayers can be shareholders. It can have only one class of stock.

The Report surmises that the continual growth in S corporation filings--which account for 65% of all corporate returns--may be due in part to the lower individual tax rates available, limited liability, and the perceived opportunity for sole proprietors to avoid self-employment tax.

Compliance data difficulties. IRS stratifies S corporation filings into three separate asset ranges (as compared with the 13 ranges for C corporations). This can make identifying returns with higher compliance risk more difficult, especially when 99% of all S corporation returns report assets of $10 million or less. In fiscal year 2006, an S corporation faced only a 4 in 1000 chance of being audited, compared to 8 in 1000 for C corporations.

The Report notes that IRS increasingly identifies S corporation returns for examination to address abusive tax schemes and avoidance transactions, but identifying compliance risk associated with multi-entity return groups is challenging. (IRS is also developing a high income taxpayer strategy to test the hypothesis that the highest income strata of Forms 1040, Individual Income Tax Return, are using a variety of tax products and entity structures to defer tax liability into future years, convert ordinary income into lower capital gain tax income, or offset income with sham losses.)

When IRS proposes changes to S corporation returns at the conclusion of an examination, it reports each shareholder's distributive share of the change as an adjustment to the individual shareholder's tax return. In addition to certain deficiencies with the audit process, IRS is unable to measure its effectiveness in S corporation examinations because it doesn't track the ultimate tax at the Form 1040 level. IRS records audit results at the S corporation level but never associates them with the tax assessment.

S elections and K-1 filings. Taxpayers elect S corporation status by filing Form 2553, Election by a Small Business Corporation, on or before the 15th day of the third month of the tax year for which the election is to be in effect. If the election isn't timely filed or is incomplete, the S corporation return is converted to a C corporation return when filed. In past years, roughly 14% to 16% of total new S corporation filings were unpostable (i.e., the S corporation election was not approved). Approximately 20% of S corporation returns are unpostable for multiple years because of missing information or IRS processing errors.

S corporations file Schedules K-1 each year to report profit and loss to their shareholders. IRS then matches income and loss information from Schedules K-1 to individual tax returns and generates notices when differences arise. Although returns are screened to eliminate unnecessary notices, the error rate is still high. IRS technicians who work discrepancies have limited accounting and tax training, while S corporation returns contain many complex issues that may go undetected where employees only address flow-through income. Further, since the K-1 matching program is part of the Automated Underreporter (AUR) program unit, which limits human involvement, many taxpayers are unable to reach a trained IRS employee to answer questions concerning mismatched K-1s because the AUR program's level of service is poor and the program has no dedicated line for practitioners.

The Report concludes that IRS needs to focus on reducing taxpayer burden associated with the S corporation election process and the K-1 matching program. Taxpayers and return preparers have identified the S corporation election process as one of the most difficult for eligible small business corporations. While efforts have been made to simplify the S-election process and reduce processing costs, the Report concludes that the best approach to reducing taxpayer burden is to permit the election to be considered timely filed with the first S corporation return. Taxpayers and practitioners need access to knowledgeable IRS employees to deal with the often complex questions regarding S corporation and K-1 matching issues.

Compensation vs. corporate distribution. The earnings of an S corporation are taxed as ordinary income to its shareholders. Unlike partnership or sole proprietor earnings, S corporation earnings are not subject to self-employment tax. This treatment gave rise to a tax planning strategy that recharacterizes shareholder compensation as distributions of profit to avoid payroll taxes. The S corporation owner pays employment taxes on only the portion of profits that he arbitrarily decides is "salary." The S corporation officer or shareholders, who takes no salary or a nominal salary, receives the remaining compensation as tax-free distributions. The corporation saves payroll taxes, and the shareholder pays only income taxes on his share of the corporate profits, avoiding paying Social Security and Medicare taxes.

In tax year 2005, almost one million S corporations with one shareholder paid no officers' compensation. The Report calculates that if all profitable S corporations that reported no officers' compensation had been Schedule C businesses, they would have paid an estimated $4.9 billion in self-employment tax.

The Report notes that the wage-to distribution conversion strategy may reduce the shareholder's future Social Security benefits--an important part of most individuals' retirement income. A taxpayer's Social Security benefits depend on the amount of pre-retirement wages received and social security taxes paid.

Although IRS has repeatedly litigated this issue and has won, taxpayers continue to use it as a tax planning strategy. IRS acknowledges this issue as a special compliance problem, featuring it in corporate classification guidelines for Form 1120S and including a reference to it in its notice of acceptance of S corporation status. IRS continues to audit returns based on this issue and reclassify distributions as wages subject to employment taxes. But establishing a fair and reasonable wage is difficult and time consuming. IRS examiners must consider: the financial condition of the corporation; the time worked by the shareholder; the company's compensation policy for other workers; the salary structure in companies in similar industries; and the return on investment.

Observation: The easiest cases for IRS to litigate and win are those where a sole S corporation owner claims no or negligible salary subject to employment taxes despite the fact that he may serve in key roles in the business, providing management, sales, or service functions, controlling the day to day activities of the company and making decisions affecting its future. The much more difficult and thornier cases are those questioning whether a salary that is not negligible is sufficient, i.e., reasonable.

The Report concludes that actions are needed to reverse the trend of electing S corporation status to avoid Social Security taxes. The employment tax strategy has an economic impact on the tax gap and erodes the Social Security and Medicare tax base. While acknowledging the challenges faced by IRS in dealing with this compliance issue (while reducing taxpayers' burden), the Report concludes that IRS must find the right balance of research, training, outreach, and compliance activities to improve the quality of S corporation work.

S Corporation tax problem? Get professional tax resolution today!

Mike Habib, EA

How to handle the IRS at your Front Door? Is a Revenue Officer or a Revenue Agent visiting you soon?

If you find yourself face to face with an IRS Agent (Revenue Officer for collection issues, or Revenue Agent for audit and examination issues), at your front door you must remember to avoid these common mistakes:

1. Don't invite them into your home or business.
2. Don't answer any question. No matter how innocent they sound.
3. Don't provide them paperwork or documentation.

What you should do is ask the IRS agent for their business card and the purpose of their visit.

Explain to them that your professional tax representative will contact them and that all future communications will go through them.

Be polite but firm. Do not let them intimidate you into talking about anything.

Your rights under the Taxpayer Bill of Rights allow you to have a Professional Tax Representative handle your IRS negotiations.

Often taxpayers become understandably nervous and invite the IRS Agent into their home or business and start telling them all kinds of things.

DON'T DO IT!

Usually you're helping the IRS and hurting yourself. The IRS Agent is trained to prepare a mental inventory of all assets they see in your home or business.

Get professional representation TODAY.

Mike Habib, EA
MyIRSTaxRelief.com

Taxpayer Advocate's Annual Report to Congress highlights compliance problems & suggests improvements

The National Taxpayer Advocate has released its 2007 Annual Report to Congress. It's a voluminous study of the most serious problems facing taxpayers and IRS, along with suggested improvements. These problems include late-year Code changes by Congress, nonreporting of income in the cash economy, and lack of clear IRS guidance to taxpayers on the tax consequence of cancellation of debt.

http://www.irs.gov/advocate/article/0,,id=177301,00.html

Impact of late-year Code changes on taxpayers and IRS. The Report excoriates Congress for making retroactive changes at the last minute in December of 2006 (extender legislation) and 2007 (AMT patch). IRS finalizes Form 1040 and its accompanying instructions in early November, and tax software companies finalize their shrink-wrapped software packages around the same time. In 2006, Congress reauthorized deductions for state and local sales taxes, educator expenses, and post-secondary tuition and fees in December, and taxpayers made an estimated 1.4 million fewer claims for these benefits in 2006 than in 2005. The only discernible difference between the two years was that the benefits for 2006 were not included in the Form 1040 package or shrink-wrapped software. Thus, it appears that numerous taxpayers did not claim tax deductions to which they were entitled simply because they did not know about them (they didn't obtain updated forms and instructions, or didn't download software patches).

Late legislative changes also force IRS to divert its resources to implement the changes, delay the start of the filing season, result in delayed refunds to taxpayers, make it more difficult to engage in legitimate tax planning, and may subject taxpayers to unanticipated penalties for failure to pay sufficient estimated tax, the Report said.

The Report suggested that IRS identify and estimate the filing-season impact of significant tax legislation--particularly provisions extending existing benefits--and transmit its findings to the tax-writing committees at several points during the year, perhaps on June 30, September 30, and monthly thereafter.

Income from the cash economy. Taxable income from legal activities that is not subject to information reporting or withholding is the type of income most likely to go unreported. Unreported income from the cash economy is probably the single largest component of the tax gap, according to the Report, likely accounting for over $100 billion per year. To improve noncompliance in the cash economy, the Report suggests that IRS:

o establish a Cash Economy Program Office to coordinate its efforts to improve compliance in this area;
o conduct research to identify tax rules that often confuse taxpayers, and provide simplifying guidance;
o combine all of the gross receipts information that it receives from third parties into a single database and then use that database to detect potential underreporting of income as well as nonfilers;
o obtain more state and local receipts-related data, match it against income reported on federal income tax returns, and use it to improve audit efficiency;
o revise Form 1040, Schedule C to break out income not reported on information returns.

The Report urges Congress to enact legislation that:

o increases use of IRS's electronic payment system for estimated tax payments;
o authorizes voluntary withholding agreements;
o eliminates the corporate exception to information reporting for small corporations if IRS's National Research Program shows significant noncompliance;
o accelerates the taxpayer identification number validation process;
o provide for withholding on payments to noncompliant contractors;
o requires information reporting by financial institutions on credit and other payment card receipts; and
o requires financial institutions to report all accounts to the IRS by eliminating the $10 minimum on interest reporting.

Improved taxpayer guidance on cancellation of debt. The Report found that many taxpayers may be paying taxes they don't owe because IRS instructions do not adequately explain exceptions to "cancellation of indebtedness" income. Although Congress passed legislation granting temporary relief relating to mortgages, taxpayers received about two million Forms 1099-C reporting canceled debts last year, many relating to defaults on automobiles and credit card bills. The Report points out that there are several exceptions to the general rule that these amounts are taxable. If the taxpayer is insolvent (i.e., the taxpayer's liabilities exceed the taxpayer's assets), the canceled debt is excludable from gross income up to the amount of insolvency. If the debt is nonrecourse (i.e., the lender's only remedy in case of default is to repossess the property to which it relates), the canceled debt is not income. Additionally, lenders may not correctly value property, leading to erroneous reporting of income.

The Report found that IRS's instructions do not explain the exceptions clearly. As a consequence, many taxpayers who receive Forms 1099-C reporting canceled debts may include the amounts in income because they lack knowledge of the exceptions. The Report recommended that IRS improve its instructions and develop a publication devoted to canceled-debt issues.

If you're having a tax problem, you will be better off if you hire a licensed tax professional to represent you before the IRS.

Payroll Taxes forms 940, 941, and 944 update

Don't get into an IRS payroll tax problem...

IRS has revised its instructions for Forms 940, 941, and 944 and will be sending out notices in February to employers that are eligible to file Form 944 for the 2008 tax year.

Form 940. The 2007 Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and its instructions, are now on the IRS web site. The due date for filing the return is Jan. 31, 2008. However, employers that deposited all of their FUTA tax in accordance with IRS deadlines have until Feb. 11, 2008 to file the return.

There are no credit reduction states for tax year 2007, so lines 2 and 11 of the form, and part 2 of Schedule A, Multi-State Employer and Credit Reduction Information, do not need to be completed.

The Form 940 instructions note that, for tax year 2008 (generally due in January 2009), the FUTA tax rate is scheduled to decrease from 6.2% to 6.0%, but caution that there is pending legislation that would eliminate the reduction in the tax rate.

Note: The Senate-passed version of H.R. 6, the Energy Independence and Security Act, would extend the temporary surtax rate through Dec. 31, 2008. Thus, the FUTA rate would remain at 6.2% through the end of 2008.

Form 941. The instructions for Form 941, Employer's Quarterly Federal Tax Return, have been recently revised to include the Department of the Treasury (DOT) in some of the filing addresses. The first quarter 2008 return will reflect the increase in the Social Security wage base to $102,000.

IRS also reminds employers to use a minus sign when reporting a negative amount as a tax adjustment on line 7 of Form 941, and not a parenthesis. It requests this to enhance the accuracy of its scanning software.

Form 944. Certain employers whose estimated annual employment tax liability is $1,000 or less are eligible to file Form 944, Employer's Annual Federal Tax Return, rather than filing Form 941 on a quarterly basis. As with Form 941, IRS has changed some of the Form 944 filing addresses to add the DOT. The 2007 Form 944 is on the IRS Web site.

In February 2008, IRS will be sending out notices to employers who should file Form 944 for tax year 2008, rather than quarterly Form 941. Employers who receive this notice should immediately discontinue filing Form 941. Employers expecting to exceed the $1,000 Form 944 threshold (approximately $4,000 or more in wages) must contact IRS before Apr. 1, 2008 to request to remain a quarterly Form 941 filer. Employers already filing Form 944 will not receive the above notice from IRS.

Employers who prefer to e-file Form 941 quarterly (rather than file Form 944) must contact IRS by Apr. 1, 2008 to change their filing status. They should wait to receive confirmation from IRS before they start filing Form 941. The first quarter Form 941 is due at the end of April.

The due date for the 2008 annual Form 944 is Feb. 2, 2009.

Source: Federal Taxes Weekly Alert (preview) 12/20/2007, Volume 53, No. 51

For Payroll tax problem representation CLICK HERE

Mike Habib, EA
MyIRSTaxRelief.com

As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia 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 D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

IRS tax audit and IRS tax problems facing transportation or construction businesses, and other similar industries

IRS SBSE-04-0108-003, 1/14/08

The IRS has reissued interim guidance that provides audit guidelines to its examiners reviewing excess per diem payments. The original guidance expired in November 2007.

The original guidance (IRS SBSE-04-1106-049) affected taxpayers who paid reimbursement allowances to employees for travel expenses in amounts that exceeded the federal per diem rate, without treating such excess amounts as wages for employment tax purposes. The excess payments called into question whether the employer had an accountable plan. Payments under an accountable plan are treated as nontaxable expense reimbursements. In contrast, payments under a nonaccountable plan are wages that must be reported on Forms W-2 and that are subject to employment taxes.

In November 2006, the IRS issued Rev Rul 2006-56, 2006-46 IRB 874. The ruling discussed the proper employment tax treatment of expense allowance payments where an employer routinely failed to treat amounts exceeding the federal per diem rate as wages. The ruling said that the entire reimbursement for business-travel-related meals and incidental expenses must be treated as paid under a nonaccountable plan (and, thus, as wages) if an employer doesn't track expenses and doesn't require employees either to actually substantiate expenses or pay back amounts in excess of the deemed substantiated amount.

Periods ending before Jan. 1, 2007. The interim guidance noted that most taxpayers who were not in compliance with Rev Rul 2006-56, 2006-46 IRB 874, after its November 2006 release needed time to update or secure accounting software that enabled them to compute the proper amount of additional wages. As a result, for taxable periods ending on or before Dec. 31, 2006, the IRS advised its examiners not to treat a plan as entirely nonaccountable solely because excess per diem payments were not treated as wages, absent egregious circumstances or evidence of intentional noncompliance. Instead, the examiner should only treat the amounts in excess of the federal per diem limit as wages.

Periods ending after Dec. 31, 2006. Effective Jan. 1, 2007, the IRS instructed its examiners to determine if the plan is abusive, based on: (1) the extent the excess payments are not treated as wages, and (2) whether a system for tracking excess payments is being utilized. If an employer utilizes a system for tracking excess payments, then the fact that the employer (due to errors in its system) routinely pays excess allowances that are not treated as wages will generally not be treated as a pattern of abuse by the examiner. If a plan evidences a pattern of abuse, all of the per diem payments made under the plan will be treated as taxable wages. The IRS notes that each case stands on its own, and a determination must be made based on the "facts and circumstances" of each particular situation.

The IRS said that the excess per diem issue most frequently arises in audits of transportation or construction businesses, but can affect other industries as well.

We provide professional tax representation CLICK HERE FOR MORE INFO Mike Habib, EA

alties, options to address your IRS tax penalty and more...

The IRS has over 148 different types of penalties. And boy do they love to hand them out. The worst part is that the IRS also charges interest and additional penalties on the original penalty.

So you must try to get them reduced or completely abated to zero. CLICK HERE FOR HELP

After you have decided to make a request to the IRS to "Abate Your Penalties" you must consider where and when to make the request. In my experience your chances are better in dealing with IRS Service Centers. The timing of your request depends on the type of penalty assessed against you. It always makes sense to request penalty abatement before you pay the IRS.

Although, if you've already paid the bill, it can't hurt to ask for a penalty abatement and refund.

These penalties can often be reduced to ZERO if you have "REASONABLE CAUSE." What makes up REASONABLE CAUSE you ask? Well, in my experience in negotiations with the IRS, anything may qualify as long as its reasonable.

The IRS abate penalties for medical reasons, bad accountants, ignorance of the tax laws, ex-spouses, helping to provide care for a loved one, military call-ups, fires, floods, alcoholism, drug abuse, death, and even relying on IRS advice.

Penalties can be such a high percentage of the total amount owed to the IRS; it usually makes sense to consider requesting the IRS to reduce all penalties to ZERO.

YOU MAY BE PLEASANTLY SURPRISED. YOU HAVE NOTHING TO LOSE AND THE SAVINGS COULD BE HUGE! Tax Hint=> File All IRS Required Tax Returns On Time!

Many people do not realize that the IRS charges you a penalty of up to 25% FOR JUST FILING YOUR TAX RETURN LATE. That's right, 25% of what you owe. This includes individual tax returns, Payroll tax returns or Corporate tax returns.

What people don't know is that they can file ANY tax return on time and AVOID THE 25% PENALTY even if you don't send in the money which is owed on the tax return.

Yes, of course you'll get some ugly mail from the IRS for not sending in the money owed, but so what, you will have avoided a 25% penalty.

So, in the future no matter what is going on in your life, file all tax returns on time even if you don't send in the money owed with the return.

Payroll Tax Penalty: Payroll Taxes Not Being paid On Time, Payroll Tax Problem

All check signers on company bank accounts can be held responsible for payroll taxes!

If you are a check signer on the company checking account, it is your responsibility to make sure all Payroll taxes are being paid to the IRS at least monthly.

Sometimes businesses get behind on payroll taxes due to cash flow problems. The penalties and interest assessed by the IRS are excessive for this type of delinquency. This problem becomes worse with IRS penalties and interest, and the total amount owed can grow by 50% to 75% in a short period of time.

If the company is now in cash flow trouble and approaching the DANGER ZONE, it may never be able to pay off the total amount owed. Each check signer may be held personally responsible for the payroll taxes. And I mean each of the check signers listed on the bank signature card. This often includes spouses, secretaries, employees, relatives, office managers or yourself.

The IRS takes a very serious approach to collecting delinquent Payroll taxes and may levy or seize company assets in short order. The best advice I can give to you if you find yourself in this situation is, NOT to meet with the IRS Revenue Officer who calls or comes to the door to collect these taxes. Often, how you answer their first 5-10 questions will determine whether you stay in business and if you or others will become personally responsible for the payroll taxes. One of the most important services I offer my clients is to meet with the IRS myself. This allows my clients to concentrate on running their business and improving cash flow. Click Here To Get FREE IRS Tax Relief Reports. Mike Habib, EA

IRS tax audit, IRS tax examination, IRS audit reconsideration, IRS appeal

Are you asking yourself ... If I have tax problems who should I contact?

Fiscal Year 2007 Enforcement and Service Results
As reported in a statement issued by IRS, it has continued to make strong progress in a number of key enforcement areas. IRS enforcement efforts increased in fiscal year 2007: overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006.

Individual enforcement. Overall, the total individual returns audited was 1,384,563 in 2007 (an increase of 7% from 2006). There were 293,188 audits of individual returns with income of $100,000 or more (an increase of 13.7% from 2006). There were 113,105 audits of individuals returns with incomes over $200,000 (an increase of 29.2% from 2006). Audits of individuals with incomes of $1 million or more increased to 31,382 during fiscal year 2007 (an 84% increase from 2006) with the result that one out of 11 individuals with incomes of $1 million or more faced an audit in 2007.

Business enforcement. Overall, audits of businesses in general rose to 59,516 (an increase of almost 14% from 2006). IRS continued its efforts to review more returns of flow-through entities--partnerships and S corporations. There were 17,681 audits of S corporations (an increase of 26% from 2006), and 12,195 audits of partnerships during 2007 (an almost 25% increase from 2006). Large corporate audits were down slightly, but audits of returns of mid-market corporations (those with assets between $10 million and $50 million dollars) rose. Audits of mid-market corporations increased to 4,473 (an increase of 6% from 2006), while the audits of large corporations declined slightly in 2007 to 9,644 audits.

Taxpayer services. IRS also provided 2007 statistics on issues concerning taxpayer services, including information on the number of taxpayers filing electronically, accessing IRS's internet site, and asking about their refunds through IRS's internet-based system. As in the prior year, IRS accuracy was 91% on tax law questions answered through its toll-free telephone service.

Don't compromise on your representation! We represent taxpayers before the IRS and any taxing authority. Mike Habib, EA Payroll Tax Problems, IRS Tax Audit, State Tax Audit
As an IRS licensed Enrolled Agent (EA) specializing in IRS Tax Problem Resolution, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia 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 D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

What's New: IRS has $110 million in undeliverable refunds

Are you still waiting for your tax refund? If so, you may be one of the 115,478 taxpayers to whom the IRS has been unable to deliver a refund check. The refunds total about $110 million.

Every year there are taxpayers who don't update the IRS or the U.S. Postal Service when they move or change their mailing address. Checks are mailed to the last known address for taxpayers, and when the address isn't current, the checks are returned as undeliverable.

To check on a missing refund, you can go to the IRS Web site at www.irs.gov and type "Where's My Refund?" in the search box. To check on a refund by phone, call 1-800-829-1954.

Mike Habib, EA

Mortgage Tax Debt Relief, AMT Relief - why you need professional tax advice

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 add-backs 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. One reason is that many of the tax figures (such as the tax brackets, standard deductions, and personal exemptions) used to arrive at your regular tax bill are adjusted for inflation, but the tax figures used to arrive at the AMT are not.

For 2007 only, a new law provides some relief. It increases the maximum AMT exemption amount over its 2006 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately. However, after 2007, the maximum AMT exemption amount will drop precipitously to where it was in the year 2000 unless Congress provides another fix.

Another provision in the new law provides AMT relief for those individuals claiming certain "nonrefundable" personal tax credits (such as the credit for dependent care and the Scholarship and Lifetime Learning credits). For 2007, these credits may offset an individual's regular tax and AMT. After 2007, unless Congress acts, these credits will be allowed only to the extent that an individual has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT.

Another new law also liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options. The change is highly technical but the essence of it is that eligible individuals may now claim this credit more rapidly (i.e., over fewer years) than would have been the case without the change.

Forgiven mortgage debt tax relief. Addressing the subprime lending crisis, another late 2007 law provides tax relief for homeowners whose mortgage debt is forgiven. Prior to the enactment of this law, a homeowner could be taxed on the amount of forgiven mortgage debt. For example, before this law, an individual with a $200,000 mortgage whose lender foreclosed on the home and sold it for $180,000 would have had to report $20,000 of income from the forgiven debt. The result would have been the same if the lender restructured the loan and reduced the principal amount to $180,000. Under the new law, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a qualifying loan secured by a qualified principal residence (e.g., one to buy or renovate a residence). The change applies to debts discharged from Jan. 1, 2007 to Dec. 31, 2009.

Mortgage insurance deduction extended for 3 years. Mortgage insurance premiums will continue to be deductible after 2007, thanks to another relief provision for homeowners. Originally, this deduction was available only for 2007. It now applies through 2010. Basically, it allows taxpayers to treat amounts paid during the year for qualified mortgage insurance as home mortgage interestand thus deductible in most instances. The special rule for home mortgage interest is phased out at higher levels of adjusted gross income (AGI). The insurance must be in connection with home acquisition debt, the insurance contract must have been issued after 2006, and the taxpayer must pay the premiums for coverage in effect during the year.

Homesale exclusion liberalized for surviving spouse. A qualifying taxpayer may exclude up to $250,000 ($500,000 for joint return filers) of gain from the sale or exchange of property that the taxpayer has owned and used as his or her principal residence. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home-sale gain if (1) either spouse owned the home for at least 2 of the 5 years before the sale; (2) both spouses used the home as a principal residence for at least 2 of the 5 years before the sale; and (3) neither spouse is ineligible for the full exclusion because of the once-every-2-year limit on the exclusion.

Before the late 2007 law changes, the up-to-$500,000 exclusion was available only if a husband and wife filed a joint return for the year of sale. Thus, if the home was sold in a year after the year of a spouse's deathit allows a surviving spouse to qualify for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after the spouse's death, provided the requirements for the $500,000 exclusion were met immediately before the spouse's death and the survivor has not remarried as of the date of the sale.

Tax relief for volunteer responders. Tax relief is on the way for volunteer firefighters and emergency medical responders, thanks to a little publicized provision in one of the late-breaking 2007 tax laws. It creates an income tax exclusion for qualified state or local tax benefits (such as reduction or rebate of state or local income or property tax) and qualified reimbursement payments (up to $360 a year) granted to members of qualified volunteer emergency response organizations (e.g., state or local organizations whose members provide volunteer firefighting or emergency medical services (EMS)). The new exclusion applies for the 2008 through 2010 tax years.

Please keep in mind that I've described only the highlights of the new laws enacted late in 2007. If you would like more details on any aspect of this legislation, please contact me at your earliest convenience.

For Tax Relief & Tax Resolution services CLICK HERE.

Mike Habib, EA

http://wwwMyIRSTaxRelief.com

I thought you might find this list of tax provisions expiring 12/31/07 helpful as you do year-end tax planning.

TAX PROVISIONS EXPIRING 12/31/07

* Deduction of up to $2,000 or $4,000 (depending on income) for college tuition.

* Option to deduct state and local sales tax instead of state income tax.

* Election to include combat pay as earned income for earned income credit.

* Credit for certain energy-saving home improvements.

* 15-year depreciation for qualified leasehold improvements and qualified restaurant property.

* Deduction for up to $250 for classroom supplies purchased by teachers and other educators.

* Credit for manufacture of qualifying energy-efficient appliances.

* Itemized deduction for mortgage insurance on qualified personal residence.

* Availability of Archer MSAs.

* Option to transfer up to $100,000 from IRA to charity for those 70½ or older.

* Enhanced deductions for donating food and certain books to charity.

* Enhanced deduction for charitable donations of real property for conservation.

* The research and experimentation tax credit.

* Expensing of brownfields environmental remediation costs.

* Qualified zone academy bonds credit.

The increased AMT exemption amounts expired 12/31/06, as did the allowance of certain credits against the AMT. Congress to "fix" this for 2007.

Hope you find this list useful.

Mike Habib, EA

As you prepare for the upcoming tax year, I thought you might find this brief rundown of 2008 tax changes useful.

* ADOPTION TAX CREDIT increases to $11,650 for adoption of an eligible child.

* SECTION 179 maximum deduction increases to $128,000. Phase-out threshold increases to $510,000.

* STANDARD MILEAGE RATE for business driving increases to 50.5¢ a mile. Rate for medical and moving mileage decreases to 19¢ a mile. Rate for charitable driving remains at 14¢ a mile.

* ESTATE TAX top rate remains at 45%, and the exemption amount remains at $2 million. The ANNUAL GIFT TAX EXCLUSION remains at $12,000.

* 401(k) maximum salary deferral remains at $15,500 ($20,500 for 50 and older).

* SIMPLE maximum salary deferral remains at $10,500 ($13,000 for 50 and older).

* IRA contribution limit increases to $5,000 ($6,000 for 50 and older).

* KIDDIE TAX threshold increases to $1,800 and now applies up to age 19 (up to age 24 for full-time students).

* NANNY TAX threshold increases to $1,600.

* TRANSPORTATION FRINGE BENEFIT limit increases to $115 for vehicle/transit passes and to $220 for qualified parking.

* SOCIAL SECURITY taxable wage limit increases to $102,000. Retirees under age 65 can earn up to $13,560 without losing benefits.

* HOPE CREDIT maximum increases to $1,800.

* HSA CONTRIBUTION limit increases to $2,900 for individuals and to $5,800 for families. An additional $900 may be contributed by those 55 or older.

Thanks to the last-minute passage in 2007 of AMT patch legislation, the AMT exemption amounts for 2007 are $66,250 for joint filers, $33,125 for couples filing separately, and $44,350 for single taxpayers and heads of household.

For Tax Relief & Tax Resolution help CLICK HERE. Mike Habib, EA www.MyIRSTaxRelief.com

On December 26, 2007, President Bush signed the "Tax Increase Prevention Act of 2007," providing a one-year "patch" to the alternative minimum tax (AMT).

Without this legislation, an estimated 25 million taxpayers would have had to pay an average of $2,000 in additional taxes for 2007.

The new law increases the 2007 AMT exemption amount to $66,250 for joint filers, to $33,125 for couples filing separately, and to $44,350 for single taxpayers and heads of household. Most nonrefundable personal tax credits will be allowed to offset AMT liability.

As a result of the late passage of this law, taxpayers using five forms related to the AMT will have to wait to file tax returns until the IRS computers are reprogrammed for the changes. The five affected forms include:

* Form 8863: Education Credits

* Form 5695: Residential Energy Credits

* Form 1040A's Schedule 2: Child and Dependent Care Expenses for Form 1040A Filers

* Form 8396: Mortgage Interest Credit

* Form 8859: District of Columbia First-Time Homebuyer Credit

The IRS has set February 11, 2008, as the expected starting date for processing returns involving these forms. Processing of other returns is expected to begin in mid-January.

I hope you find this information useful. Mike Habib, EA

MyIRSTaxRelief.com

Nothing strikes terror in the heart of American taxpayers quite like finding a letter in the mailbox from the IRS! In an effort to help you avoid that unpleasant scenario, provided below are examples of some common pitfalls to avoid if you don't want the IRS lining up to be your new pen pal.

It's surprising how many people mail their returns to the IRS without a signature. Before mailing, be sure to recheck everything and don't forget to sign your return. An even better solution is to file electronically. Returns filed electronically have safeguards and controls to eliminate common errors. Additionally, the return goes directly to the processing center and the information does not have to be keyed into a computer by an IRS employee, which could result in additional errors.

Did you remember to include all income on the return? If you received a Form 1099 from anyone, be sure this income is on the return in the right place or you will receive a notice. Even if you did not receive a 1099 for work done independently, you are required to report the income. IRS receives copies of 1099s from banks, stock brokerage firms, rental agencies, and subcontractors and these are checked against income reported.

If you made estimated payments or paid your taxes quarterly, check the amounts and the dates the taxes were paid. Forgetting to include a payment is a frequent error that makes your tax burden look heavier. Many people forget to include the January payment, so keep in mind that the first payment of the year is sent in April, followed by June and September payments and concluding with the January payment for the fourth quarter of the preceding year.

If you file or pay late, you will receive a notice of delinquency and be charged interest and penalties, so try hard to avoid that. If you can't pay taxes that are due by April 15, be sure to file the return on time with a note requesting an installment agreement to pay the remainder of taxes due.

Incorrect social security numbers will generate a notice or a disallowance of your dependents. Don't mail the return without verifying that all social security numbers have been entered correctly. Transposing those numbers is more common than you'd think.

A few minutes of extra time reviewing your return will pay off in peace of mind and help you stay off the IRS radar screen.

For Tax Relief & Tax Resolution Resources CLICK HERE.

Mike Habib, EA