Tax Relief Blog

Roth IRA Rollovers

Mike Habib, EA

I am writing to tell you of an interesting new rollover opportunity that’s coming up in a few months. After 2009, you will be able to roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.

What’s so attractive about a Roth IRA? Here’s a summary:

  • Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  • Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
  • A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there’s a moratorium on RMDs.)
  • Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, and it’s a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

  • You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. What’s more, there’s a health reform proposal before the House of Representatives right now that would help finance healthcare reform with a surtax on higher-income individuals.

So if you believe there’s a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year’s rollover opportunity.

(1) Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They’ll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won’t have to pay back the tax savings until 2011 and 2012.

(2) Individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

(3) Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

We should discuss your and your family’s entire financial situation before you plan for a large rollover to a Roth IRA after 2009. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

I’m looking forward to your call at 1-877-78-TAXES (1-877-788-2937).

Keywords: Roth IRA Rollover, Estate Planning, Tax Planning, Roth IRA 2010, Stretch IRA

Extended and liberalized homebuyer tax credit rules

Mike Habib, EA

On November 6, the President signed into law H.R. 3548, the ”Worker, Homeownership, and Business Assistance Act of 2009.” The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home. This Client Letter fills you in on the details you need to know about the first-time homebuyer credit.

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one’s tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

Your guide to the revised homebuyer credit. The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can’t close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents. For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.

(4) There’s a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It’s important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.

The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don’t qualify for it. The most important of these are as follows:

  • Beginning with the 2010 tax return, the homebuyer credit can’t be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
  • For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
  • For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can’t be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
  • Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn’t changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

What also hasn’t changed is the need for getting expert tax advice in negotiating through the twists and turns of the new beefed-up homebuyer credit. Please call us today for details on how the homebuyer credit can help you or your family members.

IRS Back Taxes

Mike Habib, EA

You incur IRS back taxes when you haven’t been filing your income tax returns religiously every year. Tax season can be a stressful time and there are a lot of people who tend to overlook the deadlines so they find themselves having to rush to make it in time. For those who are not so lucky, they have to incur penalties because of late filings. Things could get uglier once the government finds that you’re years behind in your income tax filing. You don’t want to have to pay IRS back taxes but in case you find yourself in this rut, understand that you do have options to get you out of this mess.

What to do

There are probably 6,000,000 non-filer American taxpayers who haven’t been paying their IRS back taxes and they think they are able to get away with it; you must not take your chances. It is, after all, your responsibility as a citizen to pay your taxes so your government can provide you with better public services. To get started, you might want to get all your tax documents together to prepare your unfiled tax returns.

You need to think back to the last time that you have filed your income tax return. Do you still have a copy of it? You will need your copy of W-2s, and other related tax documents to address your IRS back taxes. If you can’t find these documents, contact the Internal Revenue Service and request copies, or your power of attorney can obtain that from the IRS.

Get a tax expert

When it comes to dealing with IRS back taxes it’s always wiser to have the assistance of a tax professional with you. A tax expert can help you coordinate with the IRS on the best course of action for clearing your back taxes. He can also assist you in handling incomplete tax documentations. The best ones in the industry are licensed to negotiate with the IRS for the best terms that will suit your financial situation.

The good thing about working with a tax expert is that you know that you have a knowledgeable resource person on your side to help you when IRS back taxes become too confusing for you to comprehend. Understand that even the best financial experts and professionals usually need the assistance of a tax expert because if there was one person who knows the intricacies of IRS back taxes and other related issues, it would have to be a tax professional.

Get your tax returns in order

Before you worry about paying for back tax debts, you want to prepare your tax returns first. This is the most logical way to find out whether or not you really owe the IRS. In some cases, you might even end up getting a tax refund instead of incurring tax debts.

Review your tax refunds

Did you know that the late filers are the most likely to have tax refunds? Working with a tax professional on your IRS back taxes will also help you keep track of your refunds. You have to know the time limits for audits, refunds and for debt collection. When it comes to back taxes, you will need to estimate on how long it could take for you to get your tax refund checks. Tax refunds are important because they can even cover your tax debts that have accumulated over the years.

Get the help of Mike Habib, EA for your back taxes. He will personally see to your case and negotiate the best tax resolution plan with the IRS according to your financial situation. For inquiries and to schedule a free consult, contact us through this website today.

Keywords: IRS back taxes, IRS back tax help, IRS unfiled returns, past due tax returns, back tax relief, tax relief

Tax Debt Relief

Mike Habib, EA

If you failed to file your returns and the IRS is already calling your attention so you can pay for back taxes, you need to seek tax debt relief. These back taxes are derived from the SFR (Substitute For Return) filings that the IRS files if you cannot do it yourself. The returns are made from income notifications like the W-2 that your employer files with your social security number. You will need professional assistance to resolve the issue especially if your returns were provided to the SFR of the government for some period of time yet marked by too much debt that you have ignored. Tax debt relief often requires the help of a professional attorney, but you can still rely on an Enrolled Agent licensed by the IRS to help you solve your debt in taxes.

Why you need help from an Enrolled Agent

As long as you have problems with the IRS, you and your loved ones will greatly be affected emotionally, physically, and financially. Compared to credit card debt and other forms of debt, IRS problems are difficult to ignore because they will always go after you until you finally address them. This means that unless you settle your tax debts, the IRS will not leave you alone. If you do not want the hassle of being harassed just because of your tax debt, go for tax debt relief with the help of an Enrolled Agent, a person who is authorized by the Treasury Department of the US to represent you before the IRS.

Asking help from an Enrolled Agent allows you the ability to handle tax debt relief well with the promise of successful results. Since you are being helped by an expert, you can gain all the information you need regarding the matter to have a better understanding about it. The Enrolled Agent will represent you before the IRS.

More benefits

Compared to other tax professionals, Enrolled Agents are “The Tax Experts” and they are the only ones who are granted the right to practice regardless of the state where they are based in. Attorneys and CPAs are only granted permission according to the state where they are licensed, so the Enrolled Agent can help you in tax debt relief in more ways than other professionals. Also, the Enrolled Agent will represent, advise, and prepare your tax returns.

Never meet with the IRS

There are many solutions for tax debt relief and an Enrolled Agent can present you with the best ones. However, it is up to you to decide on which route to take when it comes to solving your tax problems. Still, do not worry because an Enrolled Agent can guide you all the way, and the best part is, you will not have to face the IRS yourself. He will do all the talking and negotiating for you.

Solutions for tax debt relief

Let Mike Habib, an Enrolled Agent help you out achieve tax debt relief. As an EA, he specializes in helping both businesses and individuals solve every tax problem with the IRS that they are facing. With more than 20 years of experience in financial advisory and taxation, Mike Habib has helped a lot of individuals and companies ranging from small businesses and even those belonging to the Fortune 500 companies. Get in touch with him by calling for a free consultation at 1-877-788-2937. You can also explore this website for more information on tax debt relief.

Year-end tax planning letter

Mike Habib, EA

As year-end approaches, taxpayers generally are faced with a number of choices that can save taxes this year, next year or both years. Employees too are faced with these choices. However, employees have some special considerations to take into account that retirees and other nonworking individuals don’t face. To help our clients who are employees take advantage of these special tax saving opportunities, we have put together a list of items to consider.

Please review the list and contact us if you need additional information on one or more of the items.

Health flexible spending accounts. Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer’s health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. They would not be deductible if you don’t itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor beneath medical expense deductions. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.

If you have set aside funds in your employer’s health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don’t forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.

To avoid the lose-it-use it rule, you must incur qualifying expenditures by the last day of the plan year (Dec. 31, 2009 in the case of a calendar year plan) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan). An exception to the use-it-or lose-it rule allows FSAs to make distributions of all or part of unused health FSA benefits to military reservists who are called to active duty for a period exceeding 179 days (or an indefinite period ).

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs. Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit. Additionally, participating in a dependent care FSA can also save on FICA taxes.

However, like health FSAs, dependent care FSAs are subject to the use-it-or lose it rule. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

Adoption assistance FSAs. Under an adoption assistance FSA, adoption reimbursement accounts are established for participating employees. Typically, these accounts are funded with employee pre-tax contributions uniformly withheld from each paycheck throughout the year. The balances in these accounts are used to reimburse qualified adoption expenses incurred during the year, subject to a reimbursement maximum. Like their health and dependent care FSA siblings, these accounts are subject to the use-it-or-lose-it rule. However, predicting the amount and timing of adoption expenses may be far more difficult than projecting medical and dependent care assistance expenses. As a result, the use-it-or-lose-it rule could pose a greater risk of loss with this type of FSA. This should be borne in mind in choosing the extent to which to participate in an adoption FSA.

Adjustments to state withholding. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009.

Adjustments to federal withholding. If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person.

401(k) contributions. Review and make appropriate adjustments to your contributions to you employer’s 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.

Tax Impact of Job Loss


The Internal Revenue Service recognizes that the loss of a job may create new tax issues. The IRS provides the following information to assist displaced workers.

> Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated payments. See IRS Publication 17,
your Federal Income Tax, for more information.

> Generally, withdrawals from your pension plan are taxable unless they are transferred to a qualified plan (such as an IRA). If you are under age 59 1⁄2, an additional tax may apply to the taxable portion of your pension. See IRS Publication 575, Pension and Annuity Income, for more information.

> Certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews. See IRS Publication 17, Your Federal Income Tax, for more information.

> Moving costs you incur because of a change in your job location may be deductible. You must meet certain criteria relating to distance moved and timing of the move. See IRS Publication 521, Moving Expenses, for more information.

> Some displaced workers may decide to start their own business. The IRS provides information and classes for new business owners. Please visit or see IRS Publication 334, Tax Guide for Small Businesses, for more information.


JOB LOSS: What Income is Taxable?

The following Questions and Answers are provided by the Internal Revenue Service to clarify the tax implications of financial issues faced by workers who have lost their jobs. References are provided for
additional information.

Is Severance Pay taxable?

Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes. See Publication 525 for additional

What about Accumulated Leave or Vacation Pay and Sick Pay?

Yes, annual, or vacation pay, and sick pay are calculated as wages by your employer and will be included in your Form W-2.

Is Unemployment Compensation taxable?

Yes, your state unemployment insurance benefits (up to 26 weeks) and your extended benefits (up to an additional 13 weeks) are taxable. You may choose to have 10% withheld for federal taxes by completing
Form W-4V. The State will provide you with a Form 1099-G prior to January 31st of each year, showing the amount of taxable benefits paid in the prior year. See Publication 525 for additional information.

Temporary Suspension of Tax on Portion of Unemployment Benefits

For tax year 2009, each taxpayer can exclude from gross income up to $2,400 of unemployment compensation. Unemployment compensation over $2,400 is subject to federal income tax.

Individuals who receive unemployment benefits in 2009 should check their withholding to ensure they are not having unnecessary tax withheld.

Is there a COBRA Health Insurance Continuation Premium Subsidy?

Workers who have lost their jobs may qualify for a 65 percent subsidy for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation premiums for themselves and their families for up to nine
months. Eligible workers will have to pay 35 percent of the premium to their former employers.

To qualify, a worker must have been involuntarily separated between September 1, 2008, and December
31, 2009.

More information on the COBRA subsidy is available from the U.S. Department of Labor.

What about Gifts of Cash and Property from Family or Friends?

Generally, the person who receives the gift is not liable for any taxes on the gift. If the gift produces income like interest, dividends or rent payments, the receiver would be responsible for taxes on that
produced income. Each year there is a specific maximum amount that may be given that will not create a taxable event to either the giver or the receiver. Gifts in excess of this maximum may be subject to gift
taxes by the gift giver. See Publications 17 or 950 for additional information.

If I am eligible for Public Assistance or Food Stamps, is it taxable? No.

When will I get my final Form W-2 from my employer?

Your employer must provide your Form W-2 by January 31st after the close of the calendar year. As an example, 2008 Forms W-2 are due to employees by January 31, 2009.

What if my employer filed bankruptcy or went out of business, how do I get my Form W-2?

In either case the employer must file and report your wages and withholding on a Form W-2 at year’s end. If you do not receive your Form W-2, try to contact your employer or their representative. If you are unsuccessful, the IRS can assist you in filing a substitute Form W-2 using your records. A good precaution is to keep year-to-date records or pay stubs until you receive your Form W-2.

Can I file an early tax return and receive any refund due?

No. Individual income tax returns are based on a calendar year and cannot be filed and processed earlier than January 1st of the next calendar year.

JOB LOSS: What Income is Taxable?

If I sell other assets like stocks, bonds, and investment property, are they immediately taxable?

Not necessarily, however the sale of such assets should be reported. If you have a gain on the sale, it maygenerate an income tax liability. You should review your overall tax situation and make sure you have paid your taxes as required to avoid any estimated tax penalty. Information on estimated tax is in Publication 505.

What can I do if I owe taxes and cannot pay them?

Contact the Internal Revenue Service as soon as possible to request a payment plan. Communication is the key to minimizing problems.

Is special assistance available on unresolved tax matters that create hardships?

Yes, if you are experiencing economic harm, a systemic problem or are seeking help in resolving tax problems that have not been resolved through normal channels, you may be eligible for Taxpayer
Advocate Services (TAS) assistance. You can reach TAS by calling toll-free 1-877-777-4778 or TTY/TTD 1-800-829-4059.

Copies of the referenced publications can be found at, or you may call 1-800-829-3676.

JOB LOSS: Pensions/IRAs – What’s Next?

The following Questions and Answers are provided by the Internal Revenue Service to help you handle financial issues with a tax impact which may arise if you lose your job.

What if I withdraw money from my qualified retirement plan or IRA?

Generally speaking, if you withdraw the funds before you reach eligible age, and do not roll it over into another qualified retirement plan or Individual Retirement Account (IRA) within 60 days, that amount will
be taxable income in the year in which it is withdrawn. You may also have to pay an additional 10% tax on those early distributions. There are special rules for computing tax on lump-sum distributions. See IRS
Publication 17 or Publication 575 for detailed information.

Can I move money from my qualified retirement plan into another qualified retirement plan or IRA?

Yes, this is called a “rollover” and the amount will not be taxed if you redeposit the amount withdrawn into another qualified retirement plan or traditional IRA within 60 days. See Publication 575 for additional

Are there any “hardship” exceptions to the early distribution penalties?

Yes. If you are totally and permanently disabled or if you withdraw the money to pay medical expenses (these expenses must be more than 7.5% of your adjusted gross income) or to pay an alternate payee
under a qualified domestic relations order. Other specific exceptions are detailed in Publication 575.

If I made an IRA contribution during the current tax year, can I withdraw it before the close of the


Yes. Contributions returned before the due date of the return can be withdrawn without penalty. You must take not only the contribution but any interest or dividend it may have earned. This is a tax-free event if (1) you do not take a deduction for the contribution and (2) you withdraw any income or interest the investment made while in the IRA and include that amount in your income. See Publication 590, Individual Retirement Arrangements for more information.

I’ve had my IRAs for several years, in some of those years I didn’t benefit from any deduction due to my income. How do I figure what part of the distribution is taxable?

If you had non-deductible IRA contributions, you would have completed Form 8606 to establish your basis (cost) in your combined IRAs. Use the worksheet in Publication 590 to calculate what part of the distribution is taxable and complete Part I on Form 8606 and attach it to your return.

If I take my pension and want to transfer it to an IRA, are there any special rules or restrictions?

Rolling over your pension distribution to a financial institution: (i.e., bank, credit union, brokerage house, etc.) is straightforward. There are some prohibited transactions including borrowing the distribution even with a signed contract with interest due, receiving unreasonable compensation for managing these funds, buying property for personal use (present or future), or using the distribution as security for a loan. Review the information in Publications 575 and 590 for additional information.

In addition to the Publications 17, 575 and 590, take advantage of every resource including your financial and/or tax advisor before deciding how to proceed in transitioning your retirement funds. Copies of the referenced publications can be found at or you may call 1-800-829-3676.

JOB LOSS: Starting Your Own Business

Every new phase of life brings many challenges. The Internal Revenue Service recognizes that the loss of a job can create new tax situations for you. The following information is provided to clarify possible tax

Can I be an Employee and a Business Owner in the same tax year?

Yes. Under the tax law, you can be both an Employee and a Business Owner at the same time if you choose. The primary issue is to report all income on your return.

Where can I get information about starting my own business?

Publication 334, Tax Guide for Small Business and Publication 3207, The Small Business Resource Guide CD ROM provides tax related information. These publications contain information on starting your
own business, record keeping, and deductible expenses. In addition, Publication 3207 contains all of the business tax forms, instructions and publications needed by small business owners.

What options do I have for organizing my business?

Under the federal tax code, there are three options: Sole Proprietorship, Partnership or Corporation. A number of factors may influence your decision about which structure is best for you including cost of startup, exposure to risk or liability, financing and the tax implications.

What record keeping requirements do I have as a Sole Proprietor?

Generally, you should keep detailed records of your income and expenses for your business to prepare not only required tax returns but also financial statements to help in maintaining and growing your
business. The same general rules apply for Partnerships and Corporations with some additional detail.

How do I report my business income?

As a Sole Proprietor, you will need to file a Form 1040, Schedule C or C-EZ and Schedule SE. For more information, please see Publication 334, Tax Guide for Small Business.

What kinds of taxes do I pay as a Sole Proprietor?

Taxes due on net self-employment income (total business income minus expenses) include income tax and self-employment (Social Security and Medicare) taxes. Additional information is available in
Publication 334, Tax Guide for Small Businesses. You may be responsible for Employment Taxes if you have employees working in your business, see Publication 15, Circular E, Employer’s Tax Guide for

How do I pay my taxes as a Sole Proprietor?

Generally, you would pay using the 1040ES Estimated Tax process on a quarterly basis. Federal income taxes including Self-Employment tax use a pay-as-you-go system. You generally must make estimated tax
payments if you expect to owe taxes of $1,000 or more when you file your return. For more information on Estimated Tax see Publication 505. Employment taxes are paid using Forms 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return. The filing requirements for each of these forms and instructions about how to pay taxes due are included in the Publication 15, Circular E, Employer’s Tax Guide.

Can I claim the Earned Income Credit on my net self-employment?

Net income from a Sole Proprietorship is earned income. The Earned Income Credit is available to taxpayers that meet certain income guidelines. See Publication 596, Earned Income Credit.

Are classes or seminars available to get additional information?

Yes. The Small Business/Self-Employed Division of the Internal Revenue Service has a number of Small Business seminars through out the nation. You can also order Publication 1066C, A Virtual Small Business Workshop DVD on the Small Business Web Site at Other products are available to order at the Small Business Web Site as well.

JOB LOSS: Miscellaneous Tax Information

Every new phase of life brings many challenges. The Internal Revenue Service recognizes that the loss of a job can create new tax situations for you. The following information is provided to clarify the tax

Can I deduct any of the expenses that I have from looking for a new job?

Yes, you can deduct certain expenses for looking for a new job in your present occupation, even if you do not get a new job. For additional information, see Publication 529, Miscellaneous Deductions.

What types of expenses can I include?

Generally, you can deduct employment and outplacement agency fees and amounts for typing, printing, and mailing copies of your resume to prospective employers for work in your current occupation. More
specific information is available in Publication 529, Miscellaneous Deductions.

What about travel costs for interviews or job hunting?

If you travel to an area to look for work in your current occupation or attend an interview you can generally deduct the ordinary and necessary travel costs. The purpose of the trip must be considered. Trips that are primarily personal are not deductible. For more information on how to compute your travel expenses, see
Publication 463, Travel, Entertainment, Gifts and Car Expense.

Do I need to file the “long-form” to deduct my job hunting costs?

Yes, you will need to file a Form 1040 and Schedule A. Job hunting costs are a miscellaneous itemized deduction, subject to a 2% Adjusted Gross Income limitation. For more information, please see
Publication 17, Your Federal Income Tax.

Can I deduct the moving costs I paid to move to my new job?

Certain moving costs are deductible if you meet the time and distance requirements. Generally, your move has to be closely related in time to the start of your new job and you must have moved at least
50 miles. Deductible moving costs are calculated on Form 3903. Publication 521, Moving Expenses, provides additional information.

If I sell my home, do I have to pay taxes on the money I make?

Usually you do not have to pay tax on the first $250,000 ($500,000 on a joint return in most cases) of gain from the sale of your main home. Generally, you must have lived in and owned the home for at least two
years of the five years prior to the sale and not excluded a gain on another home in the past two years.

For more information, see Publication 523, Selling Your Home.

Now I have to pay the full cost for my health insurance. Is this deductible?

Health insurance premiums are includible in your medical and dental bills. They are deductible on Schedule A, if you itemize. Some limitations apply. See Publication 502, Medical and Dental Expenses, for more information.

Can I deduct contributions I made to a Health Savings Account (HSA)?

If you are an eligible individual, you can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. For more information see Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Can I claim the Earned Income Credit this year?

Even though your income may have exceeded the thresholds for this credit in past years, you may be eligible for the credit this year. The credit is available to taxpayers who meet certain income guidelines.

For more information, see Publication 596, Earned Income Credit.

My chances of finding a new job will be better if I take a few college courses. Can I deduct any of

my tuition?

You may qualify for the Hope or Lifetime Learning educational credits. Sometimes, the tuition costs can even be an itemized deduction. For more information, see Publication 970, Tax Benefits for Higher
Education. Copies of the referenced publications can be found at or you may call 1-800-829-3676.


About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week.

Also online at

Do You Barter?

Mike Habib, EA

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Bartering is the most ancient form of commerce. While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair.

Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Here are a few things you should know about bartering:

Barter Exchange A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

Barter Income Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.

Taxes Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Reporting The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

Keywords: barter tax, barter taxes, tax relief, irs barter tax problem, barter tax audit, barter tax controversy

IRS Commissioner Doug Shulman addressed the National Association of Corporate Directors Governance Conference

WASHINGTON — I realize that the IRS Commissioner has not customarily addressed the NACD’s corporate governance conference…but what I want to discuss with you this afternoon is the important role that boards of directors can play in overseeing tax risk and tax strategies of corporations. After all, taxes are one of the biggest expenses of a corporation, so how they are managed is very important to most corporations.

Clearly, corporate boards of directors play an incredibly important role in the vibrancy of businesses and our economy. Boards are a source of creative ideas, strategic thinking, and, importantly, governance and oversight. Boards hold management accountable, and in that role, understanding the risk posture of the company is critically important.

So today, I want to share with you some observations of what I have seen since I’ve taken the helm of the organization responsible for collecting 96 percent of all federal receipts – around $2.5 trillion.

To begin, I understand that many of you – actually most of you – are not tax experts and you were not installed on the board because of your tax expertise. You bring other critical skills, experiences and expertise to the boardroom.

And I also understand that even with all of your sophistication, expertise and experience in business and financial affairs, it’s difficult to understand the tax consequences of a complicated business transaction, such as a tax-free reorganization or a hedging transaction, let alone the corporation’s overall tax profile as it relates to federal, state and international taxes. That’s why you need to have strong tax departments and outside tax advisors. After all, you have finance experts to help you understand the economic value of hedging transactions, and you need tax experts to help you understand the myriad and complex tax issues facing your company.

Now, my motivation to create this dialogue with you is based in part on personal and professional experience. I moved from the business world where I interacted with boards… to FINRA, the largest independent securities regulator in the U.S. ….to the IRS, where I am focusing on major trends, such as the globalization of tax administration, and innovative ways to strengthen and improve our tax system. In all of these roles, I have seen the importance of board oversight of major areas of risk.

So, I know first hand that in the post-Sarbanes Oxley world, corporations have invested significant time and resources on compliance issues and internal controls. In the tax arena, some have instituted regular meetings between the Audit Committee and the tax director to ensure an open dialogue.

As I mentioned earlier, tax issues should remain on your radar screen – and for good reason. It’s one of the biggest expenses on your income statement. In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today’s business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games.

So, although the complexity of the tax code may make your eyes glaze over, Board members – like you -are critically important to making sure that the tax system works well and is worthy of the confidence of the American people.

But how can you increase your oversight of tax compliance given the limited amount of time you have available and the competing business issues you face?

Well, you probably know or could figure out, that the IRS conducts risk assessments of its own when determining how to use its time and resources and whom to audit. Similarly, the board of directors can assess its corporation’s tax risk profile, internal controls, and relationship with its corporate tax department, to help determine the tax matters of which it should be aware.

Now, we recognize that many businesses are trying to get it right. Positions taken in tax returns may be well-grounded and taken in good faith. Other tax positions taken may be more aggressive and use elaborately structured transactions or arrangements to push tax planning up to the edge, or beyond acceptable bounds.

Enter FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.

Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company’s maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company.

FIN 48 paints a picture of tax risk by indicating how much money a corporation has to book in tax reserves to reflect the risk should one or more of its tax positions go south.

But let’s get behind the reserve numbers for a moment. What are they telling you – the board directors – beyond the dollars in the tax reserve?

They’re saying that the audit committee needs to know and influence what tax posture the tax planners are taking. They and you need to know whether that multi-million – or in some cases multi-billon-dollar bet – you and your company are making could be too aggressive and therefore risky.

So where does that bring us? What are the next steps?

Before I get to that, I want to be clear about what I “do” intend and “don’t” intend in this dialogue.

We don’t intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don’t expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk.

I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process. For example you might want to:

* Set a threshold confidence level for taking a tax position…

* Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions …

* Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.

And diving down a little deeper, here are some questions you might ask of your tax director and your external auditors relating to FIN 48:

* What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?

* How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?

* How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director’s assessment?

* Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company’s position is regarding those issues?

There are already some IRS programs in place that help provide greater certainty and can give a board more comfort that there won’t be second guessing down the road. For example, our compliance assurance program, or CAP where we agree on issues with the taxpayer before a corporate return is filed, envisions full disclosure by the taxpayer in exchange for real time tax certainty. And the Advance Pricing Agreement program, where we agree with a taxpayer on pricing methodology before a return is filed, provides certainty in the complex and uncertain area of transfer pricing.

Now, we’re not the only government thinking about the notion that corporate taxpayers that employ sound management and governance practices on tax matters are more likely to be compliant.

One example is Australia. The Australian Tax Office publishes a Governance Guide for Board Members and Directors that suggests useful questions – similar to the ones I just posed – that a corporate director can ask of management.

Some of the Australian Tax Office’s questions include: Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes? If so, can the difference be satisfactorily explained? Is the structure and financing for your business or a major transaction complicated, perhaps more complex than necessary to achieve the commercial objectives? These questions give you a flavor of what some other countries are thinking about and doing in the corporate governance area.

On a broader scale, the Organisation for Economic Co-operation and Development has charted a worldwide trend of increased boardroom attention to issues of taxation. A recent guidance document outlines good corporate governance principals in relation to tax, based on advice from governments around the world.

In summary, my main observation to share with you is this: Taxes are an important expense, and like any important expense, management responsible will try to control it. In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses. So you need to understand how management controls this expense and how it decides how aggressive to be. You also need to be certain that reporting is effective.

Tax expense in this sense is no different from other expenses. Manage it too loosely and you give up profit. Manage it too aggressively and there are bad consequences. You, the board, have to oversee how management manages it. That means some level of understanding, a set of policy principles and then a control system of reporting that assures you that the policy is being carried out.

My goal here today was to start a discussion about the board of directors’ role in overseeing tax risk. I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks.

I see my time is up today. I hope it was a good start and that this beneficial dialogue will continue and mature in the weeks and months ahead. Thank you.


About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week.

Also online at

U.S. Citizens Residing in Canada Liable for AMT Based on Foreign Tax Credit Limitation (Jamieson, CA-DC)

Married U.S. citizens residing in Canada were liable for the alternative minimum tax (AMT) because the amount of foreign tax credits they could claim was limited by Code Sec. 59(a)(2) (prior to repeal by the American Jobs Creation Act of 2004 (P.L. 108-357)) and was not offset by additional credits under the U.S.-Canada Convention With Respect to Taxes on Income and on Capital. Applying the last-in-time rule, the AMT foreign tax credit limitation under Code Sec. 59(a)(2) was the last expression of sovereign will and took precedence over the treaty, to the extent of any conflict between them.

The couple’s argument that the government could reconcile the treaty and the statute by allowing taxpayers to claim foreign tax credits after calculating the entire U.S. tax liability, including AMT, was rejected. This interpretation restricted the scope of Code Sec. 59(a)(2) to taxpayers who worked in a foreign country that did not have a treaty with the U.S. limiting double taxation. To the extent that there was any ambiguity as to whether Code Sec. 59(a)(2) applied to taxpayers in countries with which the Unites States has double taxation treaties, the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) clarified that Congress intended for Code Sec. 59(a)(2) to supersede existing treaty provisions prohibiting double taxation.


About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week.

Also online at

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us at 1-877-788-2937 for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

IRS has issued additional guidance on the waiver of 2009 required minimum distributions (RMDs). It provides transition relief through Nov. 30, 2009, so that a plan won’t be treated as having an operational failure for allowing waivers of 2009 RMDs and related payments before being amended, and rollover relief for 2009 RMD waivers and related payments. In general, retirement plan or IRA withdrawals that were made despite the 2009 RMD waiver won’t face tax if rolled over to a retirement plan within 60 days. Similar rules apply to IRAs. The new guidance includes an extension of the 60-day rollover period to Nov. 30, 2009, for certain distributions. The rollover relief gives older taxpayers an unusual opportunity to correct an inadvertent mistake that otherwise would unnecessarily increase their taxable income for 2009. It also give some individuals a “retroactive” chance to reduce their tax bill if their financial circumstances have improved during the course of 2009.

The Administration has issued a barrage of guidance designed to increase retirement savings. Three revenue rulings, four notices, and new IRS website explanations make it easier for employers to provide for automatic retirement plan enrollments and automatic contribution increases, permit unused leave to be converted into retirement savings, give employees a clearer understanding of rollover options, and permit income tax refunds to be used to purchase U.S. Savings Bonds. The new developments will, to be sure, make it easier for employers to offer automatic enrollments, and enhance the chances that taxpayers won’t spend their lump-sum payouts. However, the real trail blazers are the ruling that permits the dollar value of unused paid time off to be contributed to a 401(k) plan, and Treasury’s new policy of allowing taxpayers to funnel tax refunds directly into U.S. Savings Bonds.

The IRS has suspended through the end of this year its efforts to collect penalties under Code Sec. 6707A in some cases. This provision imposes a penalty of $100,000 per individual and $200,000 per entity for each failure to make special disclosures with respect to a transaction that IRS characterizes as a “listed transaction” or “substantially similar” to a listed transaction. The suspension applies where the annual tax benefit from the transaction is less than $100,000 for individuals or $200,000 for other taxpayers. The IRS implemented the suspension after Congressional leaders complained that Code Sec. 6707A can result in disproportionate penalties for small businesses that thought they were investing in legitimate benefits plans, but unknowingly invested in listed tax shelter transactions. Taxwriters informed IRS that an effort is under way to enact legislation that would ease Code Sec. 6707A ‘s application.

The IRS has issued temporary regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that’s greater than 25% of the amount of gross income stated in the return. Several courts have held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued temporary regulations to clarify that an omission can arise in that fashion. How courts will react to the clarification remains to be seen.

The Tax Court, addressing a new issue, agreed with the IRS that a Roth IRA can’t be the shareholder of an S corporation. As a result, the corporate taxpayer was taxable as a C corporation for the year involved. Had the Court agreed with the taxpayer, the corporation’s earnings would have escaped taxes altogether. They would not be taxed each year as they passed through to the Roth IRA (the corporation’s sole shareholder) and, if applicable Roth IRA requirements were met, would not be taxed when withdrawn from the Roth IRA. The Court prevented that result but the decision was not unanimous. Some judges dissented and others wrote their own concurring opinions.

Inflation data that is finalized each August is used by the IRS to compute the following year’s standard deductions, exemptions, tax brackets and other key items. While the IRS has not yet released its “official” computations (it has until Dec. 15 to do so), a reputable publisher of tax law information has calculated the figures for 2010. It has determined that, because of the extremely low inflation over the past 12 months, for the first time ever, many key tax items will not increase next year or will increase only slightly. Items that won’t increase include the personal exemption and the standard deduction for all but heads of household. Some tax brackets will remain the same but most will increase slightly.

A Federal appellate court has held that so-called tax accrual workpapers are not protected by the work-product privilege. That privilege protects work done for litigation, not in preparing financial statements, and the workpapers were prepared to support financial filings and gain auditor approval. As a result, the IRS could examine the tax accrual workpapers in auditing the taxpayer.

A business generally will wind up with debt discharge income if it repurchases its debt for less than the outstanding amount of the debt. However, under a provision added to the tax law earlier this year, debt discharge income from reacquisition of business debt at a discount in 2009 and 2010 can be deferred until 2014, and then included in income ratably over five years. The IRS has now issued procedures for taxpayers who wish to elect to defer recognizing cancellation of debt income under this new provision, including the time and manner for making the election and specific procedures for partnerships, S corporations, tiered pass-through entities, and foreign entities.

Reimbursements of an employee’s business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn’t exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The IRS has issued the “high-low” simplified per diem rates for post-Sept. 30, 2009, travel. An employer may reimburse up to $258 for high-cost localities ($193 for lodging and $65 for M&IE) and $163 for other localities ($111 for lodging and $52 for M&IE). The list of high-cost areas is also updated.


About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week.

Also online at