Recent testimony before the House Ways and Means Committee by officials of the Treasury Department and various economists demonstrates that large corporations know a key tax-saving tool that has not yet been used by smaller businesses to any great extent. While much of the Congressional inquiry focused on companies that may have failed to act in accordance with the rules, the fact remains that companies that operate within the law have an opportunity to reduce their corporate income taxes.

At the hearing, the Joint Committee on Taxation released a study of taxes paid by six multinational corporations. The study found that these companies generally concentrated more profitable business activities in lower-tax foreign jurisdictions and placed less-profitable operations in countries with higher tax rates.

It is a well-established principle that companies are free to locate business operations as they choose. But most countries, the United States included, insist that reported taxable income should properly reflect the level of business activity conducted in the country. Companies that try to shift a disproportionate share of business profits to low-tax countries face sanctions from the high-tax country that loses tax revenues.

While your business may not operate on a worldwide scale, if you purchase products from or sell goods or services into other countries, there may be opportunities to lower your overall tax burden with some of the same strategies properly employed by large, multinational corporations. Even if you are only considering a small expansion of your business in the United States, you should be aware of the differences in tax rates and policies from state to state. Do not hesitate to talk with your tax adviser about opportunities to save taxes at the state and local level, too.

Read the entire study here.

The IRS Taxpayer Advocate has issued a report expressing concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities and government agencies.

Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year.

To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor. For example, if you are self-employed and make numerous small purchases from your local office supply store during a calendar year that total at least $600, you must issue a Form 1099 to the office supply store and to the IRS showing the exact amount of your total purchases.

According to the Taxpayer Advocate’s analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farming businesses, 1 million charities and other tax-exempt organizations, and more than 100,000 government entities.

The Taxpayer Advocate has not yet reached any conclusions regarding the benefits and burdens of the requirement. But the report expresses concern that the burdens "may turn out to be disproportionate as compared with any resulting improvement in tax compliance."

Read the Taxpayer Advocate's report here.

The IRS has issued a one-time relief program for small nonprofit organizations at risk of losing their tax-exempt status. Thousands of small nonprofits failed to file required returns for 2007, 2008 and 2009, likely because they did not fully understand the change in law regarding tax filing. These organizations can preserve their status by filing returns by Oct. 15, 2010.

The names and addresses of organizations at risk for losing their tax-exempt status are posted on the IRS website, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance. Tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.

The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.

Organizations that have not filed the required information returns by Oct. 15, 2010, will have their tax-exempt status revoked, and the IRS will publish a list of these revoked organizations in early 2011. Donors who contribute to at-risk organizations are protected until the final revocation list is published.

A recent case in the Federal District Court decided in favor of the IRS on procedural grounds, should be followed closely by most businesses. The case will now go to trial on its merits.

The current case has its origins in a settlement agreement signed in 2000 by Fresenius Medical Care Holdings, Inc., resolving several Medicare fraud claims against the company. In the settlement, Fresenius agreed to pay the government more than $100 million to settle criminal claims and over $385 million to settle civil claims.

Fresenius deducted the civil payments as a business expense, which the IRS denied. The current case dealt with Fresenius’ request for summary judgment, which the court denied. So now Fresenius will have to go to trial.

Under the tax law, amounts paid to settle litigation may constitute a deductible business expense. However, no deduction is allowed for any fine or similar penalty paid to a government for the violation of any law.

The regulations define a "fine or similar penalty" as a payment made under any one of the following circumstances:

However, compensatory damages paid to a government do not constitute a fine or penalty. So the question becomes whether the payments are "remedial" or "punitive." Remedial payments are deductible – punitive payments are not.

The outcome of this case, and ultimately Fresenius’ tax deduction, is going to turn on how the court interprets the language in the documents Fresenius signed agreeing to make the payments. Businesses and their lawyers will follow these developments closely, as they seek to learn the specific language the courts will be looking for to secure tax deductions for settlement payments.

Read more in Fresenius Medical Care Holdings, Inc. vs. United States here.

President Obama signed legislation July 22 providing six additional months of jobless benefits for the long-term employed. The Unemployment Compensation Extension Act of 2010 (HR 4213) provides up to 99 weeks of unemployment benefits to individuals who have exhausted state unemployment assistance.

The bill will extend for six months the unemployment benefits of 5 million eligible workers, including retroactive payments to 2.5 million workers who had benefits cut off when the money ran out in June. The cost to taxpayers is estimated at $34 billion.

Small Businesses Beware:  IRS Audit Rates Rising

Is your business ready for a visit from the IRS?

In the last five years, the number of hours the IRS spent auditing small businesses with assets of $10 million or less increased by 30 percent, according to a recent study by Syracuse University’s Transactional Records Access Clearinghouse. In the same time period, the time the IRS spent auditing companies with $250 million or more in assets dropped by 33 percent.

The average number of hours spent on each audit of large corporations also went down, from 973 in 2005 to 830 in 2009. By contrast, the average number of hours spent on a small or mid-sized business audit remained substantially the same.

Read the study at:

http://trac.syr.edu/tracirs/newfindings/current/.

School is out, and many students now have summer jobs. Here are six things parents need to know about the taxes their children will have to pay on their summer income:

The government has extended the first-time home buyer credit.

If you signed a contract to purchase a home before May 1, you now have until Sept. 30, 2010, to complete the closing and qualify for the $8,000 first-time home buyer credit or the $6,500 credit for long-term homeowners.

The first-time home buyer credit is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10 percent of the purchase price of a principal residence. A long-term homeowner may claim a credit if the buyer (and the buyer’s spouse, if married) maintained the same principal residence for any five-consecutive-year period during the eight years ending on the date of purchase. The maximum credit is the lesser of $6,500 ($3,250 for a married individual filing separately) or 10 percent of the purchase price of the home.

The credits phase out over modified adjusted gross income levels of $125,000 to $145,000 for individuals and $225,000 to $245,000 for those filing a joint return. Also, the credits cannot be claimed for a home costing more than $800,000. Dependents cannot claim the credits, and a purchaser must be at least 18 years of age on the date of purchase.

To claim either credit, you must complete Form 5405, First Time Homebuyer Credit and Repayment of the Credit, and include with your tax return one of the following documents:

If the purchase date is after April 30, and before Oct. 1, 2010, you should also attach a copy of the pages from the signed purchase contract showing all parties’ names and signatures, the property address, the purchase price and the date of the contract.

For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 tax return or your 2010 tax return.

Read more in IRS Information Release 2010-080.

A recent Tax Court case denied the exclusion of gain on the sale of a principal residence to a married couple because they had never lived in the home before selling it.

In 1996, David and Christine Gates hired an architect to help them remodel and enlarge their home, a home that David had purchased in 1984 and that they had shared since their 1989 marriage. The architect advised David and Christine that more stringent building and permit restrictions had been enacted since the original house was built.

In 1999, the couple decided to demolish the original structure and constructed a new three-bedroom house on the property. On April 7, 2000, without actually moving in, David and Christine sold the new home for $1.1 million. The sale resulted in a $591,406 gain.

The couple agreed that $91,406 of the gain should be taxed. However, they asserted that the remaining $500,000 was excludable as gain from the sale of property that they had occupied as their personal residence for at least two of the five years preceding the sale.

A divided Tax Court concluded that, since neither David nor Christine had actually occupied the new home, they failed to meet the two-out-of-five-year test and the entire gain was taxable.

Read more in David A. & Christine A. Gates vs. Commissioner, 135 T.C. No. 1, July 1, 2010.

A recent Tax Court case serves as a reminder that you have a responsibility to comply with the tax law, even when you use professional advisers.

In this case, Lizzie and Albert Callaway entered into a transaction in which they transferred approximately $100,000 worth of IBM stock and received cash that was characterized as a loan. The Callaways did not report a gain from the sale of the stock, and the IRS took issue. The Tax Court sided with the IRS and ruled that the Callaways received sales proceeds rather than a loan.

Importantly, the court also upheld penalties against the Callaways.

For some reason, the Callaways had failed to file their original income tax return by the due date. Because they were expecting a refund, the couple apparently decided there was no need to be diligent about timely filing their return. The IRS does not assess late filing penalties if no tax is owed when the return is filed.

But as the court case shows, once a tax liability was upheld by the court, the late filing penalty applied to the additional taxes, even though the original return was filed showing a refund due. The return was filed late, so any additional taxes assessed for that year were subject to the penalty.

Also, the IRS asserted a penalty for substantial understatement of tax. The court noted that this penalty should not be imposed if the Callaways acted with reasonable cause and in good faith and if they relied on the advice of a competent professional adviser. However, the court found that the Callaways did not file their subsequent tax returns in a manner consistent with the purported loan transaction. And they made no effort to determine the competence of the individuals who provided tax advice in connection with the transaction. As a result, the court also upheld this penalty.

Read more in Lizzie W. & Albert L. Calloway v. Commissioner, 135 T.C. No. 3, July 8, 2010.

With mortgage interest rates at generational lows, you may be inclined to purchase a new home, take out a loan to make improvements on your existing home or take out a second mortgage to pay down high-interest credit card debt.

The IRS has issued a reminder that interest deductions on home mortgages are limited, including limitations for home acquisition and home equity indebtedness.

There is one limit for loans used to buy, build or substantially improve a residence – called home acquisition debt. There is another limit for loans secured by a qualified residence but used for other purposes – called home equity debt.

The tax law allows a deduction for interest on indebtedness secured by your residence. Acquisition indebtedness cannot exceed $1 million. Home equity indebtedness cannot exceed $100,000.

Read more in IRS Headliner Volume 299.

The adverse effects of the oil spill in the Gulf of Mexico are being felt far from the Gulf Coast.

The IRS has recognized that many people may face tax issues ranging from the deductibility of losses to the taxability of reparation payments to inaccessibility of tax records to difficulties in making timely tax payments.

If you or your business are adversely affected by the oil spill, IRS Commissioner Doug Shulman has the following message for you:

"I want to assure [taxpayers affected by the spill] that the IRS will be doing everything it can to provide tax help to those who need it. We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers."

The IRS has issued tax guidance based on current law. In the future, it is possible that Congress may pass special legislation to aid affected taxpayers.

Under current law, payments from BP to compensate for lost income are taxable in the same way that the wages or business income being replaced would have been taxed. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.

Each taxpayer can have unique financial circumstances. You should talk with your tax adviser about the tax implications of payments or compensation from the oil spill.

Read more here.

The IRS announced that small firms may now begin applying for certification for tax credits or grants available under the Qualifying Therapeutic Discovery Project Program, created by the Affordable Care Act. These credits or grants are available for projects that show significant potential to produce new cost-saving medical therapies, create U.S. jobs and increase U.S. competitiveness.

Companies applying for certification must file Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, no later than July 21, 2010.

The qualifying therapeutic discovery project program is targeted to projects that show potential to produce new therapies, reduce long-term healthcare costs or significantly advance the goal of curing cancer within the next 30 years.

The credit or grant covers up to 50 percent of the cost of qualifying biomedical research, up to a maximum credit of $5 million per firm and $1 billion overall. It is available only to firms with no more than 250 employees. Credits and grants are available for investments made in 2009 and 2010.

The Department of Health and Human Services (HHS) will evaluate each project to determine that it shows a reasonable potential to meet the stated goals. The IRS will issue certifications by the end of October, based on the determinations made by HHS.

Read more here.

As part of the federal government’s effort to strengthen the healthcare work force, the exclusion for amounts received by health professionals under student loan repayment and forgiveness programs is being expanded under the Affordable Care Act. The exclusion is retroactive for 2009 taxes.

Prior to the new law, only certain amounts qualified for the exclusion, such as those received under the National Health Service Corps Loan Repayment Program or certain state loan repayment programs eligible for funding under the Public Health Service Act.

The Affordable Care Act expands the exclusion to include any state loan repayment or loan forgiveness programs intended to increase the availability of healthcare services in underserved areas or health professional shortage areas and makes this exclusion retroactive to the 2009 tax year.

Healthcare professionals participating in these programs who have not yet filed their 2009 return need not report eligible loan repayment or forgiveness amounts when they file. Healthcare professionals who have reported income from repaid or forgiven loan amounts on their 2009 returns may be due refunds.

If you qualify for the exclusion and have already filed your 2009 return, you may file Form 1040X, Amended U.S. Individual Income Tax Return. You should write "Excluded student loan amount under 2010 Health Care Act" in the Explanation of Changes box.

If your employer withheld and paid taxes under the Federal Insurance Contributions Act (FICA) on payments covered under the new exclusion, you may request that the employer seek a refund of withheld FICA on your behalf. And because employers also pay a portion of the FICA tax, your employer also may be entitled to a refund.

Read more here.

If you are the owner of a closely held business, you undoubtedly wear many hats. To justify your compensation, it is important to document how the many roles you play that contribute to the success of the company.

Successful closely held corporations continue to pay high salaries and bonuses to owner-employees. And the IRS continues to challenge the compensation deduction on the grounds that part of the payment represents a nondeductible dividend.

A recent Tax Court case involved total compensation to the owner in excess of $2 million per year. The court allowed a deduction for 100 percent of the owner’s compensation in one year and more than 60 percent of the compensation in the other year at issue.

The court based its conclusion primarily on the fact that the owner performed multiple duties on behalf of the corporation. Duties included:

Read more in Multi-Pak Corporation v. Commissioner, TC Memo 2010-139, June 22, 2010.

When an election is required under the tax law, it is important to follow the formal requirements for executing the election.

Anjum Shiekh, an investor in a number of real estate projects, learned this lesson the hard way.

The passive activity loss disallowance rules apply to any trade or business in which you do not materially participate. You are treated as materially participating in an activity if you meet at least one of seven tests provided in regulations.

Any rental activity is generally considered a passive activity regardless of your level of participation. However, this rule does not apply to a qualifying real estate professional. You are considered a qualifying real estate professional if you meet two tests:

1. More than 50 percent of the personal services you perform during the year are performed in real property trades or businesses in which you materially participate.
2. You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate.

If you own multiple real estate properties, it may be difficult to meet the tests with respect to each property. However, you may elect to treat all your interests in rental real estate as one activity. This election applies for the tax year for which it is made and for all future tax years in which you qualify as a real estate professional.

In a recent case, the Tax Court refused to allow Anjum Shiekh to treat all of his real estate interests as a single activity because he failed to make the election as provided in the regulations. Shiekh’s aggregate treatment of his rental properties on his return was insufficient to provide notice to the IRS that he had elected to treat all of his rental properties as a single real estate activity. Similarly, his intention to file an election, without actually exhibiting his unequivocal agreement to accept the benefits and burdens of such an election, also failed to provide sufficient notice.

Read more in Anjum Shiekh v. Commissioner, TC Memo 2010-106, June 10, 2010.

Some Partnerships May Not Need to File Separate Tax Returns

If you and your spouse own an unincorporated business that is classified as a partnership for federal income tax purposes, you may not need to file a separate tax return for the partnership.

For tax years beginning after Dec. 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 provides that a qualified joint venture, whose only members are a husband and a wife, can elect not to be treated as a partnership for federal tax purposes.

A qualified joint venture (QJV) is a business in which:

The QJV option simplifies your filing requirements by eliminating the need to file a Form 1065, U.S. Partnership Return of Income, for the joint venture. The option also helps to ensure each spouse receives proper Social Security credit.

Spouses electing QJV status are treated as sole proprietors for federal tax purposes. An employer identification number is not required unless the business is required to file excise, employment, alcohol, tobacco or firearms returns.

You make the QJV election on a jointly filed Form 1040 by including a separate Schedule C, Profit or Loss From Business (Sole Proprietorship), or Schedule F, Profit or Loss From Farming, and, if otherwise required, a separate Schedule SE, Self-Employment Tax.

Your spouse is considered an employee if there is an employer-employee type of relationship, i.e., you substantially control the business in terms of management decisions, and your spouse is under your direction and control. If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her and withhold income taxes. Your spouse’s wages are not subject to federal unemployment tax. If the business has employees, either you or your spouse may report and pay the employment taxes due on wages paid to the employees, using the employee identification number of that spouse’s sole proprietorship.

If you want to save 10 percent on the cost of a deep bronze tan for the summer, you had better schedule your time in the booth before the end of this month.

The Patient Protection and Affordable Care Act of 2010 created a new 10 percent excise tax on amounts paid for indoor tanning services after June 30, 2010. Like a sales tax, the excise tax will be collected from the person tanning when payment for the tanning services is made.

The IRS has now issued final, temporary and proposed regulations to provide guidance on the new excise tax. The regulations provide that the tax applies to all amounts paid to a tanning services provider for indoor tanning services, including any amount paid or reimbursed by insurance.

Because many providers sell other goods and services in addition to tanning services, the regulations provide rules for determining the tax when the provider charges for a package of goods and services in addition to the tanning services.

The regulations carve out an exception for "qualified physical fitness facilities" that include access to indoor tanning facilities as part of a membership fee. The IRS has determined that when such access is incidental to a physical fitness facility’s predominant business, the amount attributable to the indoor tanning access would be difficult to determine.

Thus, amounts paid to qualified physical fitness facilities in that situation will not be subject to the tax. However, the regulations narrowly define "qualified physical fitness facility" to exclude businesses that engage predominantly in indoor tanning or other cosmetic services.

The definition of indoor tanning service does not include phototherapy services provided by a licensed medical professional. The regulations define "phototherapy service" and specify that the service must be performed by and on the premises of a licensed medical professional to qualify for the exemption from the tax.

Read more in td-9486 and reg-112841-10.

The Tax Court has required a son to pay his father’s income taxes.

In 1989, Scott Rubenstein moved to Florida to live with and care for his mother and father. After his mother died in 1993, Scott continued to live with and care for his father, Jerry Rubenstein.

In 2002, Jerry purchased for $35,000 a condominium in Delray Beach, where Scott and Jerry have continued to live. In February 2003, Jerry transferred the condominium to Scott by warranty deed for stated consideration of "$10 and other good and valuable consideration." The condominium was then worth $41,000, and there were no mortgages or other liens. In July 2004, Scott mortgaged the condominium to secure a revolving credit agreement with a bank.

As of Feb. 2003, when he transferred the condominium to Scott, Jerry was insolvent and unable to pay his debts. In addition, Jerry owed $112,420 for unpaid federal income taxes, penalties and interest for tax years 1994 through 2002.

In 2004, the IRS placed a lien on Scott’s condominium. In 2005, the IRS determined that Scott owed almost $45,000, plus interest, because of having received ownership of the condominium from Jerry (transferee liability). The Tax Court agreed with the IRS that the condominium was an asset subject to Florida’s Uniform Fraudulent Transfer Act and its transfer was constructively fraudulent within the meaning of the act.

The transfer was constructively fraudulent because:

Read more in Scott E. Rubenstein v. Commissioner, 134 TC No. 13, June 7, 2010.

If you purchased a home before May 1 and expect to qualify for the $8,000 first-time home buyer credit or the $6,500 credit for long-term homeowners, you must complete the closing by June 30.

Note that some members of Congress have proposed extending the closing date to Sept. 30. However, the credit is available only for home purchases that were under contract on April 30.

The first-time home buyer credit is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10 percent of the purchase price of a principal residence. A long-term homeowner may claim a credit if the buyer (and the buyer’s spouse, if married) maintained the same principal residence for any five consecutive year period during the eight years ending on the date of purchase. The maximum credit is the lesser of $6,500 ($3,250 for a married individual filing separately) or 10 percent of the purchase price of the home.

The credits phase out over modified adjusted gross income levels of $125,000 to $145,000 for individuals and $225,000 to $245,000 for those filing a joint return. The credits cannot be claimed for a home costing more than $800,000. Dependents cannot claim the credits, and a purchaser must be at least18 years of age on the date of purchase.

To claim either credit, you must complete Form 5405, First Time Homebuyer Credit and Repayment of the Credit, and include with your tax return one of the following documents:

For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 tax return or your 2010 tax return.

Have the Punch-Dub television commercials put you in the market for a new VW?

You need to move fast if you want to take full advantage of tax credits available for hybrids and vehicles using advanced lean burn technology, not to mention the chance to whack your friend on the arm.

Earlier this year, Volkswagen reported to the IRS that it had sold its 60,000th credit-eligible vehicle. As a result, for vehicles sold after June 30, 2010, the eligible tax credit drops by 50 percent. Eligible vehicles manufactured by Volkswagen and purchased or leased before July 1, 2010, are eligible for the full credit. The amount of the credit varies with the make and model of vehicle.

The Tax Court has announced that it has made electronic filing of documents mandatory for most parties represented by counsel.

The new procedure applies to cases in which the petition is filed on or after July 1, 2010. An e-filer must send the judge assigned to his or her case a courtesy paper copy of an e-filed document that is longer than 50 pages.

Mandatory e-filing does not apply to those who represent themselves or who are assisted by low-income clinics and bar-sponsored pro bono programs.

The IRS issued new guidance to make it easier for small businesses to determine whether they are eligible for the new healthcare tax credit and how large a credit they will receive.

The guidance makes clear that small businesses receiving state healthcare tax credits may still qualify for the full federal tax credit. Additionally, the guidance allows small businesses to receive the credit not only for regular health insurance but also for add-on dental and vision coverage.

The new guidelines are illustrated by more than a dozen examples to help small employers determine whether they qualify for the credit and estimate the amount of the credit. The IRS also requests public comment on issues that should be addressed in future guidance.

The small business healthcare tax credit, which is in effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. The maximum credit goes to smaller employers – those with 10 or fewer full-time equivalent (FTE) employees – paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

Read more in Notice 2010-44.

If you are an employee, the IRS withholding calculator can help you determine whether you need to give your employer a new W-4 form to avoid having too much or too little federal income tax withheld from your pay. You can use your results from the calculator to help fill out the form.

Ideally, you want your withholding to approximate your tax liability. If too little is withheld, you may owe a penalty. If too much is withheld, the IRS gets to keep your money until you file your return. And the IRS does not pay interest on your refund.

Check out the IRS withholding calculator at http://www.irs.gov/individuals/page/0,,id=14806,00.html

Expect the IRS to focus more attention on what you are doing – or not doing – with your IRA.

The federal government is losing millions of dollars every year because of increasing taxpayer noncompliance with Individual Retirement Account requirements, according to a new government report.

The report, issued by the Treasury Department’s Inspector General for Tax Administration (TIGTA), studied IRS data for 2006 and 2007. It found that hundreds of thousands of individuals are making excess contributions to their IRAs and not taking the required minimum distributions.

In 2009 and 2010, you are allowed to contribute up to $4,000 per year to your IRA – $5,000 if you are age 50 or older. Excess contributions are subject to a 6 percent excise tax. By April 1 of the year following the year in which you reach age 70½, you are required to begin taking annual distributions from your IRA.

An earlier TIGTA report in March 2008 found similar problems based on an analysis of 2005 IRS data. That report found that IRS processing procedures for IRAs do not ensure that individuals are complying with IRA rules and recommended several ways to address the problem.

In the new report, TIGTA reviewed the actions taken by the IRS to identify and correct individual excess contributions to IRAs and nondisbursements of required minimum distributions. It discovered that more than 500,000 people did not comply with the rules.

Excess contributions resulted in an estimated loss of $94 million in excise tax and $17 million in income tax. Also, those who failed to take required minimum distributions resulted in an estimated tax revenue loss of $174 million.

In response to TIGTA’s 2008 report, the IRS initiated four studies to analyze IRA compliance. The only completed study confirmed TIGTA’s 2008 findings, and TIGTA believes the remaining three studies will also validate its findings on noncompliance.

TIGTA recommended that the IRS develop a comprehensive strategy to address the growing noncompliance with limits on IRA contributions. The IRS agreed that such a strategy is necessary and plans to incorporate compliance, education and outreach components.

Read more in the TIGTA Report.

Give the IRS a Piece of Your Mind

Here is a chance to tell the IRS how you feel about the complexity of the tax law.

The IRS is inviting the public to suggest tax issues that need clarification to be considered for inclusion on the 2010-2011 Guidance Priority List.

Recommendations can be submitted at any time, but only those submitted by June 11, 2010, will be considered for inclusion in the original 2010-2011 Guidance Priority List.

Recommendations need not be in any particular format but should briefly describe the recommended guidance and explain the need for it. An analysis of how the issue should be resolved may also be included.

In reviewing recommendations and selecting projects for inclusion on the list, the Treasury and the IRS will consider whether the recommended guidance would resolve significant issues relevant to many taxpayers, promote sound tax administration, reduce controversy and lessen the burdens on taxpayers or the IRS. It will also consider whether the guidance can be drafted in a way that will be easy for taxpayers to understand and apply and can be uniformly administered by the IRS.

Read more in Notice 2010-43.

When a person owes income taxes that the IRS is unable to collect, one of the tools available to the IRS is a levy process under which the agency can require the person’s employer to pay part of his or her compensation directly to the IRS in satisfaction of the tax debt.

With so many businesses operating as LLCs and partnerships, in which business owners are technically not employees, it has been unclear whether the IRS could enforce a levy against the business to collect the business owner’s delinquent taxes.

Now the Court of Appeals for the Second Circuit has upheld a decision by a federal district court requiring a law firm to honor an IRS levy on the managing partner’s draws from the firm. The court rejected the law firm’s argument that the checks were not subject to levy because they were an advance on the firm’s profit distributions, not salary or wages.

The law partner rendered services to the firm on an ongoing basis, for which he was entitled to compensation in the form of a share of the firm’s profits. The partner’s draws were periodic payments that compensated him in advance for his services to the firm.

Read more in Moskowitz, Passman and Edelman v. United States, CA-2, April 29, 2010.

The IRS, along with the Department of Labor and Department of Health and Human Services, issued interim final regulations for group health plans and health insurers relating to dependent coverage for children under the age of 26. The regulations complement earlier guidance issued by the IRS.

The Patient Protection and Affordable Care Act requires group health plans and health insurers that provide dependent care coverage to continue to make coverage available for any adult child of a plan participant up to age 26. It also extended the general exclusion from gross income for reimbursements for medical care under an employer-provided accident or health plan to any employee’s child who has not yet turned 27 by the end of the tax year.

The interim final regulations implement the coverage extension requirement. They clarify that the expansion of coverage required by the act cannot be denied because the child:

Under the regulations, a health plan or issuer may define "dependent" based only on a parent/child relationship. The plan is not required to cover the spouse or child of a covered child.

The regulations further explain the apparent discrepancy between the "up to age 26" requirement for health plans and the "not yet turned 27" requirement for the exclusion from gross income. While healthcare plans are generally required to cover enrollees’ children up to age 26, some employers may decide to continue coverage past the child’s 26th birthday. In such a case, the value of the employer-provided health coverage will be excluded from the employee’s income for the entire tax year in which the child turns 26 (that is, through Dec. 31 for calendar-year taxpayers).

The regulations require the plan or issuers to give a child

1. Whose coverage ended, or who was denied coverage or was not eligible for coverage under a group health plan or health insurance coverage because the availability of dependent coverage ended before the child attained age 26 under the terms of the plan; and
2. Who becomes eligible or is required to become eligible for coverage under a group health plan or group health insurance coverage on the first day of the first plan year beginning on or after Sept. 23, 2010.
3. An opportunity to enroll that continues for at least 30 days. This opportunity must be provided beginning no later than the first day of the first plan year beginning on or after September 23, 2010.

Read more in T.D. 9482 and Notice 2010-38.

Young Adults now Eligible for Coverage Under Parents’ Plans

As a result of changes made by the recently enacted healthcare act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee.

The Internal Revenue Service announced that these changes immediately allow employers with  cafeteria plans to permit employees to begin making pretax contributions to pay for this expanded benefit.

This expanded healthcare tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Employees with children who will not have reached age 27 by the end of the year are eligible for the new  tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan.  A child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.

The notice says that employers with cafeteria plans may permit employees to immediately make pretax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals.  Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

In addition to changing the tax rules as described above, the new act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26.  The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described in the notice applies to that extended coverage.

Read more in Notice 2010-38.

Koch Industries is involved in the road construction industry.  The company created Koch Performance Roads, Inc., to market higher-cost, longer-lasting roads made of polymer-modified asphalt. To offset the higher initial construction costs, Koch offered extended warranties to customers.

Koch entered into a contract with the state of New Mexico regarding the expansion of a state highway using Koch’s Performance Roads concept.  The project was divided into two phases – a construction phase and a rehabilitation phase.  Koch received $46.7 million for the construction phase and $62 million for the rehabilitation phase.

Koch used the percentage-of-completion method of accounting to report the $62 million. The IRS denied use of the percentage-of-completion method, and a federal district court sided with Koch. Now the Court of Appeals for the 10th Circuit has overturned the district court’s decision and sided with the IRS.

The percentage-of-completion method may be used if manufacture, building, installation or construction is necessary for the taxpayer’s contractual obligations to be fulfilled. Non-long-term contract activities that are incident to or necessary for the completion of a long-term contract may be taken into account using a long-term contract method.

However, the regulations specifically state that performance under a guarantee, warranty or maintenance agreement is a non-long-term contract activity that is never incident to or necessary for the manufacture or construction of property under a long-term contract. Even though it was virtually certain that Koch would have to perform some work at some

point during the warranty period, Koch had no obligation to perform any work unless and until the highway and its associated structures failed to meet performance standards.

In the court’s view, the warranty agreements did not require Koch to perform manufacture, building, installation or construction to fulfill its obligations.

Read more in Koch Industries, Inc. v. United States, 105 AFTR 2nd 2010-XXXX, CA-10, April 27, 2010.

If you are a board member or an administrator of a charity or other tax-exempt organization, you should be aware of recent announcements by the IRS concerning your organization’s tax-exempt status.

Most tax-exempt organizations, other than churches, must file an annual return or notice with the IRS. If an organization does not file as required for three consecutive years, the law provides that it automatically loses its tax-exempt status.

The IRS is also holding workshops for small and mid-sized Section 501(c)(3) organizations. This introductory one-day workshop, designed for administrators or volunteers responsible for an organization’s tax compliance, will be held in Seattle, Wash. (May 11-13), and in the Washington, D.C., area (May 25-27).

The IRS has posted new FAQs and an audio interview discussing the automatic revocation of tax-exempt status for failure to file, as well as workshop registration information, on its Web site at www.IRS.gov.

The Continuing Extension Act of 2010, enacted April 15, reinstated the COBRA subsidy, which had expired on March 31.

The American Recovery and Reinvestment Act established a 65 percent subsidy on COBRA health insurance premiums to help workers who lost their jobs as a result of the recession maintain their employer sponsored health insurance.

Because of the reinstated subsidy, workers who are involuntarily terminated from employment between Sept. 1, 2008, and May 31, 2010, may be eligible for the 65-percent subsidy of their COBRA premiums for a period of up to 15 months.

Read more about the COBRA subsidy extension at www.IRS.gov.

You may have already filed your federal tax returns, but many people still have questions. Here’s what the IRS wants you to know about refund status, record keeping and mistakes and what to do if you move.

Refund Information – You can go online to check the status of your 2009 refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after you mail a paper return. Be sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

Record Retention – Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property – should be kept longer. You should keep copies of prior tax returns. They may be helpful in amending already filed returns or preparing future returns.

Change of Address – If you move after you file your return, you should send Form 8822, Change of Address, to the Internal Revenue Service. If you are expecting a refund through the mail, you should also file a change of address with the U.S. Postal Service.

If you ever wanted to give the IRS a piece of your mind, your opportunity is here.

The IRS has issued an open invitation to apply for a three-year term on the Taxpayer Advisory Panel (TAP). The panel provides a forum for citizens from each state to make suggestions regarding IRS decision making. If you are interested, you must act quickly. Applications are due by April 30, 2010.

TAP members:

To be a member of the TAP, you must be:

New TAP members will serve a three-year term starting in December 2010. Anyone chosen as an alternate member will be considered to fill any vacancies that open in their area during the next two years.

The TAP is seeking members in the following locations: California, Colorado, Illinois, Michigan, Mississippi, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Pennsylvania, Puerto Rico, Rhode Island, South Carolina and Washington.

Alternates are needed for Alabama, the District of Columbia, Idaho, Louisiana, Maine, New York, South Dakota, Vermont, West Virginia and Wyoming.

Complete the online application at

www.improveirs.org/recruit/recruit_open.shtml.

Determining dependency status for tax purposes can be quite confusing, especially when a child’s parents do not live together. A recent Tax Court case illustrates some of the factors involved.

Insel Gaitor had four minor children, ages 8, 7 and 3 years and 1 month. Gaitor did not live with the mother of the three older children, although the children lived with him for most of the year. The youngest child was born in December to a woman who lived with, but was not married to, Gaitor. He provided food, clothing and housing for the three older children, while making biweekly child support payments to their mother.

Gaitor filed his income tax return claiming head-of-household status and also claimed dependency exemptions and child tax credits for the 8-year-old and the infant.

The IRS disallowed the dependency exemptions and the child tax credits and recalculated Gaitor’s tax liability using the single filing status. The Tax Court ruled in Gaitor’s favor.

The court noted that the tax law defines a dependent to include a child of the taxpayer who has the same principal place of abode as the taxpayer for more than one-half of the tax year and who meets age restrictions and self-support prohibitions that were not at issue in the case.

There is a special rule in cases of divorced parents or parents who live apart at all times during the last six months of the year and who provide over one-half the child’s support during the year. In those instances, the child may be treated as the qualifying child of the noncustodial parent if the custodial parent signs a written declaration waiving his or her right to claim the child and attaches the written declaration to the return. The custodial parent is the parent who has custody of the child for the greater portion of the year.

Gaitor and the 8-year-old’s mother lived apart for the last six months of the year. There was no agreement establishing legal custody of the children. In the absence of such an agreement or custody being established by the divorce decree, the custodial parent is the one with the greater amount of physical custody – Gaitor in this case. Since Gaitor did not waive his right to claim the 8-year-old as his dependent, the court ruled that Gaitor was entitled to the dependency exemption.

After the birth of the infant, the child and its mother lived with Gaitor, and he provided most of the infant’s support. The court also ruled that Gaitor was entitled to the dependency exemption for the infant.

Since both dependent children were under the age of 17, the court also ruled that Gaitor was entitled to the child tax credit for each.

Finally, the court noted that head-of-household filing status is available to an unmarried individual who maintains as his home a household that for more than one-half of the year constitutes the principal place of abode of a qualifying child. Since the court determined that the 8-year-old lived with Gaitor more than one-half of the year, Gaitor was entitled to use the head-of-household filing status.

Read more in Insel V. Gaitor v. Commissioner, TC Memo 2010-70, April 8, 2010.

Corporations are generally taxed at graduated income tax rates, ranging from 15 percent to 39 percent. However, qualified personal service corporations are taxed at a flat 35 percent rate.

Qualified personal service corporations are defined as satisfying a function and ownership test. Engineering is included as one of the functions. A temporary regulation states that engineering includes surveying and mapping.

Kraatz & Craig is a corporation whose only activity is land surveying. The company employs no licensed engineers and is not associated with any firm that employs licensed engineers. It provides no services that state law requires to be performed only by a licensed engineer. The company unsuccessfully argued that, because surveying and mapping were, under state law, licensed separately from the field of engineering, such activities should not be considered part of the field of engineering.

The Tax Court found that the inclusion of surveying and mapping in the definition of engineering in the temporary regulation was supported by both legislative history and the ordinary meaning of the word "engineering," which the court found to include surveying. State licensing laws that provided separate licensing for surveyors and engineers do not control the definition of engineering for federal tax purposes. The court found that the temporary regulation was a reasonable interpretation of the statute and was not arbitrary, capricious or manifestly contrary to the statute.

Read more in Kraatz & Craig Surveying, Inc. v. Commissioner, 134 T.C., No.8, April 13, 2010.

IRS Offers Tips for Filing

If so, the IRS has offered a few last-minute tips:

Read more here.

The healthcare reform law known as the Patient Protection and Affordable Care Act is a massive piece of legislation. It contains many complex provisions, some of which do not take effect for years.

But small businesses and tax-exempt organizations that add, or already provide, health insurance coverage for their employees can immediately benefit from one provision that may provide a significant savings.

The new law provides a tax credit to offset part of the cost of employee health care for smaller organizations. The maximum credit amount for 2010 is 35 percent of employee health insurance premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum credit amount will increase to 50 percent for eligible small businesses and 35 percent for eligible tax-exempt organizations.

Your business is eligible for the credit if:

Each employee who works at least 30 hours per week is a full-time equivalent. In addition, you count one full-time equivalent for every 2,080 hours per year worked by part-time employees. Business owners and their family members are not counted toward the 25. Average annual salary is the total salaries of the employees in this group divided by the number of full-time equivalents.

The maximum credit goes to organizations with no more than 10 full-time equivalents and average annual compensation of less than $25,000. A reduced credit is available for larger eligible employers.

Small business will be able to claim the credit as part of the general business credit. The IRS will provide further guidance on claiming the credit for tax-exempt organizations.

Read more here.

Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, two new tax benefits are available to employers who hire certain previously unemployed workers.

The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of Social Security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010, through Dec. 31, 2010.

In addition, for each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for an income tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52-week period, up to a maximum credit of $1,000.

Each new employee must certify that he or she has not been employed for more than 40 hours during the 60-day period ending with the date employment begins. The qualified employee cannot be your relative and cannot have replaced another employee, unless the former employee separated from employment voluntarily or for cause.

The IRS has released a draft of new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, which new employees should complete to certify that they meet the prior employment requirement.

See the draft form W-11 here.

The U.S. Court of Appeals for the Second Circuit has allowed a company that manufactures kitchen tools to deduct royalty payments to third parties.

Robinson Knife Manufacturing Company makes a variety of kitchen products that are labeled with trademarks that Robinson licenses from other companies. Robinson pays the trademark owners a percentage of the sales revenue from the products. Robinson claimed a tax deduction for the royalty payments.

The IRS argued, and the Tax Court agreed, that Robinson should include the royalties as a cost of producing the products. Now the court of appeals has sided with the company.

According to the appellate court, Robinson’s royalties did not relate to the production of the products. Therefore, the costs should not be treated as costs of producing inventory. Rather, the royalties became payable only upon sale of a product. And Robinson properly deducted the royalty payments as products were sold and the amount owed to the owners of the trademarks could be determined with reasonable certainty.

Read more in Robinson Knife Manufacturing Company, Inc. v. Commissioner, CA-2, 105 AFTR 2nd 2010-XXXX, March 19, 2010.

Unless Congress acts to extend the expiration date, both the regular $8,000 first-time home buyer credit and the $6,500 credit for long-term homeowners will not be available for homes purchased after April 30.

A first-time home buyer can receive a credit of $8,000 ($4,000 for a married individual filing separately) or 10 percent of the purchase price of a principal residence. The residence must be purchased either before May 1, 2010, or be under a written binding contract before May 1, 2010, with a closing date before July 1, 2010.

A long-term homeowner may claim a home buyer credit if she (and her spouse, if married) maintained the same principal residence for any five consecutive year period during the eight years ending on the date of purchase. The maximum credit is the lesser of $6,500 ($3,250 for a married individual filing separately) or 10 percent of the purchase price of the home for purchases after Nov. 6, 2009.

The credits phase out over modified adjusted gross income levels of $125,000 to $145,000 for individuals and $225,000 to $245,000 for those filing a joint return. Also, the credits cannot be claimed for a home costing more than $800,000. Dependents cannot claim the credits, and a purchaser must be at least 18 years of age on the date of purchase.

To claim either credit, you must complete Form 5405, First Time Homebuyer Credit and Repayment of the Credit, and include with your tax return one of the following documents:

A copy of the settlement statement showing all parties’ names and signatures, property address, sales price and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.

For a newly constructed home if a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

If the purchase date is after April 30 and before July 1, 2010, you should also attach a copy of the pages from the signed purchase contract showing all parties’ names and signatures, the property address, the purchase price and the date of the contract.

For qualifying purchases in 2010, you have the option of claiming the credit on either your 2009 tax return, due April 15, 2010, or your 2010 tax return, due April 15, 2011.

Are current economic conditions causing you to consider scaling back on your vacation plans this year?

Maybe mixing business with pleasure can gain a tax advantage that may offset a portion of your costs.

Travel expenses are deductible if the trip is entirely business related. If the trip is primarily for personal reasons, such as a vacation, the entire cost is a nondeductible personal expense. However, if you incur expenses while on vacation that are directly related to business, those expenses are still tax deductible.  If you take a trip primarily for business reasons and incur personal expenses along the way, the business portion of the trip is tax deductible.

Suppose you live and work in Atlanta. You need to spend three days in New Orleans for valid business reasons. You decide to drive to New Orleans, taking your spouse and children with you. While you attend to business matters, your family enjoys the Crescent City.  Although your business trip would have been three days, you extend the stay to five days so that you can enjoy New Orleans with your family.

You and you family spend $3,000 for the five days you are away from home. Had you made the three-day trip alone, you would have spent $2,000 for travel, meals, lodging and other travel expenses. You can deduct $2,000, subject to the record-keeping requirements, and 50-percent meals limitation that apply to business travel. But, you cannot deduct any travel expenses that were paid or reimbursed by your employer. Also, if you are an employee, you must itemize your deductions, and your total miscellaneous itemized deductions must be greater than 2 percent of your adjusted gross income.

Read more in Publication 463, Travel, Entertainment, Gift and Car Expenses.

Last week, President Obama signed the Hiring Incentives to Restore Employment Act.

The new law contains several tax provisions, including a payroll tax credit for employers that hire workers who have been unemployed for at least 60 days and who are not replacement hires. For each qualifying new employee hired after Feb. 3, 2010, and before Jan. 1, 2011, the employer can claim a credit equal to the employer’s share of Social Security taxes on wages paid in 2010. The employer also receives a credit of $1,000 for each employee who remains employed for at least 52 weeks.

The new law also extends the $250,000 Section 179 deduction for tax years beginning in 2010. This amount had been scheduled to be reduced to $134,000 for 2010 and $25,000 thereafter.

Read more here.

The IRS announced several steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.

These steps include additional flexibility on offers in compromise, a series of Saturday “open houses” offering opportunities for people to work out tax problems face-to-face with the IRS, special outreach with partner groups to unemployed taxpayers and the availability of more information on a special section of the IRS Web site.

The IRS provides other assistance, including:

Read more in Information Release 2010-029.

In a recent case, a federal district court concluded that, in certain situations, FICA taxes are not required to be paid on severance payments resulting from involuntary terminations caused by a reduction in work force or the discontinuance of a plant or operation.

Employers that followed IRS guidelines in withholding and remitting FICA taxes – and their affected employees – may be entitled to refunds.

Because different courts have agreed with the IRS in earlier cases, it seems likely that the IRS will appeal this decision.  However, since you have a limited time to file claims for refund of overpaid taxes, you should contact your tax adviser to discuss filing a protective claim if you believe you may be entitled to a FICA refund.

Read more in Quality Stores, Inc., DC-MI, Feb. 23, 2010.

The IRS has designated the earthquake in Chile as a qualified disaster for federal tax purposes.

That means recipients of qualified disaster relief payments, who may be U.S. taxpayers, can exclude those payments from income on their tax returns. Also, employer-sponsored private foundations can assist victims in areas affected by the earthquake without adversely affecting their tax-exempt status.

A private foundation that is employer sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. These payments would not be included in the individual recipient’s gross income.

Read more in Notice 2010-026.

Do you have a friend or relative who has failed to file an income tax return in a prior year?

It seems that, as more people realize their withholding exceeds their tax liability, they decide not to bother filing a tax return.

The IRS is holding approximately $1.3 billion in unclaimed refunds just for calendar year 2006. They are waiting for almost 1.5 million people to file their 2006 federal income tax return to claim their refunds.

Here’s the rub. If someone is owed a refund for 2006 and has yet to file a tax return, the refund is gone after April 15, 2010. If a return is filed after that date, the IRS is not allowed to process the refund claim. That’s because refunds must be claimed no later than three years after the original due date of the tax return.

Returns seeking a refund must be properly addressed, postmarked and mailed by April 15. No penalties are assessed for filing late returns that qualify for refunds.

If you have yet to file a return for 2006, there may be even more money at stake than overpaid withholding taxes. That was also the year when you could claim a one-time telephone excise tax refund. That refund is a standard $30, or $60 on a joint return, unless you can prove a higher amount. Lower-income taxpayers may qualify for a refundable earned income tax credit, in addition to their over-withheld taxes.

Unfortunately, traffic flows only one way on this street.

Although a refund for 2006 cannot be claimed after April 15, 2010, the IRS can still assess additional taxes owed. The three-year period that the IRS has to assess additional taxes doesn’t begin until a return is filed.

Read more here.

The IRS has issued a revenue procedure that provides a safe harbor method of reporting gain or loss for a taxpayer who initiates a deferred like-kind exchange – sometimes called a "deferred Section 1031 exchange" or a "Starker exchange" – but who fails to complete the exchange because a qualified intermediary defaults on its obligation to acquire and transfer replacement property to the taxpayer.

The revenue procedure is available to a taxpayer who meets all of the following criteria:

If these requirements are satisfied, the taxpayer will not be required to recognize gain from the failed exchange until the taxable year in which the taxpayer receives a payment attributable to the relinquished property.

Read more here.

The Tax Court has ruled that a married couple who purchased a life insurance policy from their employer’s profit-sharing plan could not reduce the value of the policy by the amount of the policy’s surrender charge.

Karl and Deborah Matthies owned an S corporation. The S corporation’s profit-sharing plan bought a life insurance policy on their lives using money rolled over from Karl’s IRA. The profit-sharing plan later sold the life insurance policy to Karl for $315,023.

At the time of the sale, the policy was worth $1,368,327 but was subject to a surrender charge of $1,062,461. Because the value after the surrender charge was less than the purchase price, Karl reported no taxable gain on the transaction.

The IRS determined that Karl should have reported a gain of $1,053,304 on the purchase of the policy and that Karl and Deborah were liable for a $58,985 accuracy-related penalty.

The court agreed with the IRS that Karl should have recognized $1,053,304 in gross income from the bargain sale of the insurance policy but concluded that no penalty should apply because:

The Tax Court has never before addressed the tax treatment of a bargain sale of a life insurance policy.

The IRS modified its arguments during the case and subsequently amended its regulations.

Therefore, the court held that Karl and Deborah had a reasonable basis for the position they took on their return.

Read more in Matthies v. Commissioner, 134 TC , No. 6, Feb. 22, 2010.

Once again a major disaster has struck. On Feb. 27, 2010, a devastating earthquake and resulting tsunami ravaged Chile.

With earthquake relief efforts in Haiti barely under way, you are once again being called upon to provide financial assistance to aid the victims. If you decide to provide financial help, you may be able to obtain a tax deduction on your 2010 return.

Contributions to domestic tax-exempt charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has control and discretion over the use of funds.

You can ensure that you are contributing to a qualified charity by using the "Search for Charities" function on the IRS Web site at www.IRS.gov to see if the charity you intend to support is a qualified charity listed in IRS Publication 78. Certain organizations, such as churches or governmental organizations, may be qualified to accept charitable contributions, even though they are not listed in Publication 78.

Contributions directly to victims are not deductible. Also, the time period for contributing to Haitian earthquake relief and claiming a deduction on last year’s tax return has expired.

Read more in IRS Publication 526, Charitable Contributions.

No one likes to contemplate the prospect of an IRS audit, much less undergo the experience personally.

CNNMoney.com recently offered five tips for avoiding a tax audit.

Read more here.

Court Rules on Deductibility of Legal Fees

The legal fees were deductible as employee business expenses. As such, they were deductible as miscellaneous itemized deduction, subject to the 2-percent-of-adjusted-gross-income floor.

James Purdy left his employment with a regional brokerage firm to go to work for a national firm. After three years, Purdy became disenchanted with his new employer and filed a claim alleging he had been underpaid. After the firm terminated his employment, he filed an additional claim alleging wrongful termination.

The first claim was settled for approximately $400,000, and the second claim was dismissed. Purdy paid $120,000 of legal fees in connection with these claims. Purdy argued that the legal fees were fully deductible as ordinary and necessary expenses incurred in the course of carrying on a trade or business.

The court concluded that the legal fees were related to Purdy’s role as an employee of the national brokerage firm and did not relate to the business partnership he established later.

Read more in James L. Purdy v. Commissioner, TC Memo 2010-27, Feb. 17, 2010.

The IRS has released its annual tables showing the depreciation deductions for owners of passenger automobiles, trucks and vans first placed in service during calendar year 2010.

For passenger automobiles, the deduction limits are $3,060, $4,900 and $2,950 for 2010, 2011 and 2012, respectively, and $1,775 for each succeeding year. For trucks and vans, the depreciation limits for the first three years are $3,160, $5,100 and $3,050, and the limit for each succeeding year is $1,875.

For leased passenger automobiles and trucks and vans, there is also a reduction in the deduction allowed. This reduction is expressed as an income inclusion amount according to a formula provided by the IRS. The inclusion amounts for leased vehicles vary with the fair market value.

Read more here.

Residents of nine states and the District of Columbia will file their 2009 tax returns with a different IRS service center than the one they sent their returns to last year. If you file your return electronically, you do not have to worry about this change.

But if you live in Alabama, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, Vermont, Virginia or the District of Columbia and file a paper return, you will be sending your return to a different service center.

If you received an instruction booklet from the IRS in the mail and use the labels included with the booklet, your return will go to the correct address. If you do not receive a package, you should refer to the back cover of the instructions for Form 1040, 1040A or 1040EZ.

If you live in Maine, Massachusetts, New Hampshire, Vermont, Virginia or the District of Columbia, you should mail your return to the IRS center in Kansas City, Mo. Residents of Indiana and Michigan should mail their returns to the IRS center in Fresno, Calif. And Alabama residents should mail their returns to the IRS center in Austin, Texas.

Read more here.

Earlier this year, Congress passed a law allowing you to treat cash contributions made for the relief of victims in areas affected by the earthquake in Haiti on Jan. 12, 2010, as if the contributions were made on Dec. 31, 2009. To qualify, a contribution must be made no later than Feb. 28, 2010.

Contributions made after Feb. 28 will be deductible on your 2010 return. The new law also allows your telephone bill to serve as documentation for phone-in contributions.

To qualify for a charitable deduction, contributions must be made to a qualified tax-exempt U.S. charitable organization. Contributions to foreign charities and amounts given as direct aid to affected persons generally do not qualify for the deduction. Also, you will receive a tax benefit only if you itemize your deductions.

Read more here and here.

Disability Tax Benefits Defined

On Feb. 1, 2010, President Obama announced the federal government’s fiscal year 2011 budget. At the same time, the Treasury Department issued its General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals, commonly referred to as the "Green Book."

The following are among the proposed tax changes highlighted in the Green Book, most of which will require congressional action before becoming law:

The IRS has issued a notice that raises a caution about transferring assets to a trust during 2010. The IRS is concerned that taxpayers and their advisers may incorrectly conclude that such a transfer is not a gift for gift tax purposes.

The IRS issued the notice as a result of some complex changes to the gift tax law that took effect Jan 1, 2010. The change in the law created little fanfare because the enactment took place in 2001 but is only now taking effect.

Here is the situation: In general, the gift tax applies to transfers of assets, whether outright or in trust, and whether the transfer is direct or indirect. A gift is considered complete only when the donor parts with sufficient dominion and control as to leave the donor with no power to change the disposition.

The IRS says that tax law changes applicable to transfers made in 2010 broaden the types of transfers subject to gift tax. Some of those transfers would have been considered incomplete and, thus, not subject to the gift tax under pre-2010 law. A transfer in trust is treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor’s spouse under the tax law’s grantor trust provisions.

Read more here.

The Tax Court has allowed a medical expense deduction for the costs of a sex change operation – but not the expenses for breast augmentation surgery. The taxpayer in the case was born male but was diagnosed with gender identity disorder. To treat this condition, the taxpayer underwent a treatment regimen that led to the surgeries.

The tax law allows an itemized deduction for medical care, which includes:

Cosmetic surgery is specifically excluded from the definition of medical care.

The IRS disallowed the deduction, arguing that all of the treatment qualified as cosmetic surgery. According to the IRS, the procedures were directed at improving the taxpayer’s appearance and not toward treating an illness or disease. The IRS argued that gender identity disorder is not a disease because it does not "arise from an organic pathology within the human body."

The court concluded that gender identity disorder is a disease for purposes of the medical deduction and that the tax law does not require a demonstrated organic origin. The court ruled that hormone therapy and sex reassignment surgery were not cosmetic surgery and allowed the deductions for those costs as treatment for a disease. However, the court disallowed the deduction for the breast augmentation surgery because it was a cosmetic surgery directed at improving appearance and neither promoted proper function of the body nor treated a disease.

Read more in O’Donnabhain v.Commissioner, 134 TC No. 4, Feb. 2, 2010.

Although you may have already received your Making Work Pay Tax Credit through a reduction in your withholding taxes, you will still have to claim the credit on your 2009 return. Here are eight things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible.

Haitian Earthquake Relief Contribution Deductible for 2009 Taxes

Just when you thought you had closed the door on 2009, at least from a tax-planning perspective, Congress has cracked open a window – however briefly.

Last week, President Obama signed legislation that allows a deduction on your 2009 federal income tax return for certain contributions to the Haitian earthquake relief effort.

The new law allows you to treat cash contributions made for the relief of victims in areas affected by the earthquake in Haiti on Jan. 12, 2010, as if the contribution was made on Dec. 31, 2009.

To qualify, the contribution must be made between Jan. 12 and Feb. 28, 2010. The new law also allows your telephone bill to serve as documentation for phone-in contributions.

To qualify for a charitable deduction, contributions must be made to a qualified tax-exempt U.S. charitable organization. Contributions to foreign charities and amounts given as direct aid to affected persons generally do not qualify for the deduction. You will receive a tax benefit only if you itemize your deductions.

Domestic organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has

control and discretion over the use of funds. You can check Publication 78, available on the IRS Web site (www.irs.gov), to see if the charity you intend to support has received IRS qualification. Churches or governmental organizations may be qualified to accept charitable contributions even though they are not listed in Publication 78.

The IRS has also designated the earthquake in Haiti as a qualified disaster for federal tax purposes. That means recipients of qualified disaster relief payments, who may be U.S. taxpayers, can exclude those payments from income on their tax returns. Also, employer-sponsored private foundations can assist victims in areas affected by the earthquake without adversely affecting their tax-exempt status.

A private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. These payments would not be included in the individual recipient’s gross income.

Read more here.

If you qualify for a home buyer credit for 2009, be sure to gather the documents you will need to submit with your tax return.

Because of the additional documents that must be attached, you will not be able to e-file your return. That also means it may take the IRS a bit longer to process your refund.

To claim the first-time home buyer credit, your return must include one of the following documents:

If you purchased a new residence and qualify for the home buyer credit available to longtime residents of the same principal residence, the IRS encourages you to include with your return documentation to show that you lived in your old home for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Such documents may include one of the following:

Read more here.

Workers who lose their jobs during January and February of 2010 may qualify for a 65 percent subsidy on their COBRA health insurance premiums. These newly eligible individuals, along with those already receiving the subsidy, can now receive it for up to 15 months.

The COBRA subsidy eligibility period, created by the American Recovery and Reinvestment Act of 2009, was originally scheduled to expire at the end of 2009, and eligible individuals qualified for the subsidy for only nine months. But the Department of Defense Appropriations Act, 2010, enacted on Dec. 19, 2009, extended the eligibility period and the maximum duration of COBRA premium assistance.

As a result, workers who were involuntarily terminated from employment between Sept. 1, 2008, and Feb. 28, 2010, may be eligible for a 65 percent subsidy of their COBRA premiums for a period of up to 15 months. Involuntarily terminated employees who meet certain other requirements, and certain family members of those individuals, are referred to as "assistance-eligible individuals."

Employers must provide COBRA coverage to assistance-eligible individuals who pay 35 percent of the COBRA premium. Employers are reimbursed for the other 65 percent by claiming a credit for the subsidy on their payroll tax returns. Employers must maintain supporting documentation for the claimed credit.

The administrator of a group health plan or other entity must notify certain assistance-eligible individuals of the extension by Feb. 17, 2010. For assistance-eligible individuals whose nine months of subsidy had already ended, the new law also provides an extended period for the retroactive payment of their 35 percent share during a transition period.

Last week, the U.S. Supreme Court issued a landmark decision interpreting campaign finance laws. As a result, the popular press is filled with stories about the future of corporate financial involvement in the election process.

Businesses and individuals who participate in the political process by contributing money to candidates, political parties, political action committees, etc., or who get involved in lobbying or grass roots political activities, should keep in mind that nothing in the Supreme Court’s ruling changes the tax law concerning political contributions or political activities.

Contributions to a political candidate or party are not deductible. They are not considered a business expense or a charitable contribution. Similarly, lobbying expenses directed toward influencing federal or state legislation are generally not deductible.

However, the prohibition does not generally apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation may be deductible.

Read more in Citizens United v. Federal Election Commission, U.S. Supreme Court, Jan. 21, 2010.

CPAs, attorneys and enrolled agents (EAs) will be exempt from many of the new rules because they are already subject to testing and regulation by others, such as professional associations.

Often overlooked in the press coverage is the fact that it will take the IRS some time to implement the new rules, and they certainly will not be in place for the current tax filing season. In the meantime, the IRS has issued guidance to help taxpayers choose a tax return preparer. Some of the observations by the IRS include:

Read more in IRS Fact Sheet 2010-3.

The IRS has provided methods under which taxpayers can voluntarily correct certain failures by a nonqualified deferred compensation plan to comply with tax laws and, in certain cases, reduce taxes.

Nonqualified deferred compensation plans must comply with Internal Revenue Code §409A in both form and operation. The newly issued guidance primarily addresses the failure to comply in form, i.e., document failures. Previously issued guidance (Notice 2008-113) primarily addressed operational failures.

Failure to comply with the requirements of §409A can result in both the loss of deferral and additional taxes to the plan beneficiary.

Read more here.

The Tax Court has decided that recreational gamblers should determine their winnings or losses each time they redeem their tokens (e.g., cash in their chips).

George and Lillian Shollenberger were recreational gamblers. On March 29, 2005, they took $500 to a casino in Charles Town, W.V. That day, George hit a $2,000 jackpot on a $1 slot machine. George and Lillian each took $200 of the slot winnings for additional gambling and pocketed the other $1,600. By the time they left the casino, only the $1,600 they had put aside remained.

The Shollenbergers reported no gambling winnings on their 2005 federal income tax return and claimed the standard deduction. The Shollenbergers argued that gambling losses on other days more than offset their winnings on March 29. The IRS argued that they should have reported the $2,000 winnings from the slot machine jackpot.

The Tax Court concluded that a casual gambler recognizes a gain or loss at the time she redeems her tokens. Fluctuating wins and losses left in play are not accessions to wealth until the gambler can definitively calculate the amount of gain or loss by redeeming the tokens. As a result, the court ruled that the Shollenbergers had $1,100 of gambling winnings on March 25, 2005. They entered the casino with $500 and left with $1,600, resulting in a $1,100 profit.

To the extent the Shollenbergers experienced gambling losses on other occasions during 2005, those losses could be deducted as itemized deductions up to the amount of their gambling winnings. Since the Shollenbergers did not itemize their deductions, no gambling losses were allowed.

The advent of the new year 2010 also signaled the expiration of a number of popular tax provisions. Most significant was the estate and generation-skipping tax regime, which is repealed for 2010. Although several bills have been introduced in Congress that would revive the estate tax, as of today no extension has been enacted. As a result, the estate and generation-skipping taxes no longer exist, at least temporarily.

In addition, a number of temporary tax provisions, often referred to as "extenders," expired as of Jan. 1, 2010. They include tax credits, deductions and various tax incentives. Many of the provisions have been extended several times in the past, and a bill to extend them again is pending in Congress (HR 4213). It passed the House on Dec. 9, 2009, and has been referred to the Senate Finance Committee.

Some of the expired temporary tax credits include:

Some of the expired temporary deductions include:

Some of the other expired provisions include:

• The allowance for tax-free distributions from individual retirement plans for charitable purposes
• The special basis adjustment to stock of S corporations making charitable contributions of property