Barnard, Vogler & Co. - Washington Tax Update

The American Institute of Certified Public Accountants annually calculates Tax Freedom Day, the day average Americans have earned enough money to pay their taxes and begin working for themselves. In 2008, Tax Freedom Day fell on April 23.

The AICPA also offered five easy tax-savings strategies. Click here to read more.

IRS offers education for small business owners

The IRS has launched a year-long campaign to help educate new self-employed small-business owners about federal tax responsibilities. The campaign kick-off coincided with the Small Business Administration's annual Small Business Week, April 21-25, which recognizes outstanding small-business owners for their contributions to the nation's economy and their personal achievements.

The campaign will provide new small business owners with improved and updated educational materials through a variety of channels, including small business workshops available on the IRS Web site.

In the introductory phase of the campaign, the IRS is offering some basic tips to avoid potential problems. Click here to read more.

If you are starting your own small business, consider signing up for the IRS' free e-News for Small Businesses. Go to www.irs.gov and provide your e-mail address.

Court sends actor to prison for not paying tax

Actor Wesley Snipes, who eluded Tommy Lee Jones' Chief Deputy Marshall Sam Gerard in the 1998 movie U.S. Marshals, did not fare so well in the courtroom of U.S. District Court Judge Terrell Hodges. Last month, Judge Hodges sentenced Snipes to three years in prison for failing to file income tax returns from 1999 to 2001.

In February, Snipes was acquitted on two felony counts of tax fraud and conspiracy but was found guilty on three misdemeanor charges of failure to file tax returns. Judge Hodges imposed the maximum sentence of one year for each misdemeanor court, to be served consecutively.

Snipes' tax troubles stemmed from his involvement with American Rights Litigators and a successor group, Guiding Light of God Ministries. Both groups claim to help members legally avoid paying taxes.

Click here to read more.

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April 23, 2008

Tax Planning Idea of the Week

You've filed your tax returns. You've made your IRA contributions for 2007. Now you can forget about taxes for a year. That's not a good idea.

You might want to begin funding your retirement accounts for 2008. If you wait until the last minute to fund your retirement accounts, you lose out on months of opportunity for tax-deferred - or tax-free in the case of a Roth IRA - earnings.

Roth IRAs stand out among the other retirement account options in that withdrawals from Roth IRAs after age 59½ are generally not taxed. Besides tax-free growth, the Roth IRA has flexible withdrawal rules. You can take out your contributions (but not gains) for any reason without paying taxes or penalties. After age 59½, provided you have had the account open for at least five years, you can withdraw your gains without tax or penalty.

For 2008, joint filers with modified adjusted gross income (MAGI) below $169,000 can contribute to a Roth IRA. Single individuals have a MAGI limit of $116,000. Contributions are limited for joint filers with MAGI over $159,000 and single filers with MAGI over $101,000.

The contribution limits for Roth IRAs are the same as for traditional IRAs -- $5,000 per person with an increase to $6,000 for those age 50 and over.

IRS advises on avoidance of penalties

The IRS has released a fact sheet containing advice on how to avoid penalties by paying your taxes on time and by filing your returns in an accurate and timely manner. This fact sheet is the 22nd in a series designed to help taxpayers better understand proper compliance with the federal income tax laws. The fact sheet provides general guidance, including the amounts or calculation of amounts, on the following penalties and additions to tax:

Underpayment of taxes through withholding or quarterly tax payments

Filing returns or paying taxes after the due date

Accuracy-related penalties

The civil fraud penalty

The frivolous tax return penalty

The penalty for bounced checks

Click here to read more or read the entire fact sheet.

Court holds volunteer board member liable

If you serve in a volunteer capacity for a charity or other organization that has employees, read on. Your responsibilities may be greater than you contemplate.

A federal district court in Texas has ruled Steven Verret, the chairperson of the board of a tax-exempt hospital, was a "responsible person" with liability for the payment of the hospital's employment taxes. As a result, the court required Verret to personally pay more than $400,000 of taxes, interest and penalties.

The court rejected Verret's claim that he was exempt from the liability because he was an honorary board member. The court was influenced by Verret's active participation in the hospital's daily management, including his ability to affect financial, business and operational decisions such as hiring physicians.

Click here to read more about Verret v. United States, U.S. District Court, Eastern District Texas; Feb. 14, 2008.

What the IRS defines as a "responsible person"

The report on the Verret case in "What's new from the courts" above prompts us to review the rules relating to "responsible persons." Congress has given the IRS authority to collect unpaid withholding taxes, including interest and penalties, from the personal assets of those individuals responsible for the withholding and deposit obligations.

These taxes are called trust fund taxes because the responsible persons actually hold the employees' money in trust until they make a federal tax deposit in that amount. The trust fund recovery penalty, or TFRP, may apply to those responsible if these unpaid trust fund taxes cannot be immediately collected from the employer.

The TFRP may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes and willfully fails to collect or pay them.

A responsible person is a person who has the duty to perform and the power to direct the accounting for and the collecting and paying of trust fund taxes.

For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. No evil intent or bad motive is required. Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

The amount of the penalty is equal to the unpaid balance of the trust fund tax.

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April 9, 2008

IRS clarifies general welfare exclusion for seniors

The IRS recently announced that payments from state agencies to help senior citizens continue living in their homes rather than moving to nursing homes are not taxable income. Rather, the payments qualify for the general welfare exclusion.

Many seniors want to remain in their homes as long as possible. Under the facts described in the ruling, the state program subsidized low-income senior citizens so they could live in their own homes or with relatives as an alternative to nursing home or other institutional care.

Click here to read more. Click here to read the IRS letter ruling.

Tax Court rules on cancellation

of debt income

The Tax Court recently delivered some bad news to a married couple who had worked with their bank to settle their credit card debt by paying less than the full amount they owed. The court ruled that the couple had received taxable income from the discharge of indebtedness.

Click here to read more. Click here to read the case.

What to do if you're filing for an extension

It's that time of the year when procrastinators and those who are just having trouble gathering up their tax information start thinking about filing for an extension. If you can't, or just don't want to, file your return by April 15, you have a right to request a 6-month extension by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must file the Form 4868 by April 15. Then you have until Oct. 15 to complete your return.

Remember, however, that an extension of time to file your return does not extend the date on which your taxes are due. If you owe money with your return, the IRS will charge interest beginning April 16 until you pay the tax. The IRS may also charge a penalty of one-half of one percent per month for late payment.

If you are filing for an extension and think you will owe money, consider making a payment by April 15 to reduce or eliminate interest and penalties.

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March 26, 2008

Tax Planning Idea of the Week
Occasionally you meet someone who claims to have not filed income tax returns in the past. "There is no problem," they say, "because my withholding was more than the taxes I owe." These people fail to realize that the IRS is keeping their money. And they have only three years to ask the IRS for their money back.

The IRS has unclaimed refunds totaling approximately $1.2 billion awaiting about 1.3 million people who failed to file a 2004 income tax return. To collect those funds, returns must be filed with an IRS office no later than April 15, 2008. If no return is filed by the deadline, the funds become the property of the U.S. Treasury.

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.

IRS issues list of 2008 "Dirty Dozen" tax scams

The IRS has issued its 2008 list of the "Dirty Dozen," the 12 most egregious tax schemes and scams it has identified during the past year.

Tax schemes can lead to problems for both scam artists and taxpayers. Tax return preparers and promoters also risk significant penalties, interest and possible criminal prosecution.

The IRS urges everyone to avoid these common schemes. Click here to read the 2008 "Dirty Dozen."

IRS says nontaxable combat pay qualifies for rebate

The IRS has issued a news release reminding taxpayers that nontaxable combat pay is qualifying income for purposes of the rebates payable under the Economic Stimulus Act of 2008.

Military personnel who would normally not file a return because their income is nontaxable combat pay should file a simple Form 1040A, U.S. Individual Income Tax Return, with the IRS by Oct. 15 to receive the economic stimulus payment in 2008. They should report their nontaxable combat pay on Line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay with the designation "Code Q" in box 12 of Forms W-2, Wage and Tax Statement, received by military personnel.

Read more in Information Release 2008-048.

Tax Court rules on penalty for IRA withdrawal

Most people are aware that the tax law generally imposes a 10 percent penalty, in addition to any other taxes, on the amount of money withdrawn from an IRA before age 59½. There are some limited exceptions to imposition of the penalty, such as distributions to pay deductible medical expenses, qualified education expenses and first-time homebuyer expenses.

But one taxpayer tried to justify not paying the penalty because he needed the money from his IRA. The Tax Court disagreed. Click here to read more.

Read the case of Jay Andrew Reindl v. Commissioner, T.C. Summary Opinion 2008-30, March 13, 2008.

When can you expect your rebate check?

Are you wondering when you are going to receive your rebate check? Assuming you file your 2007 return by April 15, 2008, the IRS has announced the following schedule for distributing rebate checks:

Direct Deposit Payments

Last two digits of your Social Security number

Rebate deposited in your account by:

00 - 20

May 2

21 - 75

May 9

76 - 99

May 16

Paper Check

Last two digits of your Social Security number

Rebate check in the mail by:

00 - 09

May 16

10 - 18

May 23

19 - 25

May 30

26 - 38

June 6

39 - 51

June 13

52 - 63

June 20

64 - 75

June 27

76 - 87

July 4

88 - 99

July 11

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March 12, 2008

Tax Planning Idea of the Week

Are you searching for some excess cash to deposit into your IRA? Consider your tax refund. As an alternative to directing the IRS to deposit your refund check into your bank account, you can designate an IRA to receive the refund. You must tell your IRA trustee which year, 2007 or 2008, the deposit relates to. If you're trying to make a contribution for 2007, you will have to act fast. The refund must reach your IRA before April 15, 2008, to be counted as a 2007 contribution. You can even split your refund between an IRA and a bank account.

IRS issues fact sheet on like-kind exchanges

The IRS has released a fact sheet that should be of assistance to anyone contemplating a gain-deferral transaction under the like-kind exchange rules of Internal Revenue Code Section 1031. The fact sheet describes:

Who is eligible to make a 1031 exchange
What types of property qualifies for a 1031 exchange
What time limits must be satisfied
What restrictions apply to "deferred" and "reverse" exchanges
How to calculate basis in the new property
Who 1031 exchanges are reported on your tax return
How to structure a 1031 exchange

The IRS has released a fact sheet that should be of assistance to anyone contemplating a gain-deferral transaction under the like-kind exchange rules of Internal Revenue Code Section 1031. The fact sheet describes:

The fact sheet also warns about the improper use of like-kind exchange rules. It also lists claims made by promoters of these scams that should cause you concern.

Read Fact Sheet 2008-28 in its entirety.

Tax Court rules on advice from tax adviser

Couples going through a divorce have many things on their minds other than tax planning. A recent Tax Court case emphasizes the importance of consulting with a tax adviser before signing the settlement papers - even if the advice you receive is wrong!

Joyce and Thomas Perkins divorced in 1998. As part of the arrangement, Thomas agreed to pay Joyce 20 percent of his earned income until she reached age 59½. The agreement also provided that, if Thomas were to become disabled and receive benefits under his professional disability insurance policy, Joyce was to receive 20 percent of those benefits. Thomas became disabled and paid Joyce 20 percent of his disability benefits.

Relying on the advice of two attorneys, Joyce did not report her share of the disability benefits as income. Rather, she treated the payments as a property settlement. The IRS argued that the payments were taxable alimony payments and also assessed Joyce a penalty for substantial understatement of income.

Click here to read more.

Home sale exclusion available every two years

Most people are aware of the $500,000 exclusion of gain on the sale of a principal residence on a joint tax return. Fewer people are aware that the exclusion is available every two years. Of course, with the current state of the housing market, gains are not an issue on many homeowners' minds.

Perhaps you've been thinking that the housing market may present buying opportunities. If you're pondering a little bargain hunting in the residential real estate market, consider the home sale exclusion. If you buy a house, fix it up, live in it for two years and sell it, your gain may be entirely tax free. And you can replay that scenario every two years.

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February 27, 2008

Tax Planning Idea of the Week
If you itemize your deductions, don't forget to consider all of your qualified medical expenses. You are eligible for a medical expense deduction if the total of the qualified expenses not covered by insurance exceeds 7.5 percent of your adjusted gross income.

Qualified medical expenses include those you pay for yourself, your spouse and your dependents. If you can't claim the dependency exemption for a person, you may still be able to deduct medical expenses you pay on their behalf. For example, you may support an elderly parent but are unable to claim a dependency exemption because their gross income is too high. But if you pay their medical bills, the total becomes part of your deductible amount.

IRS to begin issuing tax rebates in May

The IRS has announced that it will begin issuing the economic stimulus payments in May. Since it will take several weeks to process the anticipated 130 million rebate checks, you may not receive yours until summer. The IRS is expected to announce a distribution schedule in the near future.

To receive a rebate check, most taxpayers just need to file a 2007 tax return. No other action or extra form is required. In most cases, the payment will equal the amount of your tax liability, with a maximum of $600 for individuals or $1,200 if you file a joint return. Click here to read more.

For more information, go to the IRS Web site here.

IRS issues new rules

on like-kind exchanges

Many people own condominiums or other vacation property that they sometimes use for personal purposes and sometimes rent to others. When these properties are sold, you may incur an income tax liability on the gain, even though you plan to use the proceeds to purchase a new vacation home.

The tax law provides a tax-saving opportunity, called a "1031 exchange" that allows you to defer your tax obligation. A 1031 exchange, also called a "like-kind exchange," allows you to trade your vacation home for another property and avoid current taxation.

For many years, the IRS and the courts have said that the like-kind exchange rules do not apply to an exchange of personal residences. However, the rules apply to an exchange of rental properties. The problem with a vacation home has been that it is both a personal residence and a rental property.

Now the IRS has issued a new revenue procedure which may make more rental/vacation properties eligible for the like-kind exchange rules.

To read more, click here. To read the revenue procedure in full, click here.

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February 13, 2008

Tax Planning Idea of the Week
Having your adult child move back into the nest is not part of most parents' master plans. And it usually doesn't bode well if the child is unemployed. But perhaps that cloud contains a tax-advantaged silver lining.

Beginning in 2008 and continuing through 2010, taxpayers age 24 and older with low incomes will qualify for a zero capital gains tax. The exemption applies to unmarried individuals with total taxable income below $31,850 in 2008.

If you have an adult child with taxable income expected to be below the qualifying limit, consider gifting highly appreciated investment assets to her or him. Your child can then sell the asset at no tax cost. The zero percent capital gains tax rate does not apply to collectibles.

Economic stimulus bill to be signed today

In response to President Bush's proposal to offer tax rebate checks to spur economic activity, the House of Representatives and the Senate have agreed on a stimulus package that includes rebate checks to individuals and enhanced depreciation write-offs for businesses.

The compromise bill generally calls for rebates of up to $600 for individuals and $1,200 for married couples, plus $300 per dependent child. To receive your full rebate, your adjusted gross income must be less than $75,000, or $150,000 on a joint return.

The bill passed by Congress will be signed by the president today. And the IRS must gear up to issue the rebate checks, which will probably not happen until it finishes processing the April 15 tax filings.

IRS issues regulations on musicians' products

Are you a classically trained musician or a dropout from a garage band? Do you dream of writing jingles for television commercials?

Composers of all musical genres will be interested in new regulations the IRS has released recently. These temporary and proposed regulations describe a tax election to treat the disposition of musical compositions or copyrights therein as a sale or exchange of a capital asset. Click here to read more.

Read the full text of the regulations.

Tax Court rules on gambling losses

A compulsive gambler recently turned to the Tax Court when the IRS denied his loss deductions from playing slot machines. Generally, gambling loss deductions are limited to your gambling income. In this case, the gambler had won millions in the California lottery, so he had plenty of income to cover his losses.

Perhaps the more interesting aspect of the case was testimony offered by expert witness Mark Nicely. Nicely is a casino gaming industry and math expert, with an expertise in slot machines. Click here to read more.

Read the decision in the case of Gagliardi v. Commissioner.

IRS warns of new identity theft scams

The IRS has issued another warning about e-mail and telephone scams that use the IRS name as a lure. You should be particularly aware of scams involving the new rebate checks. The goal of all these scams is to trick you into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

Click here to read some of the recent fraudulent activities the IRS has reported.

Read more in the IRS Information Release 2008-011 to determine what steps you should take if you think you have been contacted by someone falsely representing themselves as being from the IRS.

If you are newly wed, a new parent or recently divorced, make sure you've recorded the necessary changes with the Social Security Administration before you try to file your income tax return.

A blushing bride who tries to file a joint return with her new husband's last name will cause the IRS computers to reject the return if the bride's social security number does not match her new last name. The same thing can happen after a divorce if the woman reassumes her previous name. You will also need a SSN for a newborn child, or an adoption taxpayer identification number (ATIN) for a recently adopted child, to claim the child as a dependent.

If changes are required or new numbers must be obtained, contact your local Social Security office right away.

IRS to crack down on Section 529 abuse

If you have children or grandchildren, it's never too early to start planning for the cost of their college education. Qualified tuition programs (QTPs), also known as Section 529 plans (after the section of the tax law that authorizes them), have grown in popularity. In 2006, Congress acted to make these programs a permanent part of the tax law, assuring their continued popularity.

Basically, a QTP allows you to put aside money to pay future higher education costs for yourself, your descendents, other family members or others. Click here to read more.

Read the IRS notice of proposed rulemaking.

Claim losses on taxes? Time is of the essence

With all of the worries about identity theft, credit card fraud and Internet-based scams, you may wonder if you'd be entitled to any income tax relief if you experienced an uninsured embezzlement or theft loss. Such losses, if incurred in a business setting, are deductible as a business expense. And purely personal theft or embezzlement losses are generally deductible if you itemize your deductions. Two thresholds apply. The first $100 of each loss each year is not deductible. The balance is deductible to the extent the total exceeds 10 percent of your adjusted gross income.

There are two challenging aspects to claiming a theft or embezzlement loss deduction: timing and measurement. Click here to read more.

Read the case of Johnson v. US.

Checks coming in the spring?

President Bush has called for an economic stimulus package that includes rebate checks for individuals and faster depreciation write-offs for businesses. But don't go spending your rebate check -- it's not in the mail yet. Details of the new program must be ironed out, and a majority in Congress has to agree to any new tax law.

While many congressional Republicans can be expected to support the president's proposal, Democratic ideas circulating in Congress are generally aimed at strengthening the social safety net, including extending unemployment insurance benefits and expanding the earned income tax credit (EITC).

Read more in the Fact Sheet released by the White House.

January 16, 2008

Substantiating charitable contributions to United Way campaigns

The Pension Protection Act of 2006 added a new requirement, effective for 2007 tax returns, affecting your ability to claim a charitable contribution deduction for cash, check or other monetary gifts. To substantiate the deduction, you are now required to maintain a bank record or a written communication from the donee organization showing the name of the organization and the date and amount of the contribution.

In Notice 2008-16, the IRS has issued guidance on the documentation required to substantiate lump-sum charitable contributions made through a Combined Federal Campaign (CFC) or similar program, such as a United Way campaign.

The IRS had previously provided guidance, in Notice 2006-110, on how charitable contributions made by payroll deduction may meet the new requirements. The substantiation requirements are satisfied for contributions made through payroll deduction if you retain the following:

· A pay stub, Form W-2 or other employer-furnished document that indicates the amount withheld for payment to the donee organization; and

· A pledge card or other document prepared by or at the direction of the donee organization that shows the name of the donee organization.

If you don't choose the payroll deduction option and instead write a check to the CFC or United Way campaign, you can substantiate your contribution by retaining one of the following:

· A bank record of your contribution, such as your canceled check; or

· A written acknowledgement from the charitable organization that includes the name of the organization and the date and amount of your contribution.

To substantiate a contribution of $250 or more, the pledge card or other document prepared by the donee organization also must include a statement to the effect that the organization does not provide goods or services in whole or partial consideration of any contributions made to the organization.

CLIENT TIP: While the CFC or United Way campaign is required to provide you with the appropriate documentation, remember that it's your return that is reporting the charitable contribution deduction. So you are ultimately responsible for producing the documentation to support the deduction.

Read more in Notice 2008-16 and Notice 2006-110.

New deduction for mortgage insurance premiums

The Tax Relief and Health Care Act of 2006 added a provision to the tax law that allows an itemized deduction, as qualified residence interest, for qualified mortgage insurance premiums paid in 2007 for qualified mortgage insurance contracts issued in 2007. If the premium covers a period extending beyond the end of 2007, the deduction for 2007 is limited to the portion of the premium allocable to 2007.

Mortgage insurance premiums that qualify for the deduction include premiums paid on private mortgage insurance, Federal Housing Association (FHA) mortgage insurance, Veterans Administration (VA) mortgage insurance and Rural Housing Administration (RHA) mortgage insurance. In addition, the insurance must apply to a mortgage that qualifies as acquisition indebtedness.

The deduction is limited if your adjusted gross income (AGI) exceeds $100,000 ($50,000 in the case of a married couple filing separate returns), and it is not available if your AGI exceeds $110,000 ($55,000 in the case of married couples filing separate returns).

In Notice 2008-15, the IRS has issued guidance on how to allocate prepaid qualified mortgage insurance premiums. As a matter of administrative convenience, the IRS has determined that the allocation should be made ratably over the shorter of:

· The stated term of the mortgage; or

· 84 months, beginning with the month in which the insurance was obtained.

CLIENT TIP: You should receive Form 1098 from the entity receiving your mortgage insurance premium with an amount reported in Box 4. However, under the guidance issued by the IRS, the entity preparing the Form 1098 has the choice of reporting either the total premium you paid in 2007 or the amount determined under the 84-month allocation method. You may need to contact the issuer of the Form 1098 to determine how the amount reflected in Box 4 was determined.

CLIENT TIP: The IRS guidance applies to 2007 only. The law passed in 2006, which allowed the deduction only for 2007, has been extended through 2010. Additional guidance will be forthcoming for future years.

Direct Deposit Payments
Last two digits of your Social Security number	Rebate deposited in your account by:
00 - 20	May 2
21 - 75	May 9
76 - 99	May 16
Paper Check
Last two digits of your Social Security number	Rebate check in the mail by:
00 - 09	May 16
10 - 18	May 23
19 - 25	May 30
26 - 38	June 6
39 - 51	June 13
52 - 63	June 20
64 - 75	June 27
76 - 87	July 4
88 - 99	July 11