Tax Debt Help – Made a mistake? Form 1040X can save the day!
This is another great article from “Don’t Mess With Taxes” blogsite and certainly worth restating for the coming tax filing year………………….
Uh-oh! You were slipping that W-2 copy into the drawer when it caught your eye.
How could you have missed that when you did your final filing review and dropped your return in the mail? What can you do about it now?
As it turns out, plenty.
The complexity of the tax code, coupled with the frantic lives most of us lead, means that there is ample opportunity for tax-filing mistakes. Sometimes the mistakes could cost you, like forgetting to include income earned on an investment account. Other times it might lower your tax bill, such as when you run across a forgotten receipt for a generous charitable contribution you made.
Either way, the Internal Revenue Service provides second chances to get your tax return right with Form 1040X.
This X-file is normal
There’s nothing supernatural about this X-file.
For a tax form, the 1040X is pretty easy to complete. Basically, the IRS wants to know what you originally reported, what your corrected numbers are and why you are making the changes.
There’s also a section for adding or subtracting personal exemptions in case there was some confusion as to whether you properly counted someone as a dependent.
And, in most cases, you can change your filing status, which could get you a bigger refund. For example, a new divorcee filed this year as a single taxpayer. But that cost her some tax money because she’s got custody of the kids. She should have filed as a head of household, which would have provided her with a larger standard deduction.
These are the kind of things you most definitely should correct with a 1040X, say tax experts.
When the IRS benefits
Taxpayers also should be diligent about correcting their returns even if it means they end up paying a bit more in taxes.
Why? Because it’s a pretty safe bet that the IRS is going to discover your error eventually.
If it’s a simple addition or subtraction mistake, there’s no need to amend the return. The IRS says its computers will detect the error, notify you and adjust your return automatically.
But if it’s something bigger — you overlooked a Form 1099 for $1,500 you got from a freelance house painting job — and you catch and correct it first, it could save you from paying even more to the IRS.
The IRS may not penalize you for this honest mistake, but it sure will collect some interest on the proper amount you didn’t pay on time in the first place. The sooner you correct the error, the less interest you’ll face.
“We had one preparer who filed a client’s return,” explains Brenda Schafer, senior tax research coordinator for H&R Block, “and then the employer informed the person that he would be getting a corrected W-2, so it had to be re-filed.
“You just want to be sure you have a correct return,” she says, “whether it’s in your favor or not.”
Year-round amended filing season
Such corrections are a year-round occurrence, but tax professionals say the need to amend a return often is discovered during the following year’s filing season.
“Sometimes when you’re having next year’s return prepared,” notes Schafer, “the professional says, ‘Oh, you didn’t tell me about that last time.’”
Then there’s the case where a little more knowledge can mean more tax filing work.
“We’ve had people take income tax courses to help them do their own returns and pick up items where they could or should amend a return,” Schafer says.
Amending time limits
But don’t go searching through old files for ancient tax returns in the hopes of possibly eking out a few more refund dollars.
The IRS generally gives taxpayers three years after the original return’s filing date to make any changes with a Form 1040X. If you filed early, you get three years from the return’s due date to correct any errors.
Your window to amend closes a bit if you didn’t pay all the tax you owed when you filed. In this case, you must revise your return within two years of the day that you finally paid your full bill to Uncle Sam. If, however, the two-years-since-payment date arrives after the standard three-year time limit, the IRS says you can amend your return using the deadline that comes later. Similarly, if you paid your taxes late, but not that late, and the three-year grace period provides you more revision time, you can use it.
And don’t automatically reject filing an amended return out of fear of inviting an IRS audit. Sure, the IRS will take a close look at an amended return that’s netting you a refund. And that means tax agents could conceivably look at your original tax paperwork in the process.
So why, ask hesitant amended filers, should they invite the extra attention, especially if they file just within the three-year amendment limit — the same time period after which the original 1040 would be off the tax examination radar?
“An amended return might just draw attention to a return,” acknowledges Schafer. “But, really, people shouldn’t be concerned. The main thing with tax filing is to get it right.”
And that means getting it right any time.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – National Taxpayer Advocate Delivers Report to Congress
IRS News Release #IR-2008-004
National Taxpayer Advocate Delivers Report to Congress
WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, focusing particular attention on the consequences of changes to the tax code enacted late in the year and the need for a coordinated IRS approach to combat the cash economy portion of the tax gap. Olson also urged Congress to enact a Taxpayer Bill of Rights and to authorize symbolic “apology payments” in egregious cases where taxpayers suffer significant harm as a result of IRS errors. The report contains a second volume that describes the results of six research studies, including one that shows that low income taxpayers fare much better in IRS Earned Income Tax Credit audits when they are represented by practitioners.
Impact of Late-Year Tax Code Changes on Taxpayers
The report designated the frequency and magnitude of late-year changes to the tax code as the most serious problem facing taxpayers. In each of the last two years, Congress has acted in December to provide tax benefits with retroactive effect for the full year. In 2006, Congress extended several popular tax deductions. In 2007, Congress provided an Alternative Minimum Tax “patch” to protect approximately 20 million additional taxpayers from the AMT. The report notes that late action causes a variety of problems:
• More than a million taxpayers may not have claimed tax deductions to which they were entitled for 2006 simply because they did not know about them. The IRS publishes Form 1040 and its accompanying instructions in early November, and tax software companies finalize their shrink-wrapped software products around the same time. In 2006, Congress reauthorized deductions for state and local sales taxes, educator expenses, and post-secondary tuition and fees in December, and taxpayers made an estimated 1.4 million fewer claims for these benefits in 2006 than in 2005. The only discernable difference between the two years was that the benefits for 2006 were not included in the Form 1040 package or shrink-wrapped software. “When taxpayers do not claim tax benefits because they do not know about them,” Olson said, “Congress’s intent in providing the tax benefits is undermined and taxpayers understandably question the fairness of the tax system.”
• Low income taxpayers may experience financial hardship because their refunds are delayed. Most taxpayers who file returns are entitled to receive refunds, and the average refund for taxpayers who claim the earned income tax credit is more than $3,000 – about 20 percent of their yearly income. The filing season normally starts round January 15, but the IRS had to delay the start of the filing season last year by three weeks for millions of taxpayers to enable it to reprogram its computer systems to reflect the changes in law. As a consequence, the affected taxpayers had to wait an additional three weeks to receive their refunds. “For some taxpayers,” Olson wrote, “a delay of two to four weeks in receiving their refund could mean eviction, inability to pay the high heating bills that arise during winter, or defaulting on credit card bills from the holiday season.” The IRS recently stated that more than 13 million taxpayers may have to wait to file their returns until February 11 this year to allow the IRS to fully implement the changes Congress enacted last month.
• The IRS must divert its thinly stretched resources to implement the changes. Among other things, IRS computer systems must be reprogrammed to reflect changes, forms must be rewritten, new training materials must be developed for telephone assisters who answer tens of millions of taxpayer calls, and new instructions must be provided for volunteers who staff Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. This additional work requires the IRS to pull personnel off other priority projects to effectively perform these tasks twice – once under the law as it existed for most of the year and a second time to incorporate late changes.
The report recommends that the Treasury Department and the tax-writing committees create a process through which IRS identifies and estimates the filing-season impact of significant tax legislation – particularly provisions extending existing benefits – are transmitted to the tax-writing committees at several points during the year, perhaps on June 30, September 30, and monthly thereafter.
Comprehensive Strategy Needed to Target “Cash Economy” Portion of Tax Gap
The report proposes a comprehensive strategy to address tax noncompliance in the cash economy, which accounts for the largest portion of the tax gap. The report stresses the need to identify new approaches to reduce the tax gap without imposing undue compliance burdens or undermining taxpayer rights. The report concludes that IRS’s current efforts are not adequately coordinated. “It is particularly disturbing that, for the third year running, the IRS declines to create a Cash Economy Program Office to coordinate its various initiatives,” Olson wrote. “Ad hoc measures will not get the job done.” The report identifies the lack of progress in addressing cash economy noncompliance as a most serious problem, makes recommendations for legislative change, and includes a research report that proposes a comprehensive set of administrative and legislative steps to address it.
Taxpayer Bill of Rights and Authorization of “Apology Payments”
The report urges Congress to enact a comprehensive Taxpayer Bill of Rights and to authorize “apology payments” in cases where the IRS excessively burdens or harms taxpayers. The U.S. tax system is based on a social contract between the government and its taxpayers, Olson wrote. Taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so. Over the past two decades, Congress has enacted three significant taxpayer rights’ bills, but the number of bills and the lack of publicity have muddled the message, Olson said. “I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers,” Olson said.
The report notes that other tax systems, including the United Kingdom’s and Australia’s, authorize the tax administrator to make symbolic payments to taxpayers in cases where the tax administrator has made errors that imposed significant hardship or inconvenience. Such payments are de minimis – not designed to compensate the taxpayer for costs incurred but simply to acknowledge error in a tangible way. Olson recommended that Congress authorize up to $1 million a year for the National Taxpayer Advocate to make such payments, which would range from $100 to $1,000.
Need for Better Taxpayer Guidance about Taxation of Canceled Debts
The report finds that many taxpayers may be paying taxes they don’t owe because IRS instructions do not adequately explain exceptions to “cancellation of indebtedness” income. If a taxpayer borrows money and the debt is canceled, the taxpayer generally must include the amount of debt cancellation in gross income. This rule received significant attention in 2007 as homeowners who could not make their mortgage payments lost their homes to foreclosure and stood to receive tax bills for any amount of debt that exceeded the value of their property. While Congress passed legislation granting temporary relief relating to mortgages, taxpayers received about two million Forms 1099-C reporting canceled debts last year, many relating to defaults on automobiles and credit card bills.
There are several exceptions to the general rule that these amounts are taxable, including an exception that applies to the extent a taxpayer is insolvent (meaning the taxpayer’s liabilities exceed the taxpayer’s assets). In many if not most cases, the insolvency exception will shield canceled debts from gross income because affected taxpayers, almost by definition, are taxpayers who lack sufficient assets to cover their liabilities. However, IRS instructions do not explain the exceptions clearly. For example, the instructions to Form 1040 list canceled debts under the heading of “Examples of income to report” and make no mention of exceptions. As a consequence, many taxpayers who receive Forms 1099-C reporting canceled debts may include the amounts in income because they lack knowledge of the exceptions. “This is a significant shortcoming that must be addressed,” Olson said. The report recommends that the IRS improve its instructions and develop a publication devoted to canceled-debt issues.
User Fees
In a section titled, “User Fees: Taxpayer Service for Sale,” the report notes that the IRS collects about $180 million in user fee receipts annually, mostly from the fee charged to taxpayers who enter into installment agreements to pay their tax liabilities over time. The Advocate’s report expresses concern that the IRS does not have an adequate policy to determine what are core tax administration services for which no fees should be charged, to calculate the appropriate amount of a fee, and to provide a waiver of fees for low income taxpayers who cannot afford to pay them. If the IRS does not develop a clearer policy for setting and waiving fees, Olson said, “taxpayers’ access to service may be reduced and their rights harmed as the IRS establishes new fees and raises others to make up for budgetary shortfalls.” The report makes several recommendations to assist the IRS in establishing and setting fees in the future.
Status Update: Private Debt Collection Program
The report updates prior National Taxpayer Advocate reports on the private debt collection program. The report states that the program is falling far short of revenue projections. In May 2007, the IRS estimated that the program would raise gross revenue of between $1.5 billion and $2.2 billion over the next 10 years – with the midpoint of the range averaging $185 million per year. The IRS now acknowledges that the program will not hit these targets. Gross revenue totaled $31 million in FY 2007, is projected to be slightly less in FY 2008, and is not now projected to rise sharply in future years. To date, the costs of the program have exceeded the revenue the program has generated, and the IRS cannot project when the program will break even. Olson expressed particular concern about the lack of transparency in the program. IRS collection procedures are publicly available and subject to review by taxpayers and Members of Congress. By contrast, the private collection agencies have designated comparable in formation – including calling scripts and training materials – as proprietary, and the IRS to date has declined to insist on a contractual term to make them publicly available. As a consequence, the Advocate is prohibited from describing them in her reports to Congress, and the materials are not subject to public scrutiny. Olson reiterated her prior call for repeal of the program.
Research Studies
The National Taxpayer Advocate has repeatedly called on the IRS to expand its research program, and this year, her office has published six research reports in Volume 2 of the report that it conducted or commissioned. The Comprehensive Strategy for Addressing the Cash Economy proposes the establishment of a cash economy program office and includes a variety of recommendations, such as making compliance easier for taxpayers, improving income visibility, and improving the productivity of audits; a Study of the Role of Preparers in Taxpayer Compliance by Professor Leslie Book summarizes research already conducted on this issue and presents a roadmap of planned future study; the study on the expected effect of the Tax Increase and Prevention Reconciliation Act (TIPRA) on the IRS’s offer in compromise program shows that most taxpayers do not have the resources to submit the newly required 20 percent deposit; the Earned Income Credit (EITC) Audit Challenges study details survey findings on taxpayer-reported barriers in the EITC audit process and concludes that represented taxpayers retain almost twice as much EITC benefits as their unrepresented counterparts; the Simulation of EIC Filing Behavior for the 2004 Hartford Case Study tests a contractor-developed agent-based model, predictive of taxpayer behavior, on a real life tax situation to determine the model’s reliability and usefulness; and the Normative and Cognitive Aspects of Tax Compliance Literature Review, produced by Professor Marjorie Kornhauser, outlines numerous findings regarding the effect of personal values and social norms on taxpayer compliance.
Overall, the report discusses 29 problems facing taxpayers, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and discusses the 10 tax issues most frequently litigated in the federal courts during the preceding fiscal year.
Tax Debt Help – Got A Problem? Start With the Taxpayer Advocate Service
The Taxpayer Advocate Service is an independent organization within the IRS that assists taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Taxpayers may be eligible for assistance if:
• They are experiencing economic harm or significant cost (including fees for professional representation);
• They have experienced a delay of more than 30 days to resolve a tax issue; or
• They have not received a response or resolution to their problem by the date promised by the IRS.
The service is free, confidential, tailored to meet taxpayers’ needs, and available for businesses as well as individuals. There is at least one local taxpayer advocate in each state, the District of Columbia and Puerto Rico.
Taxpayers can contact the Taxpayer Advocate Service by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TTD 1-800-829-4059 to determine whether they are eligible for assistance. They can also call or write to their local taxpayer advocate, whose phone number and address are listed in the local telephone directory and in Publication 1546, The Taxpayer Advocate Service of the IRS – How to Get Help With Unresolved Tax Problems, which is available on the IRS website at IRS.gov.
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – “The Top 5 of the Dirty Dozen List of Mistakes”
After receiving the November, 2007 issue of the FEDERAL TAX ALERT from the National Society of Tax Professionals and reading this article, I felt that I really needed to pass this information along. And trust me, it is the most valuable information that you can receive for the 2008 tax season or for any tax year.
Checkout “Ten Ways To Annoy An IRS Agent” first.
http://www.youtube.com/watch?v=5NkG2Ho39iU
“The IRS announces each year what they are going to be looking for in their annual “Dirty Dozen” report. They also make the audit statistics available in order to see that they are auditing taxpayer’s returns.
The following are the top five red flags for audits. They include:
Location. Where you live makes a difference in determining whether you are more at risk from an audit. You are more likely to get an audit if you live in one of these places:
Los Angeles, North Central District (ND, SD, MN), Southern California, Northern California, Manhattan, Central California, Brooklyn, Southwest (AZ, NV, NM), South Florida and Houston.
How Much You Make. This statistic is fascinating. It would seem to make sense that the IRS is more likely to audit people who make more money. But, the fact is that they are actually more likely to audit people who make LESS money. In fact, the most likely return to be audited is a return that includes a business that makes less than $25,000 per year. If you do not have a business, you have the most chance for an audit if you file a Form 1040A and make less than $25,000 per year. Business Entities. If you have a business, you are much more likely to be audited if you operate in a Sole proprietorship, Schedule C. In fact, you are ten times more likely to be audited as a Sole Proprietorship than if you are an S Corporation or C Corporation. Why? That is because most Sole Proprietorships do not have great recordkeeping systems and the IRS knows that.Under-reporting Income. the IRS receives copies of your K-1s form Limited Partnerships and S Corporation, 1099s from interest, dividends and sales, and W-2s. If you do not report these items on your return, or you report a different amount, your return will get pulled for inquiry.Who Files Your Return Matters. If you have a complex return and prepared it yourself or if your return was prepared by someone on the IRS’s problem preparer list, you are more likely to be audited.”The most important advice that you need to remember is “once you have been audited, then you cannot go back and amend a return for changes”. Once the audit has taken place you will have to live with the IRS’s decision and finding. And once that happens, most folks find themselves having to solicit the help of Tax Resolution services such as Effectur, Inc to help with audit representation and negotation of payments. “What is the difference between a taxidermist and a tax auditor?” The taxidermist takes only your skin!”…………
S. Raines, Sr. Financial Advisor/Tax Preparer
Tax Debt Help – “A Generation of Plastic Babies!”
Having read some of Kevin Rosen’s articles, columnist for the Kansas City Star. He writes high quality columns about kids and money on a regular basis. However, one of his recent articles has drawn a lot of heat. In the article, Kevin made the following statement:
“Wouldn’t it be nice if our children grew into adulthood in a world without credit cards? Look at all the problems that would be solved in a cash-and-carry society — no gut-wrenching debt overloads, no junk mail from credit card issuers, and perhaps most important, fewer opportunities for cyber thieves to steal our identities.”
It’s an interesting idea – could your children live without credit cards? Do you wish society didn’t have credit cards? I’m positive that banks and credit card companies would fight you tooth and nail.
I was raised by “children of the depression”. I was taught that if we didn’t have the money, don’t even think about asking for it! You certainly won’t get in financial trouble. I have tried to live up to this, but I never thought I would see our society in such overwhelming indebtedness due credit cards. The truly sad part is that Americans carry the mindset that if they don’t have those little plastic cards, then they have no clout. Do you leave home without your American Express Card?
If you have a child who has graduated from high school then you can remember all those gifts that came in the mail from credit card companies. My daughter received two dozen or more. We agreed that one card with a limit of $300 would suffice for extreme emergencies. But the number of graduates to fell into the plastic trap is astounding and unfortunately some of them are still paying the price, along with those never ending student loan payments.
A group of Maryland bankers are visiting high schools in an effort to teach students to be credit smart. Check out the video.
http://youtube.com/watch?v=8xcFGxd9pUU
After reading various reports by student loan providers who surveyed graduate-school students about credit-card usage, I believe that we now have a “generation of plastic babies”. Among other things, the report found that 93 percent of these highly educated students try to pay at least the minimum monthly requirement, but only 20 percent acknowledged paying off their credit card bills in full each month.
But you know the old saying, children learn by example. Take a look at the example these children have learned from in the past courtesy of Credit Counseling Biz:
|
|
It is estimated that, on average, 20% of Americans have “maxed out” their credit cards. |
| About 25% of adults in the United States have a history of credit problems. |
|
| Americans’ average credit card debt is $8400 per household. |
|
| Roughly 24% of personal expenditures in the United States are made using bank credit cards, retail cards, and debit cards. |
|
| In the first quarter of 2002, total credit debt was $660 billion. Total credit card debt was approximately $60 billion. |
|
| Approximately 185 million American consumers have at least one credit card. |
|
| Of those 185 million consumers with credit cards, 1.3 million credit card holders declared bankruptcy in 2002. |
|
| Americans pay, on average, an 18.9% interest rate on credit cards. |
|
| The average household pays $83.33 in credit card interest per month. |
|
| On average, the typical credit card purchase is 112% higher than if using cash. |
|
| More than 40% of American families spend more than they earn. (Federal Reserve). |
|
| As of 1995, 92% of American family disposable income is spent on paying debts, up from 65% in 1975. (Federal Reserve) |
|
| An $8,000 debt, at a rate of 18% interest, will take over 25 years to pay off and cost more than $24,000 in the long run. |
These are absolutely astounding and maddening figures, and signals a need for credit education in classrooms, but most of all, on the home front.
First and foremost, don’t even think about giving them a card until they can handle cash responsibly and have a firm understanding of the benefits and dangers of using credit cards. It also doesn’t hurt to help them set up something like an automatic withdrawal from their checking account to pay off the balance each month.
We all love the convenience and purchasing power that credit cards offer. But without the proper education, credit cards can turn into your worst nightmare and you’ll find yourself needing professional “tax help”. Let me give you my “throw it back at them” “tax debt help”.
When you find yourself unable to make that minimum payment, don’t be surprised when you get a call from the credit card company wanting to settle for pennies on the dollar. Sure, their offer sounds great at the time, “if you’ll settle with us for this amount” (normally 1/3 to ½ of the balance), “then we’ll write off the remaining balance”. What they don’t tell you is that you’ll be getting a 1099-C Cancellation of Debt at the end of the year to report to the IRS. The IRS considers the write-off amount to be reportable income, and of course, you’ll be taxed on that amount.
Be prepared for the call, when they make you that offer, before you agree, ask them if they are going to 1099-C you for the balance. If they say yes, tell them that you will agree to the payoff if they will “forgive” the remaining balance and of course get it in writing!
In the past year, I have worked with a staggering number of clients who have unfiled tax returns due in part to these high balance write-offs. Not only do they have to pay the tax on the write-offs, but, failure to file penalties compounded with interest can result in garnishments and an eventual IRS Levy. The final result could be, having to contract a Tax Resolution firm such as Effectur, Inc. to help alleviate the financial burden of the plastic. There are great non-profit credit counseling agencies such as In Charge Debt Solutions who can help you with budgeting and repairing credit problems.
As parents, it is our job to educate, protect and prepare our children for the future. They may kick, scream and yell, but let’s steer them in the right direction and make them the “plastic-less generation”.
Sharon Raines, Sr. Financial Planner/Tax Preparer
My StumbleUpon Page
