Author Archives: horizonplanning

IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start

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IR-2012-53, May 21, 2012

WASHINGTON — The Internal Revenue Service today announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.

“This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” said IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

Today’s announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.
In certain circumstances, the changes announced today include:

  • §  Revising the calculation for the taxpayer’s future income.
  • §  Allowing taxpayers to repay their student loans.
  • §  Allowing taxpayers to pay state and local delinquent taxes.
  • §  Expanding the Allowable Living Expense allowance category and amount.

In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B,  Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative.

In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, earlier this year, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

Automated IRS System Helps College-Bound Students with Financial Aid Application Process

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College-bound students and their parents typically want to make every dollar and every minute of the college experience count including money spent on tuition and time spent on the college financial aid application process. The Internal Revenue Service is helping minimize the time spent on the completion of the Free Application for Federal Student Aid (FAFSA) form by automating access to federal tax returns with the IRS Data Retrieval Tool. This tool provides the opportunity for applicants to automatically transfer the required tax data onto the FAFSA form.

Here are some tips on using the IRS Data Retrieval Tool:

  • Benefits The IRS Data Retrieval tool is an easy and secure way to access and transfer tax return information directly onto the FAFSA form, saving time and improving accuracy. Also, the increased accuracy reduces the likelihood of being selected for verification by the school’s financial aid office.
  • Eligibility Criteria Taxpayers who wish to use the tool to complete their 2012 FAFSA form must:
    • have filed a 2011 tax return;
    • possess a valid Social Security Number;
    • have a Federal Student Aid PIN (individuals who don’t have a PIN, will be given the option to apply for one through the FAFSA application process);
    • have not changed marital status since Dec. 31, 2011.
  • Exceptions If any of the following conditions apply to the student or parents, the IRS Data Retrieval Tool can not be used for the 2012 FAFSA application:
    • an amended tax return was filed for 2011;
    • no federal tax return for 2011 has been filed ;
    • the federal tax filing status on the 2011 return is married filing separately; a Puerto Rican or other foreign tax return has been filed.
  • Alternatives If the IRS Data Retrieval Tool can not be used and if the college requests verification documentation, it may be necessary to obtain an official transcript from the IRS. To order tax return or tax account transcripts, visit www.irs.gov and select  Order a Transcript  or call the Transcript toll-free line at 1-800-908-9946.

In addition to helping reduce the time and effort involved in completing and submitting the FAFSA form through the IRS Data Retrieval Tool, the IRS offers money-saving information to college students and their parents.  Important information regarding tax credits and deductions for qualifying tuition, materials and fees is available at the IRS Tax Benefits for Education: Information Center and in IRS Publication 970, Tax Benefits for Education both of which are available at www.IRS.gov.
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Things I Hate About Tax Day

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Why writing the big check to Uncle Sam is the least of it.

By Brett Arends | SmartMoney – Thu, Apr 12, 2012 12:53 PM EDT

 
 

Have you got your schedule C in order? Have you hunted down all your receipts? Have you made sure to count the depreciation on your laptop and the percentage of your cable bill attributable to your home office expense? And what about those education credits?

After all, it’s not like you have anything else to do, right? It’s lucky it’s all so easy and painless. Ha!

Everybody hates Tax Day, which comes this year on April 17. And so do I. But not for the usual reasons.

This is the time of year when everyone seems to scream about just how much the federal government is costing us all. Weirdly enough, that’s not one of the things that really gets me. It’s the things that apparently no one else — at least no one else in the media — seems to notice.

Am I crazy? Am I alone? Maybe. You tell me.

Here are my top Tax Day hates.

1. Paperwork

Why isn’t there a riot about this? According to the National Taxpayers Union, we each waste about 12 hours a year, every year, filling out this crazy stuff. Schedule B. Schedule C. Above the line. Below the line. Deductions, exemptions, non-refundable credits. Medical bills over 7.5% of adjusted gross income.

It’s like we’re being mugged and held hostage. Every year.

The instruction booklet for the 1040 now runs to 189 pages. No kidding. Seventy-five years ago, says the NTU, it was two pages.

The U.S. tax code is insane and out of control. It’s tripled in a decade. It now runs to 3.8 million words. To put that in context, William Shakespeare only needed 900,000 words to say everything he had to say. Hamlet. Othello. The history plays. The sonnets. The whole shebang. But the IRS needs four times as many words? Really?

2. Dishonesty

Your tax bill this year is a lie. You’re only seeing about two-thirds of the full cost of government services. Really. Taxes are $2.3 trillion. Government spending is $3.6 trillion. The rest is being put on the national credit card.

The tax bill is a lie every year. We’ve only paid our bills in full on April 15 five times in the last fifty years. The last president to balance the books every year he was in office? Calvin Coolidge — back in the 1920s. How pathetic is that?

Deficits are just future taxes. According to the non-partisan Tax Foundation, “Tax Freedom Day” falls on April 17 this year — but “Deficit Day,” which includes the full bill, won’t come for another month.

Taxes — to steal from Albert Einstein — should be as low as possible, but no lower. Stop lying to me.

3. How they treat investment income

Aunt Sally in Dubuque lives off her savings. Her taxes should be relatively simple. But good luck with that.

She has money invested in blue-chip companies like AT&T and Wal-Mart. Her stock dividends are taxed at 15% or less. Meanwhile her bond coupons are taxed at ordinary income rates up to 35%. It’s crazy.

Yes, I know the corporations get a break on their bond payments. But what’s up with that?

Now try this: Aunt Sally can pay lower taxes on the money she makes from bonds — but only if she sells them after a year for a long-term capital gain. If she hangs on and keeps clipping the coupons, she gets whacked with higher taxes.

The tax treatment of investment income is arbitrary and stupid. We treat debt and equity differently for companies and investors. It’s irrational. The rules encourage debt. And we treat long-term capital gains better than short-term ones. That’s absurd. We only buy securities because we think they are undervalued. Why is it better if they rise in price slowly instead of quickly?

It doesn’t end there. Why should you pay income tax on zero-coupon bonds last year just because they rose in value — even if you didn’t sell them or pocket any income? If that’s the rule, why shouldn’t you pay income tax on your Apple stock? Instead you don’t even have to pay capital gains tax, until you sell.

Make the rules simple, rational and clear.

4. The mortgage interest deduction

Uncle Sam should stop bribing me to borrow money I don’t have to buy a home that I cannot currently afford.

The mortgage interest tax deduction is wildly popular, but it’s a terrible idea. The logic is upside down. It rewards debt and real estate speculation. It rewards high earners who buy really pricey homes at the expense of everyone else.

Forget the idea of a “middle-class tax break.” If you’re a typical family, you’re lucky to save a few thousand dollars. But if you’re a bond trader buying a Park Avenue penthouse it could save you $20,000.

Until the recent housing collapse — caused, of course, by too much debt — this tax break helped drive up real estate prices. That priced many ordinary people out of the housing market. They had to borrow even more to get in. Cue the debt crisis. (Or they were forced to rent for longer — and their rents, perversely, weren’t deductible.)

According to various analyses, home owners “save” about $130 billion a year from this break. But that’s nonsense. Tax breaks like this drive up overall tax rates for everybody. To bring them back down, you have to borrow money and buy an expensive home so you can take the deduction.

Get rid of this stupid break and just raise the standard deduction for everyone.

5. Stupid retirement rules

Uncle Sam wants me to save for my retirement. But only under certain conditions. Sure, he says, I can put aside $17,000 in pretax income. But only if I save through my employer’s 401(k) plan. If I’m a regular salaried worker, I can’t go down to Fidelity or Schwab and open my own such plan.

Why not?

For that matter, why am I allowed to invest $5,000 in a Roth IRA, but only if my income is below a certain threshold? Why are married couples filing taxes separately basically not allowed to invest in a Roth IRA at all? And why do the “catch-up” provisions, which allow people to save even more in their IRAs, only kick in once they turn 50? Isn’t that too late? Shouldn’t we be encouraging people to save more when they are younger?

Uncle Sam has some good instincts, but he is like your worst boss or your most annoying aunt. He just can’t stop meddling. He just can’t leave people alone.

Most 401(k) plans are mediocre, because employers run them. They have to protect themselves from costs and liabilities. So they limit the choices, and shunt you into one-size-fits-all investment plans. Yet amazingly they often include one of the riskiest investments you can make — their own stock.

It makes no sense. If Uncle Sam wants me to save $17,000 off the top of my income, he should just let me do so, and get out of my way. And the “catch-up” provisions should affect everyone.

Click here to see the full list of Things I Hate about Tax Day.

Can’t make today’s deadline? File an extension.

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Are you unable to complete and file your federal individual tax return by the April 17th deadline? If so, you can request an extension of time to file, which will automatically give you until Oct. 15, 2012, to submit your tax return to the Internal Revenue Service.

An extension gives you an additional six months to file your tax return. But keep in mind that an extension of time to file is not an extension of time to pay. All outstanding balances are due on April 17, 2012.

Numerous Ways to Get an Extension

In order to get an extension, you need to file Form 4868 with the IRS.

Taxpayers can electronically file Form 4868 through IRS Free File or Free File Fillable Forms. Using Free File to prepare and electronically submit Form 4868 is free to everyone, regardless of income.

Paid preparers can also electronically file Form 4868 as can tax software that you run on your computer.

Finally, a paper version of Form 4868 is available for download from IRS.gov. However, the IRS will only provide an acknowledgement of your extension request if you e-file or Free File the request.

When you request an extension, you need to estimate your tax liability and pay any balance due bu the April 17th deadline. If you are unable to pay the total balance due, you should pay as much as possible and apply for an installment agreement.