Lisa Stiffler's Blog

originally posted Tuesday, June 8, 2010

OPPORTUNITY FOR 2010 TAX PLANNING WITH ROTH IRA

You as a taxpayer have a
unique opportunity this year to do long-term retirement planning under very
favorable conditions. For 2010 only, it is possible to roll over funds from a
traditional IRA into a Roth IRA without penalty and to postpone taxation of the
rollover until 2011 and 2012. Also, for the first time, there is no income
limitation for IRA to Roth rollovers. Prior to 2010, only those persons with
adjusted gross income of $100,000 or less could convert to a Roth.

Roth
IRAs are different from traditional IRAs because they are more liquid—you can
pull money more easily out of a Roth before retirement age without penalty,
after you have had the Roth for more than 5 years. Also, earnings on a Roth may
never be taxed at all if you do not withdraw the earnings portion until after
age 59 ½. With Roths, you have no minimum distribution rules, so you do not have
to withdraw funds at age 70 ½ if you do not want to.

Another major
difference is that Roth IRAs are funded with after-tax money. You get no
deduction for contributions to a Roth. So when you convert a traditional IRA,
which has never been taxed, into a Roth IRA, you must pay the income tax on the
portion of the account that was funded with pre-tax dollars.

Special
2010 Income Splitting Rule

The traditional IRA rules impose a 10 percent
penalty on any unqualified withdrawal before age 59 ½. The special 2010 rule
allows you to move funds from your traditional IRA into a Roth IRA without
paying the 10% penalty. Even better, you do not have to pay the regular income
tax on the rollover in 2010. You can elect to pay ½ in 2011 and ½ in 2012,
spreading the income tax hit over two years. You also can make the rollover and
then change your mind and undo the rollover anytime up to the 2010 filing date,
including extensions of time to file. Therefore, you could wait until as late as
October 15, 2011 to make the final decision.

Strategies

You must
consider where you will get the money to pay the extra tax if you decide to
rollover your IRA into a Roth. Also, you should elect the two-year income split
if a one-year rollover would push you into a higher tax bracket. If you already
are in a high bracket, you may want to take the entire rollover amount into
income in 2010 since it is possible that tax rates may increase for higher
income individuals in 2011 when the Bush tax cuts expire. If you expect to be in
a lower tax bracket in 2010 because of a job loss or other reduction in income,
you may want to take all of the rollover into income in 2010. Again, you must
have a source of funds to pay the income taxes. Finally, if you have other
losses, such as net operating losses from a business, it may be time to make the
switch to a Roth. These losses can help offset the increased income from a Roth
conversion.

Act Fast

Time is running out to make these decisions.
Please contact me and I will evaluate your situation to help you decide if
making the special 2010 Roth IRA conversion is beneficial for you. Below is a
list of what can and cannot be rolled over into a Roth IRA.

What Can and
Cannot Be Rolled Over Into a Roth IRA

It is important to know what assets
can and cannot be rolled over into a Roth IRA. Here’s a run down:

The
following items CAN be rolled over into a Roth IRA:

● Funds held in
another Roth IRA.

● Funds held in a traditional IRA.

● A
Simplified Employee Plan (SEP) or Simple IRA (two years after
establishment).

● A rollover distribution from an employer retirement
plan.

● An eligible rollover distribution from a plan where the taxpayer
is a beneficiary.

The following items CANNOT be rolled over into a Roth
IRA:

● Required minimum distributions (RMDs) from any plan, including
inherited IRAs.

● Hardship distributions.

● Yearly annuity
distributions paid over a taxpayer’s life expectancy or over 10 years or
more.

● Deemed distributions resulting from a default on an employer plan
loan.

● Dividends on employer securities.

● Corrective
distributions of excess contributions made to a plan.

Special Rule for
Inherited IRAs

If a taxpayer inherits an IRA from his or her spouse, the
taxpayer can elect to treat it as the taxpayer’s own plan and can roll it over
into a Roth IRA. If a taxpayer inherits an IRA from anyone besides a spouse, it
may not be rolled over into an inherited Roth IRA.

EXTENSION OF
POPULAR TAX BREAKS CLOSE TO PASSAGE

The House and Senate are close to
resolving their differences on the so-called “Extenders” bills passed by each
side over the last few months. The extenders bill contains a one-year extension
of popular tax breaks such as the tuition deduction, the research credit, and
the new markets credit. Reacting to the Gulf oil leak, Congress has just added
to the bill an increase in the excise tax on oil to fund clean-up efforts. The
House passed H.R. 4213 in December 2009, while the Senate passed its amended
version of the measure in March 2010. Both Houses are working on a combined
version, trying to resolve the conflicts in how to pay for the tax breaks
contained in the bills. The new bill with the same number, H.R. 4213, has now
taken on the title of the “American Jobs and Closing Tax Loopholes Act of
2010.”

Under Congressional rules, the tax breaks in the bill have to be
paid for with revenue increases (the “pay-go” rule.) The House wants to raise
tax revenues by targeting the foreign operations of U.S. corporations. The House
bill also contains a provision to increase taxes on hedge fund and other
investment fund managers on appreciation of investments (so-called “carried
interests”). Under the bill, these interests would be taxed at higher ordinary
income rates rather than the lower capital gains rate of 15%. The Senate
previously opposed this provision but negotiations are headed toward a
compromise. A group of Senators wants to exempt venture capitalists from the
carried interest provision.

S Corporation Shareholders Payroll Tax
Increase

Senate negotiators added a provision imposing additional payroll
taxes on S Corporation income. The provision would apply payroll taxes to all
the service-related income of shareholders of S corporations primarily engaged
in service businesses. The provision is targeted at service professionals, such
as lawyers and doctors, who route their self-employment income through S
Corporations. It would apply to S Corporations whose service business is based
on the reputation and skill of 3 or fewer individuals or an S Corporation that
is a partner in a professional business.

The S Corporation Association
of America has opposed the idea as harmful to small businesses, the backbone of
the U.S. economy. In fact, the S Corporation is the most common business form
for small businesses. If the bill passes, it will take away what is known as the
S Corporation payroll advantage, which allows S Corporation owner-employees to
draw a set salary subject to social security and Medicare tax, while taking the
remaining profits out of the business subject only to income taxes. The bill
also states that service professionals cannot use an LLC or LLP to avoid payroll
taxes.

Yearly Extensions Now the Norm

Congress, on a regular
basis, extends these tax breaks one year at a time so each year there is a
scramble to pass an extension bill. This year, the provisions already expired as
of the end of 2009, so now Congress is faced with extending them retroactively
to the beginning of 2010. Even if the extension bill is passed within the next
month, as is expected, Congress will be faced with the same problem next year.
This bill only extends most of the provisions until the end of 2010, when they
will expire again. The entire exercise will then have to be repeated next
year.

Expiring Tax Provisions to Be Extended

● Tax deduction of
$250 per year for teachers who buy their own classroom supplies.

● The
deduction for college education expenses. This provision also would disallow the
deduction for higher income families who would receive a higher tax benefit from
taking one of the education credits.

● The additional standard deduction
for State and local property taxes.

● The deduction for state sales tax
for taxpayers in states that do not have an income tax;

● The research
and development tax credit for businesses;

● The new markets tax credit
for businesses;

● 5-year writeoff for most farm equipment;

●
Faster depreciation deductions for new construction, and improvements to
restaurants and retail stores;

● A tax cut for small businesses that
continue to pay employees who have been called to active duty;

● Tax
incentives for use of biodiesel fuel, hybrids, and other renewable energy;

● Tax credit for energy-efficient new homes and energy-efficient
windows.

● Increased charitable deductions for contributions of food
inventory, book inventories, computer equipment, and conservation
property;

● Tax-free distributions from IRAs used for charitable
purposes;

● Tax incentives for business investment in low-income
areas.

● Bonus depreciation and small business expensing for new property
purchased by businesses in Federally-declared disaster areas;

● Allowing
businesses to carryback to previous tax years losses that are attributable to a
Federally-declared disaster;

Revenue Raisers

● Increased payroll
taxes on service professionals who route their self-employment income through an
S corporation.

● Excise tax increase on oil companies from 8 cents to 34
cents per barrel to increase the funding for the Oil Spill Liability Trust
Fund.

● Close foreign “loopholes” including limits on the foreign tax
credit given for taxes paid by U.S. companies to other countries.

●
Taxing “carried interests” of investment fund managers as ordinary income
instead of capital gains.

● Increased taxes on corporate reorganizations,
including capital gains taxation of some types of spin-offs of corporate
subsidiaries and taxation of dividends received in certain types of business
reorganizations.

CELL PHONE TAX RELIEF MOVES THROUGH
CONGRESS

Just before the April 15th filing deadline, the House of
Representatives passed a bill that would remove the tax on the personal use of
employer-provided cell phones. The measure, H.R. 4994, the Taxpayer Assistance
Act of 2010, had overwhelming bipartisan support, passing by a vote of 399-9.
The bill would relax the burdensome recordkeeping requirements for businesses
that provide cell phones to their employees. Under current law, personal use of
business phones is taxed to employees. Also, employers can only deduct the
phones if they can prove the exact amount of business use with extensive
records. The bill would remove the recordkeeping requirements, making it easier
to get the deduction for business cell phone use.
Offers in Compromise,
Partial Payment Suspension
The bill also contains a number of other taxpayer
relief proposals, including an elimination of the partial payments that are
required when you submit an offer to compromise your tax liability. Under
current law, taxpayers must send in a partial payment with an their request for
an offer in compromise (OIC). The partial payment can be as much as 20% of the
total tax liability. Since the partial payment has been required, the number of
compromise agreements with the IRS has fallen. Eliminating the up-front payment
will make it easier for struggling taxpayers to enter into payment plans with
the IRS.
Interest on Tax Refunds
The bill also would require the IRS to
pay interest on refunds on income tax returns which are filed electronically if
the refund is not paid promptly. The IRS has to send the refund within the later
of 30 days of the return due date or the date the return is filed. Another new
rule would require the IRS to notify taxpayers when it suspects that their
identities, or their dependents’ identities, have been stolen.
Outlook
The
cell phone change has been proposed before, but has not made it through the
Senate. In the past, the cell phone fix has been combined with other tax
provisions which the Senate objected to. Since this current bill is considered
noncontroversial, and is backed by the Obama Administration, this time it may
pass. With the widespread use of cell phones by businesses, the passage of this
tax relief would be a significant help to small businesses in difficult times.

EMPLOYERS GET 2010 PAYROLL TAX HOLIDAY FOR NEW EMPLOYEES

Despite
Congress’s stalemate on many legislative agenda items, both sides of the aisle
put aside their differences and quickly passed a jobs bill in mid-March. H.R.
2847, the Hiring Incentives to Restore Employment Act (the “HIRE Act”) was
signed into law by the President on March 18, 2010. The bill gives employers a
payroll tax holiday during 2010 for hiring unemployed workers.

Specifically, the HIRE Act relieves employers from having to pay the
employer’s share of social security taxes on wages paid to new employees between
March 19, 2010 and December 31, 2010. The social security tax rate for employers
is 6.2% on wages up to $106,800 for 2010. (The new law does not cover the 1.45%
Medicare tax.) A special rule allows a portion of payroll taxes already paid by
employers in the first quarter of 2010 to be applied as a credit against the
employers’ second quarter tax.

Qualified Hires

Employers can only
claim the credit for qualified workers. The Act defines “qualified workers” as
individuals who meet the following criteria:

● They begin work after
February 3, 2010 and before January 1, 2011.

● The new law requires
employers to get a statement from each eligible new worker certifying this
information: they were unemployed during the 60 days before beginning work or
had worked fewer than 40 hours for anyone during the 60 days before being hired.
(Note: The IRS has a new form to use for the employee affidavit, which I will
provide to you if you want to claim this exemption. You do not have to file this
form with your taxes, but you need to keep it on file with other payroll and
income tax records.)

● They are not employed to replace another employee
unless the previous employee left the job or got fired for cause.

● They
are not related to the employer.

Strict Eligibility Requirements: The
Congressional Committee that wrote the bill emphasized in its report that the
payroll credit will not be allowed if an employer fires an employee to take the
credit on someone else they hire. What this means for you as an employer is that
the IRS will be keeping close tabs on your hiring and firing practices if you
decide to take advantage of the credit.

Employer Must Elect Payroll
Credit or Work Opportunity Credit

Under the Act, an employer may not
receive the Work Opportunity credit and the payroll credit at the same time.
(The Work Opportunity credit allows a credit for employers who hire members of
certain targeted groups.) As an employer, you will have to elect which one to
take, but you can make this election for each new employee.

Self-Employed, Household Employers Do Not Qualify

The payroll tax
holiday is not available for self-employed workers who must pay self-employment
taxes, which represent both the employer and employee portion of social security
and Medicare taxes. It also is not available for hiring household employees,
such as maids or babysitters.

Railroad Retirement Tax

The 2010
HIRE Act includes a railroad retirement tax holiday for employers which is
similar to the Social Security tax holiday.

Credit for Retained
Workers

The new Act also gives employers an additional credit for
employees who stay on the job for a year. The “retention credit” increases an
employer’s general business credit by $1000 for each worker the employer keeps
on the payroll for at least 52 weeks. A “retained worker” also must receive
wages during the last 26 weeks that are least 80 percent of the wages the
employer paid the worker during the first 26 weeks. While the general business
credit usually can be carried back and carried forward, the employee retention
credit may not be carried back to earlier tax years.

Higher Deduction
for Business Property

The 2010 HIRE Act increases for one year the amount
a taxpayer may deduct for investments in business property. Under the bill,
taxpayers may take an immediate deduction instead of depreciation for up to
$250,000 of the cost of business property. For taxable years beginning in 2010,
these limits were going to be reduced to $125,000, however, the HIRE Act
continues the higher limits.

HEALTH CARE TAX PROVISIONS

The 2010
Health Care Act passed by Congress in March is an amazingly complicated piece of
legislation. It contains many tax provisions, both in the form of incentives and
disincentives for individuals, businesses and insurance companies designed to
increase health insurance coverage for U.S. workers. Most parts of the bill are
phased in over time or do not take effect at all for several years.

Health Coverage Mandate

It is important to understand the
overreaching feature of the law: individuals are required to obtain health
insurance coverage for themselves and their dependents after 2013. The law
exempts the following persons from this requirement:

● individuals who
cannot afford coverage (according to a poverty calculation),
● taxpayers
with income below the income tax return filing threshold,
● members of Indian
tribes,
● individuals who have short coverage gaps, and
● hardship
cases.

It also mandates that businesses with more than 50 workers will
have to offer health coverage or pay a $2,000-per-worker penalty if any of their
employees have to seek government-subsidized coverage on their own.

To
offset the effects of these requirements, the bill offers tax credits for
individuals and for businesses to acquire private health insurance. As your tax
professional, I have been studying the legislation to determine which provisions
will have the most immediate and far-reaching effect on you and my other
clients. As part of my initial assessment, here is a description of some of the
key elements of the new Act and how such elements may affect you or your
business.

I. Tax Credit for Small Businesses Who Offer Health
Insurance Coverage

A new tax credit is available to small businesses
that offer health insurance coverage to their employees. The credit is available
to employers that pay at least half the cost of single coverage. The maximum
credit is 35 percent of premiums paid in 2010 or 25 percent of premiums paid by
employers that are tax-exempt organizations. In 2014, the credit increases to 50
percent of premiums paid by small businesses and 35 percent of premiums paid by
tax-exempt organizations. If your business qualifies for the credit, you can
claim it starting with your 2010 income tax return which will be filed in 2011.

The credit is targeted to small businesses and tax-exempt organizations
that primarily employ low and moderate income workers. To qualify, a business
must have 25 or fewer full-time employees whose wages average $50,000 or less
per employee per year. The employer also must provide at least one-half of the
employee’s health insurance coverage amount.

Note: Because the
eligibility rules are based in part on the number of full time equivalent
employees rather than the actual number of employees, businesses that use
part-time help may qualify even if they employ more than 25 workers. The maximum
credit goes to smaller employers — those with 10 or fewer full time equivalents
– paying annual average wages of $25,000 or less. The amount of the credit is
reduced for employers with more than 10 full-time equivalents and average wages
of more than $25,000 and is completely phased out for employers that have more
than 25 full-time equivalents or pay average wages of more than $50,000 per
year.

Example: For the 2010 tax year, an employer has the equivalent of 9
full-time employees with average annual wages of $23,000 per worker. The
employer pays $72,000 in health care premiums for those employees (which must
not exceed the average premium for the small group market in the employer’s
state). This employer’s credit for 2010 would equal $25,200 or 35% x $72,000 in
premiums.

Ineligible Employees

Self-employed persons, including
partners and sole proprietors, 2% shareholders of an S corporation, and 5%
owners of the employer’s company are not treated as employees for purposes of
the credit. Unfortunately, sole proprietorships—unincorporated businesses owned
by one person or a married couple, cannot take the credit for the owner and the
owner’s family members who work in the business, although some commentators have
taken the position that a spouse-employee who otherwise qualifies would be
eligible for the credit. I believe the IRS will have to put out more guidance on
this issue, as it is unclear from the legislative language and the IRS news
releases.

Coordination with Health Insurance Deduction

Employers
now are eligible for a deduction for health insurance premiums paid for their
employees. Under the new law, the employer will be able to continue to deduct
health insurance expenses which exceed the expenses for which the credit was
claimed.

Criticism of its Complexity

A number of Republicans in
Congress and several small business groups, such as the National Federation of
Independent Business, have criticized the credit as being too complicated. The
full time equivalency rules and the average wage calculations are making it
difficult for businesses to determine whether they qualify. The credit also
drops off sharply once a company gets above 10 workers and $25,000 in average
annual wages, so slightly larger business actually may receive a very limited
credit. Finally, the credit is not refundable. It is limited to an employer’s
federal income tax liability. Therefore, if a small business is losing money due
to the economy, it might not be able to use the credit even if the business
otherwise qualifies. Congress may have to make some adjustments in the credit to
answer these concerns. In the meantime, the IRS has undertaken a media campaign
to acquaint small businesses with the existence of this credit, as explained
below.

Your Eligibility for the Credit

The IRS has mailed
postcards to more than four million small businesses and tax-exempt
organizations to make them aware of the new health care tax credit, so you may
hear from the tax collector on this issue. In addition, I am studying the IRS
and Congressional information on the credit, and I will be prepared to evaluate
your situation if you incur health insurance costs for your employees, and you
believe you are within the employee and wage limits.

II. Tax Credit
for Individuals to Buy Health Insurance

The 2010 Health Care Act
provides a new refundable tax credit to qualifying taxpayers who buy their own
health insurance through one of the new Health Care Exchanges to be put in place
after 2013. This new credit is called the “premium assistance credit.” The
credit will be refundable—you can get it even if you have no tax liability—and
will be payable in advance directly to the health insurance provider

The
problem with this credit is that most taxpayers cannot qualify for it unless
they have relatively low income. To qualify, a taxpayer must have household
income of at least 100% but not more than 400% of the federal poverty line and
must not be eligible for Medicaid, employer-sponsored insurance, or other
acceptable coverage. The current federal poverty line for a family of four is
$22,050 (slightly higher for Alaska and Hawaii).

Amount of the
Credit

The credit will be based on a sliding scale for individuals and
families with household incomes between 100% and 400% of the Federal Poverty
Line. The Secretary of Health and Human Services will determine the credit
amount based on the percentage of a taxpayer’s income needed to pay health
insurance premiums. As the availability of the credit gets closer, the
government will be releasing more information to assist taxpayers and their
representatives in calculating the available credit.

III. Health
Benefits Coverage for Adult Children

If you have adult children who need
to participate in a group health insurance plan, you now may be able to cover
them under your employer’s plan. Health insurance coverage for an employee’s
children under 27 years of age is tax-free to the employee, effective March 30,
2010. The Health Care Act requires group health plans and health insurance
issuers that now provide dependent coverage of children to continue to make
coverage available for an adult child up until age 26.

If you
participate in an employer cafeteria plan, your employer can allow you to
immediately make pre-tax salary contributions to provide coverage for children
under age 27. (Cafeteria plans allow employees to choose from a menu of tax-free
fringe benefit options.) Note: There is no requirement for a health insurer to
provide coverage for anyone, including dependents, but if the employer offers a
plan for dependent children, the coverage must continue until the child turns
26.

Employees who have children who will not have reached age 27 by the
end of the year are eligible for a tax exclusion of the amount the employer pays
for the adult child’s coverage. This exclusion is available from March 30, 2010
forward, if the child is already covered under the plan or is added to the plan
at any time during 2010. Eligible children include a son, daughter, stepchild,
adopted child or foster child. Also, self-employed persons may take a deduction
for the health insurance costs of their adult children up to age 27.

IV.
Excise Tax on High-Value Health Plans
This provision is not a tax on
individuals, but is a tax on health insurers who provide high-cost health plans
(called “Cadillac plans” in the media). There is so much press on this issue,
that I have included a basic description. The tax will be 40% of the cost of a
health plan which exceeds $27,500 for a family and $10,200 for an individual. It
takes effect in 2018.

V. Increased Businesses Reporting Provisions

To help pay for the Health Care Act, a non-health-related tax reporting
provision was included in the final legislation requiring businesses to report
payments of $600 or more to other businesses for property or services. With the
ink barely dry on the new Act, a House Republican joined by the National
Federation of Independent Business (NFIB) is calling for repeal of
business-to-business reporting provision. The provision, which is scheduled to
take effect in 2012, is estimated to raise $17.1 billion.

Given the large
revenue number associated with this provision, it is unlikely that the opponents
of the reporting requirement will have much success in the short term in getting
it repealed. However, this change could have a very broad-reaching effect on
small businesses across the country. Under the provision, any business that pays
another business more than $600 a year in gross proceeds for goods or services
must file a 1099 Form with the IRS for the payment. Reacting to recent
criticism, the IRS Commissioner, Douglas Schulman, has assured businesses that
they will not have to report credit or debit card payments because these
transactions already will be reported to the IRS under new rules for credit card
processors. Still, businesses will have to report all other payments over $600
made to another business.

Outlook

As more companies become aware
of the business-to-business reporting provision, the opposition may grow and
force Congress to retreat by raising the threshold or otherwise exempting
smaller companies. The paperwork burden for small businesses IRS will relax this
rule for smaller companies before it takes effect in 2012.

VI.
Increased Medicare Tax on Individuals and Investment Income

Another
revenue raiser in the Health Care Act is an increased Medicare tax on higher
income individuals of .09% and a Medicare tax of 3.8% on the net investment
income of higher-income taxpayers. The Act increases the employee portion of the
Medicare Hospital Insurance Tax by an additional .09% on wages received over the
threshold amount of $250,000 for a joint return or surviving spouse, $125,000
for a married individual filing a separate return, and $200,000 for all other
taxpayers. This additional tax also applies to the Medicare portion of
self-employment taxes.

The Medicare tax on investment income is a
significant change from current law. Under current law, the Medicare tax is only
imposed on wage or compensation income. For the first time under this bill, the
Medicare tax will be imposed on investment income—which is income from interest,
dividends, annuities, royalties, rents, and capital gains. The tax begins in
2013 and is imposed on net investment income if a taxpayer’s income exceeds the
threshold amount of $250,000 in adjusted gross income for a joint return or
surviving spouse, $125,000 for a married individual filing a separate return,
and $200,000 for all other taxpayers.

NEW PROCEDURES FOR TAXPAYERS’
CHANGE OF ADDRESS

The IRS recently has updated its rules on how taxpayers
must change their address in IRS records. The new procedures are effective June
1, 2010. The IRS uses the taxpayer’s address on the most recently filed tax
return for all notices, correspondence and refunds, which are required to go to
the taxpayer’s “last known address.” Note: The designation of a taxpayer’s “last
known address” is important because IRS correspondence to a taxpayer’s “last
known address” is legally effective even if the taxpayer never receives
it.

For this reason, it is important that the IRS have your most
up-to-date address on file. The IRS will automatically update your address if
you provide an official change of address to the U.S. Postal Service. Otherwise,
any change of address with the IRS must be in a very specific form. If your
address changes, please notify me promptly, especially if you expect any
communications from the IRS. I will promptly make the necessary changes in your
address of record with the IRS.

STORM VICTIMS IN MANY STATES QUALIFY
FOR IRS DISASTER RELIEF

The IRS can barely keep up with all of the areas
being designated federal disaster areas due to recent storms, floods, and other
natural disasters. Taxpayers in the following states have recently been given
tax relief by the IRS: Alabama, Connecticut, Kentucky, Massachusetts,
Mississippi, North Dakota, New Jersey, Oklahoma, Rhode Island, Tennessee, and
West Virginia. The relief comes in the form of relaxed filing and payment
deadlines for taxpayers who live in disaster areas or who operate a business in
a disaster zone. The IRS’s computer systems automatically identify taxpayers
located in the covered disaster area and apply automatic filing and payment
relief. If you live in or have a business in an area located outside of the
immediate disaster area, you may still be eligible for tax relief. I will be
glad to contact the IRS on your behalf to see if you qualify.

PAYROLL
AUDIT PROGRAM LAUNCHED BY IRS

The IRS has begun an extensive payroll
audit program targeting fringe benefits, worker classification and other payroll
tax issues. The audits are to begin in June 2010 and will cover 2008 payroll
returns. The IRS suspects that $15 billion in unpaid taxes is due to employment
and payroll related issues. Beginning in March, the IRS sent out notices to
2,000 companies notifying them of the audits. Next year, 2,000 more payroll
companies will be chosen for audits and another 2,000 in year three. The bulk of
these audits will be of small businesses and self-employed taxpayers. Those
taxpayers selected for audit will be audited for all four quarters of 2008.

The IRS expects to complete the audits within 6-8 months although some
may take longer. The IRS says the audits were selected at random, and it did not
target any particular industry. The primary focus of the audits will be on
determining if some 30 types of fringe benefits are being handled properly. The
second main focus will be on determining whether employers are properly
classifying their workers as employees vs. independent contractors. The IRS also
will be looking at the tip reporting of service employees such as restaurant
workers. Finally, the IRS will be scrutinizing the compensation of company
officers and managers.

Observation: The results of the payroll audits
will affect every business because the IRS will use the information it uncovers
in these audits to develop payroll audit strategies for all businesses.

TWO COURT CASES EXPOSE INCOME REPORTING MYTHS

Two recent
court cases show how taxpayers can get caught up in filing and income myths if
they ignore tax rules or they do not seek advice on their income tax liability.

Keep Adequate Records and Save Receipts for Ebay Auctions

In the
first case, Orellana v. Commissioner, an IRS Revenue Agent was trading on Ebay,
with approximately 1200 transactions over a two-year period. She did not include
any income or expenses from this activity on her Federal tax filing. The IRS
determined that she had unreported income in excess of $32,000. The taxpayer
argued that many of the items sold were her own personal property that she paid
considerably more for than the amount she received when the items were sold. She
explained that she liked designer clothes for which she would pay over $350 but
might get only $50 when sold. However, she never kept her original purchase
receipts. The Court ruled in the IRS’s favor, noting that the burden was on the
taxpayer to produce the receipts and prove that the original cost of the items
exceeded the amount of income from the sales. The Court had little sympathy for
the taxpayer’s arguments, given that she was an IRS Officer. The lesson in this
case is that the taxpayer did not keep adequate records; consequently, she lost
the case.

Held Check Included in Income

In the second case,
Morgan v. Commissioner, the taxpayer held a check he received for work performed
as a subcontractor for a consulting company. He received it in December 2006 but
did not cash it until 2007 and did not report the $16,989 on his 2006 income tax
return. The IRS issued a notice of deficiency. The taxpayer argued that he had
an agreement with the owner of the company that paid him that he would not cash
the check until 2007. However, the company reported the full amount to the IRS
on a Form 1099-MISC in 2006.

It has long been settled that when a
taxpayer is using a cash basis for accounting, a check received is considered
income upon receipt because it is considered the equivalent of cash. The
taxpayer did not present any evidence that there had been an agreement not to
cash the check other than his own testimony. Therefore, the holding of the check
did not shift the income into 2007. It should have been reported in 2006, which
the check was received. The Court found for the IRS.

SPECIAL RULES FOR
FARM INCOME AND DEDUCTIONS
If you are in the farming business, there are a
number of special tax provisions which apply to you. Here is a list of farm tax
issues which I can help you with.

1. Crop Insurance Proceeds. Crop
insurance proceeds are income and must be reported on a farmer’s return. Farmers
receive these payments as a result of crop damage.

2. Sales Caused by
Weather-Related Conditions. If a farmer sells more livestock and poultry than he
normally would in a year because of weather-related conditions, the farmer may
be able to elect to postpone reporting the gain until the next year.

3.
Farm Income Averaging. Farmers can average their current year’s farm income by
allocating it over the three prior years.

4. Deductible Farm Expenses.
The ordinary and necessary costs of operating a farm for profit are deductible
business expenses. The expenses must be of the types that are common and
accepted in the farming business.

5. Employees and Hired Help. Farmers
who employ farm workers can deduct their wages. This includes full-time
employees as well as part-time workers.

6. Items Purchased for Resale.
Farmers may be able to deduct the cost of livestock and other items purchased
for resale in the year of sale. This cost includes freight charges for
transporting the livestock to the farm.

7. Net Operating Losses. Farmers
may generate a net operating loss that is usable in other tax years if their
deductible expenses from operating a farm are more than their income for the
year. These net operating losses may be carried over to other years and
deducted. If the loss is carried back, the farmer may be entitled to a refund of
tax paid in past years.

8. Repayment of loans. Farmers can deduct the
interest on loans used for their farming business.

9. Fuel and Road Use.
Farmers are eligible for a special credit or refund of federal excise taxes on
fuel used on a farm for farming purposes. The IRS carefully scrutinizes the use
of the fuel credit because of problems with ineligible taxpayers trying to claim
it. Therefore, it is important that you keep records of your fuel use so you can
prove the fuel was used for the farming business.

FILING PENALTIES
REMINDER

If you do not file on time, do not pay on time, or pay too
little, you could face a confusing array of penalties. Here’s a list of the most
common penalties taxpayers may face for not complying with tax filing
requirements. You can avoid these penalties by working with me to file your
taxes in a timely and complete manner.

PENALTIES
1. If you do not pay
your tax by the due date of your tax return, you could face a failure-to-pay
penalty.

2. The failure-to-file penalty is generally more than the
failure-to-pay penalty. So if you cannot pay all the taxes you owe, it is better
to simply file your tax return and then explore other payment options.

3. The penalty for filing late is usually 5 percent of the unpaid taxes
for each month or part of a month that a return is late. This penalty will not
exceed 25 percent of your unpaid taxes.

4. If your return is filed more
than 60 days after the due date or the extended due date, the minimum penalty is
the smaller of $135 or 100 percent of the unpaid tax.

5. You will have
to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each
month or part of a month after the due date that the taxes are not paid. This
penalty can be as much as 25 percent of your unpaid taxes.

6. If you
filed an extension and you paid at least 90 percent of your actual tax liability
by the due date, you will not be faced with a failure-to-pay penalty if the
remaining balance is paid by the extended due date.

7. If both the
failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5
percent failure-to-file penalty is reduced by the failure-to-pay penalty.
However, if you file your return more than 60 days after the due date or the
extended due date, the minimum penalty is the smaller of $135 or 100% of the
unpaid tax.

8. You will not have to pay a failure-to-file or
failure-to-pay penalty if you can show that you failed to file or pay on time
because of reasonable cause and not because of willful neglect. Reasonable cause
includes such things as getting incorrect information from the IRS or having a
death or serious illness in your family. You also may qualify for payment
extensions due to financial hardship.

NEW MORTAGE DEBT FORGIVENESS
RULES
Under a special rule enacted by Congress in 2007, you may be able to
exclude income resulting from the forgiveness of a mortgage debt during tax
years 2007 through 2012. Normally, if your mortgage company forgives any amount
of your debt, the amount forgiven would result in taxable income to you.
However, up until 2012, taxpayers can exclude up to $2 million of debt forgiven
on their principal residence. The limit is $1 million for a married person
filing a separate return.
The rule applies both to debt reduced through
mortgage restructuring, as well as debt forgiven in a foreclosure. To qualify,
the debt must have been used to buy, build or substantially improve the
taxpayer’s principal residence and the loan has to be secured by the residence.
Refinanced debt used for the purpose of substantially improving the taxpayer’s
principal residence also qualifies for the exclusion. Refinanced debt used for
other purposes, such as to pay off credit cards, does not qualify for the
exclusion.
When a debt is forgiven, lenders send taxpayers a year-end
statement, Form 1099-C, Cancellation of Debt, showing the amount of debt
forgiven and the fair market value of any property foreclosed. If you have lost
your home or sold your home for less than its value and you receive one of these
Forms, please contact me immediately so I can help you take advantage of this
special taxpayer relief provision.

IRS BOOSTS OVERSIGHT OF TAX RETURN
PREPARERS

You may have heard recently that the IRS has undertaken a
major initiative to regulate all tax return preparers. Not only is the IRS
conducting field visits to tax return businesses, but they also are sending out
agents posing as taxpayers. The undercover visits were designed to catch
“unscrupulous preparers” from filing inaccurate returns.

The IRS also is
requiring that all tax preparers register with the IRS in a central database and
put their registration number on all tax returns or claims for refunds that they
prepare. Tax preparers who prepare returns for a fee must sign the tax return
and must put their number on the return. One problem is that the registration
requirement will not catch preparers who do not sign the returns. Only taxpayers
can stop preparers from preparing returns and then giving them to taxpayers to
file without the preparer’s signature.

What This Means for You

As
your tax professional, I want to assure you that I support the efforts to
improve the competency of the profession. I already sign all returns, and I have
an IRS registration number. As part of a professional organization, the National
Society of Tax Professionals, I abide by a rigorous Code of Ethics, and I
regularly take professional continuing education courses to keep up with all tax
developments so I can serve you to the best of my ability.

Thank You for
Your Business

As your tax professional, I assure you that I will be
keeping a watchful eye on IRS actions which may affect your business and your
tax filings. I will be happy to address any concerns and answer questions you
have about any of the issues covered in this newsletter. Thank you for the
opportunity and privilege of allowing me to serve as your tax professional.

Best regards,

Lisa M. Stiffler, EA