Ask TaxMama Issue 514 – Happy Paperback Anniversary
July 31, 2009 by Tax Blog
Filed under Questions & Answers
Dear Family,
Since this is the anniversary of the first paperback books, I suppose this is an appropriate time for the shipment that just arrived. We’ve been waiting and waiting to get a certain shipment of paperback books (BIIIG, HEAVY PAPERBACK BOOKS) for our EA Exam students. The publisher finally gotten them from the printer and shipped them to us. Wow! You should see this place – cartons and boxes everywhere. I can hardly wait for Monday so we can ship them all out and I can see the couch again!
And the great thing is, by the time they arrived, we were already sold out and had to place more orders. This year, more tax professionals than ever are aiming to pass the IRS exam. It may be in anticipation of the new laws that are expected to be written, establishing national licensing requirements for tax professionals. Do you know that in at least 47 states there is absolutely no oversight of tax preparers? Do you really understand the consequences? Those of you facing audits because IRS is scrutinizing every single tax return your preparer prepared understand the problem.
Although, odds are the 90% of tax offices in those states are totally legitmate, competent and have well-trained staff, there is a significant population of tax offices that are run by people who know nothing about tax law, except how to make up numbers for their clients’ tax returns to get them the maximum refund possible. Legally or illegally, they don’t seem to care. Many of them just open up a storefront in an area, advertise heavily and get thousands of clients for that tax season, then disappear. That’s got to be stopped. And IRS working on it!
In fact, the lead story in IRS News this week is about a tax professional IRS just nabbed for preparing a fraudulent tax return to snag the first-time homebuyers credit. We follow up with the update on the California budget.
Hmmm…meanwhile, we have nothing new on the Health Care Reform Bill. It’s still working it’s way through the political system. My friend Don thinks the problem is too big to push through all at one time. How about small bites – like tort reform – set sensible limits on judgments to reduce health insurance premiums and malpractice premiums? And how about permitting small businesses to group together in some fashion to get group rates on employee premiums. Another way to bring small business costs down. These are just some baby steps that would work – painlessly.
http://taxquips.com/index.php?cat=IRSNews
In today’s Money Funny – you will learn how the economy works.
http://taxquips.com/index.php?cat=MoneyFunnies
TaxQuips this week was very lively. People were really having fun commenting on the questions and situations. This week we learned about designating shares of stock sold; taking personal responsibility for the consequences of our own actions; deducting placing your dog in a kennel while away on business; and more about tax bankruptcies.
http://taxquips.com/index.php?cat=TaxQuips
Oh yes, did you register for the CSEA workshop next week?
Aug 5, 09 – 11:00 am – CSEA – Audio Tax – Hobby Loss
As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!
Please use the Comments link online.
http://taxquips.com/index.php?id=1297
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www.TaxMama.com
www.TaxQuips.com
www.IRSExams.com
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TAX CALENDAR 2009
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07.31.2009 2nd Quarterly Payroll Returns and Pay Taxes Due
07.31.2009 2nd Quarterly Sales Tax Returns and Pay Taxes Due
08.17.2009 Employers Make monthly Payroll tax deposit
09.15.2009 Employers Make monthly Payroll tax deposit
09.15.2009 Corporate & Partnership Returns Due- FINAL DEADLINE
09.15.2009 3rd 2009 Estimated Payment – all entities Due
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- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- Money Funnies & Inspiration :: How the economy works
- IRS News :: First-Time Homebuyer Credit fraud; the California Budget
- Prepare your own tax return :: $19.95 includes IRS, State, e-filing and tech support
- The 100% Home-Based Business Tax Solution :: The evolving e-book and Tax MiniMiser
- Pass the IRS Special Enrollment Examination :: Becoming an EA is more than a job, it's a recession-proof career
- iTaxMama – ipod Application :: Download your own TaxMama Tax Calendar
- Follow TaxMama on Twitter :: Download your own TaxMama Tax Calendar
- Put a TaxMama Widget on your site or phone ::
California’s Balanced budget?
July 31, 2009 by Tax Blog
Filed under Questions & Answers
Courtesy of Spidell Publishing Inc. www.caltax.com
The 2009–10 budget revision does not contain any new taxes, but includes tax accelerations that bring money in earlier, so we will likely revisit the fiscal crisis later. Here are the tax changes contained in ABX4 17 and ABX4 18.
Estimated tax payments: Requires individual and corporate estimated tax payments to be made each quarter at 30%, 40%, 0%, and 30% in 2010.
The budget also corrects the adverse impact of the acceleration of estimated tax payments made in 2009 to prevent underpayment penalties from being assessed to taxpayers subject to withholding. Withholding is deemed made in accordance with the estimated tax payment schedule for the applicable tax year. Spidell Publishing brought this issue to the attention of the Franchise Tax Board at the 2008 Taxpayers’ Bill of Rights hearing.
Withholding: For certain payments on or after November 1, 2009, withholding increases:
By 10% on wages;
To 6.6% on supplemental wages; and
To 10.23% on stock options and bonus payments.
Backup withholding conformity: Payors will begin California backup withholding on certain payments beginning January 1, 2010, at a rate of 7%.
Use tax registration: Certain businesses will be required to register with the BOE and report and pay any use tax owed by April 15, for purchases made in the preceding year.
What the budget does not include: Although heavily debated, the 2009–10 budget revision does not include independent contractor withholding, a tax on services, professional license revocation for delinquent taxpayers, or tax agency consolidation.
Find out how all these crazy provisions work when you attend Spidell’s Fall Tax Update. Take one day and be ready to start tax season. Register at a location convenient for you. www.caltax.com
- Ask TaxMama :: Where taxes are fun and answers are free
- TaxQuips.com :: The number ONE free tax podcast online
- Spidell Publishing Inc. :: Register for a Spidell's Fall Tax Update near you
IRS Warns Taxpayers to Beware of First-Time Homebuyer Credit Fraud
July 31, 2009 by Tax Blog
Filed under Questions & Answers
Courtesy of the Internal Revenue Service
WASHINGTON — The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.
On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.
To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.
“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”
Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.
First-Time Homebuyer Credit
The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.
Different rules apply for homes bought in 2008.
Full details and instructions are available on the official IRS Web site: http://www.irs.gov
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Incidentally, someone asked if you could qualify for a first time homebuyers credit if you were leasing your house with an option to buy it. According to Robert Marvin, spokesman for the IRS, the answer is Yes. “Renting a home should not preclude a taxpayer from qualifying for the credit. The credit is available to taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase.”
OK, folks, if you’ve got an option to buy, consider exercising it while IRS is still subsidizing your purchase!
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- The Real IRS ::
- IRS Information page :: First-Time Homebuyer Credit
- IRS Form 5405 :: First-Time Homebuyer Credit Form
Modern Day Economics – Updated
July 31, 2009 by Tax Blog
Filed under Questions & Answers
SOCIALISM
You have 2 cows.
You give one to your neighbor.
COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.
FASCISM
You have 2 cows.
The State takes both and sells you some milk.
NAZISM
You have 2 cows.
The State takes both and shoots you.
BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away.
TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons
AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
Countrywide VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.
A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.
A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called “Cowkimon” and market it worldwide.
A GERMAN CORPORATION
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.
AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.
A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.
A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.
AN INDIAN CORPORATION
You have two cows.
You worship them.
A BRITISH CORPORATION
You have two cows.
Both are mad.
AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the **** out of you and invade your country.You still have no cows, but at least now you are part of Democracy.
AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.
A NEW ZEALAND CORPORATION
You have two cows.
A Hobbit grabs one and takes it home.
Courtesy of Courtesy of my cousin Edna in Israel
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- Money Funnies at TaxMama.com :: More Money Funnies at TaxMama.com
Caps and “Gold Plated” Health Plans
NPR interviewed me about “gold plated” health plans. I am a big proponent of capping the tax benefits for overly generous plans as part of health reform. Critics responded that many low-income people with modest insurance plans could be hit by a cap simply because they work for a small firm, have health problems, are old, or live in a high-cost region.
It’s a valid point if a cap were enacted in isolation. Much of the variation in insurance premiums is not attributable to differences in the generosity of benefits. But some of it is.
The nice thing about the reform proposals being considered by Congress is that it would easy to identify the more generous insurance plans. Whatever changes are enacted will almost surely include some way for uninsured individuals and small firms to buy insurance on terms similar to large firms.
The ideal way to limit tax benefits for health insurance is to set a cap based on the cost of the least expensive plans offered through the new health insurance exchanges–the proposed marketplaces for individuals and small businesses. This should include at least one comprehensive HMO-type option with copays and deductibles that are affordable to low-income households. Plans less expensive than the benchmark would be tax-free. More expensive plans, offering more generous coverage, would be subject to tax. Individuals could avoid the tax by buying the relatively economical plans. Since the cap level would be based on premiums in the exchanges, it would automatically reflect regional variation in health costs.
In other words, in the context of health market reform, a fair cap could easily be designed. It could contribute significant revenues to help finance reform. And, by discouraging excessively generous health insurance coverage, it could help lower health care costs.
Mitigating the Potential Inequity of Reducing Corporate Rates
Some tax proposals would reduce the marginal corporate tax rate. Others would boost the top individual rate. Although a differential between corporate and individual rates could reduce the overall tax on distributed corporate income, it could also enable higher-income taxpayers to shelter income from taxation. This paper explains how denying the lower corporate rate to income from services and passive investments combined with provisions that prevent people from permanently escaping tax on retained earnings would mitigate this problem.
Another Tax Bankruptcy
July 30, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Toni in Colorado with this problem. “We filed for bankruptcy after a foreclosure and two years of hard struggle. My husband had $48,000 in taxes for 2005. Is there a way to file ‘’tax bankruptcy’’ this far out? Our bankruptcy was discharged March 12, 2008. I’m working, my husband is not, and we barely get by on just one salary.”
Dear Toni,
Sometimes, you just have no choice – the overall burdens become overwhelming.
http://taxmama.com/AskTaxMama/169/bk.html
OK, what can you do with the remainder of the tax debt? It sounds as if the debt was too new when you filed your recent BK. http://www.taxmama.com/AskTaxMama/308/article2.html
Go back and talk to your attorney. I don’t know what section of the BK code you originally filed under. But I have seen attorneys file under Section 13 initially, then go back a couple of years later with a Section 7 filing – and discharge all the rest of the tax debt. It’s a deliberate strategy in a case like yours. If your attorney was smart, s/he set it up that way.
Be aware, though. Every time you file for BK, you stop the clock on the IRS 10-year statute of limitations for collections. (In other words, IRS generally has 10 years to collect tax debt.) Stopping the clock means, time is suspended while you are in bankruptcy, Tax Court and other situations. So all the time gets added to the original 10 years.
Incidentally, another option you may have right now is to file for an Offer in Compromise. If your income isn’t high – and your husband isn’t working, you may qualify to reduce your debt. Try that. http://www.irs.gov/pub/irs-pdf/f656.pdf
And remember, you can find answers to all kinds of questions about tax bankruptcies and other tax issues, free. Where? Where else? At TaxMama.com
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
- Ask TaxMama :: Where taxes are fun and answers are free
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- IRS Form 656 package :: Offer in Compromise Application
File Download (0:00 min / 1 MB)
No California Probate
In California, if you die without a will or if all you have is a will and you don’t have a living trust, your estate will probably have to go through probate. The Courts in Los Angeles County, Santa Barbara County, Ventura County and Orange County (as well as all the other counties in California) will oversee the probate of all the property that you owned at the time of death such as real property, personal property, bank accounts, investment accounts, etc. But there are some exceptions. You may have in your estate some assets that do not go through probate in California. These are some of them:
Payable on Death Accounts (POD accounts). This is a type of bank account where you choose a beneficiary who will receive the account without probate when you die.
Life Insurance Policies and Retirement Accounts – like an IRA. The death benefit from the life insurance and IRA benefits payable to named beneficiaries automatically pass to them and avoid probate.
Property held in joint tenancy. Many Californians who happen to be married own their home in joint tenancy with their spouse. When a joint tenant dies, the other joint tenant inherits the property without going through the probate process.
Another way you can avoid probate is to transfer your assets into a revocable living trust. Assets which have been transferred into the name of the trust are non-probate assets. Contact an experienced estate planning lawyer if you would like more information about a living trust. Call Mitchell A. Port at (310) 559-5259.
Loose Handcuffs
Way back in the last century, PAYGO rules in the 1990 Budget Enforcement Act (BEA) helped control spending and contributed significantly to four years of budget surplus. Since BEA expired after 2002, looser PAYGO rules have applied and Congress has repeatedly chosen to ignore them. That was easy since violating PAYGO could only trigger a point of order, which was pretty easy to overcome, at least in the House. The Senate requires 60 votes to beat back a point of order but senators got around that by putting tax cuts and spending increases in budget resolutions, which are not subject to points of order.
Last week the House voted to strengthen the rules but the handcuffs still wouldn’t be very tight. Senators will consider the bill after their August recess.
The strength of the new rules is sequestration: if covered legislation would increase the federal deficit—or reduce the surplus, which won’t happen under any realistic scenario—over the subsequent ten years, non-exempt programs would be cut enough to zero out the ten-year net costs. That would be harder to avoid than under current rules. But the list of exempt programs is long: Social Security, all veterans’ programs, refundable tax credits, low-income and economic recovery programs, and many, many smaller programs. CBO’s review of the bill said that “any feasible sequestration would not generate enough reductions in spending to offset the costs of major new spending or revenue initiatives.”
But the proposed rules have two other big problems. First, they start from a current policy baseline that builds in the Bush tax cuts, the AMT patch, current estate tax law, and Medicare rules for paying physicians. PAYGO would not apply to proposals that would extend those laws beyond their scheduled expiration dates. Exempting those tax laws from PAYGO is consistent with President Obama’s 2010 budget baseline, but they still affect the fiscal bottom line to the tune of $3.5 trillion more debt over ten years. And, as Bill Gale and Alan Auerbach have pointed out, pulling expiring tax cuts out of the baseline gives away a huge amount of revenue that Congress could use to help enact needed major tax reform.
The worst problem is that, given the new baseline, we face huge budget deficits stretching as far as the eye can see. If the rules are enforced, they would prevent an untenable situation from getting worse, but that’s not enough. They would do nothing to move the budget back towards balance.
Maybe my pessimism has gotten the best of me. Since January 2008, CBO deficit projections have worsened from a ten-year surplus of $274 billion to a ten-year deficit of nearly $10 trillion (including Obama’s 2010 budget). The current deep recession and this year’s stimulus bill account for a substantial piece of that number, but the red ink worsens year by year after stimulus spending ends. The president promises not to raise taxes on more than 95 percent of Americans and wants to spend lavishly on new programs. And Congress chops away at revenues the president does want—witness plans to give away almost all of the permits under cap-and-trade. None of that will help balance the budget.
Loose handcuffs may be better than no handcuffs but what we really need is a maximum security cell.
Deficit: What Caused It, Why It Matters
CNNMoney.com op-ed, July 30, 2009. William Gale and Alan Auerbach explain that the government is spending more than it’s bringing in, resulting in a deficit. They explain why that gap must be brought under control.