Category Archives: Federal tax

Information regarding federal taxes and the IRS

Taxable or Non-Taxable Income?

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Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:

Adoption expense reimbursements for qualifying expenses
Child support payments
Gifts, bequests and inheritances
Workers’ compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
Meals and lodging for the convenience of your employer
Compensatory damages awarded for physical injury or physical sickness
Welfare benefits
Cash rebates from a dealer or manufacturer
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

Life insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
Non-cash income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income

Temporary Tangible Property regs issued by IRS

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The IRS published in temporary regs that provide guidance to taxpayers on the treatment of amounts paid to acquire, produce or improve tangible property and regarding the accounting for, and dispositions of, property subject to depreciation. These regulations provide objective standards and bright-line rules intended to simplify compliance with the capitalization provisions contained in section 263(a) of the Internal Revenue Code.

The temporary regulations generally are effective for expenditures made on or after Jan. 1, 2012, and therefore these regulations do not affect taxpayers’ 2011 tax returns. The IRS and Treasury Department anticipate publishing additional guidance that will advise taxpayers regarding how to obtain automatic consent to change to a method of accounting provided in the temporary regulations for taxable years beginning on or after Jan. 1, 2012. These automatic consent requests may be filed beginning with taxpayers’ 2012 tax returns. Taxpayers may not request a change to a method described in the temporary regulations on their 2011 tax returns.

The temporary regulations also were released as a notice of proposed rulemaking, offering taxpayers the opportunity to comment on the rules. Written comments are requested by March 26, 2012, and a public hearing on the regulations is scheduled for April 4, 2012.

A Close View of IRS Tax Debt Relief Options

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Owing federal, state or local government taxes for long is certainly not a very wise decision.
Anytime, taxation agencies can execute liens against you, which can eventually lead you to loss of
assets, foreclosure, or wage garnishments. Don’t worry, government offers several IRS tax debt
relief programs, which can help you to navigate the IRS tax maze and resolve you tax debt issues
in a better way. However, you must meet certain criteria in order to get enrolled in those tax relief
options. Read on to know more about them.

Payment Plans- Part or full installment payment and penalty abatement

From 2011 onwards, the Internal Revenue Service allows taxpayers, owing less than $25,000 to
request for an installment payment plan online. Through this installment plan, a tax payer can
reorganize his repayment arrangements and can extend the repayment of the tax debt over a period
as long as 5 years. In fact, with penalty abatement, he can waive almost one third of all penalties
assessed by the IRS as well. However, larger tax debts require the tax payer to go through different
procedures. For example he needs to visit the local IRS office or mail the application or make a
telephone call to the IRS first. IRS generally charge a setup fee for an installment plan, and its
representatives do not write off the interest and late payment penalties in any way.

An Offer in Compromise

If you have few assets and little income, taxation agencies can accept your offer in compromise.
Just like debt settlement, an offer in compromise allows the debtor to settle the tax debt for less than
the original amount owed. Ideally, the taxpayer needs to offer a lump sum of cash for settlement
of the entire debt. The IRS accepts the amount, provided they found it greater than the original
amount. To go for an offer in compromise, you need to submit substantial proofs of your financial
hardship such as your household income, monthly IRS allowable living expenses, and the assets in
your name as a tax payer.

Currently Not Collectible

If you have low cash flow, but valuable assets such as property with equity or cars with equity, or
a retirement account, it might prevent you from enrolling in OIC program. Under this scenario,
currently not collectible (CNC) status can help you to safeguard your valuable assets. Stay alert
during this procedure, as IRS can force you to liquidate your easily liquidated assets such as savings
accounts, stocks, bonds, and mutual funds accounts, before granting your CNC status.

Filing Chapter 7 bankruptcy can forgive many of your pre-existing debts, but discharge only
some of your tax obligations, which are incurred at least three years prior to filing a tax return.
However, for this you need to prove through recent tax returns that you earn less than your state’s
annual median income level. In case you earn too much money to file for Chapter 7, you can go
for Chapter 13 and can partially reimburse many of your debts and some of your tax liabilities.
The three-year rule regarding taxes still applies here, but you can work out a payment plan with the
taxation agency for newer taxes. A judge can allow you to discharge your obligation to pay older
tax bills depending upon your other debts, your assets and your current income.

IRS Relief for Kentucky Flood Victims

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INDIANAPOLIS — Victims of severe storms, tornadoes and flooding beginning April 22, 2011 in parts of Kentucky may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Boyd, Crittenden, Graves, Hardin, Hickman, Jefferson, Livingston, McCracken, Marshall, Union, and Webster Counties. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after April 22 and on or before June 30 have been postponed to June 30.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after April 22 and on or before May 9, 2011, as long as the deposits were made by May 9, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until June 30 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after April 22 and on or before June 30.

The IRS also gives affected taxpayers until June 30 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007), that are due to be performed on or after April 22 and on or before June 30.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after April 22 and on or before May 9 provided the taxpayer made these deposits by May 9.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Kentucky/Severe Storms, Tornadoes, and Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.