TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from Nick in the TaxQuips Forum who is angry. “This year I saw some disturbing instances where independent contractors were issued 1099-MISC for higher amounts than they were actually paid. Some of contractors were paid in cash and there are no supporting documents on how they were paid. The reason for these inflated 1099s seems to be that crooked employers use them to deduct higher expenses fraudulently and reduce employer taxes. What is the most effective way for contractors to fight erroneous 1099s and file their taxes based on accurate amounts received? Can they turn in employer to IRS? How?” Dear Nick, Of course. You can always turn in the employer. Especially if your friends are no longer working there nor want to return. In fact, when IRS collects $ from them, you can even get a reward. Just use Form 211. Or use Form 3949A just to report them. Or just read about the rules and call IRS. In the meantime? Report the full amount of any 1099 received. Always. That avoids audits. Then, deduct the part that’s not true. Include a detailed explanation of why the extra income is false. (i.e. never received that much money; received the money in January, I should have been an employee, etc. – whatever the reason is.) Include whatever proof you have. File the tax return on paper. It’s pretty simple. People file erroneous 1099-MISC all the time – even when it’s not on purpose. If the worker should have been an employee, you can use Form 8919 to pay only the employee’s share of the FICA/Medicare taxes. But it there are more forms needed. Folks who have never done this before should work with a tax pro who knows how to do this. Ask if they have had experience with this before just turning it over to someone. Not everyone knows how to do this. OK? For the future? Rita Lewis, EA adds “Keep good records. Invoice your clients, keeping copies, of course. Try to get paid via check or even credit card. Deposit all income, cash too, in your business account. Create the best paper trail that you can.” Let’s face it, good records are always your best defense when it comes to IRS audits. And remember, you can find answers to all kinds of questions about protecting yourself from fraudulent income claims and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Lloyd in the TaxQuips Forum with a little problem. “I paid someone in Thailand approximately $15K a year to do data entry for me. IRS is not happy that I did not issue a 1099-misc to her. Until now, she did not have ITIN or Social Security Number. However, this year 2012, she came to U.S., applied for and received Resident Alien status. Now she has a Social Security Number. Can I retroactively apply that SS# to income from prior years?” Dear Lloyd, No, don’t do that! You should have been having her fill out a W-8 BEN to prove her foreign status for the prior years before issuing a check. But it’s not the end of the world, if you did not. Most people don’t know that we need to get paperwork from foreigners, not working in the U.S., when we pay them. For now, just issue her a 1099-MISC for the time she is living in the US and subject to US taxes. In other words, if she moved to the U.S. and got her ITIN in June of 2012, that’s when her worldwide income becomes subject to U.S. taxation – not a moment before. If she was not a US citizen or green card holder or resident alien until now…she is not subject to U.S. taxes for prior years. And remember, you can find answers to all kinds of questions about outsourced payments and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Ivan in the TaxQuips Forum who seems to be concerned. “I have found lots of info on filing gift tax returns – penalties – life time exclusions. But what I cannot find is, what if someone makes a gift(s) to a child, or anyone else, in an amount well over the $13,000 annual exclusion – and fails to file a gift tax return, even though no gift tax is due?” Dear Ivan,   If you have made such a gift, then, simply file the gift tax return late.   It is important to file it for a variety of reasons. The most important of which is, the gift tax IS due, UNLESS you elect to use part of your lifetime exclusion. You cannot make that election without filing the gift tax return. That’s the only way to make the gift non-taxable.   The other two important reasons are:   1) The person receiving the gift needs to be able to prove it was a gift, rather than unreported income. Your gift tax return helps corroborate that person’s claim that this was a gift, if ever audited. 2) Did you know that if a gift tax should have been filed and wasn’t, the donee (the recipient) may be liable for the gift tax?   Just file the gift tax return late so you can stop researching and forget about it. Clearly, this has been bothering you. Now you can stop losing sleep. And remember, you can find answers to all kinds of questions about gift taxes and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Lara in the TaxQuips Forum who is helping get a partnership out of trouble. As it happens, this seems to be the week for questions from tax pros about the penalties IRS imposes on late-filed partnership tax returns. So let’s talk about those. Well My Friends, Believe it or not, the IRS tries to help make it easier for us to file our tax returns. And there has always been a problem with partnership returns. When the Form 1065, with extensions, was due on October 15th, the same time as the individual tax return, the K-1s (report of pass-through information to the individual’s tax return) were issued too late. They were issued the same day as the individual tax return was due. So a couple of years ago, the IRS finally woke up and decided to make the filing deadline a month earlier – September 15th. (And that deadline is rapidly approaching!) The IRS expects the partnership to issue K-1s (or at least a reasonable estimate of activity) by April 15th. The penalty for issuing K-1s late is $100 per K-1. (Not the end of the world.) The penalties are much higher if you don’t issue the K-1 intentionally. (We aren’t going there.) However, the penalty for filing the partnership return (Form 1065) late is stiff. It’s $195 per partner, per month for up to 12 months. Even with only two partners, this is nearly $5,000. So, the big question that has been coming up this week is, “How can we get the IRS to waive the penalties?” Generally, the IRS will waive the penalties the first time the partnership files late. When all the first few years are filed late, since it’s all part of the one instance, you can usually persuade the IRS to let it go. How? IRS actually explains: If the partnership receives a notice about a penalty after it files the return, the partnership may send the IRS an explanation and the Service will determine if the explanation meets reasonable-cause criteria. You can find acceptable reasons in the IRS’s Internal Revenue Manual. Normally, I would give you a link to the information. But the IRS just launched their new website today – and none of the links from the search engines (or even internally) are working. In about a week, Google this “IRM, partnership penalties” And remember, you can find answers to all kinds of questions about penalties and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from MJ in the TaxQuips Forum who tells us, “We have a friend whose child has been injured, and would like to raise funds for her to help pay for the bills. We cannot afford to file for a non-profit (KY); and don’t know if that’s even necessary for a case like this. My fear is that we’ll receive donations for her. Then she’ll get hit at tax time owing money on the donations. Where can I find info on this, or can you offer any help?” Hi MJ, As it happens, I do know how this can work. I did some research on this problem several years ago. Here’s the easiest way to do this. If the people who are donating and helping are not looking for a tax deduction, you don’t need to have a non-profit organization. Just make it very clear to them, in writing that there is no donation deduction. In fact, what you can do is create a little form that tells them that this a GIFT, not a charitable donation. Have them enter the amount of the gift. Your friends, who get this money, will be getting GIFTS. If they have proof of each gift, in writing, they won’t have a tax problem. Gifts are not taxable to the person receiving them. People are giving them the money with no expectation of a service or product in return. As long as no individual gives the child or family member a gift of more than $13,000, which is highly unlikely, the kind people who help won’t need to file gift tax returns, either. How’s that for making it easy? And remember, you can find answers to all kinds of questions about charities, gifting and helping out – and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Joe in the TaxQuips Forum. Joe has just returned from 30 years of service in the armed forces. He hasn’t lived in his home for most of that time, so it doesn’t qualify for the personal residence exclusion. Now it’s time to sell. And Joe has a few questions about the great, big gain. Read his questions. Well My Friends, You can read my full answer to Joe here. It includes a tip to make this sale totally tax-free. Instead of posting the answer here, I’d like to provide some homeowner tips to those serving in the U.S. military or the Foreign Service: As you probably already know, your Basic Allowance for Housing (BAH) is not taxable income. But, did you know that if you use your BAH to pay mortgage interest and property taxes on your home you get to claim theses deductions – even if you’re not paying tax on the funds you use to pay these expenses? Homeowner Assistance Program (HAP) payments to service members whose homes devalued due to a base closure are tax-exempt. Normally, when you sell a residence, you must live in your residence for 2 years out of 5 in order to get the personal residence exclusion. However, persons on qualified extended duty in the U.S. Armed Services or the Foreign Service have two options: You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the Armed Forces. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. You can suspend this five-year test period for up to 10 years of such duty time. A taxpayer is on qualified extended duty when at a duty station that is at least 50 miles from the residence sold, or when residing under orders in government housing, for more than 90 days or for an indefinite period. And, of course, if you don’t meet any of these tests, when it comes to selling your home, you can read my advice to Joe. If he follows it, he’ll pay no taxes on the sale of his home at all – without qualifying for the above options. And remember, you can find answers to all kinds of questions about military taxes and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum

Today TaxMama® hears from Bill in the TaxQuips Forum. Bill insists that for payments made in 2012, we do not have to send 1099s to corporations. TaxMama says, she just read that corporations DO get 1099’d. Who is correct? Well My Friends, As it happens, both Bill and I researched this procedure over the weekend. We both came to the same conclusion. Bill Porter is correct. Here’s what he found: Information returns are covered in code section 6041. Section 6041A covers “services.” The “Notes” for Section 6041A on the Cornell Law website indicates no amendments since 1997. CFR 1.6041-3 still includes corporations as an exception. The Cornell Law website indicates that is current as of 4-1-12. The Patient Protection and Affordable Care Act, Section 9006 (Page 737) expanded on the information return requirements and the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Section 2, repealed the new 1099 requirements. On 3-23-10, the Patient Protection and Affordable Care Act became law. Section 9006 (page 855) added subsection (h) and (I). Subsection (h) is what added corporations to IRC Section 6041. On 9-27-10, the Small Business Jobs Act of 2010 became law. Section 2101 (page 2561) renumbered subsections (h) and (I) and changed them to (I) and (j). The corporations were now subsection (I). The new (h) required rental property expense payments to be reported. On 4-14-11, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 became law. This repealed the 1099 requirements. Section 2 strikes out subsections (I) and (j), which includes the requirement for corporations. Section 3 strikes out subsection (h). The USCode.House.Gov website (current as of 7-9-12) has a list of the amendments at the bottom, which summarize the changes from the above laws. Reportable payments to corporations. The following payments made to corporations generally must be reported on Form 1099-MISC. Medical and health care payments reported in box 6. Fish purchases for cash reported in box 7. Attorneys’ fees reported in box 7. Gross proceeds paid to an attorney reported in box 14. Substitute payments in lieu of dividends or tax-exempt interest reported in box 8. Payments by a federal executive agency for services (vendors) reported in box 7. And remember, you can find answers to all kinds of questions about 1099s and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® will be speaking with Bob McCormick on KFWB’s Money 101 program at 9:00 am Pacific time. Bob’s theme this week is “Fight for your right to money.” You can listen live in Southern California at 980-AM or via the Internet if you visit the CBS radio website. Your questions are welcome – just call us at (888) 539-2980 [888-KFWB 980] after the first 10 minutes of introductory material. My Friends, Bob has long been a champion for our rights. He’s been helping listeners find ways to keep their homes, save money on gas, warn seniors against financial scams and help you recoup your money from unscrupulous collection agencies – and more – and that’s just this month! Today’s theme is all about avoiding tax rip-offs. We’ll be talking about Identifying and avoiding disreputable tax professionals (the few that plague the industry) If your tax pro makes a big mistake, who’s responsible? What to do if you get an audit notice? The tax consequences of loan modifications If you’ve been missing mortgage payments, is there a tax consequence? When do tax problems really get serious? What’s if you simply can’t afford to pay your taxes If a relative dies owing taxes, are the heirs responsible? What’s if someone else is using your Social Security number to work? And anything else you call in and ask about. So please, DO call Bob McCormick and TaxMama® between 9 and 10 am PACIFIC at (888) 539-2980 [888-KFWB 980] on Thursday, August 22, 2012. And remember, you can find answers to all kinds of questions about all kinds of tax issues and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

America on a one-year work program with Disney. At the end of her contract, she filed her 2011 taxes with a tax agency that none of her coworkers used. Her coworkers all received their refund; and she ended up owing the IRS money. The agency made a mistake of having her fill out a 1040 EZ instead of a 1040 NR EZ, so she had to sign an amendment paper. Going back, she found that the agency is out of business. So she called the IRS and they suggested she pay the fee for now and re-file her taxes. What’s the best way of going about this? Is it not too late?” Dear Diego, You don’t say how much money we’re talking about here. But if there is a lot of money that she must pay, and a refund that she should be getting, there is certainly an alternative. Have her contact an EA or CPA. By giving them a power of attorney, they can pull IRS records and see exactly what IRS is showing as having been filed. They can get the information the same day – or the next day by using IRS’s online database or the special hotline just for tax professionals. They can see any notations or assessments on the account. Then, they can prepare an amended tax return for her within a day or so (if she goes to someone who is not swamped with corporate returns which are due on Sept 15th). And she can resolve the whole thing without having to pay IRS first. (By the way, she might think of reporting these fly-by-night folks to the IRS. You don’t want them doing tax returns for other people. Their preparer tax identification number is on your friend’s tax return. That will help identify them, no matter where they open up next.) And remember, you can find answers to all kinds of questions about fixing filing errors and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Richard, who wants to come in from the cold. “I was in rough financial shape for several years and have not filed a tax return in three years. How do I go about squaring up with the IRS now that my finances have improved?” Dear Richard, Rita Lewis, EA from Dollars & Sense in CT comes to the rescue. She provides excellent advice. Something to remember going forward: ALWAYS file your tax returns on time, even when you can’t pay in full. You avoid late filing and non-filing penalties. And, things like installment agreements and being put on non-collectible status are available to you. For now, file those tax returns as soon as you can, and pay them in full if possible, as soon as you can. If you need help, you should be able to find someone local who’s comfortable with filing prior year tax returns and has the time to work with you during this off-season. If you used a professional preparer in the past, you might want to return to him/her. Your preparer may have you sign a power of attorney for those years, so s/he can use e-services to download the information the IRS has in the way of W-2s, 1099s of all sorts, as well as withholding you might have. Pull out your receipts and your calendar to help you reconstruct those years. Organize as much as possible to save yourself accounting fees: sort things into each year, gather check stubs, W-2s, 1099s, bank statements, invoices, receipts, mileage logs, medical records, anything that shows your income and expenses. Pull out your copy of your last tax return filed. Use it to remind yourself of the types of income and deductions you’ve had in the past. Give a copy to your preparer also, if you use one. Come back here if you have specific questions as you lay out each year’s return to file. And read TaxMama’s additional suggestions, in case you want to gather the information from IRS on your own. And remember, you can find answers to all kinds of questions about catching up on unfiled years and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Sue, who overcame a big problem. To make a long story short, Sue suddenly discovered, purely by accident, that she’d only been paying one of the two taxes required by her city for her business. They hit her with about $12,000 worth of back taxes, penalties and interest. Uh oh. What now? Dear Sue and Friends, First of all, this problem illustrates the critical importance of knowing your industry before you start a business. If you’re not familiar with all the taxes and regulations, either do the research or hire someone to do it for you. But get it right from the start, or it could be expensive. If you suddenly find out that you missed important filings and tax payments, you can try begging for forgivenenss. In this case, TaxMama® suggested: Contact the Treasurer’s office and ask them for information about their appeals process. One argument that sometimes works is – “Penalties are designed to ensure compliance – not to punish. I have been trying to comply – and will continue to meet my obligations. Can you please waive this set of penalties and I’ll be good forevermore?” Sue did exactly that, in her own way. In fact, as sweet as she is, she probably figured this out on her own. The result? “Just this a.m. I finally moved up the chain far enough that they waived all penalties, late fees and interest. I agreed to pay their admin fees. The Director said she understood that we were complying, and agreed that their website was constantly changing and confusing.” The lessons here? 1) Be sweet and sincerely apologetic. 2) And ask. Nothing happens if you don’t ask! And remember, you can find answers to all kinds of questions about getting penalties waived and other tax issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .