Preparing for the Audit

How to prepare for an audit

It's the last thing most people want to see at this tax-paying time of the year: A plain brown envelope marked "Official Government Business" with the return address of the Internal Revenue Service.

But don't panic. The news might not be as bad as you think.

While a full-blown tax audit might be your first thought, that notice might be the extent of your contact with the IRS. The agency might be telling you that you've made a math error on your return that must be fixed. Or maybe something on your W-2 doesn't agree with your tax return. In such correspondence audit situations, you usually can clear up the discrepancy with a couple of exchanges of information via the mail.

Then again, the worst could happen and that envelope could be a notice that one of your past tax returns is being audited in full. In this case, what do you do?

This makes a good case for having a professional prepare your tax returns!

Enrolled Agents never recommend that a client call the IRS themselves nor attend the audit. They can unwittingly reveal information that is not required and potentially cause more problems. A tax professional licensed to practice before the IRS can deal with the IRS and attend the audit for you.

Even with professional representation, you still must prepare for an audit by gathering information and taking it to your tax representative. Three top tips for preparing for an audit are, "Good records, good records and more good records." In other words, adequate record keeping year round, not just on April 15, is essential in case of an audit.

More specifically, how should you, a taxpayer, prepare for an audit if it happens? These tips will point you in the right direction:

· Retain the services of a professional. Enrolled agents, tax attorneys or CPAs may represent you at an audit. They are trained in tax law and can much better represent you than you can represent yourself. To a lay person, reading the tax code is like reading a foreign language. Enrolled agents have been around since the post-Civil War days and go through relatively grueling training in this very area.

· Keep good records. It's not enough to just pull your records together year-by-year on April 15. Get in the habit of keeping good primary and secondary tax records year round and using a personal filing system to keep them with the appropriate tax return. Then, if you're tapped for an audit, you're prepared. It alleviates so much stress when you can put your finger on a document when you need it. Primary records are bills and receipts. Secondary records may be spreadsheets, mileage logs or other summary information you've kept. Warren recommends that you keep all tax returns, but that you keep your backup information for the current year plus three past years.

· Gather information. What if you haven't kept good records for the tax year in question? Go back to that year and try to re-create records as accurately as possible. If you've claimed expenses in certain areas, like medical expenses, it's possible that your doctor or hospital will still have those medical records on file. Don't hesitate to call them. You can also call your place of employment and ask for duplicate W-2s or 1099 forms or check with your mortgage company for interest expenses for that year or your county for personal property taxes paid. Put everything in a neat format, summarized but with supporting documentation, to take to the audit with you.

· Do your homework. Research what the audit process is likely to entail. Check with people in your industry or workplace to see if any of them have gone through the process. Find out what it was like so you can prepare yourself. You might be able to avoid some of the stresses they endured. Knowing what questions the IRS examiner might ask can also help lower the fear factor. The agency prepares audit guides for its examiners, with many of them posted on the IRS Web site. Check them out, says Einbinder, so you can go into the audit knowing, at least in part, what the auditor is going to ask.

· Behave professionally. Generally, the IRS will set the time and place for an audit. Comply with their wishes if possible. If you or your tax representative cannot attend the audit at the time they set, negotiate another time with them. Remember that taxpayer presentation is critical. "Be polite, prompt and professional," says Einbinder. "It will get you so much further." Don't show up at the audit wearing jeans and with your receipts in a shoe box. Be on time, be organized and take the audit seriously.

· Realize that the IRS auditor is not your friend. You can be sure of two things with an IRS auditor. First, he/she pays their taxes. Second, there is an implicit assumption that you may have done something wrong, perhaps unwittingly, or you wouldn't be there in the first place. Be forthcoming with information but only answer questions that are directed to you. Never volunteer extra information. Don't be surly or impatient, but also, don't be fearful. Be confident that your tax return was correct and that you have records to prove it.

The good news is that all audits do not result in the taxpayer owing extra taxes. There are many audits that prove the IRS actually owes you instead of the other way around. Start now on your record-keeping system if you do not have one. If you have a complex return or if you're unsure about calculating deductions, hire a tax professional to prepare your return. It may pay off in the long run. The best defense, with regard to an IRS audit, is always a good offense.

S. Raines, Sr. Financial Advisor/Tax Preparer

Taxing Air Transportation

The IRS has released new taxing regulations for the charging of excise tax on domestic and international air flights. The following is the release as sent out by the IRS.

2008 Excise Taxes on Air Transportation

WASHINGTON — Today the Internal Revenue Service announced the 2008 inflation adjustments to the excise taxes on air transportation.

Excise taxes apply to the domestic segments of taxable air transportation and to the use of international air facilities. The Consolidated Appropriations Act, 2008, signed into law on Dec. 26, 2007, extends these excise taxes to air transportation that begins or is paid for no later than Feb. 29, 2008.

These excise taxes are adjusted annually for inflation. For 2008, the excise tax on the domestic segment of taxable air transportation is $3.50. The excise tax for 2008 for international flights that begin or end in the United States is $15.40. The tax on use of international air facilities also applies at a reduced rate to departures of interstate flights that begin or end in Alaska or Hawaii. For 2008, the international air facilities tax on these flights is $7.70.

Revenue Procedure 2007-66, which contains other amounts that are adjusted annually for inflation, will be modified in the near future to include the 2008 inflation adjusted items listed above.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Filing Season and the AMT Patch

The IRS has made an updated press release regarding the AMT patch for the 2007 tax filing season. This is a must read article to see if you will be affected by the recently approved legislation. The article is as follows:

Filing Season Opens on Time Except for Certain Taxpayers Potentially Affected by AMT Patch

WASHINGTON — The Internal Revenue Service announced today that the upcoming tax season is expected to start on time for everyone except certain taxpayers potentially affected by late enactment of the Alternative Minimum Tax “patch.”

Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the Alternative Minimum Tax (AMT) legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law.

The IRS has targeted Feb. 11, as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation. The February date allows the IRS enough time to update and test its systems to accommodate the AMT changes without major disruptions to other operations related to the tax season. As the IRS has said previously, it will take approximately seven weeks after the AMT patch was approved to update IRS processing systems completely.

Although as many as 13.5 million taxpayers will not be able to file their returns until Feb. 11, the effect of the delay may be lessened by the fact that under previous filing patterns only between 3 million to 4 million taxpayers file returns with the five affected forms during these early weeks in the filing season.

“We regret the inconvenience the delay will mean for millions of early tax filers, especially those expecting a refund,” said Linda Stiff, Acting IRS Commissioner. “We’ve taken extraordinary steps to figure out a way that we can start the filing season on time for most taxpayers, including some using AMT-related forms. Our goal has always been to make sure we can accurately process tax returns while getting refunds to taxpayers as quickly as possible.”

The February delay caused by the AMT patch will affect taxpayers using these five forms:

• Form 8863, Education Credits
• Form 5695, Residential Energy Credits
• Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers
• Form 8396, Mortgage Interest Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit

While these five forms require significant additional reprogramming due to the AMT patch, the IRS has been able to reprogram its systems to begin processing seven other AMT-related forms, including Form 6251, Alternative Minimum Tax – Individuals. Taxpayers filing these seven forms should not experience delays in filing, and the IRS expects to begin processing those returns starting on Jan. 14.

Electronic returns involving those five forms will not be accepted until systems are updated in February; similarly, paper filers should wait to file as well. All other e-file and paper returns will be accepted starting in January. The IRS urges affected taxpayers to file electronically in order to reduce wait times for their refunds. E-file with direct deposit gets refunds in as little as 10 days, while paper returns take four to six weeks.

“E-file is a great option for everyone, especially if they are affected by the AMT,” said Richard Spires, IRS Deputy Commissioner for Operations Support. “Filing electronically will get people their refunds faster, and e-file greatly reduces the chances for making an error on the AMT or other tax issues.”

In addition to filing electronically, the IRS urges taxpayers to take simple steps to avoid problems:

• Taxpayers filing electronically should make sure to update their tax software in order to get the latest AMT updates.
• Taxpayers with $54,000 or less in Adjusted Gross Income can use Free File to electronically file their returns for free. Free File will only be available by visiting the official IRS web site at IRS.gov. In all, 90 million taxpayers qualify for this free service.
• Taxpayers who use tax software to print out paper copies of tax forms should make sure they update their software before printing out forms. Taxpayers using paper forms can also visit IRS.gov to get updated copies of AMT forms.

The IRS has created a special section on IRS.gov to provide taxpayers with additional information and copies of updated forms affected by the AMT. In recent days, the IRS has posted updated copies of all forms affected by the late enactment of the AMT patch by Congress.

The IRS also reminds taxpayers that printed tax packages, which will begin arriving in the mail around New Year’s, went to the printer in November before the AMT changes were enacted. The packages reflect the law in effect at the time of printing. The tax packages include cautionary language to taxpayers that late legislation was pending.

The IRS is also working closely with tax professionals and the tax preparation software community to make sure they can help taxpayers with all of the latest developments on the enactment of the AMT patch and other tax changes.

“The IRS is going to continue to do everything it can to make this a fully successful filing season for the nation’s taxpayers,” Stiff said. “We will continue to work to keep taxpayers up to date and make this situation as easy as possible for everyone.”

Related Items:

• Alternative Minimum Tax - How It Affects Filing Season 2008
• 1040 Central

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Tempting the Tax Auditor

It is the most dreaded letter a taxpayer can receive.

Dear Taxpayer,
Some of the information that you provided to us does not agree with the information we received from other sources. -- The Internal Revenue Service.

You've just joined an elite club, one whose initiation ritual is an IRS audit. Unfortunately, you can't refuse membership -- and the dues could be astronomical.

When the IRS Reform and Restructuring Act was enacted in 1998, lawmakers ordered the agency to focus more on taxpayer rights instead of collection activities. Not surprisingly, the number of audits -- or examinations, as the agency prefers to call them -- dropped dramatically.

The first year of the kinder, gentler IRS, about one of every 79 tax returns were audited. By 2003, it was even easier for tax scofflaws; that year, according to IRS data, only one of every 150 individual taxpayers were audited.

But the tax times, they are a-changing.

More audit attention
The number of audits in 2005 was the highest since 1998, just before the agency's operational structure was realigned. The trend is continuing. During fiscal year 2006 (from Oct. 1, 2005, through Sept. 30, 2006) IRS figures show that the agency completed more than 1.28 million audits of individuals, up slightly from the 1.25 million scrutinized the year before.

That sounds like a lot and the IRS is pleased that its agents are catching more incorrect returns. But overall, the examination rate of individual returns in 2006 was just under 1 percent, statistically the same as in fiscal year 2005.

Don't breathe easy just yet. If your tax return included a Schedule C detailing any self-employment income, you are three times more likely to face IRS questioning. And the IRS says it will be stepping up audits of filers who run their own unincorporated businesses.

Since this type of income has no verification mechanism (i.e., the IRS can't double check much of it in the way it can verify wage income via an employer-issued W-2), tax officials believe that many self-employed individuals underreport their income. The IRS also is keeping an eye out for potential scams that show up on returns.

Crackdown to continue
You can count on the tax-cheat crackdown to continue.Washington, D.C., lawmakers, who once demanded the IRS give taxpayers the benefit of the doubt, are applauding the new aggressive approach. The reason? Members of Congress are hoping that enhanced enforcement efforts will help close the $345 billion tax gap. That amount, based on 2001 figures, represents the difference between what taxpayers should have paid and what they actually paid. Without some help from additional IRS collections, Capitol Hill faces the prospect of raising taxes.

In March, IRS Commissioner Mark Everson reassured Congress about enforcement efforts. He told the Ways and Means Oversight Subcommittee, during its annual look into IRS operations, that the agency is committed to continued audits. In particular, Everson said, the IRS will continue to look closely at returns from wealthier taxpayers, particularly filers with incomes of more than $1 million.

Viewed against the total number of returns filed each year (the IRS is expecting around 136 million individual returns this filing season), the nominal increase in recent audits still means that most of us will likely escape extra IRS scrutiny.

You can make sure your examination chances are even more statistically remote by ensuring that, in your zeal to cut your tax bill, your 1040 doesn't send the wrong message.

What's the DIF?
"Don't draw any more attention to your return than you need to," says Robert G. Nath, author of "The Unofficial Guide to Dealing with the IRS." "Simple, plain-vanilla returns are fairly safe."Most returns chosen for audit are flagged by an IRS computer program known as the Discriminant Function System, or DIF, in tax parlance. The actual scoring formula to determine which tax returns are most likely to be in error is a closely guarded secret. But Nath, a Washington, D.C.-area tax attorney, says it's no mystery that the system is designed to screen for returns that could put more money in the government Treasury.

How do your deductions compare?
Tax experts believe one discriminate function component looks at average deduction amounts. This allows IRS examiners to spot inconsistencies, such as a high mortgage interest deduction and low income. Tax specialists examined 2004 return statistics and came up with the following itemized deduction averages. These are for illustrative purposes only. Experts note that the IRS takes a dim view of taxpayers who base their claimed deductions on these figures. The numbers can be useful, however, in giving you a general idea as to whether certain deductions on your return might seem out of line.

How do your deductions compare?

Income range	$15,000- $30,000	$30,000- $50,000	$50,000- $100,000	$100,000- $200,000	$200,000 or more
Medical expenses	$6,229	$5,324	$6,125	$9,811	$31,332
Taxes paid	$2,761	$3,592	$5,808	$10,528	$38,143
Interest paid	$6,664	$6,933	$8,310	$10,949	$19,721
Charitable contributions	$1,969	$2,132	$2,663	$4,130	$19,014

So what triggers a discriminant function red flag?

· Higher incomes.

· Income other than basic wages, for example, contract payments.

· Unreported income, such as investment returns.

· Home-based businesses, especially when in addition to salary income, and home-office deductions.

· Noncash charitable deductions.

· Large business meal and entertainment deductions.

· Excessive business auto usage.

· Losses from an activity that could be viewed as a hobby rather than a business.

· Large casualty losses.

Returns claiming the earned income tax credit, designed as a tax break for lower-income wage earners, also catch IRS eyes. The credit's complexity often results in legitimate mistakes on returns. Some filers, however, have been caught making false claims to increase the payment the credit provides.

Don't cheat yourself
Don't let fear of a potential audit discourage you from filing for credits or taking legitimate deductions.Even if your return is questioned, it's not a foregone conclusion that you'll end up owing the IRS. As long as your deductions and expenses are legitimate and you have documentation, Nath says, they will be allowed.

The groundwork you put into preparing your return will pay off in an audit situation. Be confident in what you entered. That's easy when you have good records to support your tax return entries.

Three types of audits
If your return is selected for a closer look, don't panic and don't ignore IRS inquiries. But even tax professionals admit that's easier said than done.

If I get a letter about one my clients, I still get that panicky feeling and I'm a professional. Once you get past those initial inquiry butterflies, determine exactly what the IRS wants and how much time it will take to give them the answers.

If you're in the audit majority, you'll fall into the least-intrusive category, the correspondence audit. This is the easiest process for both the taxpayer and the IRS. In this case, the IRS sends the taxpayer a letter asking for more information about one or two relatively simple items.

Just because you get a correspondence audit letter, there's no need to panic. In fact, if you get a letter instead of a call, that indicates the IRS views the inquiry as not particularly earth-shattering.After you provide the requested information, the case is usually closed. If not, you'll get another letter describing the additional taxes to be paid. In these cases, the IRS is not necessarily putting your return under a lot of scrutiny. They just want questions answered, some clarity. If questions about your tax return are more serious, you'll be asked to meet with an examiner at an IRS district office near your home. These agents generally have more training and experience with complex returns. Bring only the documentation needed to answer specific IRS questions, but don't bring or volunteer other data unless you want to open up those records to examination, too.

Finally, there's the field audit. This investigation is done at the taxpayer's home or business and is more wide-ranging. Wealthy taxpayers and businesses are generally the target of a field audit, which gives agents a chance to conduct a "lifestyle" audit. Here, an IRS agent gets an up-close-and-personal look at a taxpayer's house, neighborhood, car and everything else on hand to see if it meshes with the return's stated income. If a taxpayer has a new Jaguar parked in the garage of a six-bedroom house and reports income of $40,000 a year, he likely will have some explaining to do.

When you get a notice of any type of audit, respond immediately. After you've acknowledged the audit notification, you usually can get a postponement if you need time to gather records. And it's never too late -- even after the audit begins -- to get professional help, such as a tax attorney, certified public accountant or enrolled agent.

You have rights to contest audits at every level of the process.

Regardless of what kind of audit you might face, the key is to be prepared.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

IRS Clarifies Qualifying Relative

The following is an excerpt from the NSTP (National Society of Tax Professionals) ........

IRS Clarifies Qualifying Relative for Purposes of Section 152(d)(1)

IRS Notice 2008-5 provides guidance under section 152(d) of the Internal Revenue Code for determining whether an individual is a qualifying relative for whom the taxpayer may claim a dependency exemption deduction under section 151(c). It brings the IRS guidance into compliance with the tax code with respect to unrelated children whom a taxpayer can claim as a dependent under the “other relative” provision of the IRC for a person who lives in the taxpayer’s home for the full tax year and met all five tests.

Prior to IRS Notice 2008-5, with the IRC stated that the dependent exemption could only be taken if the child was “not the qualifying child of another taxpayer.”

IRS Notice 2008-5 clarifies the definition of “another taxpayer” to exclude persons who are not required to file a tax return and do not file a tax return, or only do so to claim a refund of taxes withheld.

The following examples were offered in the announcement:

Example 1.

A supports as members of his household for the taxable year an unrelated friend, B, and her 3-year-old child, C. B has no gross income, is not required by section 6012 to file an income tax return, and does not file an income tax return for the taxable year. Accordingly, because B does not have a filing requirement and did not file an income tax return, C is not treated as a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

Example 2.

Same facts as Example 1, except that B has earned income of $1,500 during the taxable year 2006, had income withheld from her wages, and is not required by section 6012 to file an income tax return. With one qualifying child, B may claim the earned income credit (EIC) in the amount of $519 for the taxable year. B files an income tax return solely to obtain a refund of withheld income taxes and does not claim the EIC. Accordingly, because B does not have a filing requirement and filed only to obtain a refund of withheld income taxes, C is not a qualifying child of B or any other taxpayer, and A may claim both B and C as his qualifying relatives, provided all other requirements of sections 151 and 152 to qualify for the deduction are met.

Example 3.

Same facts as Example 1, except that B has earned income of $8,000 during the taxable 6ear 2006, had income tax withheld from her wages, and is not required by section 6012 to file an income tax return for the taxable year. With one qualifying child, B may claim the EIC in the amount of $2,729 for the taxable year. B files an income tax return for the taxable year to obtain a refund of withheld income taxes and B claims the EIC on the return. Accordingly, because B filed an income tax return to obtain the EIC, and not solely to obtain a refund of withheld income taxes, C is a qualifying child of another taxpayer, taxpayer B, and A may not claim C as a qualifying relative.

The effective date of this notice is for taxable years beginning after December 31, 2004, tax professionals and their clients who did not claim dependency exemptions due to the prior interpretation may wish to review and file amended tax returns for 2005 and 2006.

NOTE: IRS Notice 2008-5 addresses dependency exemptions in a particular set of circumstances. It does not address issues of Child Tax Credit or Head of Household filing status.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Legislative Update

The end of 2007 has seen Congress very busy with legislative acts which will have great impact not only on 2007 tax filings but for years to come.

Not only did Congress pass The Tax Increase Protection Act of 2007 and the Energy Bill both reported to the NSTP membership last week but on December 20 both houses of Congress passed the Mortgage Relief Bill. The President has already signed the Energy Bill and Virginia Tech Relief into law and today, December 26, signed the Mortgage Relief Bill into law. The White House has indicated he will sign The Tax Increase Protection Act of 2007 upon the legislation reaching his desk.

The following is a summary of the most recently passed legislation:

The Prevent Taxation of Payments to Virginia Tech Victims and Families Act

Signed into law by President Bush on December 19, 2007.

• Excludes from gross income payments from a special memorial fund for victims of the April 2007 Virginia Tech tragedy.
• Increases the penalty for failing to file a partnership return by $1 beginning in 2008 to pay for the tax break.

It should be noted that along with the penalty in the Mortgage Debt Relief Act of 2007, the penalty is now $86 per partner per month.

Mortgage Forgiveness Debt Relief Act of 2007

Passed by Congress, awaiting the signature of President Bush.

Mortgage Relief:

• A three-year exception for debt forgiveness on qualified home loans, retroactive to January 1, 2007.
• Excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and is incurred in the acquisition, construction or substantial improvement of the principal residence.
• Indebtedness also includes refinancing of such acquisition indebtedness as long as the refinancing does not exceed the amount of the original indebtedness.
• The definition of principal residence for purposes of the Act is the same as that under §121 for the home sale gain exclusion.
• The basis of the taxpayer’s principal residence is reduced by the amount excluded from income under the Act.
• Tax years relief is granted include 2007, 2008 and 2009.

Mortgage Insurance Deduction:

• Extended the Tax Relief and Health Care Act of 2006 allowing taxpayers to take an itemized deduction for premiums paid or accrued on qualified mortgage insurance as deductible qualified residence interest for three years through December 31, 2010.
• Deduction is phased out at 10 percent for each $1,000 by which the taxpayer’s AGI exceeds $100,000.
• Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, the Rural Housing Administration or private mortgage insurance in Section 2 of the Homeowners Protection Act of 1998.

Survivor’s Home Sale Exclusion:

• Beginning January 1, 2008, the sale of a residence that had been jointly owned and occupied by the surviving and deceased spouse is entitled to the $500,000 gain exclusion.
• The sale must occur no later than two years after the date of death of the individual’s spouse.

Volunteer Emergency Responders:

• Individuals receiving a qualified state and local tax benefit, any reduction or rebate of tax and qualified payments of up to $360 each year provided on account of their volunteer services can exclude them from income.
• Tax treatment applies to tax years beginning after December 31, 2007.

Definitions:

The Act clarified the low-income housing credit and the definition of a cooperative housing corporation.

Other provisions:

• Increased the failure to file penalty for partnerships from $50 to $85 per partner per month. Along with the $1 penalty increase in the Prevent Taxation of Payments to Virginia Tech Victims and Families Act brings the penalty to $86 per partner per month.
• S Corporation new failure to file penalty of 85 per S shareholder per month, up to 12 months.
• Increase in corporate estimated tax payments for corporations with 1 billion-plus assets, by 1.5 percent to 117.25 percent for payments due in July, August and September 2012.

While Congress has recessed for the holidays, they will return to Washington for some last minute legislation which will likely include:

· Military tax breaks

· Tax gap legislation

· Tax shelter issues

· Lower corporate tax rates

· Farm-related tax incentives

The Federal Tax Alert reported that the name of Doug Shulman has been sent to the Congress for confirmation as the next IRS Commissioner. On December 19 Congress passed Sen.2436 which clarifies that an appointee serves the remainder of the vacating commissioner’s five-year term rather than starting a new five-year term. However, irrespective of any appointment or nomination delays, each five-year term is measured from November 13, 1997. Consequently the commissioner appointed to fill the vacancy left by the former Commissioner will fill the five-year term of office which began running on November 13, 2007 and will complete on November 12, 2012.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Bill Gates Has IRS Problems Too!

Bill Gates, Microsoft Founder and his IRS Problems........

And you think you have problems. Just when common folks thought they had it rough, we find out that Microsoft founder Bill Gates, the world's richest man, has tax problems too. But probably not the kind of tax problems you're thinking.

Gates said the tax office in the US has to store his financial data on a special computer because his fortune is so vast. Say what?

"My tax return in the United States has to be kept on a special computer because their normal computers can't deal with the numbers," he said at a Microsoft conference held in Lisbon.

Maybe so, maybe not. Maybe its just his big head that needs its own special computer. But Gates goes on to state a problem which is all too common among the common folk as well.

"... I am constantly getting these notices telling me I haven't paid something when really it is just on the wrong computer," he added in comments broadcast on television.

The shame of it is that the IRS regularly sends out incorrect notices, even to folks like Bill Gates. Government research has repeatedly shown, year after year, that the IRS can't seem to correct this problem of sending out a large volume of incorrect notices.

But I thought the IRS was perfect and didn't make any mistakes. In your dreams.

If you receive a notice from the IRS you should not assume the notice is correct just because the IRS sent it. The IRS's own internal accounting system is far from perfect. The Government Accounting Office (GAO) has reported for years in a row that the IRS's financial statements are not complete. The IRS doesn't even know where all the money is that it supposedly has, much less know where they’ve spent all their own money.

Let's make sure we're understanding this. The IRS expects taxpayers to keep perfect records while their records are stink.

This is a case of the IRS saying “Do as I say”, not “Do as I do”.

But back to Mr. Gates, who goes on to say, "Then they will send me another notice telling me how bad they feel they that they sent me a notice that was a mistake," he said.

How nice of the IRS to send those follow-up letters to Gates. The problem is that most taxpayers may not get an IRS follow-up letter admitting that the initial letter was incorrect. The hard reality is that common folks have to take their time and effort and fight to prove the IRS’s notice is incorrect.

Where’s the justice in that? This is not Bill Gates’ fault. It is the IRS’s fault for not catching their own erroneous letters and correcting the bad notices themselves.

Under this environment where the IRS fails to correct their own incorrect notices, the answer lies in having experienced tax professionals to defend you. Mr. Gates can afford to hire tax professionals to assist him. After all, Gates's fortune is put at 47 billion dollars, according to the latest list of the world's rich published by Forbes magazine.

The hard truth is that if you have a problem with the IRS you’ll probably need to hire a tax professional to help you. The IRS is not easy to deal with.

The good news is that hiring an experienced tax professional is more affordable than you think. A few tax professionals, allow you to make payments on the legal fees as the case proceeds.

Despite the fact that “Service” is in their name (Internal Revenue “Service”), they offer terrible “customer” service. In regard to the IRS, the old saying is true, “If You want something, you’ve got to be willing to fight for it.”

If you want to solve your tax problem let someone experienced fight for you.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

Federal Tax Lien Documents

IRS to Partially Redact All Federal Tax Lien Document SSNs Effective January 6, 2008

NOTE: This headliner is current through the publication date. Since changes may have occurred, no guarantees are made concerning the technical accuracy after the publication date.Headliner Volume 219 December 3, 2007Effective January 6, 2008 the IRS will partially redact taxpayer social security numbers in the format XXX-XX-NNNN on all federal tax lien documents filed in public records, including lien documents issued electronically. SSNs will also be partially redacted on documents issued to taxpayers and their representatives. Only the last four digits of the SSN will appear on all federal tax lien documents. This change will not impact IRS systems or IRS employees’ ability to provide assistance to taxpayers using the SSN as an identifier. The increasing problem of identity theft poses significant privacy concerns for public documents that include a social security number. IRS transcribed this information for many years on the public notice of federal tax lien. To proactively respond to growing national concerns about identity theft, the IRS instituted SSN partial redaction for notices of federal tax lien recorded after January 1, 2006. Documents such as lien releases and withdrawals associated with documents previously recorded with full SSNs were not included in the 2006 partial redaction due to the possibility of a negative impact on recording offices. The IRS recently surveyed recording offices and the findings indicate that partial SSN redaction on previously recorded documents will not negatively impact recording office procedures. Therefore, effective January 6, 2008, IRS will partially redact social security numbers of taxpayers on all federal tax lien documents. At this time, there is no requirement, nor does IRS plan, to partially redact Employer Identification Numbers. For more information about processing procedures for Notices of Federal Tax Lien and other lien notices, consult IRS Publication 1468, Guidelines for Notices of Federal Tax Liens and Centralized Lien Processing. Contact the Centralized Lien Unit in Cincinnati at the toll-free number (800) 913-6050, with requests for lien payoff or escrow demand letters and for copies of a certificate of release. Questions on other lien issues may be faxed or mailed to the advisory group where the taxpayer resides. The fax number and mailing addresses may be obtained from IRS Publication 4235, Technical Services (Advisory) Group Addresses, on the IRS.gov publications Web page. Call toll-free (800) 829-3676 to order by U.S. mail, or access IRS.gov to download the publications online. S. Raines, Sr. Financial Advisor/Tax Preparer www.effectur.com

The AMT for 2007

The tax professional community has awaited the action of Congress to forestall the impact of the AMT on 2007 taxes. Yesterday Congress passed and the President has indicated he plans to sign the bill titled the “Tax Increase Prevention Act of 2007.” The bill has two particular items of interest to AMT:

First, the tax exemption amount is changed to:

• $66,250 for Married Filing Joint taxpayers;
• $33,125 for Married Filing Separate taxpayers; and
• $44,350 for all other taxpayers.

Second, the nonrefundable personal credits that offset the AMT in 2006 will continue to offset the AMT for 2007.

This AMT “patch” stipulated that payment for such would be retroactive in 2008, during consideration of legislation that would extend three dozen popular tax provisions set to expire December 31.

Of the Congressional comments, Dennis Cardoza, House Member from California, said it best, “If George Washington had looked across the river and seen all those redcoats and turned tail, we would not have the country we have today. Sometimes you just have to do what is right.”

IR-2007-202

The Internal Revenue Service announced it will immediately begin the final reprogramming steps for its income-tax processing systems to prepare for the upcoming tax season following the final passage of the Alternative Minimum Tax “patch”.

“Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone,” said Linda Stiff, IRS Acting Commissioner. “Our goal is to process tax returns accurately and to issue refunds to taxpayers as quickly as possible.”

The AMT and AMT-related tax calculations affect a number of core IRS processing systems that will need to be updated. The IRS is continuing to aggressively explore options for the 2008 filing season in order to minimize the impact of processing delays on taxpayers.

To help the tax professional and software communities prepare for the upcoming filing season, revised copies of the 12 tax forms impacted by the AMT legislation will be posted to irs.gov within 72 hours after the AMT patch is signed into law.

S. Raines, Sr. Financial Advisor/Tax Preparer
www.effectur.com

New Social Security Tax Form

WASHINGTON — The Internal Revenue Service has developed a new form for employees who have been misclassified as independent contractors by an employer. Form 8919, Uncollected Social Security and Medicare Tax on Wages, will now be used to figure and report the employee’s share of uncollected social security and Medicare taxes due on their compensation.

Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when they are actually an employee. When this happens, Form 8919 will be used beginning for tax year 2007 by workers who performed services for an employer but the employer did not withhold the worker’s share of social security and Medicare taxes.

In addition, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria include:

• The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating they are an employee of the firm.
• The worker has been designated as a section 530 employee by their employer or by the IRS prior to January 1, 1997.
• The worker has received other correspondence from the IRS that states they are an employee.
• The worker was previously treated as an employee by the firm and they are performing services in a similar capacity and under similar direction and control.
• The worker’s co-workers are performing similar services under similar direction and control and are treated as employees.
• The worker’s co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
• The worker has filed Form SS-8 with the IRS and has not yet received a reply.

By using Form 8919, the worker’s social security and Medicare taxes will be credited to their social security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

In the past, misclassified workers often used Form 4137 to report their share of social security and Medicare taxes. Misclassified workers should no longer use this form. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare taxes on allocated tips and tips not reported to their employers.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

IRS Needs Some Angels of Mercy

Procedure Unveiled for Reporting Violations of the Tax Law,
Making Reward Claims

WASHINGTON — The Internal Revenue Service today outlined ways informants can report violations of the tax law and possibly claim a reward based on the amount of additional tax, penalties and interest that is owed.

“Since Congress enacted new procedures increasing award amounts last year, informants have come forward with information on alleged tax noncompliance amounting to tens of millions of dollars, and in some cases hundreds of millions of dollars,” said Stephen Whitlock, Director of the Whistleblower Office.

Since the Whistleblower Office was created in December 2006, the IRS has received about 80 claims, half of those submitted in just the last two and a half months. To make a claim, an informant must file new Form 211, Application for Award for Original Information, which asks informants to provide an estimate of the tax owed, the pertinent facts in the case and an explanation of how the informant obtained the information.

The IRS’ Whistleblower Office will make the final determination about whether an award will be paid and the amount of the award for claims that it processes. Awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected.

Under the new procedures, the amount of award will be at least 15%, but no more than 30%, of the collected proceeds in cases in which the IRS determines that the information submitted by the informant substantially contributed to the collection of tax. The award percentage may be reduced in some circumstances, which are described in IRS guidance.

To be eligible for an award under the new procedures, the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed $2 million for any taxable year and, if the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year in question.

All awards will be subject to normal tax reporting and withholding requirements.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com

IRS Implementing AMT Patch

WASHINGTON — The Internal Revenue Service announced it will immediately begin the final reprogramming steps for its income-tax processing systems to prepare for the upcoming tax season following final passage of the Alternative Minimum Tax “patch” Wednesday by the House.

“Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone,” said Linda Stiff, IRS Acting Commissioner. “Our goal is to process tax returns accurately and to issue refunds to taxpayers as quickly as possible.”

The AMT and AMT-related tax calculations affect a number of core IRS processing systems that will need to be updated. The IRS is continuing to aggressively explore options for the 2008 filing season in order to minimize the impact of processing delays on taxpayers. Additional details will be available to the public as soon as plans are finalized.

To help the tax professional and software communities prepare for the upcoming filing season, revised copies of the 12 tax forms impacted by the AMT legislation will be posted to IRS.gov within 72 hours after the AMT patch is signed into law.

As more details on the AMT situation develop, the IRS encourages taxpayers to visit www.irs.gov for more information.

S. Raines, Sr. Financial Advisor/Tax Preparer

www.effectur.com