Social Security Income Questions That You May Have Asked?

Social Security Income: Back Payments

I received social security benefits this year that were back benefits prior years. Do I amend my returns for prior years? Are the back benefits paid in this year for past years taxable for this year?

You must include the taxable part of a lump-sum (retroactive) payment of benefits received in the current year in your current year's income, even if the payment includes benefits for an earlier year.

Generally, you use your current year's income to figure the taxable part of the total benefits received in the current year. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers the taxable portion of your benefits. Refer to Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for a detailed explanation of the election and worksheets. Refer to Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits.

Social Security Income: Regular & Disability Benefits

I retired last year, and started receiving social security payments. Do I have to pay taxes on my social security benefits?

The amount of income tax, if any, that you must pay on the social security benefits you receive depends on the total amount of your income and benefits for the taxable year. If you are married and file a joint return, you must combine your incomes and your social security and equivalent tier 1 railroad retirement benefits when figuring the taxable portion of the benefits.

The taxable amount of the benefits is figured on a worksheet in the Form 1040 Instructions or Form 1040A Instructions book, or in Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Refer to Publication 915, for base amounts and additional information regarding taxability and reporting requirements. Or, Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits, includes additional information regarding taxability and reporting requirements.

Social Security Income: Survivors' Benefits

Are social security survivor benefits for children considered taxable income?

The person who has the legal right to receive the benefits must determine whether the benefits are taxable. For example, if you and your child receive benefits, but the check for your child is made out in your name, you must use only your part of the benefits to see whether any benefits are taxable to you. The amount of income tax that your child must pay on that part of the benefits that belong to your child depends on the total amount of income and benefits for the taxable year. Refer to Publication 915 and Tax Topic 423, Social Security and Equivalent Railroad Retirement Benefits.

IRS Freedom of Information

The Freedom of Information Act (FOIA), 5 U.S.C. § 552, provides public access to agency records unless protected from disclosure by one of the FOIA’s nine exemptions or three exclusions. The FOIA applies to records created by Federal agencies and does not cover records held by Congress, the courts, or state and local government agencies. Each state has its own public access laws which should be consulted for access to state and local records.

The Internal Revenue Service complies with the FOIA by:
Maintaining publicly available materials on the Internet in the IRS Electronic Reading Room,
Staffing the IRS Freedom of Information Reading Room at 1111 Constitution Avenue, NW, Washington, DC 20224, and

Responding to written requests for agency records not available in the Reading Room. IRS Disclosure Offices receive and process these requests within timeframes set by law. See the IRS FOIA Guide for more detailed information.

Do You Know Someone Who Needs the Whistle Blown on Them?

The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

Who can get an award?

The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer.

The IRS is looking for solid information, not an “educated guess” or unsupported speculation. We are also looking for a significant Federal tax issue - this is not a program for resolving personal problems or disputes about a business relationship.

What are the rules for getting an award?

The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) - Whistleblower Rules.

The IRS also has an award program for other whistleblowers - generally those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less that $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court. The rules for these cases are found at Internal Revenue Code IRC Section 7623(a) - Informant Claims Program, and some of the rules are different from those that apply to cases involving more than $2 million.

If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs.

Additional Resources:

What Happens to a Claim for an Informant Award (Whistleblower)Procedures used and the criteria followed to identify and process informant cases

History of the Whistleblower/Informant ProgramHistorical information on the evolution of the concept of paying for leads from its inception up to the current law followed today

Whistleblower LawA brief synopsis of what the new whistleblower law entails. This is the most significant change to the Services’ approach to informant awards in 140 years

How Do You File a Whistleblower Award ClaimStep by step procedures to follow to file an informant claim for award

Confidentiality and Disclosure for WhistleblowersThe rules governing confidentiality of informant information

IRC Section 7623(b) - Whistleblower RulesThe requirements of the new rules enacted in IRC Section 7623(b), the Whistleblower Program

IRC Section 7623(a) - Informant Claims ProgramThe requirement of the rules governing claims that do not meet the requirements of the provisions in the whistleblower program under IRC Section 7623(b). These claims are part of the Informant Claims Program

IRS Form 211Application for Award for Original Information

News Release IR-2007-201Procedure Unveiled for Reporting Violations of the Tax Law, Making Reward Claims

Notice 2008-4 Guidance to the public on how to file claimsClaims Submitted to the IRS Whistleblower Office under Section 7623

Whistleblower Office At-a-Glance

Home Office Deduction Reminders

Overstated adjustments, deductions, exemptions and credits account for up to $30 billion per year in unpaid taxes, according to IRS estimates.

Home Office Deduction: Basic Requirements

Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence may not be deducted as a business expense. However, taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. Note: The amount of depreciation deducted, or that could have been deducted, decreases the basis of your property.

In order to claim a deduction for that part of a home used for business, taxpayers must use that part of the home:

Exclusively and regularly as their principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of their business, or in connection with their trade or business where there is a separate structure not attached to the home; or

On a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

In addition, taxpayers working as employees can claim this deduction only if the regular and exclusive business use of the home is for the convenience of their employer and the portion of the home is not rented by the employer.

“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.

Non-business profit-seeking endeavors such as investment activities do not qualify for a home office deduction, nor do not-for-profit activities such as hobbies.

Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.

These requirements are discussed in greater detail in Publication 587, Business Use of Your Home.

Computing the Amount of Home Office Deduction

Generally, the amount of the deduction depends on the percentage of the home that is used for business. The deduction will be limited if gross income from the business is less than the total business expenses.

A taxpayer can use any reasonable method to compute business percentage, but the most common methods are to:

Divide the area of the home used for business by the total area of the home, or
Divide the number of rooms used for business by the total number of rooms in the home if all rooms in the home are about the same size.

Taxpayers may not deduct expenses for any portion of the year during which there was no business use of the home. If the gross income from business use of the home is less than the total business expenses, the deduction for certain expenses is limited. Publication 587 includes examples, worksheets and additional information on computing the allowable deduction.

Personal Expenses Are Not Business Expenses

It is important for taxpayers to realize that business expenses may be deducted only if they are ordinary and necessary for the particular type of business. Personal, family and living expenses are not deductible under any circumstances. A common error is to deduct expenses for a portion of the home that is not used regularly and exclusively for business.

Example: The basic local telephone service charge, including taxes, for the first telephone line into a home is a nondeductible personal expense. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into a home used exclusively for business, are deductible business expenses.

The IRS encourages taxpayers to familiarize themselves with the requirements before taking a home office deduction and to keep complete and accurate records to substantiate deductions.

According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.

Additional Resources:

Business Income and the Tax Gap
Cost of Goods Sold and the Tax Gap
Third-Party Reporting Reminders
Publication 587, Business Use of Your Home
Publication 583, Starting a Business and Keeping Records
Small Business and Self-Employed One-Stop Resource Center
Online Learning and Educational Products
Abusive Home-Based Business Tax Schemes

Depreciation Reminders

The Internal Revenue Service encourages taxpayers to understand the rules surrounding depreciation before attempting to deduct business-related depreciation expenses.

Overstated adjustments, deductions, exemptions and credits comprise up to $30 billion per year in unpaid taxes, according to IRS estimates. In order to educate taxpayers regarding their filing obligations, this article explains the general rules for depreciating assets.

Depreciation Basics

In general, if property is acquired for use in a business or another income-producing activity and is expected to last more than one year, taxpayers cannot deduct the entire cost as a business expense in the year it was acquired. They must depreciate the cost over the property’s useful life (as defined by the Internal Revenue Code) and deduct part of the cost each year on the Form 4562, Depreciation and Amortization. (Refer to IRC Section 179 Deduction below for an exception.)

Correctly computing depreciation deductions can be a challenging process which cannot be covered thoroughly in this fact sheet. Taxpayers with depreciable business or income-producing assets should study the resources listed at the end of this article and consider using the services of tax professionals when appropriate.

In order to be depreciated, property must:

Be property the taxpayer owns
Be used in the taxpayer’s business or income-producing (investment) activity
Have a determinable useful life
Be expected to last more than one year

Certain property cannot be depreciated, including:

Land

Property placed in service and disposed of in the same year

Certain types of intangible assets, such as franchises, agreements not to compete, and goodwill

Property used only for personal activities cannot be depreciated. If an asset such as a home or motor vehicle has both personal and business use, only the business portion of its cost may be depreciated. Depreciation rules regarding partial business or investment use are discussed in Publication 946, How to Depreciate Property.Computing Depreciation

In order to compute depreciation correctly a taxpayer must know the following:

When the asset was “placed in service” for use in a business or income-producing activity
The basis of the depreciable asset, and
The depreciation methods available

Generally property is considered placed in service when it is ready and available for a specific use, regardless of whether or not it is actually used at the time. For example, a house purchased for use as rental property is placed in service when it is ready and available to rent, even if it is not actually rented at that time.

The basis is the amount that will be recovered (deducted) once the asset is fully depreciated. It may be the cost of the asset or another amount, depending on how and when it was acquired. Information on determining basis is available in Publication 946, How to Depreciate Property, and Publication 551, Basis of Assets.

Most assets are depreciated according to the Modified Accelerated Cost Recovery System. However, there are situations when MACRS cannot be used. Taxpayers should carefully study the information in Publication 946 to be certain they are using the correct method.
IRC Section 179 Deduction

Some taxpayers can elect to recover all or part of the cost of certain qualifying property, up to a certain dollar limit each year, by claiming a Section 179 deduction. By taking the Section 179 deduction a taxpayer chooses to deduct depreciation up front rather than over the life of the asset. It is especially important to remember that the Section 179 deduction may be taken only on assets acquired for use in trade or business, not on property used for other income-producing activities, such as rental activities. See Publication 946, How to Depreciate Property, for detailed rules applicable to the Section 179 deduction.

Disposing of Depreciable Assets

Depreciation reduces the owner’s basis in the property. When depreciable property is sold or disposed of, depreciation that was allowed or allowable on that property must be taken into consideration. In other words, even if no depreciation deduction was taken, the net profit or loss on the disposition of the property must be computed as if depreciation was actually taken.

Taxpayers must also follow recapture rules to determine the amount of gain to be treated as ordinary income rather than capital gain. More information on the disposition of assets can be found in Publication 544, Sales and Other Dispositions of Assets.

Additional Resources:

Publication 946, How to Depreciate Property
Publication 551, Basis of Assets
Publication 544, Sales and Other Dispositions of Assets
A Brief Overview of Depreciation
Tax Topic 704, Depreciation

Reporting Farm Income and Expenses

Farmers may receive income from many sources, but the most common source is the sale of livestock, produce, grains, and other products raised or bought for resale. The entire amount a farmer receives, including money and the fair market value of any property or services, is reported on IRS Schedule F, Profit or Loss From Farming.

Bartering is another income source for farmers. Bartering occurs when farm products are traded for other farm products, property, someone else’s labor or personal items. For example, if a farmer helps another farmer build a barn and receives a cow for his work, the recipient of the cow must report its fair market value as ordinary income. If the farmer uses this cow for business purposes, he may be able to claim depreciation over its useful life as well as deduct the expenses incurred for the cow. However, if the cow is for personal use, no depreciation or expenses for the cow would be deductible.Other income sources include:

Cooperative distributions
Agricultural program payments
Commodity Credit Corporation (CCC) loans
Crop insurance proceeds and federal crop disaster payments
Custom hire (machine work) income
Deductible Expenses

The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the business. A necessary expense is one that is appropriate for the business.

Among the deductible expenses are amounts paid to farm labor. If a farmer pays his child to do farm work and a true employer-employee relationship exists, reasonable wages or other compensation paid to the child is deductible. The wages are included in the child’s income, and the child may have to file an income tax return. These wages may also be subject to social security and Medicare taxes if the child is age 18 or older.

Another deductible expense is depreciation. Farmers can depreciate most types of tangible property –– except land –– such as buildings, machinery, equipment, vehicles, certain livestock and furniture. Farmers can also depreciate certain intangible property, such as copyrights, patents, and computer software. To be depreciable, the property must

Be property the farmer owns
Be used in the farmer’s business or income-producing activity
Have a determinable life
Have a useful life that extends substantially beyond the year placed in service

Some expenses paid during the tax year may be partly personal and partly business. Examples include gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest and taxes. Farmers must allocate these expenses between their business and personal parts. Generally, the personal part of these expenses is not deductible.

For example, a farmer paid $1,500 for electricity during the tax year. He used one-third of the electricity for personal purposes and two-thirds for farming. Under these circumstances, two-thirds of the electricity expense, or $1,000, is deductible as a farm business expense. Records must be maintained to document the business portion of the expense.

Information about other deductible expenses and reporting requirements can be found in IRS Publication 225, Farmer’s Tax Guide.

Employment Taxes and Classifying Workers

Being an employer carries important responsibilities. Critical issues include making sure all workers are properly classified as employees or independent contractors and making sure taxes are withheld and paid in a timely way.

It is a common misconception that someone working part time or earnings less than $600 per year should be classified as an independent contractor. But in fact, part time status and the number of hours worked are generally not factors that determine whether a worker is an employee or independent contractor.

Worker Classification

Employers must withhold Social Security and income taxes from employee paychecks. Conversely, independent contractors are responsible for reporting and paying their own Social Security and income taxes.

Businesses use several factors to determine how to classify its workers, including the degree of control the business has over its workers. Generally, the more control the business has over a worker, the more likely it is that the worker is an employee rather than an independent contractor.

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral control
Financial control
Type of relationship

Behavioral control relates to whether the business has a right to direct and control how the worker performs the task for which they are hired. In general, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that the employer has the right to control the details of how the services are performed. Such details include:

When and where to do the work
What tools or equipment to use
What workers to hire or to assist with the work
Where to purchase supplies and services
What work must be performed by a specified individual
What order or sequence to follow

Financial control looks at whether a worker has the ability to affect financial decisions. Does the worker have a significant investment in assets or tools? Are there unreimbursed expenses that the worker has to bear themselves? Are the worker’s services available to the public? What is the method of payment; do they get paid whether the work is done or not or do they get paid only if they finish the job? Independent contractors can realize a profit or loss on a job. Can the worker make business decisions that affect his bottom line?

Relationship of the parties looks to whether or not there is a contract between the worker and the business and how it is worded; whether the worker gets any type of benefits – vacation and sick pay, pension plan, and health or life insurance; and the permanency of the relationship such as continuing indefinitely or only for a specific project or period. Also, does the worker have his own business, which he markets to others?

If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment
Taxes and Income Tax Withholding.

Employment Tax Obligations

If you have employees, you are responsible for several federal, state, and possibly local taxes. As an employer, you must withhold certain taxes from your employees’ pay checks. Before you become an employer and hire employees, you need a federal Employer Identification Number.Employment taxes include the following:

Federal income tax withholding
Social Security and Medicare taxes
Federal unemployment taxes (FUTA)

You generally must withhold federal income tax from your employee’s wages. To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employers Tax Guide and Publication 15-A, Employers Supplemental Tax Guide.

Social Security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). Social Security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself.

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.

In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for federal taxes. However, some taxpayers are required to deposit using the Electronic
Federal Tax Payment System (EFTPS).

A business generally does not have to withhold or pay any federal taxes on payments to independent contractors. However, independent contractors are subject to self-employment and income taxes and should plan accordingly.Most employers make every effort to meet their employment tax obligations. If an employer does make an error and classifies an employee as an independent contractor, the employer should correct that mistake. IRS.gov has instructions for correcting reporting of misclassified employees.

Professional Help

Determining worker status and filing and paying employment taxes can be a complex process. Business owners who need assistance are encouraged to consult a tax professional or payroll service provider.

If you outsource some or all of your payroll duties, you should keep in mind you are still responsible for the payment of the taxes. If a third-party fails to make your employment tax deposits, you are still liable for the unpaid amounts. IRS.gov has additional tips for outsourcing payroll services.

Additional Resources:

Publication 15, Employer’s Tax Guide
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 1779, Independent Contractor or Employee brochure
Publication 1976, Independent Contractor or Employee? Section 530 Employment Tax Relief Requirements
Employment Taxes for Small Businesses IRS Web page
IR-2007-184, IRS and States to Share Employment Tax Examination Results
Payroll and Practitioner Resources
The IRS’s archived Tax Talk Today November 2007 Webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?” focuses exclusively on worker classification issues.

Filing Past-Due Tax Returns

Most citizens voluntarily file their tax returns and pay their taxes. Most people explain it by saying they want to pay their fair share. Others file to get a refund, claim a credit or avoid breaking the law.

There are times when normally law-abiding citizens fail to file. Why? IRS research shows that sometimes people don’t file in years their filing status changes, such as due to the death of a spouse or divorce. Emotional or financial reasons may cause a person to not file. Or it could simply be due to procrastination.

Unfortunately, failing to file a return creates additional problems.

Your need to file is largely determined by your age, filing status and gross income. You can determine whether you needed to file in a prior year by checking the “Do You Have to File” section in the instructions of the Form 1040 for the year in question.

Why file a tax return?

Taxpayers are required by law to file an income tax return for any year in which a filing requirement exists.

There are numerous practical reasons to file tax returns. Important programs like federal aid to higher education require applicants to submit copies of tax returns to qualify for loans. Lending institutions also may require copies of filed returns for buying a home or financing a business.

And the filing of tax returns can have a tremendous impact on your future. A person’s lifetime earnings as reported to the IRS and the Social Security Administration are the basis for Social Security retirement and disability benefits as well as Medicare. Reported income is also the source for state benefits such as unemployment compensation and industrial insurance.

What happens if you do not file?

Not filing a federal tax return can be costly — whether you end up owing more or missing out on a refund. The IRS may also impose a wide range of civil and criminal sanctions on persons who fail to file returns.

If you owe tax and your return was not filed by the due date, including extensions, you may be subject to the failure to file penalty, unless you have reasonable cause for not filing. If you did not pay your tax in full by the due date for the return, not including extensions of time to file, you also may be subject to the failure to pay penalty, unless you have reasonable cause for your failure to pay. Additionally, interest is charged on taxes not paid by the due date; even if you have an extension of time to file. Interest is also charged on penalties.

The IRS continues to identify people who have a filing requirement but have failed to file a return.

By law the IRS may file a substitute return for you if you do not voluntarily file. A series of letters is first sent explaining the possible action IRS may take as part of the Substitute for Return Program.

If you do not file a return or otherwise indicate disagreement such as by requesting to exercise your appeal rights, the IRS will file a basic return for you. An IRS-prepared return will not include any of your additional exemptions or expenses. The IRS will compute the tax liability and send you a bill for the tax that will also include interest and penalties.

If a substitute return has already been filed for you by the IRS, you should still file your own return to claim any additional items. The IRS will generally adjust your account to reflect the corrected figures.

What are the consequences of not filing a tax return?

Here are some things to consider:

Failure to file penalty.

If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the “late filing” penalty, and interest charges. The longer you delay, the larger these charges grow. It may result in penalty and interest charges that could increase your tax bill by 25 percent or more.

Losing your refund.

There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.

EITC.

Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit.

Statutes of limitation.

After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid.On the other hand, the statute of limitations for IRS to assess and collect any outstanding balances does not start until a return has been filed.In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.

What should you do?

Regardless of your reason for not filing, file your tax return as soon as possible. You can contact a tax professional or the IRS for help with filing delinquent returns.

If you are unable to fully pay any tax due on the late returns, do not let this prevent you from filing as payment options may be available. For more details, ask your tax professional or an IRS representative.

Filing tax returns and paying the correct amount of tax is good citizenship. Conscientiously discharging this duty contributes to our nation’s well being and provides peace of mind. And failing to file returns can jeopardize a family’s financial security and future.

For more information on how to file a tax return for a prior year, visit the IRS Web site at IRS.gov, call the IRS Tax Help Line at 1-800-829-1040 or visit your local IRS office.

Additionally:

for tax law and account questions, call 1-800-829-1040
for business and specialty tax questions, call 1-800-829-4933
to order tax forms and publications, call 1-800-829-3676

Related Items:

Prior Year Forms, Instructions and Publications
Contact My Local Office

Avoiding IRS Penalties

The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion.

If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.

Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included).

Estimated Tax-Related Penalties

Employees have taxes withheld from their paychecks by their employer. When you have income that is not subject to withholding you may have to make estimated tax payments during the year.

This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount being withheld from your salary, pension, or other income is not enough to pay your tax liability.

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may have to pay a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

Penalties for filing or paying taxes late

The most common penalties are for filing late or paying taxes late.

Filing late: If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5 percent for each month or part of a month that a return is late, but not more than 25 percent. The penalty is based on the tax not paid by the due date (without regard to extensions).

If you file your return more than 60 days after the due date, the minimum penalty is $100 or, if less, 100 percent of the tax on your return.

Paying tax late: You will have to pay a failure-to-pay penalty of ½ of 1 percent (0.5 percent) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. This penalty does not apply during the automatic six-month extension of time to file period if you paid at least 90 percent of your actual tax liability on or before the original due date of your return and pay the balance when you file the return.

The failure-to-pay penalty rate increases to a full 1 percent per month for any tax that remains unpaid the day after a demand for immediate payment is issued, or 10 days after notice of intent to levy certain assets is issued.

For taxpayers who filed on time, the failure-to-pay penalty rate is reduced to ¼ of 1 percent (0.25 percent) per month during any month in which the taxpayer has a valid installment agreement in force.

Combined penalties: For any month both the penalty for filing late and the penalty for paying late apply, the penalty for filing late is reduced by the penalty for paying late for that month, unless the minimum penalty for filing late is charged.

Accuracy Related Penalties

The two most common accuracy related penalties are the "substantial understatement" penalty and the "negligence or disregard of the rules or regulations" penalty. These penalties are calculated as a flat 20 percent of the net understatement of tax.

Penalty for substantial understatement

You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10 percent of the correct tax or $5,000for individuals. For corporations, the understatement is considered substantial if the tax shown on your return exceeds the lesser of 10 percent (or if greater, $10,000) or $10,000,000.

You may avoid the substantial understatement penalty if you have substantial authority for your tax treatment of the item or through adequate disclosure. To avoid the substantial understatement penalty by adequate disclosure, you must properly disclose the position on the tax return and there must at least be a reasonable basis for the position.

To properly disclose the position, complete and attach IRS Form 8275 to your tax return and disclose all relevant facts. A reasonable basis is one that has approximately 10 percent or greater chance of success if challenged. This means that the position must be more than just arguable. There must be some authority supporting the position.

Penalty for negligence and disregard of the rules and regulations

"Negligence" includes (but is not limited to) any failure to: make a reasonable attempt to comply with the internal revenue laws exercise ordinary and reasonable care in preparation of a tax return or keep adequate books and records or to substantiate items properly

This penalty may be asserted if you carelessly, recklessly or intentionally disregard IRS rules and regulations - by taking a position on your return with little or no effort to determine whether the position is correct or knowingly taking a position that is incorrect. You will not have to pay a negligence penalty if there was a reasonable cause for a position you took and you acted in good faith.

Civil Fraud penalty

If there is any underpayment of tax on your return due to fraud, a penalty of 75 percent of the underpayment due to fraud will be added to your tax. The fraud penalty on a joint return does not apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.
Negligence or ignorance of the law does not constitute fraud.

Typically, IRS examiners who find strong evidence of fraud will refer the case to the Internal Revenue Service Criminal Investigation Division for possible criminal prosecution. Keep in mind that both civil sanctions and criminal prosecution may be imposed.

Frivolous Tax Return penalty

You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. If you jointly file a frivolous tax return with your spouse, both you and your spouse each may have to pay a penalty of $5,000. A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect.

You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.

This penalty is added to any other penalty provided by law.

Penalty for bounced checks

If you write a check to pay your taxes and the check bounces, the IRS may impose a penalty. The penalty is either 2 percent of the amount of the check - unless the check is under $1,250, in which case the penalty is the amount of the check or $25, whichever is less.

The bottom line is that you must report all your income, file your return and pay your tax by the due date to avoid interest and penalty charges.

For more information about IRS notices and bills, refer to Publication 594 (PDF), Understanding the Collection Process. More information about penalty and interest charges is contained in Chapter 1, Filing Information, of Publication 17, Your Federal Income Tax.

Additional Resources:

Tax Topic 653 - IRS Notices and Bills, Penalties and Interest Charges
Filing Late and/or Paying Late: Information You Should Know
Haven't Filed a Tax Return? Here's What to do
Receiving a Bill From the IRS
Electronic Federal Tax Payment System (EFTPS)
Installment Agreements
What is an Offer in Compromise?
Temporary Delay
The Electronic IRS: File, Pay....and More

Moving To and From a US Territory/Possession

Every year, people move to or from a U.S. territory such as American Samoa, Guam, the Northern Mariana Islands, Puerto Rico or the U.S. Virgin Islands. What many don’t realize is this can trigger new filing requirements and the need to determine whether they are considered a bona fide resident of the U.S. territory.

Notifying the IRS about Residency in a U.S. Territory

If a taxpayer moves to or from a territory and has worldwide income of more than $75,000 that year, it is necessary to file Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, with the Internal Revenue Service (IRS). If married, the $75,000 threshold applies to each spouse separately.

File Form 8898 by the due date (including extensions) for filing the Form 1040 or Form 1040NR. File this form by itself at the following address:

Internal Revenue Service center

P.O. Box 331 Drop Point S-607

Bensalem, PA 19020-8517

There may be a $1,000 penalty for not filing a required Form 8898 or for not providing all of the required information.

Determining Bona Fide Residency in a U.S. Territory

Bona fide residents (BFR) may be citizens, resident aliens or nonresident aliens of the U.S. In general, a “bona fide resident” means an individual who satisfies A, B, and C below:

Presence Test:

Present 183 days (or more) in the U.S. territory during the tax year, or
Present 549 days (or more) in the U.S. territory during the tax year AND 2 immediately preceding tax years, with a minimum of 60 days presence in the U.S. territory in each of these 3 years, or
Present no more than 90 days in the U.S. during the tax year, or
Present in the U.S. territory for more days in tax year than in the U.S. AND U.S. earned income is not greater than $3,000, or

No significant connection to the U.S. (e.g., no permanent home, voter registration, spouse or minor child in the U.S.)-.

No tax home outside the U.S. territory during the tax year.
No closer connection to the U.S. or a foreign country than to the U.S. territory during the tax year.

Certain days count as days present in the relevant U.S. territory, even if the taxpayer was not physically present in the U.S. territory. These days include:

days spent outside the U.S. territory for qualified medical reasons for the taxpayer or a family member whom the taxpayer accompanies,

days outside the U.S. territory because a disaster prevented the taxpayer from being in the U.S. territory, or

days spent outside the U.S. territory due to a mandatory evacuation.

Also, certain days spent in the U.S. do not count as days of presence in the U.S. for the purposes of the presence test. These include:

days the taxpayer spends less than 24 hours while traveling between two places outside the U.S,
days the taxpayer is in the US. as a professional athlete to compete in a charitable sports event,
days the taxpayer is temporarily present in the U.S. as a full time student, and
days the taxpayer is in the U.S. serving as an elected representative of a U.S. territory, or serving full time as an elected or appointed official or employee of the government of the U.S. territory or its political subdivisions.

There are limited exceptions to the tax home and closer connection requirements that apply for the year of the move to (or from) a U.S. territory. These exceptions are described in the Form 8898 Instructions.

Filing Income Tax Returns

Once the residency status and the source of each item of income received during the tax year is known, the taxpayer is ready to identify any U.S. and/or U.S. territory filing requirements. It may be necessary to file income tax returns with more than one jurisdiction, e.g., the U.S. and the U.S. territory.

Generally, the same rules that apply for determining U.S. source income also apply for determining U.S. territory source income. There is a table in Publication 570 showing the general rules for determining U.S. source income.

Additional Resources:

International Information on irs.gov
Persons Employed in U.S. Possessions
Individuals Living or Working in U.S. Possessions
Publication 570, Tax Guide for Individuals With Income from U.S. Possessions.
Form 8898 Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession
Form 8898 Instructions

IRS Updates Per Diem Rates for 2008

The IRS has updated the maximum per diem rates for meals and lodging. The updated per diem rates are released each year by October. Taxpayers have the option of using the updated amounts for the period beginning October 1, 2008 through December 31, 2008, or using the rates that were in effect for the first nine months of the year for the entire year.

Also included in the notice is the maximum meal and incidental rate allowed for taxpayers in the transportation industry. Beginning October 1, 2008, the meal and incidental rate for travel within the United States is $52/day (outside the United States, $58/day). These rates are limited to 80 percent in 2008. Taxpayers who used the rates in effect prior to October 1, 2008, must continue to use those rates for the remainder of the 2008 tax year. Those taxpayers cannot use the updated rates until January 1, 2009.

Third-Party Reporting Reminders - Never Get Caught In This Trap

Underreported business income accounts for more than $100 billion per year in unpaid taxes, according to IRS estimates.

In order to educate taxpayers regarding their filing obligations, this fact sheet, the third in a series, explains the rules pertaining to third-party payer reporting of income.

Third-Party Reporting Promotes Accurate Business Income Reporting

In many cases, the tax law requires third-party payers, such as small businesses or individuals, to report to the IRS payments they have made to subcontractors, attorneys, architects and other service providers.

In fact, experience shows that taxpayers are much more likely to report their income when they receive third-party notification of payments they received. For example, non-farm sole proprietorships, which seldom receive third-party payer notifications, underreport about 57 percent of their business income on Schedule C, Profit or Loss from Business. By contrast, wage earners who receive Form W-2, Wage and Tax Statement, underreport only about 1 percent of their wages.

Form 1099-MISC

Form 1099-MISC, Miscellaneous Income, is most commonly used by third-party payers to report payments made in the course of a trade or business to others for services. Third-party payers should report the following on Form 1099-MISC:

Payments of $600 or more for services performed by persons not treated as employees, such as fees to subcontractors, attorneys or accountants

Rent payments of $600 or more

Prizes and awards of $600 or more that are not for services, such as TV show winnings

Royalty payments of $10 or more

Payments to certain crew members by operators of fishing boats

Sales of $5,000 or more of consumer products to a person for resale anywhere other than in a permanent retail establishment

Any payments from which federal income tax has been withheld under backup withholding rules

There are some exceptions.

Form 1099-MISC is generally not required for payments: to a corporation; for merchandise, telephone, freight, storage and similar items; of rent to a real estate agent or a tax-exempt organization; to the United States, any individual state, the District of Columbia, a U.S. possession or a foreign government

Third-party payers must provide a copy of the form to the payee on or before Jan. 31 following the end of the tax year. For example, for services rendered during 2006, a payer must provide the form to its payee by Jan. 31, 2007. The payer must also file Forms 1099-MISC with the IRS by Feb. 28 (March 31, if filing electronically). Box 7: Non-Employee Compensation

One of the most common entries found on Form 1099-MISC is Box 7 for non-employee compensation. Examples of payments to be reported in Box 7 include:

Professional service fees, such as fees to attorneys, accountants, architects, contractors and engineers.

Fees paid by one professional to another, such as fee-splitting or referral fees.

Payment for services, including payment for parts or materials used to perform the services if supplying the parts or materials was incidental to providing the service.

Commissions paid to non-employee salespersons that are subject to repayment but not repaid during the calendar year.

Fees paid to non-employees, including travel reimbursements for which the persons did not account to the payer, if the fee and reimbursement total at least $600.

Payments to non-employee entertainers for services.

Exchanges of services between individuals in the course of their trades or businesses.

Generally, payments reported in Box 7 are subject to self-employment tax by the recipient. If the payments are not subject to self-employment tax, the third-party payer should report them as other income in Box 3.

The IRS encourages businesses to establish reliable record-keeping systems, accurately report all income, properly compute cost of goods sold and other expenses, and report all required third-party payments. According to IRS research, understated business income, including underreported receipts and overstated expenses, is an area where compliance is a concern. In addition to increasing outreach and education in these areas, the IRS will also be focusing enforcement efforts, including examinations, on these issues.

Additional resources:

The Tax Gap
Business Income and the Tax Gap
Cost of Goods Sold and the Tax Gap
Publication 334, Tax Guide for Small Business
Publication 583, Starting a Business and Keeping Records
Small Business and Self-Employed One-Stop Resource Center
Online Learning and Educational Products
Form 1099-MISC Instructions

Reporting Miscellaneous Income

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

cash earned from side jobs,
barter exchanges of goods or services,
awards, prizes, contest winnings and
gambling proceeds.

This information will help taxpayers better understand miscellaneous income and what they are required to report as taxable on their Form 1040.

The tax gap, or the amount of taxes that go unpaid each year, results from taxpayers underreporting their taxable income. Fortunately most people want to pay their fair share of taxes and many simply need a better understanding of their obligations.

What is Taxable?

Taxpayers must report all income from any source and any country unless it is explicitly exempt under the U.S. tax code. There may be taxable income from certain transactions even if no money changes hands.

Generally, the IRS considers all income received in the form of money, property or services to be taxable income unless the law specifically provides an exemption. This document discusses a few types of reportable income. Information on how to report other types of income can be found in Publication 525, Taxable and Nontaxable Income.

Self-Employment Income

It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.

All income earned through the taxpayer’s business, as an independent contractor or from informal side jobs is self-employment income, which is fully taxable and must be reported on Form 1040.

Use Form 1040, Schedule C, Profit or Loss from Business, or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship) to report income and expenses. Taxpayers will also need to prepare Form 1040 Schedule SE for self-employment taxes if the net profit exceeds $400 for a year. Do not report this income on Form 1040 Line 21 as Other Income.

Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.

Fees received for babysitting, housecleaning and lawn cutting are all examples of taxable income, even if each client paid less than $600 for the year. Someone who repairs computers in his or her spare time needs to report all monies earned as self-employment income even if no one person paid more than $600 for repairs.

Bartering

Bartering is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included on Form 1040 in the income of both parties.

An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. Income from bartering is taxable in the year in which the taxpayer received the goods or services.

Gambling winnings

Gambling winnings are fully taxable and must be reported on Form 1040.

Gambling income includes, among other things, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings as well as the fair market value of prizes such as cars and trips.

Even if a W-2G is not issued, all gambling winnings must be reported as taxable income regardless of whether any portion is subject to withholding. In addition, taxpayers may be required to pay an estimated tax on the gambling winnings.

Losses may be deducted only if the taxpayer itemizes deductions and only if he or she also has gambling winnings. The losses deducted may not be more than the gambling income reported on the return.

Prizes and awards

Subject to certain exceptions, the cash value of prizes or awards won in a drawing, quiz show program, beauty contest, or other event, must be included on the tax return as taxable income.
Taxpayers must also report the fair market value of merchandise or products won as a prize or award, as taxable income.

For example, both a $500 cash prize and the fair market value of a new range won in a baking contest must be reported as other income on Form 1040, Line 21.

Additional Resources:

Publication 525, Taxable and Nontaxable Income
Publication 505, Tax Withholding and Estimated Tax
Publication 529, Miscellaneous Deductions

Rental Property and the Tax Gap

Not reporting or under-reporting rental income contributes to the tax gap. Landlords need to be aware of everything that counts as income so they pay their fair share of taxes. They also need to be aware of all deductible expenses so they don’t overpay their taxes.

This article is intended to help reduce the tax gap by helping taxpayers better understand the tax code. The tax gap is the difference between the amount of taxes that should be paid in a given year and the amount actually paid voluntarily and in a timely way.

Rental Income

In the simplest terms, rental income is any payment received for the use or occupation of property. Most landlords operate on a cash basis. That means they count payments as income in the period they are received and deduct expenses in the period they are paid.

Landlords also need to be aware of other forms of rental income that may need to be declared.

Rental income may also include:

Advance rent payments

Early-termination fees on lease agreements

Expenses paid by tenant for the landlord (These may also be deductible as rental expenses.)

Property or services received in lieu of money (This is based on the fair market value of the property or services.)

Lease payments with option to buy (These payments are usually counted at rental income. If the tenant buys the property, payments received after the sale date are generally counted as part of the selling price.)

Payments for renting a portion of your home may or may not be taxable income depending on certain thresholds. See IRS Publication 527, Residential Rental Property.

Security deposits are not counted as income if they are to be refunded at the end of a lease period per an agreement. Landlords sometimes retain portions of security deposits because tenants don’t live up to the terms of a lease. Any funds withheld from a deposit are counted as income in the year they are retained. Deposits used as final lease payments are considered advance rents and counted as income in the period they are received.

Rental Expenses

Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.

Other deductible expenses may include:

Expenses incurred from the time a property is made available for rent and is actually rented.
Some or all of the original investment in the rental property may be recovered through depreciation using Form 4562, Depreciation and Amortization. Subsequent improvements may also be depreciated.

The cost of repairs may also be deductible. This may include the cost of labor and materials.

However, landlords cannot deduct the value of their own labor.

Improvements that add to the value of a property or prolong its useful life are considered capital expenses and generally must be depreciated. Discussion about whether an expense is an improvement or a repair is included in Publication 946, How to Depreciate Property.

Expenses may be deductible on rental property also used for personal use, but only on a proportional basis. Landlords are permitted to use any reasonable method for calculating what portion of a property should be considered rental. Using square footage is a common method and frequently the most accurate.

Some property is rented out at times and used for personal use other times, such as a beach house. In this case, deductible expenses must be calculated based on the number of days the property is used for each purpose. Deductible rental expenses can not exceed gross rental income for property used for both personal use and as a rental in a given year.

Expenses incurred while property is vacant but available for rent may be deductible. Lost rental income while a property is vacant is not deductible.

Information on other rental expenses and reporting requirements is available in Publication 527.

Related Item: The Tax Gap

Tax Challenges of Business Income

Internal Revenue Service research indicates that understated business income contributes significantly to the tax gap, with the majority understated by small businesses.

To assist small business and self-employed taxpayers better understand their reporting obligations, this information addresses the issue of income and how to determine gross income.

Business Income, Gross Receipts or Sales

If there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.

Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifically excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.

But business income can be in other forms, such as property or services. There are many forms, including: bartering, real estate rents, personal property rents, interest and dividend income, canceled debt, promissory notes, lost income payments, damages, economic injury payments, as well as kickbacks.

All income earned is taxable. Directing payment of income to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.

Cost of Goods Sold

Some businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold (COGS) from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.

There are several factors that go into determining COGS, including: inventory at the beginning of the year; purchases less cost of items withdrawn for personal use; labor costs (generally applies to manufacturing and mining operations); materials and supplies (generally a manufacturing cost); other costs (generally applies to manufacturing and mining operations); and inventory at the end of the year.

Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.

Gross Income

To calculate gross income, first determine net receipts (gross receipts minus returns and allowances) and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Then add any other income, including fuel tax credits. Gross income must be determined first before deducting business expenses.

Tools to Use

There are tools available to assist small business owners and the self-employed track and report income such as the use of: a formal set of books and records with strong; accounting/financial computer software; and separate bank accounts for business and personal income and expenses.

Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient recordkeeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid.

The Small Business and Self-Employed One-Stop Resource is a Web based tool. It contains a wealth of information to educate business owners and the self-employed on their unique tax filing and reporting obligations.

Another Web based tool is the Online Learning and Educational Products section of IRS.gov which allows business owners to view a streaming video of an IRS Small Business Workshop, order the Small Business Workshop on DVD, take an IRS course, or complete an online, self-directed version of a workshop taught live around the country.

These tools can help to more accurately determine income and expenses as well. There are benefits beyond accurate income and expense reporting to be gained. Formalized financial records will help small businesses when it is time to apply for loans or efforts to obtain capital for expansion.

Additonal resources:

Publication 334, Tax Guide for Small Business
Publication 583, Starting a Business and

Keeping Records

Economic Stimulus Payments for Military Combat Personnel

This information is for military personnel who are serving in combat zones.

For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard and National Guard are also included, but not the U.S. Merchant Marine or the American Red Cross.

Normally, combat pay is not counted as income and is not taxable. For the purposes of receiving an economic stimulus payment, however, military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.

To receive the stimulus payment this year, combat zone personnel or their spouses must file a tax year 2007 income tax return by Oct. 15, 2008. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.

Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in box 12 of Form W-2.

The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package contains everything needed to file the return immediately.

Package 1040A-3 , 8-page information package

Basic Eligibility Requirements

You have, or your family has, at least $3,000 in qualifying income from, or in combination with, Social Security benefits, certain Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

You are not a dependent or eligible to be a dependent on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)

Due to a new law change, the spouses and children of married military personnel are not required to have valid Social Security Numbers.

To Claim Your Payment

If you normally don’t file a federal tax return but must file one this year solely to claim your economic stimulus payment, you should file by Oct. 15, 2008, to ensure that you receive the payment this year. Find out where to send your tax return.

It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.

Free Tax Help Available

Individuals who need to file a return this year to receive a stimulus payment may be able to take advantage of free tax preparation sites nationwide for low-income and older taxpayers.

Free File - Economic Stimulus Payment provides free tax preparation software and electronic filing for people who are submitting a return solely to receive their economic stimulus payment

The Volunteer Income Tax Assistance (VITA) program provides help to low- and moderate-income taxpayers. Call 1-800-906-9887 to locate the nearest VITA site.

IRS employees will help prepare Form 1040A returns for low-income workers, retirees, disabled veterans and others at IRS Taxpayer Assistance Centers. For a list of centers in your state and their hours of operation, Contact My Local Office.

Related Items:

IR-2008-48, Combat Pay Can Count toward Economic Stimulus Payment Eligibility
New Law: Additional Military Families to Get Stimulus Payments This Fall
Basic Information about Economic Stimulus Payments
Frequently Asked Questions
Tax Information for Members of the U.S. Armed Forces

Treasury and SBA Launch New Website on HSAs

The Treasury Department and Small Business Administration (SBA) announced the launch of a new website to help small business employers determine whether to offer health savings accounts (HSAs) to their workers. The new website compares HSAs to other health care coverage options and provides general information to help employers and individuals determine whether to enroll in HSA-eligible coverage.

Louisiana Hurricane Ike Victims Qualify for IRS Disaster Relief

Louisiana taxpayers who were adversely affected by Hurricane Ikequalify for tax relief from the Internal Revenue Service, including the postponement of tax filing and payment deadlines until Jan. 5, 2009.

On Saturday, Sept. 13, the federal government declared the following: Louisiana parishes a presidential disaster area qualifying for individual assistance: Acadia, Beauregard, Calcasieu, Cameron, Iberia , Jefferson, Jefferson Davis, Lafourche, Plaquemines, Sabine, St. Mary, Terrebonne, Vermilion and Vernon..

"We are giving taxpayers in these hard-hit areas until early next year to file their returns and make payments," IRS Commissioner Doug Shulman said. "All Americans have concerns for those affected by this devastating hurricane, and our hope is that this extra time will allow people to stay focused on the rebuilding and clean-up effort."

Specifically, the relief postpones until Jan. 5, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts due on or after Sept. 11, 2008, and before Jan. 5, 2009 –– including individual estimated tax returns and corporate tax returns that were due Sept. 15, and extended individual returns due Oct. 15.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Sept. 11 and before Sept. 26, 2008, as long as the deposits are made on or before Sept. 26. This includes failure to deposit penalties on employment and excise tax deposits that were waived under previous relief for Hurricane Gustav.

The relief extends an initial seven-day postponement of tax filing and payment deadlines for Ike victims that was announced Sept. 12.

IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. 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 tax relief.

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, from Sept. 11, 2008, to Jan. 5, 2009.

Covered Disaster Area

The parishes 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 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 books, records, or tax professionals’ offices are in the covered disaster area –– are also entitled to relief. In addition, all relief workers affiliated with a recognized government or charitable organization assisting in the relief activities in the covered disaster area are eligible.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until Jan. 5,2009, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership and S corporation 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 Sept. 11, 2008, and before Jan. 5, 2009.

The IRS also gives affected taxpayers until Jan. 5, 2009, 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 on or after Sept. 11,2008, and before Jan. 5, 2009. This 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 Form W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to file timely 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 deposits, due on or after Sept. 11, 2008, and before Sept. 26, 2008, provided the taxpayer makes these deposits on or before Sept. 26, 2008.

Casualty Losses

Affected taxpayers in a presidentially 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, but they must first subtract $100 for each casualty event and then subtract 10 percent of their adjusted gross income from their total casualty losses for the year. For details on figuring a casualty loss deduction, see IRS Publication 547, Casualties, Disasters and Thefts.

Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Louisiana/Hurricane Ike” 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 affects them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from IRS.gov, the official IRS Web site, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Additional Information

Disaster Assistance and Emergency Relief for Individuals and Businesses
Recent IRS Disaster Relief Announcements