The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

The gap between taxes owed and taxes collected by the Internal Revenue Service could be approaching $1 trillion, IRS Commissioner Charles Rettig told members of the House Committee on Oversight and Reform’s Government Operations Subcommittee as he advocated for more funding for the agency.

During an April 21, 2022, hearing of the subcommittee, Rettig noted updated tax gap figures for the three-year period of 2012-2014, along with projections through 2019, will be released this summer. However, those projections do not account for the growth in cryptocurrency, which could be widening the tax gap beyond the current calculations and projections.

"What is not in those estimates is virtual currencies, and there is over a $2 trillion market cap for virtual currencies," Rettig testified before the committee. "Last year, there was over $14 trillion in transactions in virtual currencies and the United States, if you view relative GDP, is somewhere between 35 and 43 percent of that $14 trillion."

He said that knowledge generated from John Doe summons activity in these space reveals "that the compliance issues in the virtual currency space are significantly low."

"The tax gap estimates that the IRS prepares are based on information that the IRS is able to determine, not information that we know is out there but we are not able to determine," Rettig said, adding that the agency is trying to get more information about virtual currencies through adding questions on the Form 1040, first on Schedule L and then moving it to page one of the Form 1040 last year "to try to enhance compliance."

He added that the agency is looking to get more into that area.

The comments on the tax gap and the need to be able to tackle compliance in the cryptocurrency space underscores the agency’s need for more funding as requested in the White House budget request for fiscal year 2023.

In his written testimony submitted to the committee, Rettig noted that the agency "can no longer audit a respectable percentage of large corporations, and we are often limited in the issues reviewed among those we do audit. These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper. We are, quite simply, ‘outgunned’ in our efforts to assure a high degree of compliance for these taxpayers."

He wrote that it is "unacceptable" that corporations and the wealthiest individuals have such an advantage to push back on the nation’s tax administrator.

"We must receive the resources to hire and train more specialists across a wide range of complex areas to assist with audits of entities (taxable, pass-through and tax-exempt) and individuals (financial products; engineering; digital assets; cross-border activities; estate and gift planning; family offices; foundations; and many others)," his written testimony states.

Rettig wrote that the agency current has fewer than 2,000 revenue officers, "the lowest number of field collection personnel since the 1970s," to handle more than 100,000 collection cases in active inventory.

He continued: "In addition to our active inventory, we have over 1.5 million cases (more than 500,000 of which are considered high priority) awaiting assignment to these same 2,000 revenue officers. We have classified roughly 85 percent of those cases as high priority, many of which involve delinquent business employment taxes."

The lack of funding is also hampering criminal investigations.

"Much like other operating divisions in the IRS, CI is close to its lowest staffing level in the past 30 years. With fewer agents, we have fewer cases and fewer successful convictions," he stated in the written testimony.

Much of this also is compounded by the ancient IT infrastructure at the agency, another reason Rettig advocated during the hearing for more funding.

"Limited IT resources preclude us from building adequate solutions for efficiently matching or reconciling data from multiple sources," he wrote. "As a result, we are often left with manual processes to analyze reporting information we receive."

Retting specifically highlighted the Foreign Account Tax Compliance Act, which Congress enacted in 2010 but, according to Retting, has yet to appropriate the funding necessary for its implementation.

"This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance," he wrote. "We have an acute need for additional personnel with specialized training to follow cross-border money flows. They will help ensure tax compliance by improving our capacity to detect unreported accounts and income generated by those accounts, as well as the sources of assets in offshore accounts."

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

Internal Revenue Service Commissioner Charles Rettig remained positive that the agency will be able to return to a normal backlog of unprocessed returns and other mail correspondence by the end of the year and noted progress on hiring more people to help clear the backlog.

"With respect to our current 2022 filing season, we are off to a healthy start in terms of tax processing and the operation of our IT systems," Rettig told members of the Senate Finance Committee during an April 7 hearing to discuss the White House budget request and update the panel on the current tax filing season. "Through April 1, we have processed more than 89 million returns and issued more than 63 million refunds totaling more than $204 billion."

Getting that backlog cleared has been bolstered in part by a direct hiring authority given to the agency in the recent passage of the fiscal year 2022 omnibus budget, Rettig told the committee.

The effectiveness of that hiring authority was highlighted in his written testimony submitted prior to the hearing, where Rettig stated that in-person and virtual job fairs near processing facilities in Austin, Kansas City, and Ogden, Utah, attracted eligible applicants for more than 5,000 vacancies and "we have been able to make more than 2,500 conditional offers at the conclusion of the interviews."

Rettig said the direct hiring authority is only related to those lower paygrade processing/customer service positions and the agency is going to ask Congress to expand that authority, although he did not specify what types of positions would be hired as part of that expansion.

The IRS addressed the following common myths about tax refunds:

The IRS addressed the following common myths about tax refunds:

• Myth 1: Calling the IRS or visiting an IRS office speeds up a refund. The best way to check the status of a refund is online through the “Where’s My Refund?” tool. Taxpayers can also call the automated refund hotline at 800-829-1954.

• Myth 2: Taxpayers need to wait for their 2020 return to be processed before filing their 2021 return. Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns. They should file when they are ready. Individuals with unprocessed 2020 tax returns, should enter zero dollars for last year's Adjusted Gross Income (AGI) on their 2021 tax return when filing electronically.

• Myth 3: Taxpayers can get a refund date by ordering a tax transcript. Ordering a tax transcript will not inform taxpayers of the timing of their tax refund, nor will it speed up a refund being processed. Taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications and to help with tax preparation.

• Myth 4: "Where’s My Refund?" must be wrong because there is no deposit date yet. While the IRS issues most refunds in less than 21 days, it is possible a refund may take longer for a variety of reasons. Delays can be caused by simple errors including an incomplete return, transposed numbers, or when a tax return is affected by identity theft or fraud.

• Myth 5: "Where’s My Refund?" must be wrong because a refund amount is less than expected. Different factors can cause a tax refund to be larger or smaller than expected. The IRS will mail the taxpayer a letter of explanation if these adjustments are made.

• Myth 6: Calling a tax professional will provide a better refund date. Contacting a tax professional will not speed up a refund. Tax professionals cannot move up a refund date nor do they have access to any special information that will provide a more accurate refund date.

• Myth 7: Getting a refund this year means there is no need to adjust tax withholding for 2022. Taxpayers should continually check their withholding and adjust accordingly. Adjusting tax withholding with an employer is easy and using the Tax Withholding Estimator tool can help taxpayers determine if they are withholding the right amount from their paycheck.

As of the week ending April 1, the IRS has sent out more than 63 million refunds worth over $204 billion. The IRS reminded taxpayers the easiest way to check on a refund is the "Where’s My Refund?" tool. This tool can be used to check the status of a tax return within 24 hours after a taxpayer receives their e-file acceptance notification. Taxpayers should only call the IRS tax help hotline to talk to a representative if it has been more than 21 days since their tax return was e-filed, or more than six weeks since mailing their return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return. A manual review may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud. Other returns can also take longer to process, including when a return needs a correction to the Child Tax Credit amount or includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process. The fastest way to get a tax refund is by filing electronically and choosing direct deposit. Taxpayers who don’t have a bank account can find out more on how to open an account at an FDIC-Insured bank or the National Credit Union Locator Tool.

Further, the IRS cautioned taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Taxpayers should also take into consideration the time it takes for a financial institution to post the refund to an account or to receive it by mail. Before filing, taxpayers should make IRS.gov their first stop to find online tools to help get the information they need to file. To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. The IRS will contact taxpayers by mail when more information is needed to process a return. IRS representatives can only research the status of a refund if it has been: 21 days or more since it was filed electronically; six weeks or more since a return was mailed; or when the Where's My Refund? tool tells the taxpayer to contact the IRS.

Additionally, taxpayers whose tax returns from 2020 have not yet been processed should still file their 2021 tax returns by the April due date or request an extension to file. Those filing electronically in this group need their Adjusted Gross Income (AGI) from their most recent tax return. Those waiting on their 2020 tax return to be processed should enter zero dollars for last year's AGI on the 2021 tax return. When self-preparing a tax return and filing electronically, taxpayers must sign and validate the electronic tax return by entering their prior-year AGI or prior-year Self-Select PIN (SSP). Those who electronically filed last year may have created a five-digit SSP. Generally, tax software automatically enters the information for returning customers. Taxpayers who are using a software product for the first time may have to enter this information.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002.

The IRS reminded educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses when they file their federal income tax return for tax year 2022. This is the first time the annual limit has increased since 2002. For tax years 2002 through 2021, the limit was $250 per year. The limit will rise in $50 increments in future years based on inflation adjustments. For 2022, if an eligible educator is married and files a joint return with another eligible educator, the limit rises to $600 but not more than $300 for each spouse.

Educators can claim this deduction even if they take the standard deduction. Eligible educators include anyone who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during the school year. Both public- and private-school educators qualify. Educators can deduct the unreimbursed cost of:

• books, supplies, and other materials used in the classroom;
• equipment, including computer equipment, software, and services;
• COVID-19 protective items to stop the spread of the disease in the classroom; and
• professional development courses related to the curriculum they teach or the students they teach.

Qualified expenses do not include expenses for homeschooling or nonathletic supplies for courses in health or physical education. The IRS also reminded educators that for tax year 2021, the deduction limit is $250. If they are married and file a joint return with another eligible educator, the limit rises to $500 but not more than $250 for each spouse.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

Taxpayers who may need to take additional actions related to Qualified Opportunity Funds (QOFs) should begin receiving letters from the IRS in April. Taxpayers who attached Form 8996, Qualified Opportunity Fund, to their return may receive Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard. This letter lets them know that information needed to support the annual certification of investment standard is missing, invalid or the calculation isn’t supported by the amounts reported. If they intend to maintain their certification as a QOF, they may need to take additional action to meet the annual self-certification of the investment standard requirement.

To correct the annual maintenance certification of the investment standard, taxpayers should file an amended return or an administrative adjustment request (AAR). If an entity that receives the letter fails to act, the IRS may refer its tax account for examination. Additionally, taxpayers may receive Letter 6502, Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting Of Qualified Opportunity Fund (QOF) Investments. These letters notify them that they may not have properly followed the instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments. This may happen if it appears that they may not have properly followed the requirements to maintain their qualifying investment in a QOF with the filing of the form.

Finally, if these taxpayers intend to maintain a qualifying investment in a QOF, they can file an amended return or an AAR with a properly completed Form 8997 attached. Failure to act will mean those who received the letter may not have a qualifying investment in a QOF and the IRS may refer their tax accounts for examination.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022.

The IRS informed taxpayers that it will send Notices CP2100 and CP2100A notices to financial institutions, businesses, or payers who filed certain types of information returns that do not match IRS records, beginning mid-April 2022. These information returns include:

• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third-Party Network Transactions
• Form 1099-MISC, Miscellaneous Income
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, Taxable Distributions Received from Cooperatives
• Form W-2G, Certain Gambling Winnings

These notices inform payers that the information return is missing a Taxpayer Identification Number (TIN), has an incorrect name or a combination of both. Each notice has a list of payees or the persons receiving certain types of income payments with identified TIN issues. Taxpayers need to compare the accounts listed on the notice with their account records and correct or update their records, if necessary. This can also include correcting backup withholding on payments made to payees. The notices also inform payers that they are responsible for backup withholding. Payments reported on these information returns are subject to backup withholding if:

• The payer does not have the payee’s TIN when making the reportable payments.
• The payee does not certify their TIN as required for reportable interest, dividend, broker and barter exchange accounts.
• The IRS notifies the payer that the payee furnished an incorrect TIN and the payee does not certify its TIN as required.
• The IRS notifies the payer to begin backup withholding because the payee did not report all of its interest and dividends on its tax return.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

The IRS has issued a guidance stating that government employees who receive returns or return information pursuant to disclosures under Code Sect. 6103(c), are subject to the disclosure restrictions, like all designees who receive returns or return information pursuant to taxpayer consent. Further, government employees who receive returns or return information pursuant to disclosures under Code Sec. 6103(k)(6) or (e), other than Code Sec. 6103(e)(1)(D)(iii) (relating to certain shareholders), are not subject to the disclosure restrictions with regard to the returns or return information received.

Background

Section 2202 of the Taxpayer First Act (TFA), P.L. 116-25, amended Code Sec. 6103(a)(3) and (c) to limit redisclosures and uses of return information received pursuant to the staxpayer consent exception. Code Sec. 6103(c), as amended by the TFA, explicitly prohibits designees from using return information for any reason other than the express purpose for which the taxpayer grants consent and from redisclosing return information without the taxpayer’s express permission or request. Further, Code Sec. 6103(a)(3), as amended by the TFA, imposes disclosure restrictions on all recipients of return information under Code Sec. 6103(c). The TFA did not amend Code Sec. 6103(e) or (k)(6), or Code Sec. 6103(a) with respect to disclosures under Code Sec. 6103(e) or (k)(6).

Disclosure Restrictions

The IRS cited seven situations where disclosure restrictions of Code Sec. 6103(a) would or would not be applicable with regard to returns or return information received as a result of disclosure under:

• Code Sec. 6103(c) with the consent of the taxpayer (taxpayer consent exception),
• Code Sec. 6103(e) as a person having a material interest, but not under Code Sec. 6103(e)(1)(D)(iii) relating to disclosures to certain shareholders (material interest exception), or
• Code Sec. 6103(k)(6) for investigative purposes (investigative disclosure exception).

Effect on Other Documents

Rev. Rul. 2004-53, I.R.B. 2004-23, has been modified and superseded.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

The IRS has provided a waiver for any individual who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in a foreign country precluded the individual from meeting the requirements for the 2021 tax year. Qualified individuals may exempt from taxation their foreign earned income and housing cost amounts.

Relief Provided

The countries for which the eligibility requirements have been waived for 2021 are Iraq, Burma, Chad, Afghanistan and Ethiopia. Accordingly, an individual who left the following countries beginning on the specified date will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of the country: (1) Iraq on or after January 19, 2021; (2) Burma on or after March 30, 2021; Chad on or after April 17, 2021; (4) Afghanistan on or after April 27, 2021, and; (5) Ethiopia on or after November 5, 2021. Individuals who left the above mentioned countries must establish a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for those adverse conditions. Further, individuals who established residency, or were first physically present in Iraq, after January 19, 2021, are not eligible for the waiver. Taxpayers who need assistance on how to claim the exclusion, or how to file an amended return, should consult the section under the heading "Foreign Earned Income Exclusion" at https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad; consult the section under the heading How to Get Tax Help at the same web address; or contact a local IRS office.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

The Supreme Court reversed and remanded a Court of Appeals decision and held that Code Sec. 6330(d)(1)’s 30-day time limit to file a petition for review of a collection due process (CDP) determination is an ordinary, nonjurisdictional deadline subject to equitable tolling in appropriate cases. The taxpayer had requested and received a CDP hearing before the IRS’s Independent Office of Appeals pursuant to Code Sec. 6330(b), but the Office sustained the proposed levy. Under Code Sec. 6330(d)(1), the taxpayer had 30 days to petition the Tax Court for review. However, the taxpayer filed its petition one day late. The Tax Court dismissed the petition for lack of jurisdiction and the Court of Appeals for the Eighth Circuit affirmed, agreeing that Code Sec. 6330(d)(1)’s 30- day filing deadline is jurisdictional and thus cannot be equitably tolled.

Nonjurisdictional Nature of Filing Deadline

The Supreme Court analyzed the text of Code Sec. 6330(d)(1) and stated that the only contention is whether the provision limits the Tax Court’s jurisdiction to petitions filed within the 30-day timeframe. The taxpayer contended that it referred only to the immediately preceding phrase of the provision: a "petition [to] the Tax Court for review of such determination." and so the filing deadline was independent of the jurisdictional grant. The IRS, on the contrary, argued that "such matter" referred to the entire first clause of the sentence, which includes the deadline and granting jurisdiction only over petitions filed within that time. However, the Supreme Court held the nature of the filing deadline to be nonjurisdictional because the IRS failed to satisfy the clear-statement rule of the jurisdictional condition. It also stated that where multiple plausible interpretations exist, it is difficult to make the case that the jurisdictional reading is clear. Moreover, Code Sec. 6330(e)(1)’s clear statement—that "[t]he Tax Court shall have no jurisdiction . . . to enjoin any action or proceeding unless a timely appeal has been filed"—highlighted the lack of such jurisdictional clarity in Code Sec. 6330(d)(1).

Equitable Tolling of Filing Deadline

The Supreme Court remanded the case to the Court of Appeals for the Eighth Circuit to decide whether the taxpayer was entitled to equitable tolling of the filing deadline. However, the Supreme Court did emphasize that Code Sec. 6330(d)(1) did not expressly prohibit equitable tolling, and its 30-day time limit was directed at the taxpayer, not the court. Further, the deadline mentioned in the provision was not written in an emphatic form or with detailed and technical language, nor was it reiterated multiple times. The IRS’ argument that tolling the Code Sec. 6330(d)(1) deadline would create much more uncertainty, was rejected. The Supreme Court concluded that the possibility of equitable tolling for relatively small number of petitions would not appreciably add to the uncertainty already present in the process.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

The Government Accountability Office (GAO) has issued a report on IRS’ performance during the 2021 tax filing season. The report assessed IRS’ performance during the 2021 filing season on: (1) processing individual and business income tax returns; and (2) providing customer service to taxpayers. GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring and employee overtime. GAO also interviewed cognizant officials.

Report Findings

GAO found that the IRS faced multiple challenges and struggled to respond to an unprecedented workload that included delivering COVID-19 relief. The IRS began the 2021 filing season with a backlog of 8 million individual and business returns from the prior year. The IRS reduced the backlog of prior year returns, but in December 2021, had about 10.5 million returns to process from 2021. The IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits. GAO found that some categories of errors occur each year, however, the IRS does not assess the underlying causes of taxpayer errors on returns. Additionally, the IRS paid nearly $14 billion in refund interest in the last 7 fiscal years, with $3.3 billion paid in fiscal year 2021. However, the IRS does not identify, monitor, and mitigate issues contributing to refund interest payments.

Recommendations

GAO made six recommendations, including that the IRS should assess reasons for tax return errors and refund interest payments and take action to reduce them; modernize its “Where's My Refund” application; address its backlog of correspondence; and assess its in-person service model. The IRS agreed with four recommendations and disagreed with two. The IRS said its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure.

The just-released 2011 IRS Data Book provides statistical information on IRS examinations, collections and other activities for the most recent fiscal year ended in 2011. The 2011 Data Book statistics, when compared to the 2010 version, shows, among other things, a notable increase in the odds of being audited within several high-income categories.

Individual audits

Individual taxpayers collectively were audited at a 1.1% rate over the FY 2011 period, based on 1,564,690 audited returns out of the 140,837,499 returns that were filed. While this rate is about the same as in 2010, variations occurred within the income ranges. An uptick was particularly noticeable in the upper brackets (see statistics, below).

Both correspondence and field audits were counted within the statistics. Correspondence audits accounted for 75% of all audits for FY 2011 (down from 77.1% in FY 2010), while audits conducted face-to-face by revenue agents were only 25% of the total, albeit representing an increase from the 21.7% level in FY 2010. Business returns and higher-income individuals are more likely to experience an audit by a revenue agent; while correspondence audits are generally single-issue audits, a revenue agent is likely to explore other issues "while he or she is there."

Examination coverage: individuals

The following audit statistics taken from the FY 2011 Data Book (and contrasted with FY 2010 Data Book stats) show an increase in the audit rate especially in proportion to adjusted gross income (AGI) level:

• No AGI: 3.42% (3.19% in 2010)
• Under $25K: 1.22% (1.18% in 2010)
• $25K-$50K: 0.73% (0.73% in 2010)
• $50K-$75K: 0.83% (0.78% in 2010)
• $75K-$100K: 0.82% (0.64% in 2010)
• $100K-$200K: 1.00% (0.71% in 2010)
• $200K-$500K: 2.66% (1.92% in 2010)
• $500K-$1M: 5.38% (3.37% in 2010)
• $1M-$5M: 11.80% (6.67% in 2010)
• $5M-$10M: 20.75% (11.55% in 2010)
• $10M and over: 29.93% (18.38% in 2010)

Examination coverage: business returns

For individual income tax returns that include business income (other than farm returns), the 2011 audit rate statistics based upon business income (total gross receipts) reveals the IRS's recognition that audits of small business returns yield proportionately higher deficiency amounts:

• Gross receipts under $25K: 1.3% (1.2% in 2010)
• Gross receipts $25K to $100K: 2.9% (2.5% in 2010)
• Gross receipts $100K to $200K: 4.3% (4.7% in 2010)
• Gross receipts over $200K: 3.8% (3.3% in 2010)

The difference in audit rates between returns with and without business income, as measured by total positive income of at least $200K and under $1M provide further evidence of the IRS's tendency toward auditing business returns: 3.6% for returns with business income versus 3.2% without in FY 2011 (2.9% versus 2.5% in FY 2010).

Corporate/other returns

The audit rates for corporations are consistent with the deficiency experience that the IRS has had examining corporations of varying sizes. Some selected audit rates include:

• For small corporations showing total assets of $250K to $1M, the audit rate for FY 2011 was 1.6% (1.4% in 2010); $1M to $5 million, the rate was 1.9% (1.7% in 2010), and for $5M to $10M, the rate was 2.6% (3% in 2010).
• For larger corporations showing total assets of $10M-$50M, the audit rate was 13.3% (13.4% in 2010) in contrast to those at the top end with total assets from $5B to $20B (50.5% (45.3% in 2010)).
• For S corporations and partnerships, the overall audit rate was 0.4% (same as in 2010), in contrast to an overall 1.5% rate for corporations (1.4% in 2010).

Building on earlier steps to help taxpayers buffeted by the economic slowdown, the IRS recently enhanced its "Fresh Start" initiative. The IRS has announced penalty relief for unemployed individuals who cannot pay their taxes on time and has increased the threshold amount for streamlined installment agreements.

Fresh Start

Many of the actions that economically-distressed taxpayers would like the IRS to take it cannot by law. The IRS cannot stop interest from accruing on unpaid taxes. The IRS also cannot move the filing deadline.

However, the IRS recognized that it can take some actions to help taxpayers who want to pay their taxes but cannot because of job loss or under-employment. In 2011, the IRS launched its Fresh Start initiative. The IRS made some taxpayer-friendly changes to its lien processes and also enhanced its streamlined installment agreement program for small businesses.

Installment agreements

An installment agreement allows taxpayers to pay taxes in smaller amounts over a period of time. Generally, individuals who owe less than $25,000 may qualify for a streamlined installment agreement. "Streamlined" means that taxpayers do not have to file extra information with the IRS, such as Collection Information Statement (Form 433-A or Form 433-F). The streamlined process is intended to be as simple as possible.

Effective immediately, the IRS has increased the threshold for entering into a streamlined installment agreement to $50,000. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60 month maximum. Taxpayers generally must pay an installment agreement fee and the IRS charges interest.

Before entering into an installment agreement, taxpayers should explore other options. It may be less expensive to pay your taxes on time with a credit card or a loan. Our office can help you weigh the advantages and disadvantages of an installment agreement.

Unemployed taxpayers

Taxes must be paid when due. This year, the deadline for filing individual returns is April 17, 2012. Taxpayers may request an automatic six-month extension but an extension does not provide additional time to pay.

Individuals who do not file by the deadline may be subject to a failure-to-file penalty. The IRS also may impose a failure-to-pay penalty if a taxpayer does not pay by the due date. The rules for the penalties are inter-related and are also complex.

Both the failure-to-file penalty and the failure-to-pay penalty may apply in any month. In these cases, the five percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Now, the IRS is granting a six-month grace period on failure-to-pay penalties to certain wage earners and self-employed individuals. The IRS explained that the request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by October 15, 2012.

Penalty relief is not available to all individuals. The IRS is limiting penalty relief to:

--Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.

--Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

Penalty relief is also subject to income limits. Your income must not exceed $200,000 if your filing status is married filing jointly or not exceed $100,000 if your filing status is single or head of household.

Additionally, the IRS has imposed a cap on the balance due. Penalty relief is restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

If you have any questions about the IRS Fresh Start initiative, please contact our office.

Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Everybody knows that tax deductions aren’t allowed without proof in the form of documentation.  What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim.  Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS.  This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return.  We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Charitable contributions.  For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee.  “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return.  So save those letters from the charity, especially for your larger donations.

Tip records.  A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses.  Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log.  A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income.  Otherwise, they can only deduct losses against passive income.  An individual’s participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss.  Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment.  Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner.  A single-member LLC ("SMLLC"), for example, is considered to be a disregarded entity. For federal and state tax purposes, the sole member of an SMLLC disregards the separate legal status of the SMLLC otherwise in force under state law.

As the result of being “disregarded,” the SMLLC does not file a separate tax return.  Rather, its income and loss is reported on the tax return filed by the single member.

• If the sole owner is an individual, the SMLLC's income and loss is reported on his or her Form 1040, U.S. Individual Income Tax Return. This method is similar to a sole proprietorship.
• If the owner is a corporation, the SMLLC's income or loss is reported on the corporation's Form 1120, U.S. Corporation Income Tax Return (or on Form 1120S in the case of an S Corporation). This treatment is similar to that applied to a corporate branch or division.

An SMLLC is not the only entity treated as a disregarded entity. Two corporate forms are also disregarded: a qualified subchapter S subsidiary and a qualified REIT subsidiary. However, SMLLCs are by far the most common disregarded entity currently in use.

For federal tax purposes, the SMLLC does not exist. All its assets and liabilities are treated as owned by the acquiring corporation.

Even though a disregarded entity’s tax status is transparent for federal tax purposes, it is not transparent for state law purposes. For example, an owner of an SMLLC is not personally liable for the debts and obligations of the entity. However, since the entity is disregarded, the owner is generally treated as the employer of disregarded entity employees for employment tax purposes.

For further details on disregarded entities or how this tax strategy may fit into your business operations, please contact our offices. 

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012.  The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012. 

2011 payroll tax holiday

Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share).  These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect.  The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800.  The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension

The 2011 payroll tax holiday was originally enacted as a one-year tax break.  It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012.  The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations

In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year.  The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere.  The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences.  In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it.  They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate.  President Obama signed the bill on February 22.

2012 payroll tax holiday

The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012.  The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012.  An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule

In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension.  The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012.  Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors

Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities. 

If you have any questions about the 2012 payroll tax holiday, please contact our office.

Retired employees often start taking benefits by age 65 and, under the minimum distribution rules, must begin taking distributions from their retirement plans when they reach age 70 ½. According to Treasury, a 65-year old female has an even chance of living past age 86, while a 65-year old male has an even chance of living past age 84. The government has become concerned that taxpayers who normally retire at age 65 or even age 70 will outlive their retirement benefits.

The government has found that most employees want at least a partial lump sum payment at retirement, so that some cash is currently available for living expenses. However, under current rules, most employer plans do not offer a partial lump sum coupled with a partial annuity. Employees often are faced with an “all or nothing” decision, where they would have to take their entire retirement benefit either as a lump sum payment when they retire, or as an annuity that does not make available any immediate lump-sum cash cushion. For retirees who live longer, it becomes difficult to stretch their lump sum benefits.

Longevity solution

To address this dilemma, the government is proposing new retirement plan rules to allow plans to make available a partial lump sum payment while allowing participants to take an annuity with the other portion of their benefits. Furthermore, to address the problem of employees outliving their benefits, the government would also encourage plans to offer “longevity” annuities. These annuities would not begin paying benefits until ages 80 or 85. They would provide you a larger annual payment for the same funds than would an annuity starting at age 70 ½. Of course, one reason for the better buy-in price is that you or your heirs would receive nothing if you die before the age 80 or 85 starting date. But many experts believe that it is worth the cost to have the security of knowing that this will help prevent you from “outliving your money.”

To streamline the calculation of partial annuities, the government would allow employees receiving lump-sum payouts from their 401(k) plans to transfer assets into the employer’s existing defined benefit (DB) plan and to purchase an annuity through the DB plan. This would give employees access to the DB plans low-cost annuity purchase rates.

According to the government, the required minimum distribution (RMD) rules are a deterrent to longevity annuities. Because of the minimum distribution rules, plan benefits that could otherwise be deferred until ages 80 or 85 have to start being distributed to a retired employee at age 70 ½. These rules can affect distributions from 401(k) plans, 403(b) tax-sheltered annuities, individual retirement accounts under Code Sec. 408, and eligible governmental deferred compensation plans under Code Sec. 457.

Tentative limitations

The IRS proposes to modify the RMD rules to allow a portion of a participant’s retirement account to be set aside to fund the purchase of a deferred annuity. Participants would be able to exclude the value of this qualified longevity annuity contract (QLAC) from the account balance used to calculate RMDs. Under this approach, up to 25 percent of the account balance could be excluded. The amount is limited to 25 percent to deter the use of longevity annuities as an estate planning device to pass on assets to descendants.

Coming soon

Many of these changes are in proposed regulations and would not take effect until the government issues final regulations. The changes would apply to distributions with annuity starting dates in plan years beginning after final regulations are published, which could be before the end of 2012. Our office will continue to monitor the progress of this important development.

A reduced corporate tax rate, elimination of many business tax preferences, a new minimum tax on overseas profits, and much more are all part of President Obama's recently released Framework for Business Tax Reform (the "Framework"). The much-anticipated blueprint of the administration's plans for corporate tax reform was unveiled on February 22, 2012, in Washington, D.C.

The Framework contains a large number of general business-oriented proposals which, according to the administration, will make the Tax Code less complicated for businesses and increase the nation's competitiveness in the global economy. A reduction in the corporate tax rate would be fully paid for by repeal of business tax preferences. The Framework also calls for a new minimum tax on overseas profits and encourages companies to return work to the U.S. by offering a new relocation tax incentive.

Congressional reaction to the administration's Framework was mixed. Democrats in Congress generally applauded the Framework for laying out a plan to reduce the corporate tax rate, a proposal that enjoys bipartisan support in Congress. Republicans were less enthusiastic, but some GOP lawmakers said that the Framework could serve as a starting point for comprehensive tax reform. While the November elections certainly play a part in the release of the current proposals, major tax reform now is considered inevitable by most observers. The question remains, however, as to how it will develop over the coming months.

Five-part framework

The President's overall proposal, which currently is framed only in general terms, is grounded in five elements:

--Eliminating tax expenditures and subsidies, broadening the corporate tax base, and cutting the corporate tax rate from 35 percent to 28 percent;

--Strengthening U.S. manufacturing and innovation by effectively lowering the rate for manufacturers to 25 percent (through an enhanced manufacturing credit), making the research tax credit permanent, and providing a number of clean-energy incentives;

--Fixing the international tax system that includes imposing a minimum tax on overseas profits, creating a 20 percent tax credit for moving operations back to the U.S., denying deductions for moving operations overseas, limiting the transfer of patents and other intellectual property to offshore subsidiaries, and delaying deductions for interest paid for overseas investments;

--Simplifying and cutting taxes for small businesses (not just for corporations) through a number of reforms, including a 100 percent expensing up to $1 million; cash accounting for businesses with gross receipts up to $5 million; enhanced deductions for startup expenses, and an enhanced Code Section 45R small employer health insurance tax credit; and

--Restoring fiscal responsibility and not add to the deficit through making reform revenue neutral, including a need to do so for whatever portion of the $250 billion in reoccurring extender tax benefits that Congress deems necessary to continue.

Individual tax reform

In unveiling this framework for business tax reform, Treasury Secretary Timothy Geithner stated that individual tax reform does not necessarily need to be considered at the same time as business tax reform.  With individual tax reform clearly the most politically volatile component to total tax reform, most Washington observers believe that tax reform will follow a sequential route, with business tax reform going first.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.