Expanded Recovery Act Tax Credits Help Homeowners Winterize Their Homes, Save Energy

The IRS is reporting on two expansions of energy saving tax credits that can help tax payers save money, provided they save energy. Here is the release from the IRS newswire:

People can now weatherize their homes and be rewarded for their efforts. According to the Internal Revenue Service, homeowners making energy-saving improvements this fall can cut their winter heating bills and lower their 2009 tax bill as well.
The American Recovery and Reinvestment Act (Recovery Act), enacted earlier this year, expanded two home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.
By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.
Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.
Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits, to figure and claim these credits. A draft version of this form is available now on IRS.gov.

Posted by JK Harris & Company

Anna Nicole Smith Estate Hit with IRS Tax Lien

This article is a sad reminder that the IRS won’t go away in life, and in death. Anna Nicole Smith is now another celebrity victim of back taxes, as the IRS issued a Tax Lien on the now deceased actress’ estate.

According to WebCPA:

The Internal Revenue Service has filed a $125,112.86 federal tax lien against the late Anna Nicole Smith, nearly two years after the former Playboy Playmate of the Year and reality TV star died.

The tax lien, was filed in December 2008. Anna Nicole Smith, whose real name was Vickie Lynn Marshall, died in February 2007 of a prescription drug overdose. The California State Franchise Tax Board also billed Smith’s estate in September for $43,280.66 in unpaid taxes from her 2007 return, along with penalties and interest.

A preliminary hearing into Smith’s death is currently taking place in Los Angeles to determine whether there is enough evidence to show that her former lawyer and companion Howard K. Smith and two physicians should stand trial for illegally providing her with prescription medication.

Posted by JK Harris & Company.

Offer in Compromise, Not a Magic Wand

If you have dealt with back tax issues within the last ten to fifteen years, you have probably heard the term Offer in Compromise. Maybe you have done some research in regards to the IRS Offer in Compromise program, depending on how serious your tax problem was. Tens of thousands of people submit Offers in Compromise each year to the IRS. With all of these people participating in the program and all of the success stories you hear about it on the Internet, or on television, why shouldn’t you do it? Let’s answer that question, by digging further into what an Offer in Compromise is and how it works.

The Offer in Compromise program was originally created by the IRS and later adopted by many states. It allows a taxpayer to settle his or her tax debt for less than the amount they actually owe. Sounds great, right? I don’t have to pay as much as I originally owed and I get myself out of tax trouble. Unfortunately, it’s not that easy. You cannot simply apply for an Offer in Compromise and have your tax debt automatically lowered; you must meet a number of qualifications. The first criteria you have to meet is the one that disqualifies most people from the program: you have to exhibit an inability to pay the tax debt you owe. The IRS will look at how much you earn each month, your monthly expenses, and all of the equity that you have in assets (I.E. bank accounts, vehicles, investments, etc.) when determining your ability to pay the debt and/or qualify for an Offer in Compromise. This investigation process is very long and tedious. It can be extremely difficult for someone who is not a trained professional. The IRS requires a number of forms be prepared when submitting an Offer in Compromise and numerous supporting documents must be sent in to back up your inability to pay. The paperwork can seem to be a never-ending process, as the IRS requires up to date financials.

The second criterion you must meet is compliance from the time you submit your Offer in Compromise forward. What is compliance? Compliance is an IRS term, which describes your status in regards to filing tax returns and paying tax debts. You are only deemed to be compliant if you have filed all of your tax returns in a timely fashion and have resolved all back tax debts incurred while participating in the Offer in Compromise program (I.E. You file for an Offer in Compromise in 2005, it is accepted in 2006 and you owe a tax balance for 2007. You must pay the 2007 balance on time, or you are deemed to be non-compliant, you are removed from the Offer in Compromise program and you are back to owing the original tax debt plus penalties and interest.)

Above and beyond the two criteria mentioned above, you also have to pay a portion of the Offer in Compromise amount up front for certain Offer in Compromise types and a non-refundable $150 processing fee.

With all of this information in mind, the Offer in Compromise can be a very beneficial program to the individuals who qualify for it. It is not a magic wand to erase all of your tax debt without any work and it is definitely not designed to allow you to hide assets or money from the IRS. If you have back tax debt and are considering an Offer in Compromise, I would recommend consulting someone experienced in handling OICs, as opposed to embarking on this journey on your own. There are very reputable companies that have years of experience in dealing with the IRS, such as JK Harris and Company. Any time you have a tax issue, it can be a very scary and trying experience. Hire a reputable firm, keep good records and be honest throughout the process. It will go a long way toward resolving your tax issues.

October 15th brings deadline to file taxes; application to IRS amnesty program

If you filed an extension to file your income taxes, time is up! Today is the deadline to e-file or mail in your federal tax return. Remember, the failure to file penalty can be quite steep, so even if you owe taxes and cannot pay them all at once, get that return submitted. You can make payment arrangements with the IRS to repay your tax debt, but they do not look kindly on taxpayers who completely fail to file a return.

The other important deadline today is for an IRS amnesty program created to get tax dodgers back into the U.S. tax system. Started in March 2009, the program was set to last for six months, but the IRS extended the deadline to October 15, 2009.

According to the Associated Press, some 7500 people with bank accounts in more than 70 different countries and on six of the seven continents have applied for amnesty under the program. Senator Carl Levin, who has worked for years on the issue of tax evasion, estimates the U.S. loses $100 billion a year in tax revenue due to money being sequestered in offshore bank accounts.

The amnesty program allows these people to come forward without fear of jail time, so long as they pay their back tax debt. The IRS has long had a policy in place where tax evaders could avoid jail time by coming forward before being contacted by the agency, but the tax evader had to pay their back taxes owed, along with heavy penalties and interest. The amnesty program offered reduced penalties to sweeten the deal.

The IRS is looking to gain information from the tax evaders to go after bankers and tax advisers who helped them hide their assets.

October 15th Deadline Growing Near- Don’t Be Late

If you filed a six-month extension to file your 2008 return, the October 15th deadline is fast approaching. For most taxpayers, it is the last day to get your 2008 federal tax returns filed on time. Remember, your return must be postmarked October 15th, or if e-filing, you can still use the Free File program, available through October 15 with the IRS. The IRS is encouraging taxpayers to file electronically since electronic returns tend to have fewer errors than paper returns.

If you wait to file until after the October 15th deadline, it is possible you could be hit with failure to file penalties and interest if the IRS determines you owe taxes. According to the IRS, the failure to file penalty for returns filed more than 60 days late is the smaller of $135 or 100% of the unpaid tax. Interestingly enough, the failure to file penalty is generally more than the failure to pay. This means, even if you know you owe the IRS, you should file your return in a timely manner and settle your tax debt before the penalties and interest compound.

There are a few exceptions to these rules: military members serving in Iraq, Afghanistan and other combat zone localities, people affected by recent natural disasters may file after October 15th and those taxpayers who have paid over 90% of their owed taxes by the deadline will not be hit with the failure to pay penalty.

Virginia Offers Tax Amnesty Program to Aid Collection of Back Taxes

In a move designed to help Virginia taxpayers get owed back taxes paid off, Governor Timothy M. Kaine launched “Get Square VA.” The program is being administered by the Department of Taxation and is offering amnesty to taxpayers who pay their back taxes between October 7 and December 5, 2009. This means that most delinquent taxpayers – business or individuals – may pay their back taxes during this limited window with no penalties and half of the normal interest charges.

This program will be applicable to most taxes administered by the Department of Taxation. Qualifications details are available at the Get Square VA website.

Scam Email Send Malicious Software to Recipients’ Computers

In recent weeks, a phony e-mail claiming to come from the IRS has been circulating in large numbers. The subject line of the e-mail often states that the e-mail is a notice of underreported income. The e-mail may contain an attachment or a link to a bogus Web page directing taxpayers to their “tax statement.” In either case, when the recipient opens the attachment or clicks on the link, they download a Trojan horse-type of virus to their computers.

Malicious code (also known as malware), of which the Trojan horse is but one example, can take over the victim’s computer hard drive, giving someone remote access to the computer, or it could look for passwords and other information and send them to the scammer. The scammer will then use whatever information they gather to commit identity theft, gain access to bank accounts and more.

The IRS does not send unsolicited e-mails to taxpayers about their tax accounts. Anyone who receives an unsolicited e-mail claiming to come from the IRS should avoid opening any attachments or clicking on any links. People can report suspicious e-mails they receive which claim to come from the IRS to a mailbox set up for this purpose,phishing@irs.gov. Those who believe they may already be victims of identity theft should find out what do by going to the U.S. Federal Trade Commission’s Web site, OnGuardOnLine.gov.

Beware the early distribution penalty – from Dollander, TC Memo 2009-187

In a recent Tax Court ruling, a taxpayer who received an early distribution from his retirement plan because he claimed he was disabled could not escape the early distribution penalty. The taxpayer received the financial hardship distribution from his retirement plan in 2005, which was before he was 59 ½ years old. Claiming he qualified for the disability exception to the 10% rule due to the mental health issues he was facing, which included post-traumatic stress and depression, following the death of a patient he had cared for.

The taxpayer claimed he should not be penalized the additional 10% tax because the distribution from his plan was approved as a “financial hardship in-service withdrawal” arising from his negative monthly cash flow. He also contended he received the distribution due to his disability.

Generally, retirement plans can only make a hardship distribution if the plan permits such distributions and there must be an immediate and heavy financial need of the employee and in an amount to meet this need. Employees will generally have to pay the 10% early distribution tax in the year of the distribution, if they are under 59 ½ years of age and they do not meet the exception to the rule. It is important to note they are not subject to mandatory 20% income tax withholding.

In this case, the Tax Court denied the taxpayer’s attempt to avoid the 10% tax based on hardship. The taxpayer could not avoid this section of the Code because it is explicit: if any taxpayer receives any amount from a qualified retirement plan, his tax is increased by an amount equal to 10% of the portion of that amount which is included in gross income – unless one of the enumerated exceptions apply. Financial hardship is not one of the exceptions. The Court also stated he would not be considered disabled for this purpose unless he was unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can expected to be of long-continued or indefinite duration.

Since the taxpayer’s physician stated his patient was expected to fully recover and his treatment did not require institutionalization or constant supervision. The taxpayer also continued working at his normal pay grade and earning the same salary as before he was diagnosed.

I wanted to republish the information on this case, as it is a good warning to anyone thinking about taking this type of early distribution from a retirement plan. I have seen many taxpayers facing a mountain of back tax debt due to taking an early distribution and not paying the tax on it when it was due. They then panic when they receive their first IRS notice stating they owe back taxes.

Many taxpayers are currently facing hardship circumstances due to the recession, unemployment, disability, etc. Please be sure to educate yourself on the circumstances under which you may take an early distribution. If you take the distribution, make sure you pay the appropriate tax on it. These types of situations can trigger a potential audit on your tax return. If your return is audited, be prepared. If you need assistance, the tax team at JK Harris stands ready to assist you in preparing for an audit, or to analyze your situation to see what we can do to help.