IRS Warns of Phony Tax Scheme Abusing the American Opportunity Tax Credit

The IRS warned taxpayers today to be aware of a new scam targeting senior citizens and other taxpayers.  As part of the scam, taxpayers are encouraged to file returns claiming the American Opportunity Tax Credit.  The scammers mislead these taxpayers into believing that they are eligible to claim the credit, even if they don’t meet the credit’s requirements.

The intent is to generate bogus refund checks for taxpayers.  Scammers often charge large upfront fees, with the promise that taxpayers will later receive large refund checks.  By the time the deception is uncovered, the scammers are usually long gone.  Taxpayers are out the upfront fee they paid and are left to clear up the resulting tax mess.

Learn more about tax scams from the IRS here.

A word of warning: as with most things in life and tax – If it sounds too good to be true, it probably is.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Avoid the Tax Bite of Early Retirement Distributions

With the burst of the housing bubble, many people don’t have the luxury of tapping the equity in their home to fund large purchases.  What some have resorted to instead are early distributions from their retirement plans.  Most people don’t realize the tax consequences that go along with these early distributions.

Generally, distributions that you receive before the age of 59½ are considered “early distributions.”   In addition to being taxable income in the year received, these distributions are usually subject to an additional 10% penalty tax.  You can avoid the 10% penalty if you roll over your early distribution to another qualified plan within 60 days of receipt.  A direct roll over from qualified plan to qualified plan will also avoid the 10% penalty.

There are also some limited exceptions to the 10% penalty, such as when you use the distribution to purchase your first home (up to $10,000), to pay for certain medical expenses, or if you are totally disabled.  Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Arrangements (IRAs) provide more information.

It’s usually best to avoid raiding your retirement plan at all, but if you need the cash and want to avoid the tax and penalty, you might want to consider a loan from your retirement plan instead.  A loan is not considered taxable income or a distribution so there is no penalty.  Better yet, talk to a financial advisor to weigh other possible (and hopefully less costly) options for your financing needs.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

IRS FY 2013 Budget – They’re Back!

The IRS has released details of its FY 2013 budget request.  The current request is approximately $12.8 billion, representing about an 8% increase over 2012.

One of the primary focuses of the FY 2013 budget is increased enforcement.  The budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion annually by FY 2015.  In addition to the 4.3-to-1 direct return that the IRS expects to achieve on its enforcement investment, the IRS estimates that the deterrence value of these activities will be at least three times the direct revenue impact.  Translation — Once you see what the IRS does to your friends and neighbors, you will think twice before you cheat on your taxes!

The budget also includes $200 million in additional examination and collection programs, which are expected to raise more than $1.1 billion by FY 2015.  The IRS believes these investments are especially important to further the IRS’ mission of improving tax compliance.

While some of the enforcement increases represent IRS efforts to recover from reductions in funding over the past two years, the IRS is clearly turning its focus toward enforcement, with the goal of increasing both compliance and revenue.

What does this mean for most taxpayers?  I would expect to see a trend of increasing examinations and more focused (i.e. more aggressive) collection efforts.  While we will have to wait and see what the full impact of these increased activities will be, it definitely looks like the IRS is looking to put the “teeth” back into its enforcement efforts.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

IRS Warns Taxpayers on Identity Theft

The IRS recently released its list of the top 12 tax scams for 2012.  At the top of the list is Identity Theft.  The IRS reports that identify theft cases are a growing concern and are among the most difficult cases that they handle.  In an effort to combat identity theft, the IRS has initiated a comprehensive strategy focused on preventing, detecting and resolving identity theft cases as early as possible.

A typical identity theft case involves thieves attempting to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.  Usually, the first time a taxpayer learns of the issue is when they receive a notice from the IRS that more than one return has been filed under their name.

Anyone who believes that they have been a victim of identity theft with respect to their tax information should immediately contact the IRS Identity Protection Specialized Unit.  The IRS has set up a special page on their website specifically dealing with this issue.  The IRS website also includes a listing of Top tips  every taxpayer should know about identity theft.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Beware! – Tax Consequences of Unemployment Benefits

Many people are surprised at this time of year when they prepare their federal tax returns and realize that the unemployment benefits they received are considered taxable income.  For many people, this can make the difference between a refund and a balance due.

Unfortunately, unemployment benefits are generally taxable to the recipient.  If you received taxable unemployment benefits in 2011, you should also receive a form 1099-G with the amount of taxable benefits reflected in box 1.

Recipients of unemployment compensation can elect to have federal taxes withheld from their benefit payments by completing a form W-4V, Voluntary Withholding Request, and giving it to the paying office.  However, most people are either unaware of this option, or choose not to have taxes withheld.  This is usually because they are already struggling with the reduction of income that they are experiencing because their unemployment benefits are significantly less than the income they were earning at their former job.

For more information on the tax consequences of unemployment compensation, see Publication 17 and Publication 525.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Q: What is a Tax Lien?

A: A lien is a legal claim on property.  A tax lien is a public record that puts your creditors on notice that the IRS has a claim against all of your property, including property you acquire after the lien is filed.  The lien attaches to all of your property both real and personal, such as your home, your car, or any other property rights you may have.  Because it is a public record, a tax lien can also negatively affect your credit report and score.

While receiving a notice of federal tax lien can be an unsettling experience, there are legitimate methods that can be used to either appeal the filing of the lien, or have it withdrawn, released, or discharged.  However, it is important that you act quickly; as a lien notice is usually the first aggressive step in the IRS collection process which can later include levy and garnishment.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Court Denies Taxpayers’ Claim for First Time Home Buyer Credit

Foster v. Commissioner, 138 T.C. No. 4 (January 30, 2012)

In a decision issued today, the Tax Court held that a couple was not eligible for the First Time Home Buyer Credit (“FTHBC”) because they owned a present interest in a principal residence within three years prior to the date of purchase of their new home.

Francis and Maureen Foster (the “Fosters”) had originally purchased a home in Western Springs, Illinois in 1974 that was their principal residence (the “old house”).  However, in 2006 the Fosters began spending more time at the home of Mrs. Fosters’ parents in nearby La Grange Park, Illinois (the “parents’ house”).  Although they began spending more and more time at the parents’ house, the Fosters continued to maintain the old house, including receiving mail, maintaining utility services, and even frequently staying overnight in the old house.

The Fosters then sold the old house, finalizing the sale on the June 6, 2007.  For about the next two years, they rented an apartment.  On July 28, 2009, the Fosters purchased another house in Brookfield, Illinois (the “new house”).  The Fosters claimed the FTHBC on their 2008 return.

In order to claim the FTHBC, a taxpayer must be a “first-time homebuyer.”  IRC Section 36(c)(1) defines a first-time homebuyer as a taxpayer that had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the home for which the credit is claimed.

Therefore, in order to claim the FTHBC, the Fosters could not have had a present interest in a principal residence after July 27, 2006 and before July 28, 2009.  Despite the fact that the old house was not sold until June 6, 2007, the Fosters claimed that they had stopped using the old house as their principal residence in February 2006.

It isn’t clear what evidence the Fosters presented in an attempt to prove that they had stopped using the old house as their principal residence but, as mentioned above, the court noted that they continued to maintain the old house, used the address to receive mail, and maintained utilities.  The court also noted that the Fosters did not pay rent, or pay for utilities, at the parents’ house, which would arguably have been their principal residence once they stopped using the old house as their principal residence.

In looking to see where the Fosters went wrong, and what they might have done differently, the obvious response would have been to delay the purchase of the new house until more than three years from the closing of the old house.  If that wasn’t an option, the Fosters could also have taken steps to demonstrate that they had stopped using the old house as their principal residence, such as having their mail forwarded to the parents’ house, changing their addresses for license and voting purposes to the parents’ house, or even just making regular payments for rent and utilities at the parents’ house.  These things might seem obvious in hindsight, but the main point to take away from this case is that if you are claiming a credit (or a deduction for that matter) and there is a question as to whether you meet the requirements, you need to be sure that you can document and prove facts that support your eligibility for the credit.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

IRS Announces Multilingual Resources

The IRS issued an announcement today to remind taxpayers that tax information is available online in a variety of languages.  The IRS’ Multilingual Gateway offers information in Chinese, Korean, Vietnamese, Russian, and Spanish.  The Gateway can be accessed via the following link:

IRS Multilingual Gateway – tax information in 5 additional languages

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

Q: How do I get copies of my old tax returns?

A: The IRS provides several options for retrieving prior year tax data.  If all that you need is a copy of the information from your return, you can request a “return transcript.”  This transcript will show most of the line items from your return, including accompanying forms and schedules.  A return transcript will not show any changes or payments made after you filed your return.

If you are interested in changes or payments made after you initially filed your return, you can request an “account transcript.”  This transcript gives you the basic data from your return, along with any later adjustments or payments.

Transcripts are free to request and can be ordered online, by phone at 1-800-908-9946, or by using a paper Form 4506-T.  Allow 10 to 30 days for transcripts ordered online or by phone and a little longer if you use the paper form.

If a transcript isn’t going to get you what you need, you can request a copy of your actual return by filing Form 4506.  Copies of your past returns will cost you $57 per return, and can take up to 60 days to receive.

If you need your return information faster, contact a tax professional who has access to the IRS e-services system.  By submitting a Form 2848 Power of Attorney electronically, your tax professional should be able to obtain copies of your transcripts immediately online.  Unfortunately, copies of your actual return still have to be requested by paper.

**UPDATE** When I originally drafted this post, I requested a copy of my individual tax transcript the same day.  I received my transcript in the mail on February 11, 2012, for a turnaround time of 15 days – Not bad!

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

County Posts Schedule for Release of Suburban Assessment Numbers

Allegheny County has posted a listing of suburban municipalities and when their reassessment values will be available to the public.  Based on the listing, it appears that eastern suburbs will be released on January 27, 2012, southern suburbs on February 20, 2012, and northern suburbs on March 2, 2012.  The complete list can be viewed at the following link:

Release of Allegheny County Assessment Data

In addition, the county has made the information used to compute the assessments, including comparable sales, available on the internet.  At the moment, the information is only available for the City of Pittsburgh and Mount Oliver.  Information for suburban communities will be made available based on the above scheduled release dates.  This site is separate from the county’s main real estate site and can be viewed at:

Allegheny County 2013 Assessment Data

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
      
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