Summer 2009 TAX CLIENT NEWSLETTER
Tax filing season is barely over bills. Details are provided below. extended under President Obama’s
but it’s not too early to start looking All of the tax changes are difficult budget proposals (See the article
ahead to next year, especially with to adjust to for both practitioners on the Obama budget below.)
the rapid pace of legislative change and their clients, but the news is Ineligible individuals include
over the past nine months since not all bad. In fact, there are many nonresident aliens, those claimed
the first economic recovery bill was planning opportunities you may be as a dependent on another person’s
passed. Another huge tax bill has able to take advantage of this year, tax return and those who do not
become law, the American Recovery so read on. include a social security number
and Reinvestment Act of 2009, on their tax return. For joint filers,
which expands and extends many only one social security number is
NEW TAX BENEFITS AVAILABLE
popular tax provisions, including required on the return.
UNDER THE STIMULUS BILL
the child tax credit, the first-time The credit is being implemented
On February 17, 2009, President
homebuyers’ credit, college credits, through revised income tax
Obama signed into law H.R.
and bonus depreciation. But the withholding tables which employers
1, the American Recovery and
President and Congress are not were required to start using by April
Reinvestment Act of 2009, which was
stopping there. More tax changes 1 of this year. Employers and payroll
designed to give relief to struggling
are being considered in Congress as companies will handle this change,
taxpayers and to stimulate certain
part of the Obama Administration’s so taxpayers do not need to fill out
sectors of the economy. This massive
2010 fiscal year budget. Congress new W-4 withholding forms to have
legislation extends and expands
has to act on these proposals because the credit amount reflected in their
many of the tax changes enacted in take-home pay.
of the need to fund government
the economic recovery act passed in
operations and because the Bush Two Important Points: Taxpayers
late 2008. Below are highlights of the
tax cuts expire at the end of 2010. will not get a separate check mailed
tax breaks contained in the new law.
A replacement plan for the Bush tax to them from the IRS like last year’s
cuts is expected to pass Congress TAX BREAKS FOR INDIVIDUALS economic stimulus payment. Also,
late this year. We will show you what with the adjusted withholding
• Making Work Pay Credit –
it may look like. tables, employees need to ensure
The refundable credit is equal to
Meanwhile, the IRS is struggling 6.2 percent of a taxpayer’s earned that enough taxes are withheld,
as the credit could reduce the
to keep up with the guidance income with a maximum credit
withholding for a married couple
taxpayers need to comply with the of $800 for a married couple
with dual income by too much if the
new rules. Some topics discussed in filing a joint return and $400 for
couple is ineligible or only partially
this newsletter include how to claim other taxpayers, but it is phased
eligible for the credit.
the first-time homebuyer credit and out for higher income taxpayers.
how the new withholding tables for The phase-out applies for those • First $2400 of 2009 Un-
the Making Work Pay credit could with adjusted gross income employment Benefits Tax Free —
affect your 2009 tax liability. The above $75,000 for individuals The first $2,400 of unemployment
IRS also has recognized the difficult and $150,000 for married couples benefits received by taxpayers in 2009
economic times by granting relief filing jointly. The credit is available are tax free. For a married couple,
to taxpayers who can’t pay their tax for 2009 and 2010, but may be the exclusion applies to each spouse
Summer 2009 Tax NewS Page 2
separately. Unemployed workers can credit next year when they file January 1, 2010. The deduction may
choose to have income tax withheld the 2009 tax return, rather than be taken on the 2009 tax return and
from their unemployment benefit claiming it on the 2008 tax return. is available to both those who itemize
payments. Those who choose this This could benefit taxpayers who their deductions and those who take
option will have a flat 10 percent tax might qualify for a higher credit on the standard deduction instead.
withheld from their benefits. The the 2009 tax return because they • American Opportunity Tax
IRS has instructed taxpayers to use have less income in 2009 due to a job Credit for College Costs – The
Form W-4V, Voluntary Withholding loss or a drop in investment income HOPE college credit has been
Request, or the equivalent form and, thus, will not be penalized by renamed the “American Opportunity
provided by the payer, to request the phase-out provisions. Tax Credit” and has been increased to
withholding to begin or end. Instant Credit May Be Available: $2500 per eligible student, beginning
• First-Time Homebuyer Credit Buyers eligible for the credit who in 2009 or 2010. The new credit rate
– Qualifying taxpayers who purchase get FHA loans may soon also be is 100% of the first $2,000 of qualified
a home before December 1, 2009 eligible for cash advances from their tuition and related expenses and
receive a credit of 10% of the cost loan companies up to the amount 25% of the next $2,000 of qualified
of the home purchase up to $8000 of the credit. The Federal Housing tuition and related expenses. The
or $4,000 for married individuals Administration has announced credit is available for the first four
filing separately. You can qualify it will authorize lenders who do years of higher education. The
if you have not owned a home for business with the agency to provide credit is phased out for taxpayers
the past three years. Taxpayers have bridge loans at closing secured only with adjusted gross income between
the option of claiming the credit by the tax credit the borrower will $80,000 and $90,000 ($160,000 and
either on their 2008 tax returns or receive from the IRS. The bridge $180,000 for married couples filing
on their 2009 tax returns next year. loans act as advances on the credit jointly. A portion of the credit is
The amount of the credit begins which the homebuyer can use to refundable.
to phase out for taxpayers whose make the down payment or pay
Note: Obama’s budget proposal
adjusted gross income is more than closing costs without waiting for
would make this credit permanent.
$75,000, or $150,000 for married the normal tax filing cycle to claim
Congress also is requiring the IRS to
couples filing jointly. Taxpayers their credit.
submit a study by February 17, 2010
buying the home after December • Deduction for Sales and Excise on requiring students to perform
31, 2008 do not have to repay the Taxes on Purchase of Vehicle – community service as a condition
credit. (Taxpayers who bought a Taxpayers can deduct state and local of receiving tuition credits.
home under the previous provision sales and excise taxes they pay on
during calendar year 2008 have to the purchase of a new automobile • Computer Equipment Qualifies
repay the credit over 15 years.) in 2009. The deduction is limited to as College Expense – Taxpayers may
tax amounts paid on up to $49,500 use funds from tax-qualified 529
Some filing options to consider are: accounts for purchases of computer
of the purchase price of a qualified
1) Amend the 2008 tax return. new car, light truck, motor home hardware, software, internet access
Taxpayers who buy a home after or motorcycle. Also, the deduction or related services used by a college
they filed their 2008 return can is allowed for purchases of motor student. The purchases must take
consider filing an amended tax homes or vehicles with a gross place in 2009 or 2010. Software
return. The amended tax return will vehicle rating of not more than 8,500 designed for sports, games, or
allow them to claim the homebuyer pounds. The deduction is phased hobbies does not qualify unless it is
credit on the 2008 return without out for taxpayers whose adjusted mainly educational in nature.
waiting until next year to claim it on gross income is between $125,000 • Increase in Tax-Free Transit
their 2009 return. and $135,000 for individual filers and Vanpool Benefits – If your
2) Claim the credit in 2009 rather and between $250,000 and $260,000 employer provides transit passes
than 2008. For some taxpayers, for married couples filing jointly. To and vanpool benefits to you for
it may make more financial sense qualify, the vehicle must be purchased commuting, the amount of those
to wait and claim the homebuyer after February 16, 2009, and before benefits is excluded from your
Summer 2009 Tax NewS Page 3
income up to $230 per month. • Earned Income Tax Credit – brackets who have large deductions,
Previously, only parking benefits The earned income tax credit (EITC) particularly for state and local
were tax-free. The increase applies for families with three or more taxes and mortgage interest on loans
to months beginning on March 1, qualifying children is increased to not used for home improvements,
2009 and before January 1, 2011. 45% for 2009 and 2010, resulting calculate their tax twice: first, under
• Employee Subsidy for COBRA in a maximum credit of $5,656.50. the regular tax rules; and then under
Coverage and Tax Credit for The phase-out thresholds also are special minimum tax rules, which
Employers Who Provide COBRA increased for 2009 and 2010. disallow many deductions. The
Benefits – Employees who lose • Recovery Payment for Federal minimum tax rules also include
their jobs after August 31, 2008 and Program Beneficiaries and Retired more items in income than the
before January 1, 2010 and who elect Federal and State Employees — regular tax rules, such as tax-exempt
COBRA health continuation coverage Retirees, disabled individuals, bond interest and income from the
are entitled to receive a 65 percent Railroad Retirement beneficiaries, exercise of stock options. Then,
subsidy on their COBRA premiums. and disabled veterans will receive a the taxpayer has to pay the regular
For periods of COBRA coverage one-time $250 “recovery” payment tax amount and any minimum tax
beginning after February 16, 2009, in 2009. To be entitled to the amount which exceeds the regular
the employee is covered by paying payment, an individual must have tax calculation. More taxpayers are
only 35 percent of the premium been eligible for those benefit subject to the minimum tax each year
amount. The employer may recover programs during November and because it is not adjusted to reflect
the other 65 percent by taking the December 2008 and January 2009. inflation. To ease this problem,
subsidy amount as a credit on their Federal and state pensioners who are Congress increases the minimum
quarterly employment tax return. not eligible for social security also tax exemption amount each year,
• Child Tax Credit – The will receive the $250 payment. The but Congress has never fixed the
refundable portion of the child one-time payment will reduce any underlying inflation problem.
tax credit has been increased by allowable Making Work Pay credit.
changing the amount refundable The IRS won’t be making these $250 BUSINESS TAX BREAKS
from 15% of earned income in payments. Instead, they will be made
The February 2009 Act created,
excess of $12,550 to 15% of earned through the agency that provides the
extended, and expanded many
income in excess of $3,000, for benefits under these programs.
business tax deductions and credits
tax years beginning in 2009 and affecting both large and small
2010. The amount of the existing ALTERNATIVE MINIMUM TAX RELIEF
businesses. Because some of these
child tax credit is $1,000 per For tax years beginning in 2009, changes are only available this year,
qualifying dependent child under individuals will receive some relief
eligible businesses only have a few
age 17 through 2010 (and $500 from the alternative minimum tax
months to take action and save on
thereafter). The credit is phased out (AMT) through an increase in the
their taxes. Here is a quick rundown
for taxpayers with adjusted gross exemption amounts to $46,700 for
of some of the key provisions.
income above $110,000 for married unmarried individuals, $70,950
couples filing jointly and above for married couples filing a joint • Estimated Tax Payments –
$75,000 for single taxpayers. return and surviving spouses, Many individual small business
Refundable v. Nonrefundable and $35,475 for married persons taxpayers may be able to defer until
Credits: With a refundable credit, if filing separate returns. Also, the end of the year paying a larger
the amount of a credit exceeds the nonrefundable credits are allowed part of their 2009 tax obligation.
amount of the taxpayer’s total income against the minimum tax. Finally, For 2009, business owners can
tax liability for the year, the excess tax-exempt interest on private make quarterly estimated tax
amount is paid by the government activity bonds will not be included payments equal to 90 percent of
to the taxpayer. For nonrefundable in the minimum tax calculation. their 2009 tax or 90 percent of
credits, you lose whatever amount Minimum Tax in a Nutshell: The their 2008 tax, whichever is less.
of a credit that you cannot use alternative minimum tax requires Individuals qualify if they received
against your tax liability. that taxpayers in the higher income more than half of their gross income
Summer 2009 Tax NewS Page 4
from their small business in 2008 • Loss Carrybacks by Small 17, 2009, and before January 1,
and meet other requirements. To Businesses — Many small 2011. The stock must be held
qualify, an individual must have businesses that had expenses for more than five years. This
less than $500,000 of adjusted gross exceeding their income for 2008 provision is limited to individual
income (AGI) ($250,000 if married can choose to carry the loss back investors and is not available to
filing separately) shown on the tax for up to five years, instead of corporations.
return for the preceding tax year. the usual two years. For small
businesses that were profitable in ALTERNATIVE ENERGY TAX BREAKS
For purposes of this rule, a small
business is one that employs no the past but lost money in 2008, this Both individuals and business
more than 500 persons. could mean a special tax refund. can take advantage of new or
The option is available for a small expanded tax benefits for the
• Bonus Depreciation — An
business that has no more than cost of reducing energy use or
additional 50% first-year write-off is
an average of $15 million in gross creating new energy sources.
allowed for business property acquired
receipts over a three-year period. Two of the more useful credits
and placed in service before 2010.
This option also has a time limit. for individuals are the new tax
• Depreciation Cap for New credit for plug-in electric vehicles
A corporation that operates on a
Passenger Autos — The depreciation and the credit for making energy
calendar-year basis, for example,
limit for qualified new passenger efficient improvements to your
must file a claim by September 15,
automobiles used in a business is home. Here’s a run down of some
2009. For eligible individuals, the
increased by $8000 over the 2009 of the new provisions.
deadline is October 15, 2009.
dollar caps. Note that the boosted
depreciation limit is reduced to the • Work Opportunity Credit • Residential Energy Property
extent of non-business use and does — Businesses may now take an Credit — Taxpayers can now
not apply if the taxpayer elects out expanded per-employee credit for get a generous credit for making
of bonus first-year depreciation. hiring individuals in targeted groups energy efficient improvements
including unemployed veterans and to their existing homes equal
• Immediate Expensing Deduction
“disconnected youth” who are hired to 30 percent of the cost up to
— The Act extends the higher limits
in 2009 or 2010. A “disconnected $1,500 for 2009 and 2010.The
on the immediate deduction for
youth” is defined as an individual at credit applies to improvements
investment in business property
least age 16 but not yet age 25 on such as adding insulation, energy
through 2010. The limits will
the hiring date who is not attending efficient exterior windows and
continue to be a total of $250,000
school, is unemployed, and who is energy-efficient heating and air
per year, with a limit of $800,000 for
not readily employable because of a conditioning systems.
all property purchased. This limit
lack of skills. Note: For information on
is designed to target the expensing
deduction to small businesses. The • Built-in Gains Tax – For tax efficiency standards and what
investment limit requires that the years beginning in either 2009 or type of equipment qualifies for
deduction be phased out dollar- 2010, the new law eliminates the the credit, you can go to the
for-dollar for purchase amounts corporate level tax on the built- government’s information website
in excess of $800,000. “Expensing” in gains of an S-Corporation that at http://www.energystar.gov. Most
under the tax rules means that the converted from C-corporation manufacturers and installers also
business can take a higher portion status at least seven tax years before have information on which models
of the cost of business property as the current tax year. qualify for the credit.
a deduction in the current year • Exclusion of Gain on Small • Residential Energy Efficient
instead of taking lower depreciation Business Stock — To encourage Property Credit — This non-
deductions each year over the life investment in small businesses, refundable energy tax credit will
of the asset. Thus, businesses can the new law increases from help individual taxpayers pay for
expense a significant portion of the 50 to 75% the exclusion of qualified residential alternative
cost in the year of purchase and gain from the sale of qualified energy equipment, such as solar
then take depreciation deductions small business stock which hot water heaters, geothermal heat
over time for the rest. was acquired after February pumps and wind turbines.
Summer 2009 Tax NewS Page 5
• Plug-In Vehicles — Taxpayers certain hardship cases where • Lien Assistance — The IRS
may take a new 10%, nonrefundable taxpayers are unable to pay. has changed its procedures
credit for vehicles bought after This includes instances when to better assist taxpayers with
February 17, 2009 and before January the taxpayer has recently lost a lien releases. When a taxpayer
1, 2012, including electric drive job, is relying solely on Social cannot pay the full amount
low-speed vehicles, motorcycles, Security or other assistance or on a lien and there is a pend-
and three-wheeled vehicles. The is facing devastating illness or ing real estate transaction or
maximum credit amount is $2,500. significant medical bills. refinancing, the IRS provides
A new 10% credit also is allowed them with information about
• Added Flexibility for Missed
for the cost of converting any motor partially discharging liens,
Payments: The IRS has flex-
vehicle into a plug-in vehicle, with a subordinating them to other
ibility in working with taxpay-
maximum credit of $4000. lenders’ liens, and the tele-
ers who have previously com-
phone number to call to in-
• Business Credits for Manu- plied with a payment schedule
quire about lien assistance.
facturing Green Equipment and who are now having difficulty
Producing Alternative Energy — making payments because of
Manufacturers get a new credit for
EMPLOYER RELIEF TO SAVE
financial hardship. The IRS
producing clean energy equipment. may allow a skipped payment
401(K) PLANS
Businesses that produce electricity or a reduced monthly pay- To prevent cash-strapped
from alternative sources also can get ment without automatically employers from terminating their
a generous credit or apply for a grant suspending the Installment employees’ 401(k) plans, the
to offset their costs. Agreement. IRS is allowing some employers
to reduce or suspend certain
• Prevention of Offer in Com- required contributions they make
IRS REACHING OUT TO HARD-HIT promise (OIC) Defaults: to their employees’ individual plan
SMALL BUSINESSES WITH SPECIAL Taxpayers who are unable to accounts as long as the employers
RELIEF MEASURES meet the payment terms of an follow certain notice and timing
The IRS has put in place special accepted offer in compromise procedures.
programs to help small business will receive a letter from the
owners — primarily Schedule C IRS outlining options available TAX PROPOSALS IN OBAMA’S
filers — facing hardship as a result of to help them avoid default. BUDGET CURRENTLY BEFORE
the economic downturn. Here’s a list • Expedited Levy Releases: The CONGRESS
of IRS initiatives aimed at helping IRS will speed the delivery President Obama unveiled his
small business: of levy releases by easing re- budget proposal on February 26,
• Offering Installment Agree- quirements on taxpayers who 2010. The budget blueprint raises
ments: The IRS has instructed request expedited levy releases revenue by approximately $1 trillion
its agents who are examining for hardship reasons. over 10 years but contains an
returns to consider collect- additional $1 trillion in spending
• Fast Track Settlement: The
ability during the pre-audit cuts over the same period. Many of
IRS is using its Fast Track
phase. They also are being en- the tax provisions would not take
Settlement (FTS) program to
couraged to offer installment effect until 2011.
settle cases more quickly than
agreements at the end of an The tax increases are said to fall
is possible with its traditional
audit when taxpayers are hav- mostly on high-income individuals.
Appeals procedures. This pro-
ing difficulty paying all of the The revenue raised is supposed to
cess is especially beneficial to
tax, thereby enabling them to fund health care reform, according
taxpayers who have a tax lia-
minimize interest and penalty to the budget description. One of the
bility in dispute that is greater
charges. most controversial proposals is the
than $25,000. It speeds up the
• Postponement of Collection process and gets the IRS Ap- plan to limit the value of itemized
Actions: IRS employees may peals office involved at an ear- deductions to 28% for upper income
suspend collection actions in lier stage. taxpayers. Interestingly, much of
Summer 2009 Tax NewS Page 6
the opposition is coming from the — Make permanent the research employer-provided healthcare plans
President’s own party, including and experimentation credit. with a refundable $2,300 tax credit
Congressional leaders who are — Extend the carryback period for ($5,700 for families) for employees
concerned about the effect on business losses to five years. to allow them to purchase their
charities and on the housing market, insurance. The credit could be
since charitable deductions and OTHER TAX CHANGES: received in advance for taxpayers
home mortgage interest deductions — Freeze the estate tax at its unable to afford the premiums. The
would be capped at 28%. Legislation 2009 level which includes an bill also would allow taxpayers to
containing these proposals is exemption for estates valued at use health savings accounts to pay
moving through Congress and is up to $3.5 million and a top rate for health insurance premiums.
expected to be passed in Fall 2009. of 45 percent. Some type of health care reform
Set forth below is a list of possible — Require information reporting bill is expected to be voted on in
changes that could affect your tax for rental payments. late Summer. Both businesses and
bill in the near future. individual taxpayers could be affected.
— Tax carried interest paid to
managing partners as ordinary In fact, health care reform could bring
UPPER INCOME TAX INCREASES:
income instead of capital gains. unprecedented change to the current
— Increase the top rates for taxpayers system of tax-free health insurance
earning over $250,000 (married benefits provided by employers. Keep
taxpayers) or $200,000 (for ALTERNATIVES TO TRADITIONAL
your eye on this one.
singles) to 36 and 39.6 percent. HEALTH INSURANCE TAX
— Reinstate the personal exemption BENEFITS BEING CONSIDERED IN
CONGRESS VICTIMS OF PONZI SCHEMES
phase-out and itemized deduction
MAY TAKE DEDUCTION FOR THEFT
limitation for taxpayers earning A new bill, the Small Business
LOSSES, IRS RULES
over $250,000 (married taxpayers) Health Options Program (SHOP)
or $200,000 (for singles) which is Act of 2009, would create a national The IRS has issued guidance
set to expire in 2010. small-business health insurance to taxpayers on how to deduct
purchasing pool and give tax credits losses from fraudulent investment
— Increase the capital gains and
for the health insurance expenses arrangements, such as Ponzi
dividends tax rate from 15% to
of small businesses. The bill has schemes. If there was criminal
20% for taxpayers earning over
bipartisan support in Congress intent to defraud the investor,
$250,000 (married taxpayers) or
and also is backed by some key then the loss is considered a theft
$200,000 (for singles).
business and labor groups. Under loss under the tax law, not a capital
INDIVIDUAL TAX CUTS: the program, small businesses loss. Theft loss deductions can
would receive a tax credit of up be taken in the year the taxpayer
— Make permanent the following
to $1000 per employee if the discovers the loss. However, if
credits:
business covers at least 60 percent there is a reasonable chance of
• Making Work Pay Credit recovering the money, the loss
of employee premiums. Employers
• Child Tax Credit deduction cannot be taken until
funding more than 60 percent of
• New American Opportunity Tax premiums would receive a bonus the tax year in which the taxpayer
Credit (for college expenses) tax credit. Self-employed workers can tell whether or not he will
— Expand the Earned Income Tax would be eligible for a $1,800 tax receive the reimbursement.
Credit credit ($3,600 for families). The amount of the deduction is the
— Expand saver’s credit and provide As an alternative, Republicans amount invested in the arrangement,
automatic enrollment in IRAs have introduced the Patients’ Choice less amounts withdrawn, and also
and 401(k)s. Act of 2009, which is designed reduced by reimbursements or other
to increase private coverage of recoveries.
BUSINESS TAX CUTS: the uninsured. Sponsored by key The IRS also has provided a so-
— Completely eliminate capital Republicans, the bill would replace called “safe harbor” formula under
gains tax on small businesses. the current tax exclusion for which defrauded investors can claim
Summer 2009 Tax NewS Page 7
a theft loss deduction the IRS will not acted a special equitable relief pro- transfers, foreign trusts, employee-
challenge. The calculation is complex vision for innocent spouses who leasing schemes, private annuities
and must be reported on a specific could not take advantage of the or life insurance plans.
IRS form. The taxpayer also must standard rules because of some le-
sign a statement containing specific
Filing False or Misleading Forms
gal technicality. The IRS tried to
information about the investor and impose the two-year limit of the Some scam artists file false or
the fraud and attach it to the return. regular innocent spouse rules to misleading returns to claim refunds
Thus, this type of claim is best left to the equitable relief provisions, but that they are not entitled to, such as
your tax preparer. Also, the investor the Tax Court would have none of Form 1099-Original Issue Discount
may have income or an additional it. The Tax Court struck down the (OID), claiming false withholding
deduction in a later year depending two-year limit, commenting that credits.
on the actual amount of the loss that the nature of equitable relief is to
is eventually recovered. The safe address hardship cases, such as Abuse of Charitable Organizations
harbor procedure only applies to missed deadlines, unforeseen cir- and Deductions
losses discovered beginning in 2008. cumstances, etc. You should see us, Exempt organization scams
if you think you qualify for such include arrangements to improperly
IRS SEEKS TO BRING OFFSHORE equitable relief. shield income or assets from
TAX EVADERS INTO THE FOLD taxation and attempts by donors
In a major new initiative, the IRS DIRTY DOZEN TAX SCAMS FOR 2009 to maintain control over donated
has unveiled new incentives for peo- assets or income from donated
The IRS has issued its 2009 “dirty
ple with offshore accounts to turn property. Another area of abuse is
dozen” list of tax scams. “Taxpayers
themselves in voluntarily over the the donation of over-valued assets.
should be wary of scams to avoid
next six months, pay what they owe paying taxes that seem too good
and answer questions about who Return Preparer Fraud
to be true, especially during these
helped them set up secret accounts. challenging economic times,” IRS Dishonest return preparers can
Government officials are offering cause many headaches for taxpayers
Commissioner Doug Shulman
milder penalties than could other- who fall victim to their ploys.
commenting when releasing the
wise be imposed — and a reduced These preparers skim a portion of
list. Here’s some of the 2009 list:
likelihood of criminal prosecution. their clients’ refunds and charge
Phishing inflated fees for return preparation
TAXPAYERS IN SOME STATES Phishing is a tactic used by services. They attract new clients by
ELIGIBLE FOR DISASTER RELIEF Internet-based scam artists to promising large refunds.
In the last several months, the IRS trick unsuspecting victims into
has declared taxpayers in a number revealing personal or financial
Frivolous Arguments
of states eligible for disaster relief in information. These scams send Promoters of frivolous schemes
the form of later filing deadlines and e-mails which appear to come from encourage people to make unreason-
penalty waivers on tax deposits. States the IRS promising a refund. If the able and unfounded claims to avoid
on the list include Arkansas, Indiana, taxpayer sends personal or financial paying the taxes they owe. The IRS
Georgia, Florida, Minnesota, and information back, this information has a list of frivolous legal positions
North Dakota. We can assist you to is used to steal the person’s identity that taxpayers should avoid. Taxpay-
obtain relief, if you receive a penalty or raid their bank account. ers who file a tax return or make a
notice or otherwise need to qualify. submission based on one of the iden-
Hiding Income Offshore tified abuses on the list are subject to
IT MAY NOT BE TOO LATE FOR Taxpayers try to avoid or evade a $5,000 penalty.
INNOCENT SPOUSES U.S. income tax by hiding income in
The U.S. Tax Court slapped the offshore banks, brokerage accounts Abusive Retirement Plans
IRS on the wrist this month by or through other entities. Taxpayers The IRS continues to find abuses
holding one of its innocent spouse also evade taxes by using offshore in retirement plans, including
regulations invalid. Congress en- debit cards, credit cards, wire Roth Individual Retirement
Summer 2009 Tax NewS Page 8
Arrangements (IRAs). The IRS
is looking for transactions that STATES LOOK TO NOVEL WAYS state, not just in a few areas
taxpayers are using to avoid the TO RAISE REVENUE as it is now, to raise $200
If you are excited about million in taxes.
limitations on contributions to
IRAs as well as transactions that are getting a few more dollars in • Lawmakers in New Jersey
not reported as early distributions. your paychecks thanks to the are considering taking food
The IRS warns taxpayers to be wary new stimulus bill, your federal taxes a step further and
of advisors who encourage them to tax break may be offset by new placing a “sin” tax on fast
shift appreciated assets into IRAs State taxes. Many states are food. The U.S. Congress
at less than fair market value to considering major increases in briefly considered a tax on
circumvent annual contribution sales and income taxes to backfill sugary sodas this year, but
limits. some of the shortfall they are the idea was put aside.
experiencing in their tax revenues
Disguised Corporate Ownership from the dramatic downturn in
Some taxpayers form corpora- the economy. Unlike the federal Thanks for Your Business
tions and other entities for the government, many states cannot As your tax professional, I assure
primary purpose of disguising the run a deficit under state law you that I will be keeping a watchful
ownership of a business or finan- but instead must balance their eye on Congress and on IRS actions
cial activity. Such entities can be budgets by raising taxes, cutting which may affect your tax filings.
used to facilitate underreporting of spending or dipping into their I will be happy to address any
income, fictitious deductions, non- reserves, if they have any. concerns and answer questions you
filing of tax returns, participating To give you a feel for the new have about your taxes and the issues
in tax shelters, money laundering, frontier of state taxation, we covered in this newsletter.
and financial crimes. have assembled information on
several recent state tax initiatives, Thank you for reviewing the
Misuse of Trusts described below. Summer 2009 Tax Client Newsletter
The IRS notes that, for years, • Connecticut is faced with and for the opportunity and
unscrupulous promoters have trying to raise $3 billion privilege of allowing me to serve
urged taxpayers to transfer assets extra from sales tax in the as your tax professional. Rest easy.
into trusts. Some promoted next two years. Good things happen in the Summer.
transactions promise reduction of • Delaware Gov. Jack Markell For one thing, Congress usually
income subject to tax, deductions wants to raise the marginal leaves town.
for personal expenses and reduced income tax rate by one
estate or gift taxes. Such trusts rarely percentage point, to 6.95%.
deliver the promised tax benefits
• New York and Washington Best regards,
and are being used primarily as a
State have discussed a tax
means to avoid income tax liability
on pornography.
and hide assets from creditors,
including the IRS. • Oregon is looking at a Beer
Tax increase of 1900%.
Fuel Tax Credit Scams • One California legislator
The IRS is receiving claims has introduced a weed
for the fuel tax credit that are tax which would legalize
unreasonable. Some taxpayers, and tax marijuana, which
such as farmers who use fuel for off- could bring in as much as
highway business purposes, may be $1 billion.
eligible for the fuel tax credit. Some • Some officials in Nevada
individuals are claiming the tax have proposed legalizing
credit for nonbusiness uses of fuel. prostitution throughout the
Service to the Tax Profession