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					  Locality Training 2003
Virginia Department of Taxation
                                  Agenda
•   Introductions                     9:30 – 9:40   Howard Overbey
•   Filing Season 2003               9:40 –10:10    Gerald Gwaltney
•   Legislation & Forms Changes     10:10 - 11:10   Lee Mikelson
•   Processing Updates             11:10 – 11:45    Howard Overbey
•   Bank Franchise                 11:45 – 12:15    Mike Fojtik
•   Lunch                           12:15 – 1:15
•   IRMS                              1:15 – 1:45   Gerald Gwaltney
•   760PY Return Preparation          1:45 – 2:30   Steve Mason
•   763 Return Preparation            2:30 – 3:15   Percy Everson
•   Break                             3:15 – 3:30
•   Penalty & Interest                3:30 - 4:00   Lee & Percy
•   Panel Discussion                  4:00 – 4:30   Howard Overbey
Filing Season 2003




Another home run!
   Overview of Filing Season 2003

• Electronic filing growth continues!

• Refunds issued fast, faster, fastest….

• Error rate continues downward trend!




  Thank you! Working together, we
   made filing season 2003 the best
                 ever!
Returns Processed
As of November 5, 2003
                         Refund Turnaround
                Current Year Refunds, All Tax Types




As of November 5, 2003
                  Refund Turnaround – Current Year
                      Local Filed Paper Returns
                            All Tax Types




As of November 5, 2003
Refund Turnaround – Current Year
 All Tax Types & All Channels
         Local & Direct
                         Refund Information




As of November 5, 2003
                      Error Rates
                     As of November 5st

                            Rate          Inventory
Filing Season 2001         22.36%         238,099

Filing Season 2002         10.76%          37,848

Filing Season 2003         10.13%          33,509
               Individual Error Rates
         Electronic vs Paper Filed Returns
               All Years & All Types



• Electronic Returns              4.21%

• Paper Filed Returns            12.89%

• Overall Error Rate             10.13%



As of November 5, 2003
           Most Common Errors
• Estimated, Extension & Other Payments –
  amounts claimed do not equal TAX Records

• Penalty, Interest, and Addition to Tax errors
  (see above – related issues)

• Tax Roll Problems – Name and SSNs do not
  match tax roll

• Deductions and Subtractions errors
                      Goals for 2004

• Issue Refunds – fast, faster, fastest ever!
   – Monitor workflow and receipt dates
   – Monitor Error inventory and focus on resolving refund
     returns with errors in a timely fashion

• Increase Electronic Filing
   – Actively promote electronic filing via tax professional
     conferences and seminars
   – Expand returns eligible for electronic filing e.g. ifile will be
     able to accept returns with political contribution credits for
     taxable year 2003 returns

• Continue to reduce errors
   – Continue to seek methods to resolve errors systematically
   – Continue to work with commercial tax preparation software
     developers to minimize errors
                    Goals for 2004
• Improve speed of deposits
   – Continue to develop knowledge and experience working
     with new remittance system
   – Improve system reporting

• Expand use of imaging technology
   – Implement TACS 2003 (Image based return processing) by
     1/1/04 (wasn’t ready last year until 1/30/03)
   – “Backscan” for archive more returns processed via manual
     data entry

• Support IRMS implementation
   –   Prepare Channel processing procedures
   –   Locate and resolve processing issues
   –   Assist with preparation of training materials
   –   Update forms and instructions
   –   Set-up “print-on-demand” forms
   –   Assist with conversion from STARS to IRMS
Any questions about the
      numbers?
Legislative & Form Changes
     Taxable Year 2003
         Virginia Individual Income Tax

          Form Type - Filing Statistics

                 Breakdown by Form Type

•   The 2002 760CG (paper CG + ELF)             71.62%
•   The 2002 760 Handprint (booklets & flats)   20.95%
•   In-house Electronic (Ifile & Telefile)      7.43%
TY2002 Filing Statistics - as of July 9, 2003
                Legislative Changes for TY2003
                           Individual Returns

                             Fixed Date Conformity

•   2003 Virginia General Assembly rolled date of conformity forward to 12/31/02
    with 2 exceptions

     – Special Bonus Depreciation – must adjust Virginia return
     – Net Operating Loss – 2 years for Virginia

•   Impact of 2003 Federal Jobs and Growth Tax Relief Reconciliation Act

     – Prior to JGTRRA, the annual limitation for the §179 deduction for 2003 was
       $25,000 and the phase-out threshold began at $200,000.
     – For 2003, JGTRRA increased the annual limitation to $100,000 and increased
       the phase-out threshold to $400,000.
     – Therefore, each taxpayer claiming a §179 expense deduction in which (1) the
       deduction was in excess of $25,000 and/or (2) property placed in service for
       the taxable year was in excess of $200,000, must make an adjustment on his
       or her Virginia return.
              Legislative Changes for TY2003
                          Individual Returns
                                 Contributions

•   3 New Contributions:

     – Home Energy Assistance Fund (Refund & Tax Dues)
     – 8 new School Foundations (Refunds & Tax Dues)
     – War Memorial and D-Day Memorial Foundation (Refunds & Tax Dues)

•   Historic Resources Fund - Contribution was scheduled to expire but
    sunset date was extended. Remains in effect as valid “refund only”
    contribution.
                  Legislative Changes for TY2003
                               Individual Returns
                                     Subtractions
•   3 New Subtractions

    – Peanut Quota Buyout Program - payments received in accordance with the
      Farm Security and Rural Investment Act of 2002.Retroactive to 2002. Use Code
      47.

    – Avian Influenza - indemnification payments received by qualified poultry growers
      and table egg producers as a result of depopulation of poultry flocks because of
      avian influenza in 2002. Indemnification payments made to owners of poultry who
      contract with poultry growers do not qualify for the subtraction. Retroactive to
      TY2002. Use Code 45.

    – Military Death Gratuity – subtraction for military death gratuity payments made
      after September 11, 2001, to survivors of deceased military personnel killed in the
      line of duty to the extent included in federal adjusted gross income. Retroactive to
      TY2001. Use Code 46.

• Foreign Source Income Subtraction Repealed.
                Legislative Changes for TY2003

                             Individual Returns
                                        Credits

•   Neighborhood Assistance Program Credit - eligible health care professions
    expanded to include professional counselors, clinical social workers, clinical
    psychologists, marriage and family therapists, and physical therapists. Pre-approval
    required.

•   Credit for Employers of the Disabled - Credit expired at end of taxable year
    2002. No new credits will be authorized. However, taxpayers have up to 2 years left
    to claim eligible carry-over amounts.
                 Legislative Changes for TY2003
                                Individual Returns
                                       Other

•   Refund Interest - Changes the start date for calculating interest due on refunds.
    For returns filed electronically, interest will be paid if refund not issued by 30th day
    following day of receipt and, for paper returns, if refund not issued by 60th day
    following day of receipt. Applies to current year individual income tax returns only.
    For prior year returns (late) filed in 2004, interest will be paid beginning on the 60th
    day following filing date.

     – For filing season 2003, VA TAX issued:
        • 99% of electronically filed refunds in 12 days or less
        • 87% of paper filed refunds in 12 days or less

•   Criminal Penalties - any individual who makes a fraudulent return or statement
    with intent to evade the payment of taxes shall be guilty of a Class 6 felony
    (increased from Class 1 misdemeanor).
                 Form Changes for TY2003
                       The 760CG

           A New Schedule - the Schedule OSC
•   To be used for reporting Multiple Credit for Taxes Paid to Another
    State
•   Schedule will allow for detail for credits to be claimed for 4 states on
    one page
•   2 Additional line items for each credit - filing status claimed on other
    state return and indicator for taxpayer claiming credit when filing
    status different (e.g. joint in VA but married filing separately in other
    state)
•   Taxpayers with one credit will use ADJ - taxpayers with multiple
    credits will use Schedule OSC
                Form Changes for TY2003
                      The 760CG

             Reasons for New Schedule OSC
– Inconsistency among software developers when reporting detail for
  multiple credits as there has been no standard methodology
  established by Virginia
– With no standard reporting method, unable to capture data efficiently
  either manually or using automated processing technology
– At present and continuing with TY2003, VA TAX will not capture credit
  for taxes paid to another state – program will continue to be manually
  audited
– Beginning with taxable year 2004, VA TAX will capture credit detail and
  begin implementing automated audit/review programs
                   Form Changes for TY2003
                         The 760CG

                           Other Changes

•   760CG Page 1 - Line 10 Deductions. Order has been changed in
    response to requests from Tax Professionals - will now flow as 10a
    Federal Itemized, 10b State/Local Income Tax, and then 10 Deductions

•   760CG Page 1 - Line 23 Other Credits. New Political Contribution Credit
    Indicator

•   760CG Page 2 - Telephone Numbers. Moved to above Schedule
    ADJ/CG Part 1 for technical reasons
                  Form Changes for TY2003
                        The 760CG
•   Schedule ADJ - one code box for School Foundation Contributions
    eliminated (25e)

•   Schedule FED - Full name and address added to schedule and
    indicators to reflect if information in lines 1 - 10 is from the Federal
    Schedule C or the Federal Schedule F. (For the Schedule FED
    download program, we will also provide the taxable year.)

•   Schedule INC - added VA Account Number and a taxpayer indicator

•   Schedule INC - added to 2D barcode with space allotted for 10 wage
    statements
                    Form Changes for TY2003
                          The 760CG

•   Schedule CR, Page 2 - Line item reference errors for Foreign Source
    Retirement Income corrected

•   Schedule CR, Page 4 - Credit for Employers of Disabled Individuals
    has expired - form will reflect that no new credits may be claimed and
    allow only for carryover credits to be claimed for TY2003

•   Schedule CR, Page 4 - Line items for Land Preservation Credit
    expanded and text changed to allow for easy reconciliation of transferred
    credit amounts
                      Form Changes for TY2003
                 The TY2003 760 Resident Return
                       Handprint Changes

•   Whole Dollar amounts only
     – Note: with Virginia requiring whole dollar rounding on its 2003 returns, 26 out of
       42 states that have individual income taxes will now be requiring whole dollar
       rounding.
     – For taxable year 1998, only 13 states required whole dollar rounding – the
       number has doubled in 5 years.
•   Minor Adjustments to Schedule ADJ, contribution area
•   New Schedule OSC
•   Schedule CR wording for expired Credit for Employers of Disabled
    Individuals
•   Schedule CR line items updated for Land Preservation Credit
               Form Changes for TY2003
                   The TY2003 760PY
                Part-Year Resident Return

•   Whole Dollars Only

•   Check Boxes Added upper left-hand corner:
    – Amended Return
    – Net Operating Loss
    – Fixed Date Conformity


•   General Clean-Up
    – Spacing, Fonts, and Boxes
    – Preparer’s Firm Name added
    – Consistent wording
                 Form Changes for TY2003
                            The TY2003 763
                          Nonresident Return

•   Whole Dollars Only

•   New Lines 19a & 19b – Withholding amounts for married taxpayers
    must now be separately recorded – extra line causes all line items to shift
    i.e., Lines 19a – 19g now are now Lines 19a – 19h

•   Check Boxes Added upper left-hand corner:
     –   Amended Return
     –   Net Operating Loss
     –   Fixed Date Conformity
     –   Name and address different than shown on 2002 return

•   General Clean-Up
     – Spacing, Fonts, and Boxes
     – Consistent wording
                 Form Changes for TY2003
                   The TY2003 Schedule NPY

•   Schedule Renamed
    – Now - “Schedule of Adjustments for Nonresident or Part-Year Resident”
    – Was - “Schedule for Computing the Age Deduction; Credit for Tax Paid to
      Another State; Addition to Tax, Penalty and Interest; Contributions and
      Consumer’s Use Tax”


•   Whole Dollars Only

•   General Clean-Up
    – Spacing, Fonts, and Boxes
    – Consistent wording
                      Form Changes for TY2003

                          Other Form Changes

•   760E (Extension Return / Voucher)
     – Form redesigned; it is the same form but it has a new, fresh look!
     – Whole Dollar amounts only
     – Special 760E / CG version


•   770 – General Clean-up
               Form Changes for TY2003

The 760CG Return Package, Substitute Form Specifications, other
           Forms, and Instructions can be viewed at:

                      www.tax.state.va.us

  Just click onto the tax professional page and enter password
                               “VA_Tax”

             The Hotline number is 1-804-367-9286
    e-file!
Our Electronic Forms
                                  What is E-file?

•   E-file is a joint federal and state program that allows tax professionals and taxpayers
    to submit both federal and state returns to the IRS electronically using commercial tax
    preparation software (also referred to as ELF or JELF).

•   VA TAX receives the returns by accessing a secure IRS site and downloading the
    Virginia returns daily

•   For each e-filed return, Virginia either accepts or rejects the return and then sends an
    acknowledgement to the tax professional – so the filer knows within 2 to 3 days if
    Virginia has accepted or rejected the return! (And, if we reject the return, we provide
    the filer with a reason code so the filer can fix the return and and resubmit!)

•   E-filed returns have a 4.7% error rate compared to a 10.41% error rate for paper
    returns. And, the errors for e-filed returns are usually simple errors that can be
    quickly resolved without any taxpayer contact!

•   Refunds are issued fast – no mail delays, no manual processing at TAX to capture
    the return information – the return is transferred right from the preparer’s computer
    into ours!
                           Individual Income Tax
                        What can be filed using e-file?

•   760 Returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another
    State

     –   Exception: may file using e-file if only credit claimed from the Schedule CR is the Political
         Contribution Credit

•   760PY returns w/o credits from the Schedule CR or the Credit for Taxes Paid to
    Another State

•   763 returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another
    State


    Virginia now accepts “state only” returns – however, not all
            software supports this functionality. Advise tax
         professionals to check with their software developer.
                  Individual Income Tax
            What cannot be filed using e-file

•   Amended Returns
•   Prior Year Returns – use ifile
•   Fiduciary Returns
•   Extension Requests – use ifile
•   Returns with certain other subtractions that require documentation
•   Returns with Federal Forms 4852, Substitute W2s
•   Returns for deceased taxpayers – including joint returns with one
    deceased taxpayer
•   Fiscal Year Returns
•   Returns with Schedule CR credits claimed (except for 760s when
    the only Schedule CR credit claimed is the Political Contribution
    Credit)
•   Returns with Credit for Taxes Paid for Another State
                   If your Locality is using Tax
                       Preparation Software:
•   Always ensure you are using the latest version of your software

•   Your Locality name should be printed on page 2 of the 760CG, bottom left hand
    corner – we need to know if your Locality prepared the return!

•   Send us original returns, single sided – not copies

•   If using software with 2D Barcode capability, do not change information on the
    return after you print – ALWAYS make the changes in your software and reprint

•   Report problems with your software to your software company – if you cannot
    resolve the issues with your software developer, let us know – contact Lee
    Mikelson at Lmikelson@tax.state.va.us

•   Other questions or issues, use the Tax Preparer hotline 1-804-367-9286 or send
    us a secure email via www.tax.state.va.us
         Return Processing
Making it even easier than last year!!
                     Return Processing
•   General Theme - use the PP3!

•   What’s New in PP3?
    – Refund Interest (House Bill 39)
    – Simpler Screening
    – Reporting Incorrectly Keyed on-line Direct Deposits


•   Return Screening Concept
    – Separate, distinct list of screening codes for each return type
       • Take a return - match it to the appropriate list!
    – PP3 has been organized to make this easy!
       • Screening codes you physically apply - Refer to PP3 Exhibit 8-14
         (8-E14-1 for the forms, 8-E-14-2 for the CR)
       • List of ALL screening codes that show up on STARS, either
         manually applied or system applied! (RP1) - Refer to PP3 Exhibit
         8-24.
                       Updated Screening Sheet
                                                                                                770,
                                                                                     760       763, or
Code                                    Description                        760CG   Handprint   760PY


AD     Schedule ADJ Not Attached/Completed                                            X

AX     W-2 Altered                                                          X         X          X

BB     Nonresident Fiduciary                                                                     X

BM     Border State Method used to compute Out-Of State Credit                        X

CC     Local Filed Prior Year Return with Payment Processed by Locality     X         X          X

CO     Coalfield Employment Enhancement Tax Credit .                                  X          X

CX     Form 760 C/F Attached – Not Liable                                             X          X

DD     Nonresident Allocation Percentage Schedule Not Attached/Completed                         X

EE     Withholding claimed exceeds amount on W-2’s by $5 or more            X         X          X

FC     Federal Schedule C oval filled                                                 X

FD     Fixed Date Conformity Additions/Subtractions                                   X          X

 FF    Dependent on Another’s Return                                                  X          X

 FJ    Self employed Farming, Fisherman, Merchant Seaman                              X          X
       Fed Form 1040 Not Attached to Form 763/760PY or Fed Form 1041 Not
FX                                                                                               X
       Attached to Form 770
GX     Secondary Filer Deceased                                                       X          X

HH     Head of Household                                                              X          X

HX     Primary Filer Deceased                                                         X          X
       Low-Income Families Tax Credit – CLI Section of Schedule ADJ Not
 IC                                                                                   X          X
       Attached/Completed
 II    Schedule of Income and Adjustments (Part 1) on 760PY Incomplete                           X

 IX    Farmer/Fishermen filed by March 1                                              X          X
         New Screening Code for 2004
•   Apply manually to Handprint Current Year Forms and 760CG

    – Write “OS” – if the schedule OSC is attached

    – Should be pre-printed on the CG (note – may not be supported
      by all software brands for ty2003 – but will be mandatory for
      ty2004)

    – Screening code will not be transferred to STARS – when the
      code is keyed during data capture, it will cause a special data
      capture keying template to be display for the data entry operator



               Wow – only one
             new screening code!!!!
                       Farmer, Fisherman,
                      or Merchant Seaman
•   Batch Farmer, Fisherman, & Merchant Seaman separately and sort
    by postmark date i.e., on or before and after March 1st!!!!
    –   See LPR 4.0, page 1

    –   760CG returns may have a pre-printed “FJ” code. This code is to
        prompt you to screen for Farmer, Fisherman, & Merchant Seaman –
        cross through the FJ code and write in the IX or UX code, as applicable

    –   If postmarked on or before March 1, write screening code IX on return

    –   If postmarked after March 1, write screening code UX on return

    –   Bundle these returns separately and label as Farmer, Fisherman, &
        Merchant Seaman returns to assist TAX in processing correctly

        This is CRITICAL – Be on the look-out for these returns
                   LAP-Sorts

•   LAP-Sorts 1 & 2 Exhibit 8-2

•   Local Tax Due Group Control Document (Yellow)
    Exhibit 8-17

•   Local Denied Group Control Document (Pink)
    Exhibit 8-21

•   Accepted AR (Green) Exhibit 8-3
Form LAP-SORT 1
                                                                      FIPS Code ____________________


                                      LOCAL
                  SORT IDENTIFICATION SHEET

                        Group like documents together. DO NOT mix document types.


           Form Type          760Handprint            760CG with 2D         760CG without 2D
                                               (circle one)


                              760PY              763           763S         770




           Bottom Line Type           Refund              Tax Due            Zero Balance
                                               (circle one)

                                           (Rev11/02)
Form LAP-SORT 2
                                                                                                  FIPS Code ____________________


                                                             LOCAL

                                    SORT IDENTIFICATION SHEET


                                                  For Direct Filed Returns

      Direct Filed work is listed below, only for your information.
      Work does not have to be sorted by form, tax year or type.
      All Direct Filed work may be bundled together and you do not need to circle the type on this form.
      Secure this Form on top of the bundle of direct filed work


Prior Year return                                                Forms 760C and 760F NOT accomp anied by a return
Amended return                                                   Form CU-7 NOT accompanied by a return
Form 760 with certain contributions or Consumer Use Tax          Form CU-7 with a return and one check for both liabilities
Tax Due return with Credit Card payment claimed                   Form CU-7 with a refund return and no payment
Fiscal Year Filer on Form 760                                     Form 760E Extensions NOT accompanied by a return

                                                            (Rev11/02)
1
                                                                              FIPS Code ____________________

                                                                              Number Accepted ______________



                                              Local AR

                                     On-line Accelerated Refund
                                      Group Control Document


    Group Control Number ______________________________ (from Screen E04)


    Form Type (circle one)     760Handprint           760CG with 2D            760CG without 2D


    On-line Operator Number / Date Keyed _________________       __________/__________/__________

                                     ***********************************

    Return Screener Name ________________________________________


     Date Screened       __________/__________/__________

                                                   (REV 11/02)
                           The Bottom of the Form
•   “Late date” exact positioning
     – For 760 Handprint forms, use the boxes located bottom middle of the form –
       ALWAYS write as MMDDYY
     – For 760CG Forms, WRITE THE LATE ON THE LINE located bottom middle of the
       form – ALWAYS record as MMDDYY with NO dashes or slashes!!!
     – CRITICAL

•   LAR - Accepted Accelerated Refund

•   DLAR - Denied Accelerated Refund

•   LTD – Check the LTD indicator IF YOU collected and deposited payment
    or if you are going to assess the taxpayer for missing payment or the
    difference due if partial payment was received
     – If you are not going to assess, send in as direct even if you’re a “local file” locality
       – and send any payment received with the return to TAX also!
     – Prevents double billing
     – Prevents not billing at all!
                         Staples

• Reference PP3 1-1-2

• W2’s - middle left for Handprint

• Attachments - upper left

• Always be careful not to damage anything inside the
  borders
       Order of Forms & Attachments

•   Virginia Tax Return – always place first
•   ADJ (or NPY for 763 or 760PY)
•   Schedule FED
•   Schedule CR
•   Schedule INC
•   Schedule OSC
•   Schedule 760 C or F
•   Forms 301, 304, 306 and/or 307
•   Federal attachments
•   Any other attachments / correspondence
                   Howard’s Light Bulbs

•   PP3 4-3-1 - 2D barcode returns - if any printed data is altered, write
    the word “ALTERED” directly above the 2D barcode, and draw 4 heavy
    black lines horizontally through the barcode:
     – if you do not obscure the 2D barcode, TAX’s automated system will
        read the return data from the barcode and fail to capture the data
        as altered
     – Do not mark through 1D barcodes

•   Medium point red or black pens are ok – do not use fine point pens

•   TD keying (E03) - If credit card payment is indicated, do NOT key the
    TD, pull and send to TAX as a direct filed return

•   “CC” code – prior year return and Locality inadvertently deposited the
    funds, use CC to stop TAX from billing
                    Howard’s Light Bulbs

• Shipping returns - fill out one locality shipment form per shipment

• Ship to same addresses as previous years:
   – Department of Taxation, Channel Processing, PO Box 1336,
     Richmond 23218-1336
   – Department of Taxation, Channel Processing, 3600 W. Broad St,
     Richmond 23230-4915

• “Return to Taxpayer” Letters - 8-E1-1 and 8-E1-2

• 759C Reports – due to Erma by the 10th

• LPR 2.2 New Method for reporting incorrectly keyed on-line direct
  deposits – review the PP3 and follow the new procedures
             Common Screening / Procedural
                      Mistakes
• Not putting SSNs on second page

• Late dates – not writing on return or not writing in correct area –
  please be careful!!!

• Assessed vs. not assessed tax dues (if you want us to assess,
  return must be submitted as direct filed)

• Adding an ADJ for P&I and then leaving the SSN off of the ADJ

• 760PY’s - putting the numbers wrong in move in-move out date
  area - refer to PP3 4-4-1 (MAKE SURE YOU CONVERT THE
  DATES ON THE FORM TO THE CORRECT CODES)
             Local Estimated Concerns

• Using wrong year voucher

• Using FIPS code block for
  other information (such as
  “voucher #1)

• Using 760ES to process a
  return payment

• Mixing 760PMT’s, 760E’s, etc.,
  in with 760ES’s

• Submitting “zero” vouchers
           Local Estimated Concerns
•   Always use the correct voucher for the period:

     – The pre-printed vouchers include the “period” in the scanline
     – If the taxpayer’s payment is submitted with the wrong voucher, it
       could be applied incorrectly – even considered late
     – Either prepare a new voucher – or, cross through and write in the
       correct period
     – You must cross through the period shown in the scanline


•   The payment due dates are, for taxpayers with evenly
    distributed earnings, May 1, June 15, September 15, and
    January 15
      Local Estimated Concerns
• Omitting revenue source code on deposit certificate

• Using the wrong revenue source code on the
  deposit certificate

• Creating TA number incorrectly on 559’s from
  Deposit Certificate
                 Local Estimated Concerns

•   Envelopes for late vouchers

    –   Need one side only of the envelope
    –   Cut to same size as voucher!
    –   Smooth, clean edges!
    –   However – WE PREFER THAT YOU USE LATE CARDS INSTEAD OF
        CUTTING ENVELOPES!


        NO window envelopes – use a late card!!!
Bank Franchise TAX
    Bank Franchise Tax


What is Bank Franchise Tax?

Tax based on the net capital of banks
        and trust companies.
            Revenue Collected


– 2002     $65 million

– 2001     $60 million

– 2000     $67 million

    80% of Revenue Allocated to Localities
  When and Where Returns Are Filed

• Form 64 must be filed in duplicate on or before
  March 1st of each year

• Returns are filed with the locality in which the
  principal office of the bank is located

• Schedules C and H are filed with each locality
  assessing the tax
        Responsibilities of Localities

• Ensure each bank, which has a principal office in your
  locality, files a complete return on or before March 1st

• Ensure that Form 64 and Schedule E are signed by an
  officer of the bank

• Ensure that Schedule H is properly completed and the local
  tax is entered on line 17 of Form 64
        Responsibilities of Localities

• Verify the value of the real estate listed on Schedule C and
  verify real estate values with each locality listed on
  Schedule C

• Execute the certificate at the bottom of the schedule

• Execute the Commissioner of the Revenue’s Certificate of
  Assessment at the bottom of Form 64
    Responsibilities of Localities

Send the original of each return by March 20th to the
          Virginia Department of Taxation
                     Schedule C

• Real Estate Deductions Allowed

   – Real estate owned by the bank

   – Real estate used or occupied by the bank and held in the
     name of a majority owned subsidiary of the bank

   – Real estate used or occupied by the bank and held in the
     name of a bank holding company which owns a majority
     of the capital stock of the bank
                 Schedule C

– The assessed value attributable to leasehold
  improvements owned by the bank up to the amount of
  the unencumbered equity

– Real estate used or occupied by a majority owned
  subsidiary of the bank up to that portion of the assessed
  value which represents the bank’s percentage of
  ownership of the subsidiary’s common stock
                Schedule H

• Locality Allocation Table

   – Copy is filed with each locality imposing tax
     upon the filing bank

   – An adjusted copy will be mailed from the
     Department of Taxation if a correction is
     made to the return
            Contact Information

          Bank Franchise Tax Coordinator

Chad Cannon

Phone Number:        804-367-8031, extension 8154
E-mail:              Ccannon@tax.state.va.us
Mailing Address:     Virginia Department of Taxation
                     Bank Franchise Tax
                     Post Office Box 0546
                     Richmond, Virginia 23218-0546
Lunch Time
            Introducing the New
      Integrated Revenue Management
                  System




A new day,
         and a whole new way to do business.
               Overview Topics

•   What is the Integrated Revenue Management System
    (IRMS)?

•   Implementation Timeline

•   Black-out Period

•   Training

•   Key Differences between STARS & IRMS – with a sneak
    peek!

•   IRMS Access
            What is IRMS?

• IRMS will be the system of record for taxpayer
  demographic and financial information for TAX.

• The functions now performed by your office using
  STARS will be performed in IRMS.
             Implementation Timeline

• Joint Integration Test            11/07/02 - 11/28/03

• End-to-End Test                   02/16/03 – 03/31/04

• Integrated User Acceptance Test   04/26/04 - 07/16/04

• Mock Production                   07/12/04 – 08/06/04

• STARS Blackout                    08/27/04 – 09/13/04

• Go-Live                           09/14/04
            STARS Blackout Period
               The Blackout Period

• limited to view only capability in STARS

• Deposits will continue to be processed during this time

• Various systems will continue to process work but will
  hold the information until IRMS goes-live and then will
  upload the information over a period of time

• Conversion from STARS to IRMS of taxpayer records is
  completed
                              Training
• Technology based training (TBT) will be delivered via the
  agency’s Learning Management System to the staff of CORs
  and Treasurers

• TBT will be supported by our Performance Support System
  (PSS) and TARP.

• PSS is an online help system and TARP is an online database
  of procedures!

• Locality training kick-off is scheduled for around July 1st, 2004



                    Everything you need
               will be right at your desktop!
               Training Content Areas
•   Overview                       •   Returns Processing, Payment
                                       Processing, and Assessment
•   Access and Security                Activities
                                        – In-depth on tasks such as
                                           preparing returns and
•   Customer Information:                  exoneration processing
     – In-depth on tasks related
       to individual or business
       profiles and accounts       •   Performing Penalty and
                                       Interest Calculations
                                       – In-depth training on tasks
                                         related to calculating P&I using
                                         P & I Calculator
                Key Differences
            between STARS & IRMS
•   Windows based - new look and feel
     – Drop down menus instead of screen numbers
     – Electronic Information (i.e., Uncollectibles, Exonerations, etc.)
•   Tax account structure:
     – customer profile for each taxpayer
     – For joint taxpayers, each taxpayer will have a separate customer profile
•   Tax account number:
     – Customer profile for each “FEIN”
     – Account numbers assigned based on FEIN
     – 15 character account numbers: XX – XXXXXXXXXX - XXX:
         • 2 digit tax type suffix
         • FEIN + “F”
         • 3 digit location code
•   Online training and procedures
         Individual Tax Account Structure –
        differences between STARS & IRMS

• STARS - For joint returns, STARS stores on tax roll as “Robert
  and Susan Smith”. If Susan had filed returns separately before
  she married, then Susan would also be on tax roll as “Susan
  Jones”.

• IRMS - For joint returns, each taxpayer will still have a separate
  profile – if you accessed Susan Smith’s profile, you would see a
  list of all returns she filed separately as Susan Jones and the
  returns she filed jointly with Robert as Susan Smith. Note - In
  IRMS, the first name, last name, and middle initial will also be
  stored in separate fields and a history of name and address
  changes will be maintained.
                 Business Tax Account Number –
              differences between STARS & IRMS

•   STARS - For a business with 2 locations in different Localities, each
    location is assigned a separate Virginia Account number for filing
    sales tax:
     – Location A = 1234567891
     – Location B = 5678912345

•   IRMS - For a business with 2 locations in different Localities, each
    location will have the same account number except that the last 3
    digits will be different:
     – Location A = 11-123456789F-001
     – Location B = 11-123456789F-002

       By establishing one customer profile using the FEIN and then creating separate
          account numbers using established prefixes and suffixes, all of a customer’s
        accounts will be linked i.e., IRMS will maintain a relationship among the separate
                           accounts by establishing one customer profile
                              Conversion

• STARS Individual – TAX began collecting and storing separate
  name fields in 2003 to facilitate conversion from STARS to IRMS:
   – STARS stores “Robert & Susan Smith” as one name in one field
   – TAX has also been capturing the separate names “Robert” + “Smith” and “Susan”
     + “Smith” and storing to minimize conversion problems
   – If TAX does not have the separate names stored, then a program will be used to
     determine the separate names and then to create the new record in IRMS
   – It is possible that conversion errors could occur


• STARS Business – TAX has been capturing the FEIN on all
  Corporate returns in order to facilitate conversion to IRMS:
   – Starting sometime next spring, business taxpayers will begin receiving information
     about the conversion and the change in account numbers
   – To minimize problems, IRMS has been designed such that it will be able to accept
     and process with the old Virginia Account number
                          Conversion

• Converting from STARS to IRMS will be a major undertaking – it is
  very likely that we will experience some problems and that some
  clean-up will be required after conversion

• During the blackout period, several Channels will continue to process
  returns and payments:
   – When IRMS goes-live, the Channels will systematically transfer
      the captured data to IRMS over a period of time
   – We will not be able to upload everything processed during the
      blackout to IRMS in one day – by uploading the returns and
      payments over a period of time, we will be able to monitor the
      system and, if necessary, take corrective action if problems are
      encountered
   Windows – Accelerated Refunds
STARS                             IRMS




        Compare the difference!
Windows – Local Uncollectibles
                      Uncollectibles
                      can be entered
                         online or
                     uploaded via the
                           web!
             Windows – Return Detail




 Tabs for
maneuverin
    g
                       IRMS Access

•   Local offices will connect to VITA to gain access to IRMS

•   The connection to VITA can be achieved via:

     – A dial-up modem - the least expensive option and potentially
       very slow depending upon number of users and other
       variables; or

     – A high-speed circuit – much faster but more expensive then
       the modem option.

•   Whether your office uses a modem or a high-speed
    connection, the connection to VITA will be secure.
                                IRMS Access

•   Contact VITA to find out more about the requirements for installing a high-
    speed connection

•   All connection costs will be incurred by the Local office… each Locality
    must determine which connection method will best suit their needs based
    on number of users, transaction volume, response time desired, etc.
                         IRMS – Minimum
                      Workstation Requirements
•   Pentium 350MHz is the minimum requirement, but the Pentium III processor is
    recommended
•   128M Ram
•   10 gig hard drive
•   Operating Systems:
           Windows 98           Windows 98 SE
           Windows ME           Windows NT 4.0 w/SP 6a and higher
           Windows 2000                    Windows XP
•   Internet Explorer 6.0, SP 1
•   Internet connectivity via modem or local area network
•   Anti-virus software (TAX uses Norton)
•   Firewall software (TAX uses zone alarm pro)


    Note – these are minimum requirements for running IRMS – your Locality should also
    consider any other applications used by its staff to determine workstation requirements.

    *The 10 gig hard drive is a recommendation. Preliminary analysis indicates that 1GB is
                                        needed for IRMS.
         The 760PY

   Preparing the Part-Year
Resident individual income tax
            return.
             Who Files a Part-Year Return?

•   Individuals whose residency in Virginia began or ended during
    the taxable year. Part-Year residents include:

     – Virginia residents who move out of Virginia during the taxable
       year and become domiciliary residents of another state, provided
       they do not move back to Virginia for at least 6 months; or

     – Individuals who move into Virginia during the taxable year and
       become either domiciliary or actual residents of Virginia
                 Who Files a Part-Year Return?


•   The act of leaving Virginia and then returning to the state within 6
    months does not, in general, demonstrate intent to establish
    residency in another state. For example:

     – A Virginia resident who enters the military and is assigned duty
       outside of Virginia remains a Virginia resident; and

     – A Virginia resident who accepts employment in other countries on a
       non-permanent basis and who does not take action to abandon
       Virginia as his or her legal residence remains a Virginia resident.
                          What Form does a
                        Part-Year Resident use?

•   Part-Year residents file Form 760PY along with Schedule NPY and
    Schedule CR, if applicable. Exceptions:

     – If the taxpayer’s entire federal adjusted gross income is from
       Virginia sources, the taxpayer may file as a resident using the Form
       760; or

     – If the taxpayer maintains legal domicile in another state and lived in
       Virginia for less than 183 days, the taxpayer may file as a
       nonresident using the 763 return package

     Note – the return for a taxpayer who was a resident of Virginia but who
       died during the taxable year should be prepared using the resident
       return, not a Part-Year return.
              How the Part-Year Return Works.

•   The Part-Year Resident return separates income based on residency
    status. That is, federal adjusted gross income is separated based on
    when income was received or payments made. Personal exemptions
    are prorated based on length of residency. The standard deduction
    amount is prorated based on the percentage of federal adjusted gross
    income attributable to Virginia residency.

•   A Part-Year Resident whose total income is attributable to Virginia is
    allowed to file a Resident Return because the percentage of VAGI
    attributable to Virginia is 100%.

•   A Part-Year Resident who lived in Virginia for less than 183 days may
    file using the Nonresident Return, Form 763. The taxpayer will then
    compute taxable income as a resident, and determine net taxable
    income based on the percentage of Virginia source income reported.
                           Preparing the 760PY
•     First, complete the return through Line 5
       – Be sure to enter the dates of residency accurately
       – If the return is for married taxpayers, be sure to enter each taxpayer’s dates of
         residency


•     Then, complete Parts I through V on page 2 of the return
       – Information from page 2 flows to page 1
       – By completing page 2 first, you can then complete the return much more
         quickly and accurately
       – If the return is for married taxpayers with different dates of residency, be sure
         each taxpayer’s exemptions and deductions are adjusted appropriately
       – Remember, a resident spouse and a part-year spouse may file a joint or
         combined 760PY


    Note – to prepare the 760PY return, you will need a copy of the federal return. A
     copy of the federal return must accompany the 760PY when it is submitted for
                                       processing.
                      Preparing the 760PY
  Other considerations when preparing the Part-Year Return

• Page 1, Line 12 Personal Exemptions
   – Use the ratio schedule provided in the 760PY Instruction Booklet to
     calculate the taxpayer’s prorated personal exemption amount
   – For married taxpayers be sure to compute each taxpayer’s
     personal exemption amount based on that taxpayer’s dates of
     residency

  Result = the ratio reflects the exact number of days the taxpayer lived in
   Virginia. For example, if the taxpayer lived in Virginia for 152 days (moved
             out on June 1), the ratio is .416 – or 152 divided by 365.
                     Preparing the 760PY
  Other considerations when preparing the Part-Year Return

• Page 2, Part I, Line 30 Moving Expenses:
   – Moving expenses are considered expenses in the state to which
     the taxpayer moved
   – Record total moving expenses on Line 30 A1 and/or Line 30 B1
   – Moving expenses incurred as a result of a move to Virginia are
     recorded on line 30 A2 and/or Line 30 B2 and result in a lower
     Virginia Adjusted Gross Income (VAGI)
   – Moving expenses incurred as a result of a move out of Virginia are
     recorded on line 30 A3 and/or Line 30 B3 and do not result in a
     lower VAGI

      Moving expenses cannot be prorated i.e., a taxpayer may not assign
       some moving expenses to one state and the remaining expenses to
                                another state.
                       Preparing the 760PY
  Other considerations when preparing the Part-Year Return

• Page 2, Part I, Line 32 Federal Adjusted Gross Income
   – Line 32 must equal the Federal Adjusted Gross Income as shown
     on the federal return
   – For married taxpayers, Line 32A1 and Line 32 B1 must add
     together to equal the joint Federal Adjusted Gross Income as
     shown on the federal return

     If the sum of Lines 32 A1 and 32 B1 do not equal the amount shown on
           the federal return, the return will be subject to Audit Review and
                                       adjustment.
                       Preparing the 760PY
  Other considerations when preparing the Part-Year Return

• Page 2, Part III, Line 40 Subtraction for income attributable for
  period of residency outside of Virginia
    – Amounts shown on Line 32 A3 & B3 are transferred to Lines 40 A3
      & B3 in order to calculate the total amount to be subtracted from
      the taxpayer’s Virginia Adjusted Gross Income
    – If the amounts on Line 32 A3 and/or B3 are negative, transfer the
      amounts to Line 35 A and B as an addition

  Result = Computation Isolates income received as a Virginia resident for
    taxation by Virginia. Just as the income from the other state will not be
   taxed by Virginia, any negative income incurred in the other state will not
                             lower the Virginia tax.
                      Preparing the 760PY
  Other considerations when preparing the Part-Year Return

• Page 1, Line 18(f) Credit for Taxes Paid to Another State
    – In general, Virginia allows a credit for earned or business income
      (or gain on a capital asset not used in business or trade) from
      sources outside of Virginia, which is subject to tax by Virginia as
      well as another state
    – For a Part-Year resident, the credit can only be claimed for income
      or gain derived from sources outside of Virginia and received
      while a Virginia resident because income received while not a
      Virginia resident is subtracted from the taxpayer’s Virginia Adjusted
      Gross Income
    – As a result, out of state credits claimed on Form 760PY are
      frequently incorrect
                     Preparing the 760PY

                            An Example

Name:                                        John Q. Taxpayer
Dates of Residency:                          June 1 – December 31
Deduction:                                   Standard
Filing Status:                               Single
Federal Adjusted Gross Income (FAGI):        $25,000

                         Breakdown of FAGI

  Wages ($2,000 per month)                      $24,000
  Interest Income ($100 per quarter)                400
  Dividend income (paid on December 1)              600
  Total FAGI                                    $25,000
                      Preparing the 760PY
                             An Example

Income received while a resident of a another state


   Wages for January – May @ 2,000 per month          $10,000
   Interest income for 1st quarter (Jan-March)            100
   Total income received in other state               $10,100


Income received while a resident of Virginia


   Wages for June – December @ 2,000 per month        $14,000
   Interest income for 2nd, 3rd & 4th quarters            300
   Dividend income                                        600
   Total income received in Virginia                  $14,900
                     Preparing the 760PY
                           An Example

                 Compute the Standard Deduction

A. Income received as a Virginia Resident =       $14,900
B. Total Federal Adjusted Gross Income =          $25,000
C. Divide A by B =                                 59.6%

D. Standard Deduction for Single =                $3,000
E. Part-Year Standard Deduction (C X D) =         $1,788
                      Preparing the 760PY
                             An Example

                  Compute the Personal Exemption

A. Look-up Ratio using table in Instructions:              .586
B. One Personal Exemption =                                $800
C. Part-Year Personal Exemption (A X B) =                  $469

John moved to Virginia on June 1st
June 1st is the 152nd day of the year
John lived 151 days outside of Virginia

      With 365 days in the year, 365 – 151 = 214 days in Virginia
                       214 divided by 365 = .586
            But it’s easier to just use the ratio schedule!
Now, let’s make it a little more complicated!
                          Special Situations


                               Situation #1

1.   Taxpayer is a Part Year Resident; and
2.   Taxpayer received Virginia source income while the taxpayer was a
     Nonresident; and
3.   Taxpayer’s income is not all Virginia Source (i.e., the part-year taxpayer
     is not eligible to file as a resident)



          Taxpayer is required to file both a 760PY Part-Year Return
                        and a 763 Nonresident Return
                               Special Situations

                                      Situation #1

1.   Prepare the 760PY to report the income received during the taxpayer’s
     residency in the state
     •     Subtract all income the taxpayer received while a nonresident, including Virginia
           source income

         Result = Part-Year tax liability is computed based only on the income received
                        by the taxpayer during his or her period of residency

2.   Prepare the 763 to report the Virginia source income received while the
     taxpayer was a nonresident
     •     Prepare the return following standard procedures except
     •     Prepare Part V using only the Virginia source Income received while a
           nonresident.

          Result = Nonresident tax liability is computed based only on the taxpayer’s
            Virginia source income received during his or her period of non-residency.
                    Special Situations


                         Situation #2

1.   Married Taxpayers
2.   One taxpayer is a full-year resident; and
3.   One taxpayer is a part-year resident



Taxpayers may file a joint or combined 760PY Part-Year return,
   or the resident taxpayer can file a 760 Resident return, with
    the part-year resident filing a 760PY Part-Year return and
                     both using filing status 3.
                          Special Situations

                                 Situation #2

1.   If the married taxpayers elect to file a joint or combined 760PY Part-
     Year return:
     •   The resident taxpayer may NOT:
         • Subtract income from other states
         • Prorate personal exemptions and deductions
     •   The part-year resident MUST:
          • Subtract income from the other states
          • Prorate personal exemptions and deductions



     Result = tax liability computed using the resident taxpayer’s total income and
        the part-year taxpayer’s income received during residency
                           Special Situations
                                  Situation #2

2.   If the married taxpayers elect to file separately:
     •   Both must use filing status 3. Using the federal return and all other available
         documentation, determine income, exemptions, and deductions as if the
         taxpayers had filed separate federal returns :
          • In general, the taxpayer claiming an exemption for a dependent must be
              reporting at least half of the federal adjusted gross income
          • In computing itemized deductions, determine each taxpayer’s share of the
              itemized deductions based on which taxpayer incurred the expenses – but
              if that is not possible, allocate the itemized deductions proportionately
              based on each taxpayer’s respective share of the federal adjusted gross
              income reported on the joint federal return.
     •   Prepare a 760 return for the resident taxpayer
     •   Prepare a 760PY return for the part-year resident
     •   Neither taxpayer may claim the other taxpayer as a dependent

     Result = tax liability computed separately for each taxpayer based on that
                               taxpayer’s residency status
Questions?
         The 763

 Preparing the Nonresident
individual income tax return.
           Who Files a Nonresident Return?

•   Nonresidents of Virginia with Virginia Adjusted Gross Income at
    or above the Virginia filing thresholds must file if they have
    income from Virginia sources.

•   Virginia source income is income received from labor performed,
    business conducted, or property located in Virginia and includes:

     – Wages or salaries received for services performed in Virginia
     – Income received from the rental, sale, exchange or other disposition of
       real estate and intangible personal property having situs in Virginia,
       including business income and proceeds from real estate transactions
       based through by a Virginia trust
     – Income, including interest, received from a partnership, sub-chapter
       S corporation, or other business entity that does business in Virginia
     – Prizes paid by the Virginia Lottery,
     – Gambling winnings from wagers placed or paid at a Virginia location
                    Who is a Nonresident?

•   Nonresidents include:

    – Individuals who do not live in Virginia or who live in Virginia for an
      aggregate of 183 days or less and are not domiciliary residents of
      Virginia

    – Members of the U.S. armed forces who have another state as their home
      of record even though they may be stationed in Virginia for years


Note: With approval from the Tax Department, a Partnership, S Corporation, or
      Limited Liability Company with nonresident partners, shareholders, or
         members may file a unified Nonresident return on behalf of their
     nonresident partners, shareholders, and members, thus relieving these
             persons of filing a separate Virginia Nonresident return
            Filing Exceptions for Nonresidents


•   Residents of Kentucky and the District of Columbia who commute
    to work daily in Virginia do not have to file if they:

     – Have no actual place of abode in Virginia at any time during
       the taxable year; and
     – Salaries and wages are the only Virginia source income; and
     – Salaries and wages are subject to taxation by Kentucky or the
       District of Columbia
             Filing Exceptions for Nonresidents


•   Nonresidents with Virginia source income who are residents of
    Maryland, Pennsylvania, or West Virginia do not have to file if:

     – They are not actual or domiciliary residents of Virginia
     – Salaries and wages are the only Virginia source income; and
     – Salaries and wages are subject to taxation by Maryland,
       Pennsylvania, or West Virginia




Residents of Kentucky, Maryland, Pennsylvania, West Virginia, or the District of
    Columbia who have Virginia source income other than salaries and wages,
     such as business income or gain from the sale of a residence, must file a
                          Virginia Nonresident return.
                            What Form does a
                            Nonresident use?

•   Nonresidents file using Form 763 along with Schedule NPY and
    Schedule CR, if applicable.

•   For married taxpayers, if one taxpayer is a resident and the other
    taxpayer is a nonresident, the resident taxpayer files using the
    resident form 760 while the nonresident files using form 763.



     Exception: if the nonresident taxpayer has no income at all or all of the
    nonresident taxpayer’s income is Virginia source, then the married taxpayers
                          may file a joint resident form 760
               What Form does a Nonresident use?
                      Special Situations

                    Military – Married Couples

•   If both lived in Virginia the entire year; and
•   The active duty taxpayer is a domiciliary resident of another state;
    and
•   The nonmilitary spouse is a resident; and
•   Both taxpayers have nonmilitary Virginia source income;

                                    then

•   The taxpayer on active duty files a Form 763, using filing status 4; and
•   The nonmilitary taxpayer files a Form 760 using filing status 3.
               What Form does a Nonresident use?
                      Special Situations

                    Military - Married Couples

•   If both have nonmilitary Virginia source income; and
•   The active duty taxpayer is a domiciliary resident of another state;
    and
•   The nonmilitary spouse lived in Virginia for 183 days or less;

                                    then

•   The taxpayers may file a Form 763, using filing status 2.
               What Form does a Nonresident use?
                      Special Situations
                    Military - Married Couples

•   If both have nonmilitary Virginia source income; and
•   The active duty taxpayer is a domiciliary resident of another state;
    and
•   The nonmilitary spouse’s domicile changed to Virginia during the
    taxable year;

                                    then

•   The taxpayer on active duty files using Form 763, filing status 4; and
•   The nonmilitary spouse files using 760PY, filing status 3.

Any income received from Virginia sources before the nonmilitary spouse became
                a Virginia resident should be reported on form 763.
            How the Nonresident Return Works.

•   Step 1 - The Nonresident taxpayer computes Virginia Taxable Income
    as if the taxpayer is a resident (lines 1 through 15);

                                    Then

•   Step 2 - The taxpayer determines the percentage of Virginia source
    income to total income. This percentage is referred to as the
    nonresident allocation percentage (Part V);

                                    Then

•   Step 3 - The taxpayer applies the nonresident allocation percentage to
    the Virginia Taxable Income computed as a resident to compute the
    Nonresident Taxable Income.

Result – By applying the nonresident allocation to the Virginia Taxable Income
         computed as a resident, the taxpayer’s personal exemptions and
   deductions, as well as the income, are prorated based on the percentage of
                     Virginia source income to total income.
                                  Preparing the 763

    The 763 is prepared following the same general rules as preparing the resident
                               760 return, except as follows:

•      The 763 has 4 filing statuses, which are different than the filing statuses provided for
       on the Resident 760 and the Part-Year 760PY returns. The filing statuses are as
       follows:
       –   Filing Status 1 = Single
       –   Filing Status 2 = Married, filing joint return
       –   Filing Status 3 = Married, spouse has no income from any sources
       –   Filing Status 4 = Married, filing a separate return

•      The 763 does not provide for a “married, filing a combined return” filing status nor
       does it provide for a Spouse Tax Adjustment

•      Filing status 3 and 4 both provide a $2,500 standard deduction

    Note – to prepare the 763 return, you will need a copy of the federal return. A copy
             of the federal return must accompany the 763 when it is submitted for
                                          processing.
                       Preparing the 763

    Other considerations when preparing a Nonresident Return

•     In general, Virginia does not allow taxpayers filing a
      nonresident return to claim a credit for taxes paid to another
      state. The only exception is if:


      –   The nonresident taxpayer is a resident of Oregon, Arizona,
          California, or the District of Columbia; and

      –   The taxpayer has Virginia source income that is taxed by
          Virginia as well as the other state.
                        Preparing the 763

    Other considerations when preparing a Nonresident Return

•   The nonresident allocation percentage is computed to one decimal
    place only: e.g., 2.13% must be rounded down to 2.1% and 2.17% would
    be rounded up to 2.2%



•   A taxpayer may file both a 760PY and a 763 if the taxpayer had income
    generated in Virginia either prior to or after the taxpayer’s period of
    residency in Virginia
                           Preparing the 763
    Other considerations when preparing a Nonresident Return

•   The Federal Adjusted Gross Income (FAGI) reported on Line 6
    should always equal the FAGI reported on the federal return unless
    the taxpayer is using filing status 4, married filing separately in
    Virginia. For filing status 4 returns:

    •   Use the federal return and all other available documentation, to determine
        income, exemptions, and deductions as if the joint taxpayers had filed
        separate federal returns:

        •   In general, the taxpayer claiming an exemption for a dependent must be
            reporting at least half of the federal adjusted gross income
        •   In computing itemized deductions, determine each taxpayer’s share of
            the itemized deductions based on which taxpayer incurred the expenses
            – but if that is not possible, allocate the itemized deductions
            proportionately based on each taxpayer’s respective share of the federal
            adjusted gross income reported on the joint federal return.
        •   Neither taxpayer may claim the other taxpayer as a dependent
Questions?
Break Time
Penalty & Interest
   Calculations


             May 3rd, 2004

             I’m late, I’m late,
           for a very important
                   date!
                     Agenda

• What is an assessment?
• How long does the taxpayer have to pay the
  assessment before any applicable penalty and interest
  is added to the assessment?
• What are the penalties that may apply when calculating
  an assessment?
• Examples
                        Assessments
               as defined in Section 58.1-1820
                   of the Code of Virginia

“Assessment” …..shall be deemed to be made when a written notice
  of assessment is delivered to the taxpayer……, or mailed to the
  taxpayer at his last known address. …an assessment shall also
  be deemed to be made when a notice of assessment is
  transmitted….to the taxpayer by either facsimile transmission or
  electronic mail…..
              Assessments & Payments
             as defined in Sections 58.1-308
           and 58.1-1812 of the Code of Virginia


“The taxpayer shall pay such additional tax….within 30 days after
  the amount of tax as computed is mailed…..

“Upon such assessment..shall send a bill therefore to the taxpayer
  and the taxes, penalties, and interest shall be remitted…within 30
  days….if …not paid within 30 days, interest at the rate provided
  shall accrue thereon from the date of such assessment until
  payment.”
                    Critical Points related to
                          Assessments

• The act of calculating an assessment amount does not constitute the
  issuance of an assessment until the assessment is reduced to writing
  and delivered or mailed to the taxpayer.

• The taxpayer has 30 days from the date of the assessment to pay the
  assessed amount before any additional interest and penalty is added
  to the assessment.
             Penalties


• Late Filing Penalty

• Late Payment Penalty

• Extension Penalty
                  Late Filing Penalty
              as defined in Section 58.1-347
                  of the Code of Virginia


“Upon all [individual or fiduciary] returns on which tax is due,
   filed with or assessed by the commissioner of revenue after
   the time herein prescribed for the filing of returns, the
   commissioner of the revenue shall assess a penalty equal to
   six percent of the amount of taxes assessable thereon if the
   failure is for not more than one month, with an additional six
   percent for each additional month or fraction thereof during
   which such failure continues……, not exceeding thirty
   percent…”
                   Late Payment Penalty
                  as defined in Section 58.1-351
                      of the Code of Virginia

“If any payment is not made in full when due, there shall be added
    to the entire tax or to any unpaid balance of the tax, a penalty of
    six percent of the amount thereof if the failure is for not more
    than one month, with an additional six percent for each
    additional month or fraction thereof during which such failure to
    pay continues……, not exceeding thirty percent… The penalty
    under this section shall not be applicable to any month or
    fraction thereof for which the individual is subject to the penalty
    imposed under Section 58.1-347.”
                Extension Penalty
           as defined in Section 58.1-344
               of the Code of Virginia


“…if the underestimation of the balance of tax due exceeds
  ten percent of the actual tax liability, there shall be
  added to the tax as a penalty an amount equal to one-
  half of one percent per month for each month or fraction
  thereof from the original due date….to the date of
  payment.”
              Valid Extension

• Must file an extension request and tentative tax
  return - the 760E
• Remit the tentative tax due with the 760E to TAX
  on or before the original due date
• File the return prior to the expiration of the
  extension period

 If the taxpayer files the return after the expiration of the
        extension period, the extension is NOT a valid
                            extension
               760 - Penalty & Interest
                     Example One
• Tax Liability from line 17 =             $850
• Prepayments from Line 24 =               $725
• Tax Due on Line 25 =                     $125

• Taxpayer filed an Extension Request postmarked April 25th but
  did not remit any tax payment
• The taxpayer filed the return with full tax due payment on
  August 15th but no interest or penalty was included


         What should the Locality assess?
                     760 - Penalty & Interest
                           Example One
1.) First Question - Did the taxpayer file a valid extension? That is, did the
    taxpayer file the 760E before May 1st and then submit the return within the
    extension period? Yes

2.) Second Question - Is the balance of tax due greater than 10% of the tax
    liability? Yes

                     Tax due divided by total tax liability =

                       $125 divided by $850 =        14.7%

3.) Third Question – Since the taxpayer did not pay 90% of the total tax
    liability by May 1st but did file a valid extension, what penalty should be
    applied? Apply the extension penalty as follows:

½% for each month or portion of a month until tax is paid – therefore, ½% for
                      May, June, July, and August = 2%
               760 - Penalty & Interest
                     Example One
                   First Assessment Calculation

Extension Penalty = 2% times $125 =                $2.50
Interest for 104 days =                            $1.63
Total Assessment =                                 $4.13


•   Assumes annual interest rate of 4.5% for illustrative purposes
    only – always look-up the interest factor!

•   In this example, assessment is under $5.00 so COR is encouraged
    not to create a Memorandum of Assessment (refer to the PP4).
                   760 - Penalty & Interest
                Example One – Critical Points

•   90% of tax liability was not paid by the original due date thus an
    Extension Penalty of 1/2% for each month is applicable

•   The Late Filing Penalty is not applicable because the taxpayer
    filed the return before the extended due date

•   The Late Payment Penalty is not applicable as the taxpayer paid
    the balance of tax due paid with return when filed

•   Interest is owed from original due date to date of payment
                     760 - Penalty & Interest
                           Example Two

• Tax Liability from line 17 =               $850
• Prepayments from Line 24 =                 $725
• Tax Due on Line 25 =                       $125

• The taxpayer did not file an Extension Request (Form 760E)
• The taxpayer filed the return and paid the full tax due on August
  15th but no interest or penalty was included with the tax due
  payment


          What should the Locality assess?
              760 - Penalty & Interest
                    Example Two

1.) First Question - Did the taxpayer file a valid extension? That is,
    did the taxpayer file the 760E before May 1st and then submit the
    return within the extension period? NO


2.) Second Question – Since the taxpayer did not file an extension
     request and the return is a tax due with payment, what penalty
     should be applied? Apply the Late Filing Penalty as follows:


6% for each month or portion of a month until tax is paid – therefore,
              6% for May, June, July, and August = 24%
             760 - Penalty & Interest
                   Example Two

                   First Assessment Calculation

Late Filing = 24% times $125.00 =                        $30.00
Interest for 104 days =                                   $1.63
Total Assessment =                                      $31. 63

Assumes annual interest rate of 4.5% for illustrative purposes only –
   always look-up the interest factor!
                  760 - Penalty & Interest
               Example Two – Critical Points

•   The Extension Penalty is not applicable because the taxpayer did
    not file an Extension Request (760E) by May 1st

•   The Late Filing Penalty is applicable because the taxpayer filed a
    tax due return after May 1st

•   The Late Payment Penalty is not applicable as the taxpayer paid
    the balance of tax due with the return

•   Interest is owed from original due date to date of payment
                760 - Penalty & Interest
                     Example Three

• Tax Liability from line 17 =              $850
• Prepayments from Line 24 =                $725
• Tax Due on Line 25 =                      $125

• The taxpayer filed an Extension Request (Form 760E)
  before May 1st but did not make a tentative tax payment
  with the 760E
• The taxpayer filed the return and paid $25.00 on August
  25th


      What should the Locality assess?
                  760 - Penalty & Interest
                       Example Three


1.) First Question - Did the taxpayer file a valid extension? That is,
    did the taxpayer file the 760E before May 1st and then submit the
    return within the extension period? Yes

2.) Second Question - Is the balance of tax due greater than 10% of
    the tax liability? Yes

                Tax due divided by total tax liability =

                   $125 divided by $850 =     14.7%
                    760 - Penalty & Interest
                         Example Three
3.) Third Question – Since the taxpayer filed an extension request and
     submitted the return before the extended due date but did not pay in full,
     what penalty is applicable?

    –   Does the taxpayer owe an extension penalty? Yes – because the
        balance of tax due is greater than 10% of the tax liability

    –   Does the taxpayer owe a Late Filing Penalty? No – because the
        taxpayer filed the return by the extended due date

    –   Does the taxpayer owe a Late Payment Penalty? Yes – the full tax
        due amount was not paid when the return was filed

           Extension penalty = ½% for May, June, July, and August
 Late Payment Penalty = 6% for August (and for each month thereafter up to
                             30% until tax is paid)

     Remember – a penalty applies to each month or portion of a month!
                     760 - Penalty & Interest
                          Example Three
                       First Assessment Calculation

Tax Due Amount =                                                     $125
Amount paid with Return =                                             $25
Balance of Tax Due =                                                 $100

Extension Penalty = 2% times $125 =                                 $2.50
Late Payment Penalty @ 6% of $100 =                                 $6.00
Interest on $125 for 121 days =                                     $1.89
Total Assessment =                                                $110.39


•   Assumes annual interest rate of 4.5% for illustrative purposes only
•   Assumes taxpayer is assessed on August 26th – “timing is always an issue….”
             760 - Penalty & Interest
          Example Three – Critical Points

• The taxpayer owes the Extension Penalty for 4 months because
  90% of tax liability was not paid with extension

• The taxpayer owes a Late Payment Penalty because full
  payment of the balance of tax due was not remitted when the
  return was filed on August 25th. Critical point – for balance due
  returns filed after May 1st, the Late Payment Penalty kicks-in on
  the date the balance due return is filed or the extended due
  date, whichever is earlier

• Interest is owed from original due date to date of payment
              Penalty & Interest - Notes

• The Late Payment Penalty should never be assessed in the
  same month that a Late Filing Penalty is assessed

• The Extension Penalty and a Late Payment Penalty may both
  apply - see example 3

• If a taxpayer files and extension but submits his or her return
  after the expiration of the extended filing date - the extension is
  not valid and should not be considered when calculating penalty
  and interest
Panel Discussion
Thank you for attending. We look
forward to working with you during
        filing season 2004!

				
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Description: W2 Income Tax Form Calculator document sample