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IRS Document 6209 – 8A Master File Codes

May 19, 2012 John R. Dundon II IRS Appeal, IRS Audit, IRS Centralized Insolvency, IRS Collections, IRS Criminal Enforcement, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, IRS Transcript, Tax Guidance & Preparation

The first thing that I always do when investigating a tax dispute is pull the transcripts from the IRS for review. They can be really hard to read if you don’t understand the Transaction Codes referenced. Transaction Codes are defined in IRS Document 6209 – Section 8A. This is a valuable resource in understanding how your [...]

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Employee Tool and Equipment Plans

May 17, 2012 John R. Dundon II Business Expense, Deductible Expense, Disallowed Expenses, Employee Business Expense, Employment Tax, IRS Enforcement, IRS Examination, Tax Abuse, Tax Deductible Expenses, Tax Guidance & Preparation, Trust Fund Recovery Penalty

Tool and Equipment Plans generally require employees to provide their own tools. Some plans purport to receive tax-favored treatment as “accountable plans” under the definition of adjusted gross income in Internal Revenue Code § 62(c). If you are expected to use your own tools and equipment on the job and get reimbursed be very careful in [...]

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Calculating Adjusted Basis in an S-Corporation

May 16, 2012 John R. Dundon II Basis, Corporation, Sub-chapter S

It seems to me that a relatively significant problem for most Sub chapter S Corporations is accounting for the capital accounts of each and every single shareholder. The company must maintain reasonably detailed records of each shareholder’s equity investments of cash and property, loans that each shareholder advances to the company as well as distributions [...]

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Medical and Dental Expenses – IRS Publications 502 + 969

May 13, 2012 John R. Dundon II Medical Expenses

This post is a quick overview of IRS Publication 502, Medical and Dental Expenses and IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct [...]

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IRS Rules for Providing K-1′s Electronically: Rev. Proc. 2012-17

May 11, 2012 John R. Dundon II Corporation, Income, Partnership, Small Business, Sub-chapter S, Tax Guidance & Preparation

Certain entities, such as partnerships, are required annually to file K-1s with the IRS and provide a copy to their partners. The IRS estimates that partnerships filed almost 26 million K-1s during 2011. Revenue Procedure 2012-17 provides new rules describing when partnerships may provide K-1s electronically to partners. These new rules make it easier for partnerships to provide [...]

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Understanding IRS Notices and Letters

May 10, 2012 John R. Dundon II IRS Appeal, IRS Audit, IRS Centralized Insolvency, IRS Collections, IRS Criminal Enforcement, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, Tax Guidance & Preparation, Uncategorized

Look on the IRS notice or letter you received in the upper right hand corner for an alpha numeric sequence.  The corresponding IRS explanations below to their Notices and letters are sub categorized as follows: 1. Redesigned Notices 2. Other Notices 3. Individual Filer 4. Business Filer Redesigned Notices Notice Number Description Topic CP01H You [...]

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Unemployment Benefits and the IRS

May 9, 2012 John R. Dundon II Income, Tax Guidance & Preparation, Unemployment

Unemployment compensation generally includes, among other forms, state unemployment compensation benefits, but the tax implications depend on the type of program paying the benefits. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ as represented by any IRS Form 1099-G‘s that you receive, [...]

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IRS Bartering Tax Center

May 7, 2012 John R. Dundon II Barter

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties in the year exchanged. The IRS has an online Bartering Tax Center that is worth checking out to help get it [...]

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Updated Rules Issued for IRS Communications with Appeals Office – Rev. Proc. 2012-18

May 2, 2012 John R. Dundon II Appeals & Audit Resolution, IRS Appeal

The IRS Office of Appeals resolves more than 100,000 tax cases each year. Employees staffed in this function are trained to resolve disputes taking into consideration the hazards of litigation as well as the benefits of efficient tax administration. They are not necessarily trained to advocate on behalf of the United States Government’s best interest as they are to resolve and close files. To that end the Internal Revenue Service updated existing rules on permissible communications between the Office of Appeals staff and pretty much all other parts of the IRS. The updated rules are in Revenue Procedure 2012-18.

The previous rules were issued in October 2000 so it was time that they were revisited. The new rules address ex parte communications, which are communications between the Office of Appeals and other parts of the IRS that take place without the taxpayer or the taxpayer’s representative being given an opportunity to participate in the communication.

“These rules implement a provision in the IRS Restructuring and Reform Act of 1998, aimed at ensuring that the Office of Appeals remains an independent and flexible vehicle for settling audit and collection-related disputes between taxpayers and the IRS. A part of IRS, but independent of the agency’s compliance functions, Appeals serves as one of the checks and balances built into the U.S. system of tax administration.”

In one key change IRS Appeals will no longer participate on issue management teams (IMT) but can be briefed by IMTs, as long as the discussion remains generic rather than case specific. IMTs include representatives from various IRS components, typically Compliance and Counsel, and the IMT meetings usually involve general discussions of how to handle technical issues or procedural matters.

Additionally when there is a breach of the ex parte communication rules, Appeals employees will now ask the affected taxpayer or their representative for input on the appropriate remedy and the appropriate remedy will be determined by a senior management official. The IRS Office of Appeals resolves more than 100,000 tax cases each year.

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Tax Deductible Job Search Expenses

May 1, 2012 John R. Dundon II Business Expense, Disallowed Expenses, IRS Appeal, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, Moving Expenses, Tax Guidance & Preparation, Tax Problems & Requests, Tax Records, Taxable Income

Recently the IRS’ Outreach Corner published an article stating that if you’re searching for a job, “you may be able to deduct some of your expenses, such as attending career fairs, moving expenses and submitting resumes, on your tax return as long as you are looking for a new job in your current occupation.”

This is a true statement of fact however I worry for taxpayers because particular care needs to be had in understanding, substantiating as well as representing how long it has been since your last ‘job’ as well as whether the new ‘job’ in question is in the same ‘occupation’ as your previous ‘job’ and ultimately what the definition of a ‘job’ really is. These are the questions I am regularly faced with in IRS audits when job search expenses are being scrutinized and in Appeals if job search expenses have been disallowed.

For more information about job search expenses check out:

IRS Publication 529, Miscellaneous Deductions,

Tax Topic 508, Miscellaneous Expenses,

Tax Topic 511, Business Travel Expenses.

In Summary

• Job search expenses fall into the category of miscellaneous itemized deductions on Schedule A, Itemized Deductions. If your total itemized deductions are higher than the standard deduction, it’s generally better to choose to include your itemized deductions. Also, in most cases, these expenses must exceed your adjusted gross income by two percent to provide a tax benefit.
• Expenses incurred while searching for a job in your current occupation can be deductible. However, you may not deduct expenses incurred while looking for a job in a new occupation.
• Fees paid to employment and outplacement agencies are deductible. However, if your employer reimburses you for these fees in a later year, you must include the amount in your gross income up to the amount of your tax benefit in the earlier year.
• Costs for resume preparation and postage for mailing your resume to prospective employers is deductible.
• Travel expenses may be deductible if the primary purpose for the trip is to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether or not the trip is primarily personal or primarily to look for a new job.
• Moving costs to a new job location may be deductible. However, you must meet certain criteria relating to distance moved and timing of the move. See IRS Publication 521, Moving Expenses.
• Job search expenses cannot be deducted if there was a substantial break between the end of your last job and the time you began looking for a new one.
• You cannot deduct job search expenses if you are looking for a job for the first time.

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Colorado’s Uniform Debt Management Services Act

April 29, 2012 John R. Dundon II Colorado Attorney General, Tax Guidance & Preparation, Tax Problems & Requests

According to Colorado’s Uniform Debt Management Services Act (UDMSA) any person acting on behalf of a consumer in an effort to negotiate a debt must register with the Attorney General (AG).  Subsequently I learned ANYONE NEGOTIATING TAX DEBT RELIEF could be subject to enforcement by the state of Colorado Attorney General for failure to comply with registration.

The Colorado AG’s rules regarding registration under the UDMSA clearly state: “Any person or organization that provides, offers to provide, or agrees to provide Debt‐Management services directly or through others must register as a Debt‐Management Services Provider.  This includes, but is not limited to, Consumer Credit Counseling agencies, Debt Settlement agencies, telemarketing or marketing companies advertising as Credit Counseling or Debt Settlement agencies, and the like.”

To get a better understanding of the UDMSA I called the Colorado Attorney General’s office and was routed through to Neal Monaghan who serves as a financial investigator and is purportedly the ‘go-to’ person for the AG as I was of the opinion that registration with the AG under UDMSA is obligatory only if you intend to enter into an ‘agreement’ to offer ‘debt management services’ as a ‘provider’ by offering a ‘plan’ in exchange for a ‘settlement fee’ based on the following specific statute definitions:

(3) “Agreement” means an agreement between a provider and an individual for the performance of debt-management services.

(10) (A) “Debt-management services” means services as an intermediary between an individual and one or more creditors of the individual for the purpose of obtaining concessions

(14) “Plan” means a program or strategy in which a provider furnishes debt-management services to an individual and that includes a schedule of payments to be made by or on behalf of the individual and used to pay debts owed by the individual.

(16) “Provider” means a person that provides, offers to provide, or agrees to provide debt-management services directly or through others.

(18) “Settlement fee” means a charge imposed on or paid by an individual in connection with a creditor’s assent to accept in full satisfaction of a debt an amount less than the principal amount of the debt.

What I learned however is that the Colorado Attorney General’s office now includes taxpayer representation and tax dispute resolution services compensated for on an hourly fee for service basis under the definition of ‘debt management services’ and anyone offering this service in Colorado must register with the AG under the UDMSA.  Attorneys and CPAs are exempt from registering but Enrolled Agents are not.  This interpretation of ‘debt management services’ is a real game changer here in Colorado.  I additionally learned that the AG’s position on the matter is that those of us not registered need to draw a distinction between actions associated with arriving at a ‘true tax liability determination’ and actions associated with ‘negotiating terms for payment.’  Evidently any work associated with negotiating payment terms on behalf of Colorado residents even if the total liability does not change is a precursor for AG registration under UDMSA regardless of how we are compensated, fee for service or otherwise.  That means no more IRS forms 433’s, 656’s, or even CNC requests until registration is obtained.

For whatever it is worth I was lead to believe that the AG is scrutinizing practitioners that consumers have complained about which on the bright side is better than investigating all tax practitioners industry wide.  So before taking on any more tax resolution work investigate registering with the Colorado AG under the UDMSA.

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Researching Tax Treaties – IRS Publications 54 and 901

April 25, 2012 John R. Dundon II Foreign Income, International Tax

IRS Publication 901 U.S. Tax Treaties is to be used as a quick reference guide that will tell you whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of particular countries. It is not a complete guide to all provisions of every income tax treaty.

Tables in the back of the publication show the countries that have income tax treaties with the United States, the tax rates on different kinds of income, and the kinds of income that are exempt from tax. In addition to the tables in the back of the publication, the publication contains discussions of the exemptions from tax and certain other effects of the tax treaties on the following types of income:

  1. Pay for certain personal services performed in the United States,

  2. Pay of a professor, teacher, or researcher who teaches or performs research in the United States for a limited time,

  3. Amounts received for maintenance and studies by a foreign student or apprentice who is here for study or experience,

  4. Wages, salaries, and pensions paid by a foreign government.

Some common tax treaty benefits available to U.S. citizens and resident aliens with foreign income are explained in IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad. Also look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the US Treasury Department’s Tax Treaty Documents page.

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What is a Qualifying Child for the Child Tax Credit – IRS Publication 972

April 24, 2012 John R. Dundon II Child Tax, Children, Tax Credit

A qualifying child for the child tax credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.

1. Age test To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.

2. Relationship test To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

3. Support test In order to claim a child for this credit, the child must not have provided more than half of his/her own support.

4. Dependent test You must claim the child as a dependent on your federal tax return.

5. Joint return test The qualifying child can not file a joint return for the year (or files it only as a claim for refund).

6. Citizenship test To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.

7. Residence test The child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.

The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.

If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

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Sales & Other Dispositions of Capital Assets – IRS Form 8949

April 23, 2012 John R. Dundon II Capital Gain, Capital Loss

The IRS has a new Form 8949, Sales and Other Dispositions of Capital Assets that taxpayers must use to report most capital gains and losses. Any properties you own for investment purposes and most properties you own for personal purposes (ie your house) are for the most part considered capital assets. Use Form 8949 to report the sale or exchange of a capital asset you are not reporting elsewhere such as Form 6252 or 8824.  Procedure wise you’ll need to fill out Form 8949 before you fill out line 1, 2, 3, 8, 9 or 10 of Form 1040 (Schedule D)

Use as many Forms 8949 as necessary to report all transactions, but make sure that each Form 8949 includes only the type of transactions described in the text for the box checked. Basically at the top of each Form 8949 you file, you’ll need to check box A, B or C, based on what is indicated in box 3 of the Form 1099-B or substitute statement.

  • Check box A if your broker reported the transaction to you and the basis of the securities sold also was reported to the IRS

  • Check box B if the transaction was reported to you but box 3 of the Form 1099-B is blank or your statement says the basis was not reported to the IRS.

  • Check box C for all other transactions.

There has been some confusion surrounding the fact that in order to adjust a gain or loss, you may have to enter a code in column (b) and an adjustment in column (g). For clarification I suggest reading the 2011 Instructions for Schedule D and Form 8949.

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IRS Taking A Closer Look At Under Reported Retirement Income

April 18, 2012 John R. Dundon II Retirement, TIGTA

The Taxpayer Inspector General for Tax Administration determined that the IRS Automated Under Reporter Program (AUR) is effectively determining the proper reporting of retirement income when Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., discloses the taxable amount of the retirement distribution. For example, for Tax Year 2007, AUR Program examiners made tax assessments totaling approximately $607.5 million on 217,811 tax returns.  However, additional tax form information, if available, would improve compliance. In other words people the days of fudging on your required minimum distribution are O-V-E-R.

TIGTA recommended that the Commissioner, Wage and Investment Division: 1) revise the Form 1099-R to clarify the meaning of the Taxable amount not determined box in order to reduce taxpayer confusion and include the dates needed to identify retirement savings program distributions and transfers not rolled over within 60 days as required, and 2) establish procedures to transcribe additional lines from various tax forms.

The IRS substantially agreed with the recommendations and plans to revise the instructions to Form 1099-R to clarify taxpayer responsibilities and the amounts to report.  The IRS plans to consider the feasibility and the benefits of including the dates of distributions and their respective contributions to identify distributions not rolled over within 60 days.  However, TIGTA maintains this information would be useful to the AUR Program when taxpayers do not utilize direct transfers between financial institutions.

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treas.gov/tigta/auditreports/2012reports/201230011fr.html.

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IRS Tax Filing Extension Form 4868 & Tax Paying Extension Form 1127A

April 17, 2012 John R. Dundon II Paying Taxes, Tax Guidance & Preparation

Tax day is upon us – remember to at least get you application for automatic extension post marked today using IRS Form 4868

Or if your Adjusted Gross Income is under $57,000 you can file an automatic extension request online using Free File

If you or your spouse (when filing a joint return) were unemployed for 30 consecutive days in 2011 you can file for an extension of time to pay until October 15th 2012 using IRS Form 1127-A

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