News Letter Page 3
BIG CHANGES FOR SMALL TAX EXEMPT ORGANIZATIONS
Approximately 275,000 organizations have automatically lost their tax-exempt status because they did not file legally required annual reports for three consecutive years. Most of these are small nonprofits that are required to file the Form 990N e-postcard. Many of these organizations are recreation sponsors, local art groups, or local environmental stewards. If your organization was dropped from the approved list, you can apply for reinstatement with the IRS by December 31, 2011. I will be glad to help you with this filing.
IRS GIVES UP ON TWO-YEAR LIMIT FOR MANY INNOCENT SPOUSE REQUESTS
In a complete reversal of its position, the IRS announced that it will eliminate the two year limit it imposed on “equitable” innocent spouse claims. The IRS took the unusual action after a number of embarrassing losses in the Tax Court and under heavy pressure from Congress, including Republican presidential candidate Rep. Michele Bachmann, R-Minn. Innocent spouse relief is designed to help a taxpayer who did not know that his or her spouse understated or underpaid an income tax liability on a joint return.
Under regular innocent spouse relief, spouses must petition for status as an innocent spouse within two years of when the IRS first tries to collect. The equitable provisions, added later, allow a spouse to apply for innocent spouse status when the spouse does not qualify for regular relief but it would be inequitable to hold the spouse liable. Congress did not put a two year limitation on equitable relief, but the IRS wrote regulations with the two year time limit. Equitable innocent spouse relief is frequently sought in situations of spousal abuse.
PROPOSED RULES ON HEALTH INSURANCE TAX CREDIT
The Treasury Department has issued proposed regulations on the tax credit for health insurance premiums that is directed at the middle class. The guidance also explains the rules for enrollment in plans through insurance exchanges. Under the Obama health care Act, individuals and small businesses can buy private health insurance through state based insurance exchanges. To enable taxpayers to buy this insurance, the Act allows a refundable tax credit for health insurance premiums. The rules are effective beginning in 2014.
Eligibility and Advance Payments
The premium tax credit is available to individuals and families with incomes between 100% and 400% of the federal poverty level
($22,350 – $89,400 for a family of four in 2011).
Larger tax credits apply for older Americans who face higher premiums. Projections show that individuals receiving the credits will get an average subsidy of over $5,000 per year. For lower-income families, the Treasury department will make an advance payment directly to insurance companies as an advance on the credit. Later, the advance payment will be reconciled against the amount of the family’s actual premium tax credit, as calculated on the family’s federal income tax return.
Other requirements are:
1. Covered individuals must be enrolled in a “qualified health plan” through an Affordable Insurance Exchange.
2. Covered individuals must be legally present in the United States and not incarcerated.
3. Covered individuals must not be eligible for other qualifying coverage, such as Medicare, Medicaid, or “affordable” employer sponsored coverage.
‘Affordable’Employer Plans
The credit is only available if the taxpayer does not have “affordable” coverage through his or her employer. Under the regulations, plans are not affordable if the self-only premium exceeds 9.5% of household income or the plan fails to cover 60% of total allowed costs.
IRS GIVES TRUCKERS 3-MONTH EXTENSION FOR HIGHWAY
The IRS has extended for three months the due date for federal highway use tax returns filed by truckers and other owners of heavy vehicles. Instead of being due on August 31st, the returns will be due on November 30, 2011. The $550 per vehicle highway use tax applies to trucks, truck tractors, and buses with a gross taxable weight of 55,000 pounds or more. Ordinarily, vans, pick-ups and panel trucks are not taxable because they fall below the 55,000-pound threshold. Special rules apply to vehicles with minimal road use, logging or agricultural vehicles, vehicles transferred during the year and those first used on the road after July.
State Registration Process
Under new rules issued with the extension, states are required to accept as proof of payment last year’s stamped Schedule 1 of Form
2290 through the November 30th filing date. Normally, states can only accept a prior year Schedule 1 up until October 1st. If you acquire and register a new or used vehicle during the July to November period, your state must register the vehicle without proof that the highway use tax was paid. You must present a copy of the bill of sale showing that the vehicle was purchased within the previous 150 days. Some State governments may not be aware of this change. If you have tried to register a vehicle and had problems, let me know and I will provide you with the IRS Notice to take to your State registration office.
CLIENT ADVISORIES
YOUR ACCOUNTING SOFTWARE FILES FAIR GAME FOR IRS, USE CAUTION IN KEEPING RECORDS
The IRS maintains that, in conjunction with an audit, it has the authority to require taxpayers to turn over their complete electronic accounting records, including data files created by programs like QuickBooks® and Quicken®. The IRS recently instructed its auditors on how to handle these software requests. The IRS says it will ignore irrelevant data and confidential information, but this claim is not realistic, especially given that the rules of evidence do not protect the taxpayer in this situation. Tax professionals are concerned about the potential for IRS receiving private or privileged records, information from years not under audit, and non tax business information, such as customer lists. It is common for businesses to use their accounting software as their daily planner, their checkbook, and their business contact list. This broad use of electronic files becomes problematic when the data is released to the IRS during an audit. Handing over the entire data file can expose you to an expanded audit. Unfortunately, the software programs are not designed to let you block portions of the data from review by the IRS.
To the extent possible, the following types of information should be kept separate from your electronic accounting records to prevent disclosure to the IRS:
1. Divorce Financial Affidavits
2. Client Lists
3. Client Addresses and Phone Numbers
4 Tax Planning Documents
5. Billing Information
6 . TAX IDs of Customers, Clients, and Business Associates
7 .Payment Form (Check or Cash).
Example: An example of over disclosure can be illustrated by the inclusion of a Divorce Financial Affidavit in a taxpayer’s accounting software records. These affidavits show monthly income and expenses, with a proposed budget for the taxpayer going forward. If a divorce financial affidavit is included in the taxpayer’s electronic tax records, IRS could scrutinize any tax issue raised by the divorce, even if the IRS was not auditing the taxpayer on any divorce issue.
