Category Archives: Preparing Your Tax Return

Pay Day is Looming

That’s right — the inevitable date by which you must pay your taxes is looming — April 17, this year. And in the Internet Age, there’s more than one way to pay — writing a paper check like most folks have done for years is certainly still acceptable, but there are other options.

IRS will actually accept your payment if you choose to make it by credit or debit card. They will tell you that this mechanism is safe and secure, due to all of the procedures built into the technology by the big card companies.
If you choose one of these payment schemes, be aware that in addition to whatever charges (including interest on your unpaid balance) which your card company may charge, there will also be “convenience fees” charged on your card as well. The fees vary by company, and if you’re considering this payment methodology, you should first contact your card company and gain an understanding of just what this glitzy process will cost you overall. And take comfort in the knowledge that IRS does not receive or charge any fees for card payments.

Check out the IRS website at www.irs.gov for more details.

Muni Bond Income Not Always Tax-Exempt

Most people are familiar with the notion that interest income associated with municipal bond investments is “tax free,” which in most cases is true.  However, not all municipal bonds are created equal — some possess certain characteristics which can render their income indeed taxable.

The complication arises for taxpayers who are burdened with the alternative minimum tax, and who have invested in a certain kind of muni bond – the so-called “private activity bond.”

These are bonds which satisfy either the “private business use” test, or the “private loan financing” test defined in the Internal Revenue Code.  Generally speaking, such bonds are municipal borrowings, the proceeds of which are used to finance nongovernmental activities — such as those of private businesses which the municipality is courting for one reason or another.

So before immediately diving into a portfolio of muni bonds, taxpayers should assess their specific situation (in particular regarding whether they may otherwise be paying AMT), and then the specifics of the bonds they are purchasing, so they are not surprised when April 15 rolls around and they find they are, indeed, paying some tax on what they thought were tax-free investments.

Capital Gains Reporting — Increased Complexity

The good news for individual taxpayers who sustain long term capital gains is that the tax bite is favorable, compared with the tax on ordinary income.  Beginning with 2011 tax returns, however, the reporting complexity rises to a new level.

First of all, there’s an entirely new form to deal with now:  Form 8949, Sales and Other Dispositions of Capital Assets. Many transactions which used to go directly on our old friend, “Schedule D” must now be reported on Form 8949, though landing eventually on Schedule D.

And all of this further integrates with the new Form 1099-B rules which apply this year, and which impose upon your broker the requirement that your tax basis in any “covered security” which you sold be reported to IRS.

Use Form 8949 to “sort” both long and short term transactions among those for which your broker did or did not report the tax basis of the assets sold, and those related to which the broker-reported basis is correct or incorrect, as well as whether the type of gain or loss (short term or long term) is correct or incorrect as characterized by the broker.  Also use Form 8949 if you received a Form 1099-B as a nominee for the actual owner of the property, to report the sale of your main home at a gain, to report the sale of “qualified small business stock” with some excludable gain, to report a nondeductible loss from a “wash sale,” among other things.

Whew!

It’s probably a good idea to familiarize yourself with the 14 pages of instructions for Schedule D (and Form 8949) before starting the process, which is obviously going to create some new headaches for taxpayers this filing season.

Changes to IRS Power of Attorney Form

Just a few months ago, IRS released a new version of Form 2848, “Power of Attorney and Declaration of Representative,” along with five pages of instructions.

Taxpayers will notice a significant revision in the new form. In the case of individuals who filed a joint Federal income tax return, each spouse will now be required to execute a separate Form 2848, rather than both spouses signing the same Form as in the past. Since the revised form (under this new scheme) has been published, we hear IRS has had some processing problems in keeping track of the separate forms filed by spouses. They say they are “working on” the situation.

Presumably the reason for this change is in the interest of protecting taxpayers — situations might arise (though unlikely) in which one preparer representing both spouses as power of attorney finds him or herself in a conflicted position with respect to the parties. The requirement that each spouse, separately, authorize his or her representative allows for an opportunity to discuss this eventuality. Nonetheless, the new procedure seems unduly burdensome in application to most if not all situations.

IRS Audit Guide Targets Attorneys

IRS has released its Attorneys Audit Technique Guide (ATG) to help auditors sniff out what are perceived potential problems with the way attorneys complete their income tax returns.

Some of the highlights:

1. Unreported income – Generally an attorney will deposit a litigation award into his trust account, later disbursing the client’s share and paying the attorney his fees. Sometimes, he may simply cash the award check, or deposit the check directly into a personal or investment account, which could lead to omission (intentionally or by mistake) of the income from the eventual tax return.

2. Deferral of income – After resolution of a case, an attorney may attempt to defer income truly earned by allowing the legal fees to remain in the trust account until the next year. To do so would clearly be a tax avoidance move under the “constructive receipt” doctrine.

3. Noncash payments instead of fees for services rendered – The ATG suggests, for example, that an attorney might borrow a large sum of money from a client, and then pay it off by performing legal services. While the loan may be shown on the attorney’s books, the income resulting from the obvious relief of debt may somehow escape the bookkeeper’s attention! Also, bartering may find its way into the relationship between the attorney and the client. Auditors are told by the ATG to be on the lookout for situations in which the attorney’s workload has not decreased from one year to the next, but reported fees has declined — a possible indication that the attorney is rendering services in exchange for noncash payments.

4. Advanced client costs – Often, attorneys who take cases on a contingency basis may pay litigation costs on behalf of clients, only to later recover those costs when the eventual award comes in the door. Attorneys on the cash basis of accounting may be inclined to deduct these advanced costs when paid. ATG concludes, however, that courts have determined that costs paid on behalf of a client are more properly treated as loans for tax purposes, thus not deductible as a current year cost of doing business. The expectation of reimbursement is the issue here.