Don’t Forget the Second Half of That Roth Conversion!

Recall that IRS allowed you to convert your IRA to Roth IRA status in 2010, while spreading the tax hit over two years: 2011 and 2012. Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on your 2012 return. But now is the time to remember to report the second half of that 2010 conversion you made.

Roth conversions in 2010 from traditional IRAs are shown on Form 1040, Line 15b.

Check out IRS Publication 590 and IRS Publication 575 for more info.

Congressional Research Service Hints at More Estate/Gift Changes

A recent report by the Congressional Research Service (CRS) suggests that things should settle down, now, with respect to the estate and gift tax laws which were recently solidified. However, some perceived abuses remain, which might eventuate in further changes.

  • Family partnership discounts – Courts sometime allow estates to “discount” the fair market value of interests in family partnerships or family limited liability companies – even when assets such as marketable securities are held by such entities. There is a proposal on the table which would disallow such discounts.
  • Currently there is no explicit rule preventing a low valuation of fair market value for an estate and a higher valuation of the asset for purposes of stepped up basis in the hands of the heir. A proposal would require the same value for both purposes.

IRS Plays Hardball on Accuracy-Related Penalty

In a recent Action on Decision (AOD 2012-005), IRS concluded that even though the state of the law may be uncertain at the time a taxpayer files his return, there exists a burden on the taxpayer to at least acquaint himself with the issues, to include obtaining competent professional advice, in order to be exonerated from the accuracy-related penalty under a “reasonable cause” theory.

The taxpayers had purchased property with the intention of demolishing the house on that property and constructing a new one. They allowed their local fire department to burn the house down as a training exercise, and recorded a large charitable contribution deduction on their tax return. IRS denied the deduction, and taxpayers went to Tax Court which upheld the deduction disallowance, but declined to impose the accuracy-related penalty, finding that the law in a case of this nature was uncertain at the time the deduction was claimed.

IRS reasoned that a taxpayer couldn’t have been acting in good faith and therefore have reasonable cause on the basis of the unsettled state of the law if the taxpayer was not aware of the state of the law, and didn’t make a reasonable attempt to become aware.

IRS Intensifies Search for ID Thieves

IRS announced, last week, the results of a “massive national sweep” targeting identity theft suspects in 32 states. The “coast to coast effort” led to 734 enforcement actions in January, including indictments.

“As tax season begins this year,” says Acting Commissioner Steven T. Miller, “we want to be clear that there is a heavy price to pay for perpetrators of refund fraud and identity theft.”

By late 2012, IRS assigned more than 3,000 employees – more than double the 2011 number – to work on ID theft related issues. IRS employees are working to prevent refund fraud, investigate identity theft-related crimes and help taxpayers who have been victimized by identity thieves. Also, IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

IRS Big On ‘Social Media’

IRS wants you to be able to reach them easily, and have access to all of the information resources which they offer – and has therefore added Tumblr to their list of social media platforms.

“Tax issues touch a wide range of people who use information in many different ways.  The IRS Tumblr site provides a new avenue for taxpayers and partner groups to get and share important tax information,” says Terry Lemons, IRS Communications Director.

Folks can already reach IRS on YouTube, and more than 61,000 people follow the IRS Twitter feeds.

IRS warns, however, that these platforms should only be used to share public information, and not to seek answers to personal tax or account questions.  Taxpayers should never post confidential information, such as a social security number, on social media sites.

Don’t Miss Out on Earned Income Tax Credit!

IRS recently started promoting, for this filing season, the Earned Income Tax Credit (EITC), by launching an outreach campaign, targeting millions of Americans who earned $50,270 or less, and who thus may qualify.

IRS thinks one third of the eligible population changes each year, relative to their financial, marital and parental status.  Although an estimated four out of five eligible workers and families get the credit, one in five still miss it, because they don’t claim it when filing.

IRS says that last year, the average EITC was in the neighborhood of $2,200, and for tax year 2011, over 27 million eligible workers and families received nearly $62 billion in EITC!

Go to www.irs.gov/eitc for more info.

There’s Still Time to Donate That IRA to Charity

The recent “fiscal cliff” tax deal granted IRA owners aged 70-1/2 or more an extension to January 31, 2013 to make tax free transfers to eligible charities, and treat such transfers as if they had been made in 2012.  Further, eligible IRA owners who received a distribution in December, 2012 can donate any portion of that distribution to a charity by January 31, and record the transaction in 2012!

Recall that folks age 70-1/2 or older have been able to make tax free distributions to a charity from an IRA, in amounts of up to $100,000 per year, and such distributions have not been subject to the charitable contribution percentage limits since they have not been includible in gross income, nor have they been included among the charitable contributions on Schedule A.

This provision was originally scheduled to expire for tax years beginning after December 31, 2011, though it was extended to apply to the 2012 tax year, and has now been further extended for charitable transfers made in tax years beginning before January 1, 2014.

Employee or Independent Contractor?

Not known for its flexibility in analyzing taxpayer situations, IRS comes to a strange conclusion in its recently-issued Information Letter 2012-0069, which says that in certain situations, a consultant working for a company on two separate consulting projects can be both an employee of the company and an independent contractor at the same time!

In determining whether an individual is an employee or an independent contractor under common law, IRS looks at:

  • The relationship of the parties (agreements between them, how they perceive the relationship, and how they represent the relationship to others);
  • Behavioral controls (with respect to how much control the business has over the worker); and
  • Financial controls (including the worker’s risk of loss, and whether he has made a significant financial investment).

IRS actually concludes that a worker can provide services to a business in two separate roles, with respect to two separate projects, simultaneously!

Pay Attention to the Charitable Contribution Documentation Rules

Now’s the time to start gathering documentation which you will need for your 2012 tax returns. And remember that IRS imposes some very specific requirements related to supporting your charitable contributions.

To deduct any charitable donation of cash, regardless of amount, a taxpayer must have a “bank record” or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records typically include canceled checks and credit card statements.

And importantly, don’t forget the rule requiring that you obtain an acknowledgement from a charity for each deductible donation (whether in cash, or in the form of property) of $250 or more. And get that acknowledgement before you file your 2012 tax return!

And if all of your noncash contributions exceed $500, your return must include Form 8283, detailing all relevant information.

Check out IRS Publication 526 for more details.

Form 709 and Gifts to Charity

A little known and often ignored rule addresses the reporting of charitable gifts on Form 709 — the gift tax return form generally understood to only cover gifts to “people” — individuals and trusts.

A careful reading of the Form 709 instructions, however, reveals that if a taxpayer is required to file a return to report non-charitable gifts, any gifts to charities should also be reported on the Form 709. If the donor only makes charitable gifts that represent his entire interest in the gifted property, no Form 709 is required. But charitable gifts of split interests must generally be reported.

Transfers to charitable organizations that are required to be reported are entered on Form 709, Schedule A, Part 1. The portion of the transfer that qualifies for the gift tax charitable deduction is entered on Part 4, Line 7.