In 1996, the law allowed for the creation of the Office of the Taxpayer Advocate (in replacement of the former Office of the Taxpayer Ombudsman), whose functions are:

1. To assist taxpayers in resolving problems with the Internal Revenue Service;
2. To identify areas in which taxpayers have problems in dealings with the Internal Revenue Service;
3. To the extent possible, propose changes in the administrative practices of the IRS to mitigate those identified problems; and
4. To identify potential legislative changes which may be appropriate to mitigate such problems.

In 1997, the National Commission on Restructuring the Internal Revenue Service called the Taxpayer Advocate the “voice of the taxpayer.”

In 1998, Congress renamed the Taxpayer Advocate as the National Taxpayer Advocate, provided that the National Taxpayer Advocate could not be an officer or employee of the IRS for two years preceding or five years following his or her tenure, and provided for Local Taxpayer Advocates in each state of the Union.

When you find yourself getting nowhere in your dealings with the bureaucrats, try contacting your Taxpayer Advocate!

Unfortunately, modern-era taxpayers sometimes suffer losses at the hands of unscrupulous financial “deal” promoters.  Recently, the notorious Bernard Madoff was the perpetrator of such a scheme, which cost many taxpayers dearly.

And in 2009, the IRS took note of this particular scandal, and made it clear that a violation of federal criminal law can qualify Ponzi scheme losses for theft loss treatment under the Internal Revenue Code.

Taxpayers can deduct a loss suffered during a tax year and not compensated by insurance if such a loss is incurred in a trade or business, or a transaction entered into for profit if it arose from a theft.

The term “theft” includes, but is not limited to, larceny, embezzlement, and robbery.  To deduct a theft loss, a taxpayer must show that “the loss resulted from a taking of property that is illegal under the law of the state where it occurred, and that the taking was done with criminal intent.”  (Rev Rul 72-112)  And generally, this requires that the perpetrator have specific intent to deprive the victim of his property, which in turn requires a degree of privity between the perpetrator and the victim.

But pursuant to a recent Chief Counsel Advice (CCA 201213022), IRS expressed the view that Ponzi scheme losses suffered by taxpayers are theft losses, under IRC Section 165, even though the taxpayers invested through individuals other than the perpetrator himself (such as a fund manager) because of the close connection or relationship among the parties.

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.

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.

This one has been kicking around for years, and in these lean times, don’t be surprised if  your state decides the time has come – impose a sales tax on services.

California (one of the leaders amongst states always on the lookout for new revenue sources) is looking at this:  Assembly Bill 1963 was recently introduced.  This bill would, on and after January 1, 2013, reduce the rate of state sales and use tax to 4% of the gross receipts from the retail sale of tangible personal property (a good thing), and would also, on and after January 1, 2013 impose a state sales and use tax on the privilege of selling services at retail and on the storage, use, or other consumption of services in the state at the rate of 4% of the sales price of the services.

Who knows where this particular bill will go?  But given the currently prevailing fiscal fiasco in many state (and local) jurisdictions, don’t be surprised if you, sometime soon, find yourself paying sales tax to your barber, vet, accountant…..

In a recent information release (IR 2012-31), Uncle Sam offers to take it easy on folks who are struggling in this economy.

IRS is now offering late payment penalty relief, and the opportunity to allow more taxpayers to qualify for installment payment agreements.

Certain wage earners and self-employed individuals will now qualify for a six-month grace period on failure to pay penalties.  A request for an extension of time to pay will result in relief from penalties for tax year 2011 as long as the tax, interest and any other penalties are fully paid by October 15, 2012. (More on Filing and Paying Taxes Late.)

To qualify, wage earners must have been unemployed for at least 30 consecutive days during 2011 or 2012 up to the initial filing deadline of April 17, 2012.  Self-employed individuals who have experienced a 25% or greater reduction in business income in 2011 will also qualify.

Qualifying taxpayers’ income must not exceed $100,000 in the case of single or head of household filers and $200,000 for joint filers.  Also, penalty relief won’t be available to taxpayers whose calendar year 2011 tax balance due exceeds $50,000.

Check out Form 1127-A, which must be filed in order to seek relief in these circumstances.

More from Nolo: Back Taxes & Tax Debt.

Is there no end to the parade of tax protestors who actually think they can make up (or more commonly, simply repeat) specious and fallacious arguments which seemingly justify their position that income taxes are illegal, and they need not pay them?

Another recent example:  James R. Garber v. Commissioner, TC Memo 2012-47, wherein the Court found for the government, concluding that the taxpayer “advanced frivolous arguments primarily for the purpose of delay and require(d) that he pay a penalty of $1,000 to the United States,” and further actually warned him that larger penalties could ensue if this taxpayer were to return to the Court and advance frivolous or groundless arguments in the future!

This particular chap made many “unfounded” arguments (to again use the Court’s word), apparently leading him to his conclusion that no statutes render him liable for Federal income taxes. Seems Mr. Garber thought that the IRS “has not been able to provide him with ‘any Section of the IRS code which makes (him) liable’ ” for the (income) tax, and that “a resident of the fifty states may choose to file a return thereby assessing himself or he ‘may’ choose not to do so.”

The age old game of S corporations paying their owner/employees low salaries and taking most of the income out in the form of “dividends” just got another comeuppance in the courts.

The 8^th Circuit Court of Appeals (Watson, P.C. v. U.S., 109 AFTR 2d 2012-483) has once again stood up for the proposition that this sort of game plan, in many cases, won’t fly.

Recall that particularly service-providers are motivated to minimize FICA and Medicare taxes by treating what might otherwise be construed as self-employment income to be S corporation dividends.  No income tax advantage, just a FICA/Medicare savings ploy.

In 2010, the House (though not the Senate) actually passed legislation which would plug this loophole with respect to service professionals.  Despite the failure by the legislative bodies to close up this gap, the courts have consistently (and once again in Watson) ruled that this game doesn’t work, pointing to these principal factors in evaluating what is the appropriate level of reasonable compensation:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• Use of a formula to determine compensation

Every year IRS publishes its list of the most obnoxious tax scams for the year – taking the name from a famous movie of decades ago:  “The Dirty Dozen.”

It’s always amusing to review the list, while at the same time recognizing that there are real crooks out there, trying to steal not only from unsuspecting taxpayers, but also from Uncle Sam himself.

“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” says IRS Commissioner Doug Shulman.  “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money.  Don’t be fooled by these scams.”

Number one on this year’s list is identity theft, generally first brought to the attention of the target taxpayer who receives a notice from IRS that more than one return was filed in that taxpayer’s name or that the taxpayer received wages from an unknown employer.  Folks who suspect for one reason or another, that their personal identity has been stolen and used for tax purposes should contact IRS – check out www.IRS.gov/identitytheft for the procedures.

And if you are interested in the rest of the “Dirty Dozen,” get hold of IRS News Release 2012-23, issued just last week.

Post authored by Jeffrey A. Quinn

In recent years, more than a few taxpayers have thought they could buy that “tear down,” give the house to their local fire department for a live burn it-training exercise, and claim a charitable donation deduction.

“Not so fast,” said the 7^th Circuit Court of Appeals in its recent decision in Rolfs, et al. v. Comm (109 AFTR 2d 2012-xxxx, 02/08/2012).  These taxpayers did just that, claiming a $76,000 charitable donation deduction in 1998 for the “value of their donated and destroyed house.”

In noting that charitable deductions for burning down a house in a training exercise are unusual but not unprecedented, the Court noted that the valuation of the building, valued as if the house was given away intact and without conditions, is not a complete or correct way to value such a gift.

“When a gift is made with conditions,” said the Court, “the conditions must be taken into account in determining the fair market value of the donated property…..Proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction.”

More from Nolo: Tax Deductions on Charitable Contributions