Federal student loan rates are slated to increase by July 1 and the Democratic bill aimed to maintain the current rate of 3.4 percent. Senate Republicans charged that the bill’s offset raids funds intended for Social Security and Medicare payments and would penalize businesses that create jobs. Senate Minority Leader Mitch McConnell, R-Ky., maintained that his party also wants to stop the rate increase, but not at the expense of small businesses.

“For Republicans, well, we don’t think young people should have to suffer any more than they already are as a result of this president’s failure to turn the economy around,” stated McConnell. “We just disagree that we should pay for a fix by diverting $6 billion from Medicare and raising taxes on the very businesses we’re counting on to hire these young people.”

Senate Majority Leader Harry Reid, D-Nev., sought a last-minute compromise as he offered to take up a Republican measure that offered an alternative pay-for to the student loan bill, but failed to reach a deal. “Unfortunately, it appears that Republicans appear more interested in obstruction than progress,” said Reid.

Sen 2343 would require S corporations with three or fewer employees who earn more than $250,000, to be liable for payroll taxes. The offset proposal is targeted only to those S corporations that derive 75 percent or more of their gross revenues from the services of three or fewer shareholders or where the S corporation is a partner in a professional service business.

By Jeff Carlson, CCH News Staff

©2012 Wolters Kluwer. All Rights Reserved.

Generally, identity thieves use personal data to steal financial accounts and run up charges on the victim’s existing credit cards. However, identity theft can also affect your tax records as follows:
•Undocumented workers or other individuals use your Social Security number to get a job. The employer then reports W-2 wages the workers earned under your Social Security number to the IRS. When you file your return based on your real W-2 income, it appears that you failed to report part of your income on your return.

•An identity thief files a return using your Social Security number to claim refundable credits. This can be lucrative for cyber thieves who take advantage of the Earned Income Credit or the American Opportunity Education Credit, both of which are refundable credits. Generally, credits can only be used to offset a tax liability. However, these two credits are refundable even if the taxpayer has no tax liability.

•An identity thief may also use your Social Security number or your children’s SSN to claim additional tax return exemptions. Each exemption claimed on a return provides a deduction worth $3,800 (2012) and can be used to claim head of household status.
How do the thieves obtain this information? Some buy it from other thieves who collect identity information by hacking into firms that have those records or by using ingenious ways to trick you into disclosing the information. This is often done by sending you an e-mail disguised to look like an e-mail from a trusted source. This practice is referred to as “phishing.” An example of phishing is an e-mail with a fake IRS header claiming to have a refund for you and directing you to a site that requires you to enter your SSN and other information to verify your claim for the refund.

Don’t be a cyber-victim. Here are some tips you should know about phishing scams.
1.The IRS and legitimate businesses never ask for detailed personal and financial information such as Social Security numbers, PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.

2.The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

◦Do not reply to the message.

◦Do not open any attachments. Attachments may contain malicious code that will infect your computer.

◦Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides links to additional resources that can help. Visit the IRS website (www.irs.gov) and enter the search term “identity theft” for additional information.

3.The address of the official IRS website is www.irs.gov. Do not be confused, misled or respond to sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

4.If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS, but you suspect he or she is not an IRS employee, contact this office immediately. You should also call the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.
If you receive a notice or letter from the IRS or state tax authorities, you should always contact this office. This is especially true if you believe someone may have used your Social Security number fraudulently or stolen your identity.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25% of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

For example: Sue filed her 2011 tax return before the due date of April 17, 2012. She will be able to dispose of most of her records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category:
•Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.

•Stock and mutual fund statements – Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements at least four years after the final sale.

•Tangible property purchase and improvement records – Keep records of home, investment, rental property or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.
Have questions about whether or not to retain certain records? Give this office a call first. It is better to be sure before discarding something that might be needed down the road.

In addition, the April 17, 2012 deadline also applies to the following:
•Tax year 2011 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

•Tax year 2011 contributions to a Roth or traditional IRA – April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.

•Individual estimated tax payments for the first quarter of 2012 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call this office for any questions.

•Individual refund claims for tax year 2008 – The regular three-year statute of limitations expires on April 17 for the 2008 tax return. Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns.
If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

IRS Tax Tip 2012-42: Six Facts for Adoptive Parents

The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

The limit is $1 million for a married person filing a separate return.

You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007

In order for the taxpayer to get a refund, the return must be properly addressed, mailed and postmarked by April 17, 2012. If no return is filed by the deadline, the money that would have been refunded becomes the property of the U.S. Treasury.

©2012 Wolters Kluwer. All Rights Reserved.

The special rule requirements were not satisfied because the couple did not sign, and attach to their return, a written declaration that the custodial parent would not claim the child as a dependent. Because the couple did not have a qualifying child, and their adjusted gross income exceeded the maximum adjusted gross income for a married couple with no qualifying children, they were not entitled to an earned income credit.

L. Santana, TC Memo. 2012-49

©2012 Wolters Kluwer. All Rights Reserved.

The transfer of the property to the FLP was a bona fide sale because creating a family asset and protecting the woodland parcels from partition were legitimate and significant nontax reasons. Although in some instances the FLP failed to respect partnership formalities, other factors such as: (1) the fact that the property was actually transferred; (2) the gifted interests in the FLP were not discounted; (3) the FLP did not make distributions; (4) FLP and personal funds were not commingled; and (5) the decedent and her husband were in good health at the time of the transfers support the argument that the transfer was bona fide. Thus, the fair market value of the decedent’s interest in the FLP, rather than the fair market value of the assets, which she contributed to the FLP was includible in her gross estate.

J.H. Stone Est., TC Memo. 2012-48

©2012 Wolters Kluwer. All Rights Reserved.

Kay pointed out that budgets have been difficult, causing cuts in enforcement. Appeals’ staff, which reached a high of 2,173 in FY 2010, declined three percent to 2,111 in FY 2011. He does not expect staffing to return to the higher level.

Appeals’ cases fall into two categories, collection and exam, according to Kay. Prior to the IRS Reform and Restructuring Act of 1998 (P.L. 105-206), almost all of the cases were exam cases. Now, however, there are a substantial number of collection cases. In fact, in the last three years, more than half of Appeals’ cases involved collections, with the percentage hitting a high of 58 percent in FY 2011. He did say that innocent spouse cases should start to decline, now that the IRS has changed its position (by allowing more equitable innocent spouse claims).

Because of the high volume of cases, cycle time (the time needed to resolve the case) continues to be an issue. Many types of cases take 200 days or more on average, Kay said. The more complicated Coordinated Industry Cases take almost two years, although that has declined from an average of 900 days. The time spent on examination cases declined from 295 days to 255 days from FY 2010 to FY 2011, but both Collection Due Process and offer-in-compromise cases saw increases in cycle time in FY 2011.

One approach to reduce cycle time is the use of alternative dispute resolution, such as mediation, fast track settlement (FTS) and early referral to Appeals, Kay noted. Although the number of cases in these programs is low, the resolution time is much quicker. For example, FTS cases in the Large Business and International (LB&I) Division generally settle within 74 days, and even the slower cases are resolved within 85 days. He said that FTS cases received from LB&I increased from 65 to 95 in the past year, not a big number, he conceded, but still an important step. Kay noted that costs are much less than litigating a case. He said that these techniques are more effective if the taxpayer has a good relationship with its exam team. Kay added that post-Appeals mediation is also a popular program.

Appeals recently issued new guidelines (IR-2012-22; Rev. Proc. 2012-18, I.R.B. 2012-10; TAXDAY, 2012/02/16, I.2) on ex parte communications. The rules are designed to keep Appeals independent of the Exam and Collection functions, but not isolated from IRS offices, said Kay. Appeals can still get advice from Chief Counsel, for example, as long as any attorney who has advised Exam or Collection regarding the same taxpayer does not advise Appeals. Appeals may no longer participate in issue management teams but can participate in some noncase-specific cross-functional teams.

Kay said that the ex parte rules do not prohibit communications with Exam or Appeals, but the taxpayer must be present or must at least have a chance to respond to any communication. Anything can be said if the taxpayer is present and has a chance to respond, Kay noted. He indicated that Appeals will set up a tracking system for issues that arise to determine if more training is needed. He added that Appeals will provide substantial training for each business unit, so that they will recognize problems.

By Brant Goldwyn, CCH News Staff

©2012 Wolters Kluwer. All Rights Reserved.