| Tax Issues/Alerts
U.S. Tax Court finds in favor of widow in innocent spouse relief case
Recently, the U.S. Tax court heard the case of Mrs. Rose Marie Sunleaf, widow of Roger W. Sunleaf. When he passed away in September 2003, Mrs. Sunleaf discovered there were severe financial problems she had been unaware of during her marriage.
Mrs. Sunleaf was 70 years old at the time of her trial. She and her husband had been married for 38 years at the time of his death. He had been an attorney and she had become a homemaker when she was no longer able to work as a nurse due to a disability. Mr. Sunleaf took care of all of the Sunleafs’ finances.
Upon her husband’s death, Mrs. Sunleaf learned he had not been paying their joint Federal income taxes, Federal employment taxes and they owed the IRS over $131,000. Approximately $106,000 of this amount was due to underpayments, including interest and penalties, of Federal income tax for 1993-1996 and 2000. She also learned the gross value of her late husband’s estate was $226,261 but he owed over $295,000 to creditors and the IRS.
The Sunleafs filed their 2000 federal return on time. Mr. Sunleaf prepared the return and she signed the return without reviewing it. It was Mr. Sunleaf’s habit to prepare the return and present it to Mrs. Sunleaf just before the post office closed each year on the day the return was due. According to Mrs. Sunleaf, this was what happened and what prevented her from reviewing the 2000 joint return.
Mrs. Sunleaf requested innocent spouse relief by submitting Form 8857 and a letter explaining her circumstances to the IRS, after having liquidated all the assets she had to pay off the prior years of tax debt. The IRS denied her request for equitable relief for 2000. The IRS said Mrs. Sunleaf’s request was not timely since it was made over two years from the date of the first collection activity. When she petitioned for reconsideration, her claim was denied on the grounds that she did not have reason to believe at the time the return was filed the tax would be paid by her husband. At this point, Mrs. Sunleaf petitioned the U.S. Tax Court for relief.
The Tax Court disagreed with the IRS’ decision and rejected the argument Mrs. Sunleaf had knowledge of underpayment of taxes simply by signing the 2000 tax return. The Court felt Mrs. Sunleaf credibly testified she had no knowledge of the tax liabilities prior to her husband’s death. The Tax Court also found she met all three of the safe harbor conditions required for her to receive equitable innocent spouse relief.
For more information on innocent spouse relief, visit the IRS Tax Topic 205.
Seven Things you Should Know When Selling Your Home
People who sell their home may be able to exclude the gain from their income. Here are seven things every homeowner should know if they sold, or plan to sell their house.
1. Amount of exclusion. When you have gain from the sale of your home, you may be able to exclude up to $250,000 of the gain from your income. For most taxpayers filing a joint return, the exclusion amount is $500,000.
2. Ownership test. To claim the exclusion you must have owned the home for at least two years during the five year period ending on the date of the sale.
3. Use test. You also must have lived in the house and used it as your main home for at least two years during the five year period ending on the date of the sale.
4. When not to report. If you are able to exclude all of the gain from the sale of your home, you do not need to report the sale on your federal income tax return.
5. Reporting taxable gain. If you have gain which cannot be excluded, it is taxable and must be reported on your tax return using Schedule D.
6. Deducting a loss. You cannot deduct a loss from the sale of your home.
7. Rules for multiple homes. If you have more than one home, you may only exclude gain from the sale of your main home and must pay tax on the gain resulting from the sale of any other home. Your main home is generally the one you live in most of the time.
For more information see IRS Publication 523, Selling Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
Publication 523, Selling Your Home (PDF 194K)
Schedule D, Capital Gains and Losses (PDF 136K)
Tax Topic 701 — Sale of Your Home
First-Time Homebuyers Have Several Options to Maximize New Tax Credit
WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.
The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.
“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”
First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.
Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
The filing options to consider are:
File an extension — Taxpayers who haven’t yet filed their 2008 returns but are buying a home soon can request a six-month extension to October 15. This step would be faster than waiting until next year to claim it on the 2009 tax return. Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.
File now, amend later — Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later. Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.
Amend the 2008 tax return — Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.
Claim the credit in 2009 rather than 2008 — For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.
The IRS reminds taxpayers the amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000, or $150,000 for joint filers. Taxpayers can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately.
IRS.gov provides more information, including guidance for people who bought their first homes in 2008. To learn more about the overall implementation of the Recovery Act, visit www.Recovery.gov.
Filing Tax Returns from Home Computers Up 20 Percent in 2009
WASHINGTON — Taxpayers are e-filing their Federal income tax returns from their home computers in record numbers this year the IRS announced today. As of March 6, more than 18 million income tax returns were filed from home computers, up 20 percent compared to the same time last year.
So far this year, almost 52 million tax returns have been e-filed, up 6 percent compared to the same time last year. However, the number of people using IRS Free File has fallen from almost 3 million last year to just under 2 million for the same time this year, a reduction of about 30 percent. A number of factors could be causing the decrease in Free File volumes, including national advertising of other free online tax preparation offers and the elimination of electronic filing fees by some software providers.
As of March 6, about 91 percent of tax returns resulted in a refund. This percentage however is usually at its highest at the start of the filing season because taxpayers expecting refunds usually file earlier than taxpayer who must make a payment.
The IRS cautioned that year-to-year analysis of total returns file will be an anomaly this year because last year’s results include those returns filed for the economic stimulus payment. As the year progresses, the IRS expects to receive and process more individual income tax returns during 2009 than in 2007 but fewer than in 2008.
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2009 FILING SEASON STATISTICS |
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| Cumulative through the weeks ending Mar. 7, 2008 and Mar. 6, 2009 | |||||
| Individual Income Tax Returns |
2008 |
2009 | % Change | ||
| Total Receipts | 63,383,000 | 63,851,000 | 0.7% | ||
| Total Processed | 59,270,000 | 59,763,000 | 0.8% | ||
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| E-filing Receipts: |
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| TOTAL | 48,795,000 | 51,793,000 | 6.1% | ||
| Tax Professionals | 33,419,000 | 33,349,000 | -0.2% | ||
| Self-prepared | 15,377,000 | 18,444,000 | 19.9% | ||
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| Web Usage: |
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| Visits to IRS.gov | 90,729,850 | 116,774,933 | 28.7% | ||
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| Total Refunds: |
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| Number | 53,176,000 | 54,638,000 | 2.7% | ||
| Amount (Billions) | $136.976 | $153.579 | 12.1% | ||
| Average refund | $2,576 | $2,811 | 9.1% | ||
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| Direct Deposit Refunds: |
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| Number | 41,665,000 | 44,744,000 | 7.4% | ||
| Amount (Billions) | $117.808 | $135.613 | 15.1% | ||
| Average refund | $2,827 | $3,031 | 7.2% | ||
Five Important Tax Credits
Check it out! You might be eligible for a tax credit. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are even refundable. That means you might receive a refund rather than owe any taxes.
Here are five popular credits you should consider before filing your 2008 Federal Income Tax Return:
1. The Earned Income Tax Credit is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the credit. For more information, see IRS Publication 596, Earned Income Credit.
2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, to enable you to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
3. The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low- and moderate-income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
5. Health Coverage Tax Credit. Certain individuals, who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit when you file your 2008 tax return.
There are other credits available to eligible taxpayers. Since many qualifications and limitations apply to the various tax credits, taxpayers should carefully check their tax form instructions, the listed publications, and additional information that is available on the IRS Web site at IRS.gov. IRS forms and publications are also available by calling 800-TAX-FORM (800-829-3676).
Links:
1040 Central
Publication 596, Earned Income Credit (EIC) (PDF 281K)
Publication 972, Child Tax Credit (PDF 128K)
Publication 503, Child and Dependent Care Expenses (PDF 167K)
Publication 524, Credit for the Elderly and Disabled (PDF 140K)
Publication 970, Tax Benefits for Education (PDF 368K)
Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
Form 1040 Instructions (PDF 1,101K)
IRS Warns against scam e-mails and phone calls
The IRS warns taxpayers to be on the alert for e-mails and phone calls they may receive which claim to come from the IRS or other federal agency and which mention their tax refund or economic stimulus payment. These are almost certainly a scam with the purpose of obtaining personal and financial information – such as name, Social Security number, bank account and credit card or even PIN numbers – from taxpayers which can be used by the scammers to commit identity theft.
The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer’s bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS “refund application form.” However genuine in appearance, these phonies are designed to elicit the information the scammers are looking for. Be aware these emails surface from time to time. Visit Identity Theft and Your Tax Records on the IRS website for more information.
The IRS does not send taxpayers e-mails about their tax accounts. Additionally, the only way to get a tax refund or stimulus payment, or to arrange for a direct deposit, is to file a tax return.
For more information on consumer scams, see Suspicious e-Mails and Identity Theft on the IRS website.
National Taxpayer Advocate releases annual report to Congress
In her latest report to Congress, NTA Nina E. Olson calls for simplifying the tax code and using compassion with taxpayers who have been hit by the recent economy. And just a few days after the report was issued, the IRS kicked off the 2009 tax filing season by announcing how it is going to help financially distressed taxpayers.
Olson’s office compiled data that showed U.S. taxpayers and businesses spend approximately 7.6 billion hours a year just complying with tax-filing requirements. Some of Olson’s recommendations for simplifying the tax code include withdrawing the Alternative Minimum Tax, streamlining the education and retirement savings tax incentives, simplifying the family status provisions, and revising the overall penalty structure.
“If tax compliance were an industry, it would be one of the largest in the United States,” the report to Congress said.
Olson’s suggestions for helping taxpayers in financial trouble are as follows:
- Make greater use of collection alternatives such as Offers in Compromise and Partial-Payment Installment Agreements when economic hardship is present.
- Simplify the “cancellation of debt” process for taxpayers who default on credit card balances, mortgages, car loans, student loans, etc.
- Put a “screen” in place to protect low-income Social Security recipients from automated tax levies.
The IRS is working to help struggling taxpayers in the following areas:
- Postponement of collection actions, added flexibility for missed payments, additional review for Offers in Compromise on home values, prevention of Offer in Compromise defaults, and expedited levy releases.
- New credits such as First-time Homebuyers Credit, Recovery Rebate Credit, Standard Deduction for Real Estate Taxes, and Mortgage Workouts and Foreclosures.
For more information about the Taxpayer Advocate Service and additional information on the 2009 tax filing season, visit the IRS website.
Don’t ignore an IRS notice
According to the IRS, every year millions of letters and notices are sent out to taxpayers to request payment of taxes, notification of account changes or to request additional information.
It is not uncommon to experience the anxious feeling that comes when you open the mailbox and find a letter bearing the IRS’ return address in the upper left hand corner, but do not panic. The IRS sends many different letters of correspondence, so mail from the IRS is not always bad news. Usually, these letters are very specific in nature regarding your account and carry very specific directions on what you need to do to satisfy the IRS’ need for information or payment.
If you agree with the correspondence, you do not need to reply to the letter unless a payment is due.
If you disagree with the notification, you have the right to appeal. If your records show that the IRS has incorrect information, respond as directed in the letter as soon as possible. Write an explanation stating why you disagree with the IRS notice and include any documents you have that may back up your letter. Be sure to include the tear off portion of the IRS notice. Mail your letter to the IRS address in the upper left-hand corner of the notice. The IRS requests you give them at least 30 days to respond to your letter.
Usually, these requests can be handled by correspondence, but you may call the IRS for more information or to have your questions answered. When calling, make sure you have your tax return in front of you and use the number listed in the upper right hand corner of the IRS notice.
It is very important to keep all copies of correspondence between you and the IRS for future reference. The more documentation you have to state your case, the better your chance for resolving your tax issue with the IRS.
IRS announces E-File 2009 is open, with new features
The IRS announced its E-File program will be open to taxpayers starting on January 16. The program will be an expanded version of the 2008 program, but will have new features including expanded access to electronic filing and help for people looking to get speedier refunds. Also included are improvements to the current Free File program that will allow most taxpayers to e-file for free.
IRS Commissioner Doug Shulman is hoping taxpayers will take advantage of the e-file program to help get cash back into taxpayers’ pockets quickly. Using e-file and direct deposit can help taxpayers get their refund back in as little was ten days.
The IRS e-file program can help taxpayers with simple to very complex returns. There are several benefits to using e-file. With the e-file program, there is no paper return going to the IRS and with direct deposit, no paper check going to the taxpayer. This cuts out a lot of time when it comes to getting a tax refund.
As a reminder, the IRS offers its Free File program to taxpayers with less than $56,000 Adjusted Gross Income (AGI). Free File is an e-file program run by an alliance of private-sector tax software companies and the IRS. The Free File program must be accessed through the IRS website.