What Records Do I Need to Keep

Now that the new year has started, you may want to start off on the right foot. Tax time is drawing nigh and you may wonder what records you need to keep and for how long. Read the details below from the IRS on what the requirements are for maintaining tax records.

You probably already keep records in your daily routine. This includes keeping receipts for purchases and recording information in your checkbook. Keeping these and other records will help you avoid headaches at tax time. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 552, Recordkeeping for Individuals ( PDF 61K )

Unpaid Payroll Taxes

If your business has payroll taxes that it has not paid to the IRS, then you need to act quickly. You may not be aware of the problems not paying your payroll taxes can create. By not paying your payroll taxes you have put your personal finances as well as your business at risk.

If you cannot make your Federal Tax Deposits, the IRS can force you to close your business. Even if you have not paid some previous quarters as due, pay the most current ones. As long as you start paying them now and keep current, the IRS will work with you on paying back your past due payroll taxes.

The other issue you will face with unpaid payroll taxes is that the IRS can assess those payroll taxes to your personally. The fact that your business may be a corporation does not protect you. You and anyone in your business who had signature privileges on the payroll checking account, as well as all owners and officers of the corporation can be held liable for the payment of these taxes.

If the IRS assesses the Trust Fund portion of taxes to you personally, they may be able to put a lien against your personal residence. This will damage your credit and make it difficult for you to get loans. The Trust Fund portion is the amount you withheld from your employees pay checks. You are holding this money in trust and not paying it to IRS as required is serious.

If you need assistance in handling your payroll tax debt, contact an Enrolled Agent who can represent you before the IRS and work with you in finding the best options for your situation.

Tips on The Recovery Rebate Credit

If you have questions about the Recovery Rebate Credit and whether or not it applies to you, read the important info published by the IRS.

Most taxpayers who received the economic stimulus payment last year will not be able to claim the Recovery Rebate Credit on their 2008 federal income tax returns. A small number of taxpayers who did not receive the full economic stimulus payment last year may be eligible to claim the Recovery Rebate Credit on their 2008 federal income tax return. Figuring the Recovery Rebate Credit incorrectly or entering inaccurate information will delay the processing of your tax return and any refund due.

Below are the four things every taxpayer should know about this one-time credit, which is related to last year’s Economic Stimulus Payment:

1. You do not have to pay back your Stimulus Payment and the payment is not taxable.

2. Less than an estimated 3 percent of taxpayers are eligible. The vast majority of taxpayers are not eligible to receive the Recovery Rebate Credit.

3. Did you have a major life change? If so, you may be eligible to claim the Recovery Rebate Credit. Some of the major factors that could qualify you for the Recovery Rebate Credit include:

• Your financial situation changed dramatically from 2007 to 2008.
• You did not file a 2007 tax return.
• Your family gained an additional qualifying child in 2008.
• You were claimed as a dependent on someone else’s return in 2007, but cannot be claimed as dependent by someone else in 2008.

4. Any Recovery Rebate Credit amount will be included in your refund. The IRS will figure the credit for you and include it in your refund or put it toward any taxes owed.

Links:

• Recovery Rebate Information Center

What is an IRS Tax Lien?

The other major reason you should try to prevent having a tax lien filed, is the affect if has on your credit. A tax lien will lower your credit score and show up whenever someone pulls a credit report. The tax will make it more difficult for you to borrow money for a car or a home or get credit for any purchase.

Respond to any IRS notice you receive and you may be able to prevent the lien. If you owe the IRS 25,000 or more a tax lien will be filed. If you are able to pay your liability below 25,000, the IRS may not file a lien.

If you need assistance in handling your IRS tax debt, contact Effectur. Our experienced Tax Consultants can help you determine which type of resolution is best for your circumstances.

Identity Theft

The IRS just posted information on how to protect yourself from identity theft. Read the important details from the IRS below:

1. If you receive a letter or notice from the IRS which leads you to believe someone may have fraudulently used your Social Security Number, respond immediately to the name and address or phone number printed on the IRS notice.

2. If you receive a letter from the IRS that indicates more than one tax return was filed for you, this may be a sign that your SSN was used fraudulently.

3. Another sign that you may be the target of identity theft is an IRS letter indicating you received wages from an employer unknown to you.

4. The IRS has a department which deals specifically with identity theft issues. The IRS Identity Protection Specialized Unit is available if you have been in contact with the IRS about an identity theft issue and have not achieved a resolution.

5. You can contact the IRS Identity Protection Specialized Unit by calling the Identity Theft Hotline at 800-908-4490 Monday through Friday from 8:00 am to 8:00 pm local time (Alaska and Hawaii follow Pacific Standard Time).

6. The IRS Identity Protection Specialized Unit is also available if you believe your identity may be at risk of being stolen due to a lost or stolen purse or wallet or due to questionable activity on your credit card or your credit report.

7. The IRS never initiates communication with taxpayers about their tax account through emails. If you receive an e-mail or find a Web site you think is pretending to be the IRS, forward the e-mail or Web site URL to the IRS at phishing@irs.gov.

8. The IRS has many more resources available to help inform taxpayers about identity theft on the IRS Web site at IRS.gov. On IRS.gov you can access information on how to report scams and bogus IRS Web sites. You can also visit the IRS Identity Theft Resource Page, which you can find by typing Identity Theft Resource Page in the search box on the IRS.gov home page.

9. The Federal Trade Commission is also available to assist taxpayers with identity theft issues. You can reach them at 877-ID-THEFT (877-438-4338).

10. Visit OnGuardOnline.gov for protection tips from the federal government and the technology industry.

IRS Notices

If you have recently received a notice from the IRS, be sure you respond promptly. If you have received a notice from the post office for a certified letter from the IRS, refusing to pick it up and sign for it will only make your situation worse.

This notice is probably the IRS form CP504. This form is your notice of the IRS’ intent to levy your wages/bank account and to file a tax lien. This notice, which gives you 10 days to respond, is followed by for L1058, Final Notice of Intent to Levy. This form gives you 30 days to respond. If you ignore this notice, then the IRS will file a tax lien and levy your wages and bank account.

You best move is to respond to the notice by either calling the IRS directly or contacting an Enrolled Agent. An Enrolled Agent can represent you before the IRS and assist you finding the best resolution possible.

If you receive the CP503, calling the IRS before the CP504 is issued, could prevent a lien from being filed, depending on how high your liability is. Ignoring these notices does not make your tax debt go away. Responding promptly can save you money and save your credit rating.

Completing Your W4

Now is the time of year you may be worrying about whether or not you had enough taxes taken out so that you won’t owe at tax time. Most tax payers have no idea how much they need to withhold. Several factors affect how many exemptions you should claim on your W4.

• If you work more than one job
• If you are married and file jointly
• Whether or not you itemized deductions
• If you are single with a child and can file Head of Household.

There may be others too. If you have had a change in circumstances since last year, you may need to change your W4 to avoid having either too much or too little taken out. Having too little taken out could cause you to have a balance due that you could not pay by April 15. If balances due are not paid by the due date, you will incur a failure to file penalty. If you have way too much taken out, you are giving the government an interest fee loan.

The simplest way to determine how many exemptions is to follow the link for the withholding calculator. Just answer a few questions and the calculator will tell you how many exemptions to claim. If you still need assistance, a tax professional such as an Enrolled Agent who can assist you in determining the right amount of exemptions for your situation.

Dependents and Exemptions

If you are confused whether you you should file your own return if you are a dependent of someone else, or just have general questions about dependents, read the important information below from the IRS. If you have additional questions follow the link below to IRS Publication 501 or contact and Enrolled Agent or other tax professional.

1. Dependents may be required to file their own tax return. Even though you are a dependent on someone else’s tax return, you may still have to file your own tax return. Whether or not you must file a return depends on several factors, including: the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Credit payments you received.

2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,500 on your 2008 tax return. Exemptions amounts are reduced for taxpayers whose adjusted gross income is above certain levels, which is determined by your filing status.

3. Dependents may not claim an exemption. If you claim someone as a dependent, such as your child, that dependent may not claim a personal exemption on their own tax return.

4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return and were not the dependent of another taxpayer.

5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

For more information on dependents and exemptions, including whether or not you or your dependent needs to file a tax return, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Links:

IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

Find the Tax Form That Is Right For You

If you are confused about which tax form is right for you, read the helpful information published by the IRS included below. If you have questions that are not answered by the information below, contact an Enrolled Agent or other tax professional.

When you file your 2008 individual tax return, you will use one of three IRS tax forms. Be sure to use the simplest form you can, which will help you avoid costly errors or processing delays so you won’t have to wait to receive your refund. Each of these forms can be filed electronically, which speeds up the processing of your return.

Use the 1040EZ if:

• Your taxable income is below $100,000
• Your filing status is Single or Married Filing Jointly
• You (and spouse) are under age 65 and not blind
• You are not claiming any dependents
• Your interest income is $1,500 or less

Use the 1040A if:

• Your taxable income is below $100,000
• You have capital gain distributions
• You claim certain tax credits
• You claim deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. You must use the 1040 if:

• Your taxable income is $100,000 or more
• You claim itemized deductions
• You are reporting self-employment income
• You are reporting income from sale of property

When preparing your return, be sure to carefully check the instructions for the appropriate form. All IRS forms and instructions can be found on our Web site, IRS.gov.

Links:

• Form 1040EZ, Individual Income Tax Return (PDF 105K )
• Form 1040A, Individual Income Tax Return (PDF 138K)
• Form 1040, Individual Income Tax Return (PDF 181K)
• Publication 17, Your Federal Income Tax
• Publication 17, Your Federal Income Tax (PDF 2.3MB)

The 5 Filing Status Options

A source of confusion for many taxpayers is, what is my filing status? Included below are the IRS descriptions for each of the 5 possible filing status. Be sure you look carefully to see which situation best describes your situation. If you need additional help, contact an Enrolled Agent or other tax professional.

Everyone who files a federal tax return must determine which filing status applies to them. It’s important you choose your correct filing status as it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you.

There are two things to consider when determining your filing status:

First, your marital status on the last day of the year determines your filing status for the entire year. Secondly, if more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

Here are the five filing status options:

1. Single. This will generally apply to anyone who is unmarried, divorced or legally separated according to your state law.

2. Married Filing Jointly. A married couple may file a joint return together. If your spouse died during the year, you may still file a joint return with that spouse for the year of death.

3. Married Filing Separately. A married couple may elect to file their returns separately.

4. Head of Household. This generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

5. Qualifying Widow(er) with Dependent Child. You may be able to choose this filing status if your spouse died during 2006 or 2007, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Link — Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)

Tax Tips

The IRS is publishing important information you need to know for tax season. I will include the major ones on my blog as they are posted. Read below this informative article on tax tips. Remember, if you need assistance filing your taxes, contact an Enrolled Agent or other tax professional.

1. Gather your records…now! It’s never too early to start getting together any documents or forms you’ll need when filing your taxes: receipts, canceled checks, and other documents that support an item of income or a deduction you’re taking on your return. Also, be on the lookout for W-2s and 1099s, coming soon from your employer.

2. Find your forms. Whether you file a 1040 or 1040-EZ, you can download all IRS forms and publications on our Web site, IRS.gov.

3. Do a little research. Check out Publication 17 on IRS.gov. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return. Review Pub 17 to ensure you’re taking all credits and deductions for which you’re eligible.

4. Think ahead to how you’ll file. Will you prepare your return yourself or go to a preparer? Do you qualify to file at no cost using Free File on IRS.gov? Are you eligible for free help at an IRS office or volunteer site? Will you purchase tax preparation software or file online? There are many things to consider. So, give yourself time to weigh them all and find the option that best suits your needs.

5. Take your time. Rushing to get your return filed increases the chance you will make a mistake and not catch it.

6. Double-check your return. Mistakes will slow down the processing of your return. In particular, make sure all the Social Security Numbers and math calculations are correct as these are the most common errors made by taxpayers.

7. Consider e-file. When you file electronically, the computer will handle the math calculations for you, and you will get your refund in about half the time it takes when you file a paper return.

8. Think about Direct Deposit. If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a check by mail.

9. Visit IRS.gov often. The official IRS Web site is a great place to find everything you’ll need to file your tax return: forms, tips, FAQs and updates on tax law changes.

10. Relax. There’s no need to panic. If you run into a problem, remember the IRS is here to help. Try IRS.gov or call our customer service number at 800-829-1040.

Links:

• Forms and Publications
• E-filing
• 1040 Central

IRS Help for Taxpayers

Even if you are already in an agreement with the IRS, if you are currently in a financial hardship, the IRS may be willing to cut you a break. Read the important information below to find out if your situation qualifies.

If you are facing financial difficulties and struggling to meet your tax obligations the IRS can help. As the 2009 tax filing season begins, in addition to new credits, deductions and exclusions, the IRS is taking steps to help people who owe back taxes. Here are some areas where IRS can help:

• Added Flexibility for Missed Payments: The IRS is allowing more flexibility for individuals with existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. Depending on the situation, the IRS may allow a skipped payment or a reduced monthly payment amount. Taxpayers in this situation should contact the IRS.
• Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay are not necessarily accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new, second review of the information to determine if accepting an offer is appropriate.
• Prevention of Offer in Compromise Defaults – Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.
• Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in hardship cases where taxpayers are unable to pay. If an individual has recently encountered a job loss or other financial problem, IRS assistors may be able to suspend collection in some situations without documentation to minimize burden on the taxpayer.
• Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases of levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

If you are behind on tax payments there could be additional help available if you are facing an unusual hardship situation. For assistance with your back taxes contact the phone numbers listed on your IRS correspondence.

More information is available on the IRS web site at IRS.gov.

Links:

• IR-2009-2, IRS Begins Tax Season 2009 with Steps to Help Financially Distressed Taxpayers; Promotes Credits, e-File Options

Currently Non Collectable

If your finances are such that you have no ability to make a payment to the IRS to repay your tax debt, you may qualify for a Currently Non Collectable or CNC status. You will have to provide the IRS with a complete financial statement and prove based on their standards, that you cannot make a payment.

This CNC status does not make your liability go away, and penalties and interest continue to accrue. The IRS will look at your income each year and if they determine that you then have an ability to pay, they will require that you begin to make payments at that time. After 10 years from the date of assessment , if the liability has not been paid, it is wiped out. (some exceptions to this time frame apply)

Again, this is something you can handle yourself, but having someone who is familiar with the IRS collection process can help you get the best possible arrangement. An Enrolled Agent can help you wade through the process. Knowledge about the IRS’ processes and procedures can really help you get the best resolution possible.

What ever you do, do not ignore notices you receive from the IRS. Respond as requested and get help from an Enrolled Agent if you want assistance is handling your IRS problems.

I Have a Revenue Officer-What Now?

If you have been contacted by an IRS Revenue Officer, now would be a good time to call an Enrolled Agent. We help clients every day whose tax debt has put them with an RO.

Contacting an Enrolled Agent does not mean you will never have to meet with your RO, but even if you do, at least you have someone who can help you prior to, sometimes during and after your meeting. In some instances an RO will Summons you for an appearance and you will be required to go meet with them. Other times they request to meet with you for information and may agree to cancel the meeting if you have someone representing you who will help them get the information they need. Whatever you do, do not ignore an appearance before an RO. Do not skip a meeting.

It is important to be sure to comply with all requests or Summons the RO issues. Not working with the RO towards repaying your tax debt will be sure to tell the RO you are not interested in taking care of your debt and will cause them to issue levies and liens. They can clean out your bank account, levy your wages and issue a lien on all property which is a matter of public record and will hurt your credit. If you owe over 25,000 a lien will be filed no matter what you do. If you owe under that, a lien may or may not be filed.

If you have unfiled tax returns, the RO with require that you file all necessary returns prior to putting you into any type of payment plan. You will be required to complete a 433A Collection Information Statement.

Your attitude towards the RO and your willingness to cooperate goes along way in showing the RO you are willing to take care of your debt. Most ROs are more willing to work with you towards a reasonable resolution if you show you are going to cooperate with the process.

While you can take care of this yourself, you may find that the services of an Enrolled Agent will relieve you of the stress of handling things yourself. If you find you need assistance, contact Effectur for your peace of mind.

IRS Debt over $25,000

If you owe over $25,000 to the IRS, you will be required to provide a complete financial statement. This form is called a 433A and asked a lot of questions about your assets and finances. If you own your home and have equity in it, the IRS will require that you apply for an equity loan up to the amount of your liability to pay off or pay down what you owe.

If you have money in an IRA or 401K, they will require you liquidate or borrow against it to pay off or pay down your liability.

If you have any ability to pay your liability down below 25,000, you will not have to provide the financial information or be required to secure payments as indicated above.

The 433A also asks for your income and expenses. Keep in mind that the IRS’ allowances for expenses may be a lot less than what you are actually spending. What your standard of living is, is up to you, unless you owe the IRS. Once you owe the IRS tax debt, you will be expected to adjust your living standards to what the IRS considers allowable. These amounts vary by area and can be found on the IRS website.

Negotiating and Installment Agreement when your liability is over 25,000 is complicated and you may decide you need an Enrolled Agent to represent you. Contacting an Enrolled Agent is not as expensive as hiring an attorney and they are admitted to practice before the IRS by taking a series of exams.

IRS Debt Below $25,000

If the total amount of debt you owe the IRS is below $25,000, (This is for personal liability, not business) your solution is usually fairly simple. If you personal debt to the IRS is under 25,000, divide you total liability (including penalties and interest) by 60. This will tell you approximately what your payment should be.

You need to call the IRS at 800-829-7650 and ask for payment plan. If your liability is under 25,000 you do not have to provide financial information, but will probably have to tell them the name of your employer and bank. If you are pressed for more detailed financial information, do not give it. Let them know your liability is under the amount at which financial data is required. If you are still pressed for more info, you may let them know you want to call back later.

If you cannot afford to make the payment you computed above, you will have to submit a complete financial statement to the IRS to be set up in a payment plan.

You may find if you have problems on the phone that you need and Enrolled Agent to assist you. Contact Effectur for more information.

Problems With The IRS

The next few blogs will be focused on those of you with tax debt. If you owe the IRS, you may be unsure what your rights are and how to proceed. Your best bet may be to hire someone to represent you. An Enrolled Agent can do so and Effectur is a company that has several Enrolled Agents who can talk to the IRS on your behalf.

Navigating the rough waters of the IRS can best be done by someone familiar with their processes and procedures. If however, you cannot afford assistance or just want to try it yourself first, the next few blogs will give you some helpful hints as well as let you know when handling your tax issues yourself, may not be the best option.

Remember no matter how friendly or helpful the IRS rep you talk to may seem on the phone, their job is to get you to full pay the money you owe and as quickly as possible. Many of them are helpful and are very reasonable to deal with. Some of them however will try to make you feel bad, that you have no options and will push you into resolutions you cannot afford. Also keep in mind what you feel you can afford and what the IRS feels you can afford may be poles apart! Read tomorrow’s blog for more details.

Early Distributions From Retirement Accounts

Included below are important details from the IRS on early distributions taken from your retirement. If you withdrew your money before you are 59 1/2 you may have to pay a 10% penalty. For the details on under what circumstances you will not have to pay that penalty, read the information below.

To discourage the use of pension funds for purposes other than normal retirement, the law imposes an additional 10% tax on certain early distributions of these funds. Early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. The term "qualified retirement plan" means:
• A qualified employee plan such as a 401(k) plan,
• A qualified employee annuity plan under section 403(a),
• A tax–sheltered annuity plan under section 403(b) for employees of public schools or tax–exempt organizations,
• An IRA other than an education IRA, or
• If you have an early distribution from a SIMPLE IRA plan within the first 2 years of participation in the plan, the additional tax is 25%.
Distributions that are not taxable such as distributions that you roll over to another qualified retirement plan, or a distribution of your designated Roth contributions are not subject to this 10% tax. For more information on rollovers, refer to Topic 413.
There are certain exceptions to this penalty. The following six exceptions apply to distributions from any qualified retirement plan:
1. Distributions made to your beneficiary or estate on or after your death.
2. Distributions made because you are totally and permanently disabled.
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception. For more information on medical expenses, refer to Topic 502.
5. Distributions made due to an IRS levy of the plan.
6. Distributions to qualified reservists. Generally, these are distributions to individuals called to active duty after September 11, 2001 and before December 31, 2007.
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
1. Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55 (After August 17, 2006, does not apply to distributions from qualified governmental plans if you were a public safety employee who separated from service after you reached age 50),
2. Distributions made to an alternate payee under a qualified domestic relations order, and
3. Distributions of dividends from employee stock ownership plans.
The following exceptions apply only to distributions from IRAs:
1. Distributions equal to or less than your qualified higher education expenses,
2. Distributions made to pay for a first–time home purchase, and
3. Distributions made to pay health insurance premiums if you are unemployed.
Refer to Topic 557 for information on the tax on early distributions from IRAs. For more information, refer to Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Arrangements (IRAs).
The 10% tax is reported on the appropriate line of Form 1040 (PDF) . You must also file Form 5329 (PDF),Additional Taxes on Qualified Plans (Including IRA's) and other Tax-Favored Accounts, if:
1. Your distribution is subject to the tax, and distribution code "1" is not shown in the appropriate box of Form 1099-R (PDF), or
2. One of the exceptions applies but the box labeled "Distribution Code(s)" does not show a distribution code of "2", "3", or "4". On the other hand, you do not need to file Form 5329 if your distribution is subject to the tax and a distribution code of "1" shows in the appropriate box. In this case enter the 10% tax on the appropriate line of Form 1040 and write "no" on the dotted line next to the appropriate line.
Distributions from a qualified retirement plan are subject to federal income tax withholding; however, if your distribution is subject to the 10% additional tax, your withholding may not be enough. You may have to make estimated tax payments. For more information on estimated tax payments, refer to Publication 505, Tax Withholding and Estimated Tax.

Child and Dependent Care Credit

As tax time approaches, many of you are looking for deductions or credits that will reduce the amount of taxes you have to pay. If you pay for day care for your child, disabled spouse or elderly parent, read the important information below on how you can qualify for this tax credit. You may need to contact and Enrolled Agent or other tax professional.

If you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work, you may be able to claim the credit for child and dependent care expenses. If you are married, both you and your spouse must have earned income, unless one spouse was either a full–time student or was physically or mentally incapable of self–care. The expenses you paid must have been for the care of one or more of the following qualifying individuals:
1. Your dependent (under the rules for qualifying child) who was under age 13 when care was provided. For certain custodial parents, refer to Child of Divorced or Separated Parents in Publication 503 , Child and Dependent Care Expenses. A noncustodial parent, however, cannot treat a child as a qualifying person even if the parent may claim the child as an exemption.
2. Your spouse who was mentally or physically not able to care for himself or herself and who has the same principal place of abode as you for more than one-half of the year.
3. Your dependent who was physically or mentally not able to care for himself or herself, for whom you can claim an exemption, and who has the same principal place of abode as you for more than one-half of the year.
In addition to the conditions just described, to take the credit, you must meet all the following conditions:
1. You must provide the taxpayer identification number (usually the social security number) of the qualifying person.
2. Your filing status must be a status other than married filing separate (You must file a joint return if you are married.)
3. The payments for care cannot be paid to someone you can claim as your dependent, or to your child who is under age 19 even if he or she is not your dependent.
4. You must report the name, address, and taxpayer identification number, (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is tax exempt, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider. If you do not provide information regarding the care provider, you may still be eligible for the credit if it is shown that you exercised due diligence in attempting to provide the required information.
If you qualify for the credit, complete Form 1040A, Schedule 2 (PDF), or Form 2441 (PDF) with Form 1040 (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF)), you must complete Part III of Schedule 2 (Form 1040A) or Form 2441. You cannot use Form 1040EZ if you claim the child and dependent care credit.
The credit is a percentage, based on your adjusted gross income, of the amount of work–related child and dependent care expenses you paid to a care provider. There is a maximum dollar limit of dependent care expenses you can use for this credit. The amount of the maximum dollar limit depends on the taxable year and the number of qualifying children. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income. Refer to Publication 503, Child and Dependent Care Expenses, for additional information.
If you pay someone to look after your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, refer to Publication 926, Household Employer's Tax Guide, or to Topic 756.

Earned Income Credit

If you have low income for 2008 you may qualify for the Earned Income Credit. Most taxpayers who qualify are single parents in low income brackets. Read the info from the IRS below for more details on qualifying. Be aware that if you claim it and are not entitled to it. You will not be allowed to claim it again for at least 5 years.
If you need assistance in determining if you qualify, contact an Enrolled Agent or other tax professional.

You may qualify for the Earned Income Tax Credit, or EITC, if you worked last year, but did not earn a lot of money.
EITC is a refundable tax credit meaning you could qualify for a tax refund even if you did not have federal income tax withheld.
To qualify for the credit, you must:
• Have a valid Social Security Number (if you are filing a joint return, your spouse also must have a valid Social Security Number)
• Have earned income from employment or from self-employment
• Have a filing status other than married, filing separately
• Be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return
• Not be a qualifying child of another person (if you are filing a joint return, your spouse also can not be a qualifying person)
• Not file Form 2555 or 2555-EZ (related to foreign earned income), and
• Have a qualifying child OR:
o be age 25 but under 65 at the end of the year
o live in the United States for more than half the year, and
o not qualify as a dependent of another person
If you qualify, the amount of your EITC will depend on whether you have children, the number of children you have, and the amount of your wages and income last year.
For more information or to see if you qualify, go to www.irs.gov/eitc or call 1–800–829–3676 and request Publication 596, Earned Income Credit.

Form W4-Employer's Perspective

Everything you need to know about your employees W4 is detailed in the article below from the IRS. If you have a small business, it is especially important that you know the what the IRS requires you to do.

When you hire an employee, you must have the employee complete a Form W-4 (PDF), Employee's Withholding Allowance Certificate. Form W-4 tells you, as an employer, how many withholding allowances to use when you deduct Federal income tax from the employees' pay. Form W-4 includes detailed worksheets to help the employee figure his or her correct number of withholding allowances. Employees may also want to access the withholding calculator on the IRS website at www.irs.gov/individuals for help in completing Form W-4. Tell any nonresident alien employees to see the Form 8233 Instructions before completing a Form W-4
If an employee qualifies, Form W-4 is also used by the employee to tell you not to deduct any Federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. However, if the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations apply. See the instructions for Form W-4. A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. If the employee does not give you a new Form W-4, withhold tax as if he or she is single, with no withholding allowances. However, if you have an earlier Form W-4 (not claiming exempt status) for this employee that is valid, withhold as you did before.
After the employee completes and signs the Form W-4, you must keep it in your files. This form serves as verification that you are withholding federal income tax according to the employe's instructions and needs to be available for inspection should the IRS ever request it.
In the past, employers had to routinely send the IRS any Form W-4 claiming complete exemption from withholding if $200 or more in weekly wages was expected or claiming more than 10 allowances. Employers no longer have to routinely submit these Forms W-4 to the IRS. However, Forms W-4 are still subject to review. Employers may be directed (in a written notice or in future published guidance) to send certain Forms W-4 to the IRS.
The IRS will also use information reported on Forms W-2, Wage and Tax Statement, to more effectively identify employees with withholding compliance problems. In some cases, where a serious under-withholding problem is found to exist for a particular employee, the IRS may issue a notice (commonly referred to as a "lock-in-letter") to the employer specifying the maximum number of withholding allowances permitted for a specific employee. The lock-in letter will also specify the marital status for purposes of calculating the required withholding under the lock-in letter. The IRS will provide the employee with an opportunity to dispute the determination before the employer adjusts withholding based on the lock-in letter.
The IRS will send a letter to the employee explaining that the IRS will require the employer to start withholding additional income tax unless the employee contacts the IRS by telephone or in writing to explain why the employee should not have withholding increased. A toll-free number and address for the unit handling this program will be provided in the letter. As an additional safeguard, the employer will also receive a notice to provide to the employee.
After the lock-in letter takes effect, the employer must disregard any Form W-4 that claims more allowances or exempt status, until the IRS notifies the employer to withhold tax based on the new Form W-4. However, if, at any time, the employee furnishes a Form W-4 that claims a marital status, number of withholding allowances, and any additional withholding that results in more withholding than would result from applying the marital status and number of withholding allowances permitted in the lock-in letter, the employer must withhold tax based on that Form W-4. Employers who use electronic Form W-4 systems must make sure the employee can not override the lock-in letter to decrease withholding via an electronic Form W-4 system.
After the lock-in letter takes effect, if the employee wants to claim complete exemption from withholding or claim a number of withholding allowances more than the maximum number specified by the IRS in the lock-in letter, the employee must submit a new Form W-4 and a written statement to support the claims made by the employee on the Form W-4 to the IRS.
You should inform your employees of the importance of submitting an accurate Form W–4. An employee may be subject to a $500 penalty if he or she submits, with no reasonable basis, a Form W–4 that results in less tax being withheld than is required.
You should keep blank Forms W–4 for the current year on hand so you can provide them to your current and new employees. An employee may want to change the number of withholding allowances or his or her marital status on Form W–4 for any number of reasons, such as marriage, an increase or decrease in the number of dependents, or an increase or decrease in the amount of itemized deductions or tax credits anticipated for the tax year. Any of these reasons could affect the employe's tax liability. If you receive a revised Form W–4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received the revised Form W–4, assuming there is no lock-in letter in effect.
An employer can download and print Form W-4 from the IRS website at www.irs.gov. Taxpayers may also order Forms W-4 by calling 1-800-TAX-FORM (1-800-829-3676). TTY/TDD users may call 1-800-829-4059 to order Forms W-4. A substitute Form W-4, developed by the employer, may be used instead of the official Form W-4, if the employer also provides the tables, instructions, and worksheets contained in the Form W-4 in effect at that time. Employers may refuse to accept a substitute form developed by an employee and, if the form is rejected, the employee submitting such form will be treated as failing to furnish a Form W-4.
If an employee fails to give you a properly completed Form W–4, you must withhold federal income tax from his or her wages, as if he or she were single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.
Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language by which the employee certifies that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false. When you get an invalid Form W-4, do not use it to determine federal withholding. Tell the employee that it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this employee that is valid, withhold as you did before.
For additional information, refer to Publication 15, (Circular E), Employer's Tax Guide, Publication 505, Tax Withholding and Estimated Tax, Publication 919, How Do I Adjust My Tax Withholding?, and the Withholding Compliance Questions & Answers on the IRS website at www.irs.gov. For the procedures for withholding income taxes on the wages of nonresident alien employees, refer to Notice 2005-76 and Aliens Employed in the U.S. on the IRS website at www.irs.gov.

Form 941 and 944 Deposits

If you are a small business owner, read the important information below from the IRS that gives details on making your 941 and 944 deposits. Even if you have not done so in the past, now is the time to start making those tax deposits on time. Save your business money and yourself stress by taking care of your payroll taxes promptly and accurately. Read on to learn all the details you need to know.

The tax liability on a Form 941 (PDF), Employer's Quarterly Federal Tax Return, and Form 944, Employer's Annual Federal Tax Return, includes your employees' withheld Federal income tax, social security tax, and Medicare tax, and your share of social security and Medicare tax. If you are required to file Form 941 and you accumulate a liability for these taxes of less than $2,500 per quarter, you may submit payment of taxes due with your timely filed return. Similarly, if you are required to file Form 944 and you accumulate a liability for these taxes of less than $2,500 a year, you may submit payment of taxes due with your timely filed return. However, if you accumulate a liability for these taxes of $2,500 or more per quarter, and you are required to file Form 941, you generally must deposit your taxes periodically according to your deposit schedule (i.e., monthly or semiweekly). You generally must make tax deposits in the same manner if you are required to file the annual Form 944 and accumulate a liability of $2,500 or more per year. Some exceptions apply, as discussed below.
The withheld federal income tax and social security and Medicare taxes are added together on Form 941 and Form 944. If you made advance earned income credit payments to employees, these payments are subtracted from your total taxes. Refer to Topic 754 for more information on the advance earned income credit. The resulting net tax is the amount of employment taxes you owe for the quarter (Form 941) or the year (Form 944).
Form 944, designed to reduce the burden on small employers, is an annual employment tax return to report social security, Medicare, and withheld federal income taxes. Employers who file Form 944 will file one Form 944 for the year instead of four quarterly Forms 941. Employers cannot file Form 944 unless they are notified by the IRS that they qualify to file this form. If you believe your yearly employment taxes will be $1,000.00 or less for the tax year (approximately annual wages of $4,000 or less), please contact us at 1–800–829–0115 to determine if you are eligible to file Form 944. You should continue to file Form 941 quarterly until you receive written notification from the IRS that your filing requirement has been changed to Form 944 for a particular year.
Even if an employer's employment tax liability exceeds the de minimus deposit amount of less than $2,500 per quarter (for Form 941 filers) or per year (for Form 944 filers), the employer can make a payment with the return if the employer is a monthly schedule depositor making a payment in accordance with the Accuracy of Deposits Rule (see Publication 15, section 11).
An additional exception applies to Form 944 filers. Even if a Form 944 filer owes employment tax of $2,500 or more for the year, it may pay the fourth quarter employment tax liability with the return if it is less than $2,500, as long as the employment taxes for the first, second, and third quarters were already deposited.
If you are required to deposit your employment taxes, you must deposit them according to one of two deposit schedules, monthly or semiweekly. Which schedule you use for the current calendar year is based on the amount of taxes you reported during the four quarters in your lookback period. For details on your lookback period refer to Chapter 11 of Publication 15, or if you are required to file Form 944, refer to the Instructions for Form 944.
If you reported taxes of $50,000 or less during the lookback period, you are a monthly schedule depositor, and generally must deposit each month's accumulated employment taxes on or before the 15th day of the following month. For example, taxes for January must be deposited by February 15th.
If you reported taxes greater than $50,000 for the lookback period, you are a semiweekly schedule depositor, and generally must deposit your employment taxes on Wednesday or Friday, of each week, based on the following schedule:
1. The employment taxes on payments made to your employees on Wednesday, Thursday, and/or Friday, must be deposited by the following Wednesday.
2. The taxes on payments made to your employees on Saturday, Sunday, Monday, and/or Tuesday, must be deposited by the following Friday.
Semiweekly depositors always have at least 3 banking days to make a deposit. If any of the 3 weekdays after the end of the semiweekly period is a holiday on which banks are closed, you have one additional day to deposit.
Regardless of whether you are a monthly depositor or a semiweekly schedule depositor, if you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit them on the next banking day. If this happens, you become a semiweekly depositor for the remainder of the calendar year and for the following calendar year.
If any deposit due date falls on a Saturday, Sunday, or legal holiday, the deposit will be considered timely if made by the next banking day.
If you are a new employer, your taxes in the lookback period are considered to be zero for any quarter your business did not exist. Therefore, in the first year of business you are a monthly schedule depositor unless the $100,000 next day deposit rule applies.
Deposits are made either by using the Electronic Federal Tax Payment System (EFTPS), or by making payment to an authorized financial institution with a Form 8109, Federal Tax Deposit Coupon. If you use Form 8109, it is very important that it show the correct employer identification number, name, and type of tax and tax period, as this information is used by the IRS to credit your account. Your check or money order should be made payable to the financial institution where you make your deposit, not to the IRS. There are penalties for depositing late, or for mailing payments directly to the IRS that are required to be deposited, unless you have reasonable cause for doing so.
You must make deposits using EFTPS for all depository tax liabilities for the current year if you made more than $200,000 in aggregate deposits for all types of Federal depository taxes in the year two years before the current year or if you were required to make electronic deposits in the previous year.
If you are required to make electronic deposits through EFTPS and fail to do so, or make your deposit using a paper coupon Form 8109, you may be subject to a 10% penalty. Refer to Section 11 in Publication 15 for rules on depositing taxes.
Even if you do not have to make electronic deposits, you may voluntarily participate in EFTPS. To enroll in EFTPS, call 1–800–555–4477, or to enroll online, visit www.eftps.gov. For general information about EFTPS, call 1–800–829–1040 for individuals or 1–800–829–4933 for businesses.
Refer to Publication 966 (PDF) for Electronic Federal Tax Payment System information and Publication 15, (Circular E), Employer's Tax Guide, for deposit requirements.

Independent Contractor vs. Employee

As tax time approaches, your employer may approach you about your status for next year. If you are asked to consider being an independent contractor not an employee, read the info below from the IRS to see which status really applies to your situation. Your employer could just be trying to save employment taxes, while still wanting to treat you in all other ways like an employee.

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Type of Relationship itself.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. This includes:
• The extent to which the worker has unreimbursed business expenses,
• The extent of the worker's investment in the facilities used in performing services,
• The extent to which the worker makes his or her services available to the relevant market,
• How the business pays the worker, and
• The extent to which the worker can realize a profit or incur a loss.
Type of Relationship covers facts that show how the parties perceive their relationship. This includes:
• Written contracts describing the relationship the parties intended to create,
• The extent to which the worker is available to perform services for other, similar businesses,
• Whether the business provides the worker with employee–type benefits, such as insurance, a pension plan, vacation pay, or sick pay,
• The permanency of the relationship, and
• The extent to which services performed by the worker are a key aspect of the regular business of the company.
For more information, refer to Publication 15-A (PDF), Employer's Supplemental Tax Guide, or Publication 1779 (PDF), Independent Contractor or Employee. If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Alaska Permanent Fund Dividend Is Taxable Income

If you are eligible for Alaska’s Permanent Fund Dividend, read the important information below, published by the IRS on the taxability of that income. If you need additional information, visit the IRS website.

SEATTLE — Don’t forget that the Alaska Permanent Fund Dividend (PFD) is taxable income on Federal income tax returns. Be sure to set aside enough to cover your tax bill, or consider making an estimated tax payment when you get your PFD. For more information on how to report the Alaska PFD income on the Federal tax return contact the IRS at 1-(800)-829-1040 or visit the the IRS web site at IRS.gov and input the key words in quotes: "Around the Nation Alaska" in the top right search engine.

The Internal Revenue Service reminds Alaskans that the Alaska PFD (including the one-time addition of the $1,200 Resource Rebate) is taxable income for both adults and children, and must be reported on a Federal income tax return.

Because of the size of the PFD this year, every child under 18 who is a dependent will be required to file a tax return, and will be affected by the “kiddie tax” rules. Many older children may be affected as well.

Special Tax Rules for Children
Special tax rules apply to children under age 18, and — beginning in 2008 — certain older children who receive more than $1,800 of unearned income, including the PFD and Native Corporation Dividends. Some people refer to this as the “kiddie tax.”
Beginning in 2008, the age of children whose unearned income is taxed at their parent’s rate increased. For children under age 18 and certain older children (described below), unearned income over $1,800 is taxed at the parent’s rate. These special tax rules apply to children who meet all of the following conditions:

1. The child had more than $1,800 of unearned income (defined below).
2. The child is required to file a tax return.
3. The child either:
a. Was under age 18 at the end of 2008,
b. Was age 18 at the end of 2008 and did not have earned income that was more
than half of the child’s support, or
c. Was over age 18 and under age 24 at the end of 2008 and was a full-time
student who did not have earned income that was more than half of the child’s
support. (Full-time Student and Support are defined below.)
4. At least one of the child’s parents was alive at the end of 2008.
5. The child does not file a joint return for 2008.
Unearned Income: For this purpose, unearned income includes taxable interest, ordinary dividends (including taxable Native Corporation Dividends), capital gains (including capital gains distributions), rents, royalties, taxable social security benefits, pension and annuity income and income received as the beneficiary of a trust.
Support: Your child’s support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your child’s support, count support provided by you, your child, and others. However, a scholarship received by your child is not considered support if your child is a full-time student.
Full-time Student: A student is a child who during any part of five calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

Penalty Abatement

If you have received a notice from the IRS for taxes due, it may include penalties and interest. The IRS does not abate interest (unless they made an error), but they do, in some circumstances abate penalties. To have penalties abated on your tax liability you need to request this abatement in writing. You need to state the reasons why you either did not file or pay your taxes on time.

Explain that it was not due to willful neglect, but due to the reasons you will explain. You need to attach documents to substantiate what your reasons are. Keep in mind they will only accept major issues that affected your entire life, not just your taxes. If everything else in your life was handled, and your taxes were the only item you could not take care of, they will not abate penalties.

If you had a death of a loved one, a major illness or addiction that affected all aspects of your life, they may abate the penalties. Be sure to include a timeline of events that shows you life was in turmoil when you taxes were due to be filed or paid.

If you need assistance in handling your abatement, contact an Enrolled Agent.