Poll reveals Americans' views on government finance

A new poll suggests many Americans support President Barack Obama's proposal to increase taxes on the nation's millionaires.

The research, conducted by GfK and the Associated Press, found that at least 65 percent of respondents were in favor of requiring those with incomes above $1 million to pay at least 30 percent in taxes, compared to about 26 percent who opposed the idea.

At the same time, however, researchers found that more than half responded more positively to the idea of cutting spending to improve the government's fiscal situation, The Associated Press reports. Only about 30 percent suggested that higher taxes are generally a preferable solution.

This trend may be beneficial for day traders, given that financial transactions and capital gains have been considered and proposed as targets for higher taxation. A general sentiment favoring spending cuts, despite the specific support for this particular presidential proposal, could decrease the odds of lawmakers legislating higher day trading taxes.

The poll also determined that Congressional approval is at about 19 percent, which AP states is close to what was found last December. This remains close to the all-time low the survey reported last August, when only 12 percent of respondents said they approved of the job Congress was doing. At that time, legislators had just ended a struggle over whether to raise the debt limit. Some said they have not worked together effectively to cope with national economic difficulties and the budget deficit.

President pushes for 28 percent corporate tax rate

In a move that would have a significant impact on many day trading companies across the country, the Obama administration has announced that it would look to reduce the top corporate tax rate to 28 percent.

There has been a great deal of discussion about the current tax structure for U.S. companies, and dropping the maximum rate from 35 to 28 percent would be a significant step for many businesses. The administration says it will make up for the tax reduction by removing several loopholes in the current code. However, those changes have yet to be detailed.

The changes echo statements made by the chief executive during his recent State of the Union speech, in which he called for incentives to be given to manufacturing companies.

Treasury Secretary Timothy Geithner said the proposal would "help level the playing field for businesses and allow the government to collect needed revenue while promoting economic growth" during a committee meeting last week.

Some analysts highlighted the political angle of the announcement, as candidate Mitt Romney has also called for a restructuring of the corporate tax code.

"Everyone agrees on the basic principle of lowering rates in exchange for eliminating loopholes," Dean Baker, co-director of the Center for Economic and Policy Research, told Reuters.

While the change would not have a significant impact on day traders incorporated as a limited liability company, or LLC, the other changes being introduced into the corporate tax code may create additional hesitancy for business owners.

Ten Things to Know About Capital Gains and Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.

Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may only deduct capital losses on investment property, not on personal-use property.

5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.

8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.
For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Tax filing 2011: Accounting tips for day traders

When filing federal tax returns, day traders should take note of a number of deductions that may be available for certain business and personal activities.

For example, individuals who purchased a new fuel cell automobile can claim the alternative motor vehicle credit. Use of a car is deductible under some circumstances, though the rate depends on the purpose of the trip. Driving a car for business purposes allows a deduction of 51 cents per mile for the first half of 2011, and a half cent less for the second half of the year. If a vehicle was used to move or reach medical care then the driver may be able to deduct 19 cents per mile for the first half of the year and 23.5 cents for each mile driven during the remainder.

Those who wish to take the self-employed health insurance deduction should note that it is now on line 29 of Form 1040, not on Schedule SE as in the past. Health savings accounts and Archer MSAs are also treated differently under 2011 tax rules, with a 20 percent tax on distributions not used for qualified medical expenses, which now include only prescription drugs and insulin.

Aside from changes to various tax breaks, day traders should be aware that the mailing locations for some paper returns has changed and check their area's to ensure they send their documents to the proper location. With the number of tax code changes that have occurred in recent years, it may be best to have a professional firm prepare returns.

IRS Releases the Dirty Dozen Tax Scams for 2012

WASHINGTON –– The Internal Revenue Service today issued its annual “Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

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

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

The following is the Dirty Dozen tax scams for 2012:

Identity Theft

Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.

The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

• Do not sign the return or place a Preparer Tax identification Number on it.
• Do not give you a copy of your tax return.
• Promise larger than normal tax refunds.
• Charge a percentage of the refund amount as preparation fee.
• Require you to split the refund to pay the preparation fee.
• Add forms to the return you have never filed before.
• Encourage you to place false information on your return, such as false income, expenses and/or credits.

For advice on how to find a competent tax professional, see Tips for Choosing a Tax Preparer.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware. Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Diverse tax breaks sometimes forgotten

As tax season approaches, many Americans search for useful accounting tips and strategies to help them avoid paying more than necessary to the Internal Revenue Service.

A number of tax breaks are available to those engaged in retirement planning and long-term saving. Tax expert Barbara Weltman suggests that Americans re-examine these accounts, because the stagnant wages that have characterized recent years may make some who did not previously qualify due to income limitations eligible for contributions.

Most day traders given the option will likely prefer to deduct state sales taxes on their returns, rather than income. Other categories of deductions include education, which includes childrens' education or one's own. This includes graduate school and continuing education costs, in some cases. Even taxpayers who do not itemize their deductions can benefit from a $4,000 deduction for tuition and fees.

Taxpayers who wish to deduct their health insurance should remember to include expenses such as glasses, braces, physical therapy, and medically necessary home improvements, such as air conditioning necessary for someone with allergies or breathing problems.

Those who find the process difficult, or who wish to have the lowest possible taxable income, may wish to consider that payment for tax preparation is itself deductible, making professional tax accounting assistance even more advantageous.

Some of these tax breaks are on the verge of disappearing, though they could be renewed in the future. Charitable gifts are generally tax-deductible, but so is volunteer time, which some may forget. Volunteers who go on trips to deliver supplies or perform other tasks may be able to claim a deduction dependent on the distance travelled.

Eight Facts about New IRS Form 8949 and Schedule D

The IRS has a new form taxpayers must use to report most capital gains and losses from transactions relating to investment property. In previous years, these transactions would have been reported on your IRS Schedule D or D-1, but for tax year 2011, use Form 8949, Sales and Other Dispositions of Capital Assets.

Here are eight important points about the new Form 8949 and IRS Schedule D, Capital Gains and Losses:

1. Short-term capital gains or losses (assets held for one year or less) are now reported on Part I of Form 8949.

2. Long-term capital gains or losses (assets held for more than one year) are now reported on Part II of Form 8949.

3. Fill out Form 8949 before you fill out line 1, 2, 3, 8, 9 or 10 of Schedule D.

4. Most property you own and use for personal purposes, pleasure or investment is a capital asset. Use Form 8949 to report the sale or exchange of a capital asset you are not reporting on another form or schedule (such as Form 6252 or 8824).

5. At the top of each Form 8949 you file, you'll need to check box A, B or C, based on what is indicated in box 3 of the Form 1099-B or substitute statement.

• Check box A if your broker reported the transaction to you and the basis of the securities sold also was reported to the IRS

• Check box B if the transaction was reported to you but box 3 of the Form 1099-B is blank or your statement says the basis was not reported to the IRS.

• Check box C for all other transactions.

6. If you have a lot of transactions, use as many Forms 8949 as necessary to report all of them, but make sure that each Form 8949 includes only the type of transactions described in the text for the box you checked (A, B or C).

7. The reporting of certain transactions has changed. If you have to adjust your gain or loss, you may have to enter a code in column (b) and an adjustment in column (g). For details, see the 2011 Instructions for Schedule D (and Form 8949).

8. For 2011 transactions, Schedule D-1 is no longer in use. Form 8949 replaces it.

Start planning to file taxes

February means that it is a good time to start preparing for tax filing as IRS deadlines begin to approach.

One step for day traders and every other taxpayer is to check that any and all needed documents are on hand. This may include forms and records from employers, clients and other sources. Day traders may wish to review equipment expenses, for example, to determine how to benefit from tax breaks for businesses purchasing needed equipment. Those working out of a home office should recall the IRS rules for taking business deductions under those circumstances, which require that part of the house be devoted almost exclusively to work.

Marketwatch suggests those who find they do not have needed documentation from another party make contact and find out what is causing the delay, in order to make sure they get the records in time. It may also be convenient to ensure that one's filing system is neat and consistent while pulling together these documents is. It may be helpful to set up for next year, the news source notes, since bills and other relevant papers may have started to accumulate.

Those who anticipate owing money for their 2011 tax returns may want to start saving now, so they can pay in a timely fashion once they know how much they owe. Additionally, the news source notes, anyone who has suffered identity theft in the past should ensure they have their IP PIN, issued to those who report identity theft to prevent fraudulent filings under their name.

Tax fraud a growing concern

Increasing frequency of tax-related identification theft is likely to severely inconvenience taxpayers who are not victims in the coming years.

This is because the trend encourages the Internal Revenue Service and other government agencies to increase regulation and enforcement efforts in a way that is likely to drag out the process of filing tax returns and receiving refunds. One common scam involves filing returns for the recently deceased, intentionally using deceptive information to secure the highest possible tax refund.

That can net scammers a significant profit, while the dead individual's relatives may not even find out until they attempt to file a proper return. The legitimate return is likely to be rejected, since there is already another in the system for the name and Social Security number being used. In one case, the Detroit Free Press notes, a family member attempted to file a return in March and was unable to get the matter straightened out until December.

The IRS and the Justice Department are attempting to crack down on tax fraud, since the Government Accountability Office reported the number of incidents detected spiked from about 52,000 in 2008 to 250,000 in 2010.

Those concerned with estate tax planning and other financial preparations for their own passing may wish to ensure that any executor of their estate is prepared to deal with unforeseen legal and financial complications like this. Taking precautions concerning personal and financial information may also help decrease the likelihood of such a problem occurring.

Tax breaks: Education and dependents

Day traders and others preparing to file their federal taxes may wish to take advantage of available accounting tips to get the most out of their filings.

There are many tax deductions that may be available, depending on an individual's circumstances. A number of tax breaks exist for education, CPA Lisa Greene-Lewis recently told The Huffington Post, in the form of both credits and deductions, which may apply to dependents' and spouses' education costs as well.

These include the American Opportunity Tax Credit, which may be worth as much as $2,500 each of the first four years of college, as well as a refund of up to $1,000 even for those who owe no taxes. Another is the Lifetime Learning Tax Credit, which can be claimed any number of years and may provide professionals who are studying with a tax break as high as $2,000. Greene-Lewis also notes the Tuition and Fees deduction, which reduces adjusted gross income by up to $4,000 for taxpayers with eligible education expenses.

Similarly to the breaks for dependent education costs, there are tax credits for child and dependent care, allowing some to deduct between 20 and 35 percent of qualifying expenses with a limit of $3,000 per qualifying individual. Expenses for dependents who cannot take care of themselves may meet eligibility requirements.

Day traders who run their own businesses should also investigate tax breaks for equipment, furnishings and other necessary items. This may include software in addition to physical objects, although it may be best to consult an accounting firm to ensure eligibility and take advantage of all applicable tax breaks.

Timing of charitable donations

When engaged in estate tax planning and considering charitable contributions, donors should keep in mind that the type of gift given and the timing of the donation may affect its tax status.

Those planning to give charitable gifts while they are alive may find that the best choice is to use publicly traded securities or real estate. As long as the assets have been owned for at least a year, the full market value is deductible by any taxpayer who itemizes deductions. Neither the donor nor the charity has to pay taxes on the appreciation of these assets.

When giving contributions worth more than $250, the donor will need documentation from the receiving organization to verify the amount given. If the contribution is money, whether cash, a check or in another fashion, then a written acknowledgement from the organization or a bank record will be necessary.

Attorney Carissa Giebel notes that giving retirement assets while alive may not be the best choice, however. They are considered a distribution and subject to income taxes under those circumstances. For those who wish to leave a gift to a charity after they die, however, the situation is different.

While leaving retirement assets to most beneficiaries leaves them subject to taxation, giving them to a charity avoids both the income and estate taxes. Nonretirement assets, on the other hand, may not be subject to the capital gains tax when left to individual beneficiaries.

Payroll tax cut debate resumes

Lawmakers have yet to pass a long-term extension of the payroll tax cut for this year, CNNMoney reports, despite widespread support for the measure.

The short-term extension passed at the end of 2011 expires at the beginning of March, giving legislators one month to agree on how to pay for the provision, which was the sticking point that prevented a full-year version of the tax break from being passed before January. Few lawmakers still oppose the measure itself, which would set the payroll tax rate at 4.2 percent instead of 6.2 percent for the rest of the year, affecting about 160 million workers across the nation.

The same legislation is expected to prevent pay cuts to Medicare physicians and extend emergency federal unemployment benefits. According to the Congressional Budget Office, the lower payroll tax rate will cost $100 billion from March to December.

"Extending the payroll tax cut through the end of the year will increase output and increase employment," CBO budget director Douglas Elmendorf recently told the House Budget Committee.

Some lawmakers have proposed that the savings from decreased spending on military operations abroad may be used to cover the expense at least partially, although not all agree. As the debate continues, day traders could be impacted by other methods of paying for the tax cut, namely rate increases or the elimination of tax breaks. With a month until the deadline, given the difficulty of passing the current two-month extension at the end of last year, some are concerned that the payroll tax cut will distract from broader tax and fiscal policy issues.

Identity Theft Crackdown Sweeps Across the Nation; More than 200 Actions Taken in Past Week in 23 States

WASHINGTON – The Internal Revenue Service and the Justice Department today announced the results of a massive national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.

Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states. The coast-to-coast effort took place over the last week and included indictments, arrests and the execution of search warrants involving the potential theft of thousands of identities and taxpayer refunds. In all, 939 criminal charges are included in the 69 indictments and informations related to identity theft.

In addition, IRS auditors and investigators conducted extensive compliance visits to money service businesses in nine locations across the country in the past week. The approximately 150 visits occurred to help ensure these check-cashing facilities aren’t facilitating refund fraud and identity theft.

“This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail. This is part of a much wider effort underway at the IRS to help protect taxpayers.”

“The Justice Department is working closely with the IRS to investigate, prosecute, and punish tax refund crimes committed through the theft of identities,” said Principal Deputy Assistant Attorney General John A. DiCicco of the Tax Division. “Now, more than ever, we must remain vigilant against the unauthorized use of identification information to defraud the U.S. government.”

The national effort is part of a comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

The law-enforcement sweep started last week across the country, reflecting investigative efforts stretching back months and even years.

The nationwide effort by the Justice Department and the IRS led to actions taking place in 23 locations across the country with 105 individuals. The actions included 80 complaints/indictments and informations, 58 arrests, 19 search warrants, 10 guilty pleas and four sentencings. A map of the locations and additional details on the actions are available on IRS.gov, the IRS Civil and Criminal Actions page and the Department of Justice Tax Division page.

Beyond the criminal actions, the IRS enforcement personnel conducted a special sweep last week and on Monday to visit 150 money services businesses to help make sure these businesses are not knowingly or unknowingly facilitating identity theft or refund fraud. The visits occurred in nine high-risk places identified by the IRS covering areas in and surrounding Atlanta, Birmingham, Ala., Chicago, Los Angeles, Miami, New York, Phoenix, Tampa and Washington, D.C.

In addition, the IRS has more than 250 check-cashing operations under audit across the country and will be looking for indicators of identity theft as part of the exam effort.

The information from these audits and compliance visits will be used to assist continuing IRS investigations into refund fraud and identity theft.

The IRS also is taking a number of additional steps this tax season to prevent identity theft and detect refund fraud before it occurs. These efforts includes designing new identity theft screening filters that will improve the IRS’s ability to spot false returns before they are processed and before a refund is issued, as well as expanded efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents.

To help taxpayers, the IRS earlier this month created a new, special section on IRS.gov dedicated to identity theft matters, including YouTube videos, tips for taxpayers and a special guide to assistance. The information includes how to contact the IRS Identity Protection Specialized Unit and tips to protect against “phishing” schemes that can lead to identity theft.

Identity theft occurs when someone uses another’s personal information without their permission to commit fraud or other crimes using the victim’s name, Social Security number or other identifying information. When it comes to federal taxes, taxpayers may not be aware they have become victims of identity theft until they receive a letter from the IRS stating more than one tax return was filed with their information or that IRS records show wages from an employer the taxpayer has not worked for in the past.

If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.

Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

Romney returns reveal tax code complexity

In examining presidential candidate Mitt Romney's tax returns, The New York Times reports, a close analysis indicates that he actually overpaid by about $44,000.

Many may have failed to realize this, the source notes, but it appears that Romney's returns overstated his capital gains so that he and his wife were assessed extra taxes. The news source reports that this occurred because of an error by the trustee of one of the Romney trusts.

The source also points out that Romney and his wife saved $1 in taxes during 2010 due to a tax credit for employers who hire workers who meet certain criteria, such as people who have been on welfare for some time.

These details, the source notes, underscore the complexity of the nation's tax code. Another example found in the Romney tax returns is a grantor trust set up by Romney and his wife for their five children. Through some knowledgeable estate tax planning, they effectively give their children millions of dollars. While the two cannot use the profits from assets in the trust, the source notes, they pay taxes on the trust's gains themselves to give their children more.

Time magazine notes that the candidate's returns were nearly 550 pages long. While day traders may not have to cope with complexity on that scale, the services of a professional accounting firm may still be useful in coping with the many, ever-changing provisions of the U.S. tax code, particularly with many lawmakers proposing further changes.

Capital gains tax going up, expert writes

Any significant federal fiscal reform plan is likely to include a higher capital gains tax rate, expert Ronald Barusch recently wrote in The Wall Street Journal.

Federal lawmakers with opposing views of the tax code are considering either higher taxes on high earners, who Barusch indicates benefit most from the fact that the capital gains tax rate is lower than the income tax rate, or a tax code with lower, flatter marginal rates.

In the former case, higher capital gains taxes may be the only way to increase federal tax revenue derived from individuals who get little of their income from salaries and wages, according to Barusch. In the latter, on the other hand, eliminating tax preferences for capital gains may be a necessity in order to balance lower marginal rates.

Day traders would feel the impact of such a change on their business, since capital gains are generally their primary income source. Barusch also estimates that many other investors are likely to rush deals in an effort to take advantage of the current tax rate before such an increase took effect, among other consequences.

According to opponents, a higher capital gains tax rate is detrimental to economic growth because it discourages the investment that fuels entrepreneurship and business expansion. If a slowdown does occur, day traders may find the pace of activity slows, possibly discouraging investment by making it less profitable. They may wish to support alternative measures to raise federal revenues.

Lawmakers weigh in on presidential proposal

Some tax experts indicate that President Barack Obama's proposal to create a provision requiring millionaires to pay at least 30 percent of their income in taxes is problematic, Bloomberg reports.

Other methods of increasing the amount paid by high earners include increasing the capital gains tax rate to account for the amount of investment income wealthy Americans receive, revising the existing alternative minimum tax or limiting deductions that taxpayers may claim based on their income level, according to the source.

"It will always be a challenge to have a rule that nobody can get around," said Kogod Tax Center managing director David Kautter. "I refer to it as closing off the escape routes." According to the news source, experts note that none of the options can be guaranteed to provide the revenue the federal government needs, and changes risk causing people to find new avenues to trim their taxes.

Some lawmakers have pledged to support the provision, citing concerns over national income inequality and the federal deficit among their reasons for supporting such a change to the tax code. Senate Majority Leader Harry Reid of Nevada reportedly stated that tax issues including the measure would be a major focus all year.

From the perspective of day traders, the measure is likely less problematic than an increase in the capital gains tax, since it would only apply on a case-by-case basis to individuals meeting a specific income requirement. In contrast, higher day trading taxes would impact every transaction for a broader effect.

President proposes tax provision

President Barack Obama proposed an addition to the tax code in his State of the Union, specifically a rule that would require millionaire households to pay at least a 30 percent tax rate.

This would be assessed as a surcharge on those in the income bracket whose effective tax rates fell below 30 percent to bring their taxation up to that level. This measure could have less of an impact on day traders than other proposals that have been made seeking to address perceived income inequality and flaws in the tax code.

While those with incomes above the threshold could be affected significantly, any with incomes that came to less than $1 million annually should not experience any difference under the provision as it has been described.

However, according to the Wall Street Journal, the concept of such a surcharge is rooted in mistaken or incomplete ideas of how the current tax code functions. According to the source, when calculating the effective taxes on the wealthiest Americans and taking into account corporate and other taxes, their tax rate is close to 30 percent.

WSJ also notes that part of the reason the capital gains tax rate has been set lower than the income tax rate is to compensate investors for the fact that their profits are taxed at the corporate level first, whereas income is only taxed once.

For day traders, the shift from proposals to raise the capital gains tax rate or impose a tax on financial transactions to the current idea represents a beneficial one. It would only apply under some circumstances, rather than making all trades more expensive.

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

IRS Reminds Parents of Ten Tax Benefits

Your kids can be helpful at tax time. That doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.

5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents. For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.

7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.

8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.

9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.

10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

Forms and publications on these topics are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Legislators, experts examine economic impact of capital gains tax

The recent statement by Mitt Romney that he pays an effective tax rate of about 15 percent has touched off another round of the ongoing discussion of the capital gains tax.

Many wish to see the rate of the capital gains tax increased, for a number of reasons. Some believe it is an opportunity to increase federal government revenues and reduce the budget deficit. Some cite the current rate of 15 percent as a provision that encourages income inequality by rewarding wealthy financiers, and others have stated that a higher tax rate would reduce speculation and volatility in the economy.

While some experts say that keeping the rate of the capital gains tax low benefits the economy by encouraging investment, The Washington Post reports, others say that it has little effect on what investors do with their money.

On the other hand, Forbes reports that many remain in favor of a low capital gains tax rate. Beyond promoting investment that can drive entrepreneurship and business growth, the source notes, some point out that corporate profits are taxed before gains are realized, making the capital gains tax redundant. They also point out that some capital gains are a result of inflation, making taxation potentially unfair and unreasonable.

Some oppose the current tax structure because it adds to the complexity of the tax code to treat capital gains differently from wage income. Day traders and others who receive their income primarily in the form of capital gains may find the tax rate or the structure changing in the near future.

Simple estate plans may help many Americans

Creating a basic estate plan is easy, according to Forbes, despite the fact that many Americans die without a will.

For whatever reason, many Americans never create living trusts and wills or pursue related documentation, leaving their estates in potential disarray when they die. People commonly fail to start estate planning, the source notes, or begin but do not finish because of the perceived complexity of the task. To prevent this, an expert suggests, adopt a simple approach and focus on key areas of importance to avoid getting bogged down in the details.

For example, parents' largest concern might be who will become their child's guardian if they are both lost. A day trader or investor with no children or older children might be concerned with the disposition of his or her stocks and financial tools and assets.

Setting up a trust can be a useful way to ensure possessions and assets are passed on correctly, and it is possible to select a professional to oversee the trust, keeping the position of power in the hands of someone objective. Using a trust can allow the estate to bypass probate, the source notes. Many people may find this useful if attempting to pass on a large asset, such as a house.

As useful as accounting tips may be, estate planning can still be difficult. To avoid mistakes and ease the process, it may be appropriate to seek professional assistance, such as that of an accounting firm with the relevant expertise. This may be particularly important for those with sizable or complex estates.

Tax returns may significantly impact presidential debate

Many presidential candidates have experienced unpleasant consequences from releasing their tax returns, The Associated Press reports.

With the candidates for the coming election being pressured by each other and other observers to release their own tax returns and reveal their personal finances, the source notes that the criticism and controversy arising from the documents tends to last for some time, likely leading to a certain reluctance among candidates.

Candidates' returns are typically examined for apparent inconsistencies with their statements on policy, both current and proposed. In a number of cases, the source notes, candidates have also suffered when their spouses did not reveal their tax returns, leading to accusations that something was being hidden.

With tax policy a major issue at the moment and generally expected to be one throughout the next presidential election, the debate may grow more detailed and complex than in the past. Some candidates, such as Teas Governor Rick Perry, have already released theirs. Mitt Romney, considered by many to be a strong contender, has stated he will do so in April.

Day traders and others may wish to examine the clues within candidates' tax returns to evaluate them. Those who have some experience in investment may be more sympathetic to the needs and difficulties of complying with day trading rules and other regulatory measures, as well as the financial situations of those who depend on investment income rather than wages.

New tax forms await traders this year

As day trading companies begin gathering up their tax records for the past year in preparation for tax filing season, new procedures await this year.

The rules are intended to conform to new reporting requirements for brokers, although they will still affect day traders all the same. In order to properly report capital gains and losses for 2011, taxpayers must now complete their usual Schedule D form, along with new form 8949, which is titled Sales and Other Dispositions of Capital Assets.

However, in the event of mark-to-market transactions, each of those transactions must be detailed on Form 4797 instead of the new form.

Regardless of gains or losses specified on those forms, they are excluded when determining self-employment earnings for the year. Interest income and other expenses are reported on Schedule C.

In addition, other varying requirements also surround the reporting of any stocks acquired and retained for investment purposes.

Also this year, the traditional April 15 filing deadline has been extended to April 17. Filing would have generally fallen on Monday the 16th because the 15th is a Sunday. However, April 16 is a Washington, D.C. holiday - Emancipation Day - so filing is postponed an additional day.

With tax reporting requirements changing on a regular basis, day traders may benefit from working with a specialized accounting firm to deal with tax reporting. That step can allow traders to focus more on running their companies instead of dealing with piles of paperwork.

Tax changes affecting self-employed

Self-employed individuals should be prepared for several factors which may affect their tax filings during the 2011 tax season, according to the National Association for the Self-Employed (NASE).

The health insurance deduction for payments self-employed individuals make toward premiums for themselves or their family will be deductible in 2011, but will not reduce the calculated net earnings from self-employment as it did last year. According to NASE, this effectively acts as a 13.3 percent tax increase on the self-employed, because the net earnings are used to determine the Self Employment Tax.

Another change is the alteration of mileage rates for business owners who use a personal vehicle for business, medical or charitable transportation. The deduction rate was set to 51 cents per mile for 2011, but rises to 55.5 cents per mile for 2012.

As useful as such accounting tips may be, day traders may find it better to hire the services of a professional accounting firm to ensure their income and expenses are structured ideally. Taking maximum advantage of tax breaks and ensuring compliance can save money and time in the long run. Even if it becomes too late to do so for 2011 taxes, such services could be useful in the years to come.

This is especially true in light of NASE's observation that tax policy is a major political issue at the moment, with tax code alterations likely after, and possibly leading up to, the next presidential election. With the potential for rapid changes, securing professional accounting help may be the way to ensure compliance.

National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on IRS Funding and Taxpayer Rights

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, identifying the combination of the IRS’s expanding workload and declining resources as the most serious problem facing taxpayers. The result, the report says, is inadequate taxpayer service, erosion of taxpayer rights, and reduced tax compliance. The Advocate expressed her continuing concern that the IRS’s expanding use of automated processes to adjust tax liabilities is causing harm to taxpayers and recommended that Congress enact a comprehensive Taxpayer Bill of Rights.

THE IRS IS NOT ADEQUATELY FUNDED TO SERVE TAXPAYERS AND COLLECT TAXES

“The overriding challenge facing the IRS is that its workload has grown significantly in recent years, while its funding is being cut,” Olson said in releasing the report. “This is causing the IRS to resort to shortcuts that undermine fundamental taxpayer rights and harm taxpayers – and at the same time reduces the IRS’s ability to deliver on its core mission of raising revenue.”

Workload Overload. The sharp increase in the IRS’s workload is due to several factors, including the increasing complexity of the tax code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer population, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft, and the implementation of new third-party information reporting requirements.

There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims.

In addition, the report says, an expansion of refundable credits in recent years – including the First-Time Homebuyer Credit, the Making Work Pay credit, the American Opportunity tax credit, the health care premium tax credit, the adoption tax credit, and the Additional Child Tax Credit – has helped spawn an increase in illegal activity that seeks to profit off the tax system by filing bogus refund claims and often by stealing and using another taxpayer’s identity. While refundable credits provide valuable benefits to the target populations, they can be tempting targets for fraud because taxpayers eligible for them may claim refunds that exceed the amount of taxes they have paid. In 2011, the IRS’s Electronic Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase of 72 percent over 2010. Meanwhile, the IRS’s centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20 percent over 2010.

“Each year,” Olson wrote, “the IRS’s task in identifying these claims has become more challenging, with the inevitable result that some fraudulent claims are never identified and many legitimate claims are mistakenly held up, imposing a significant burden on honest taxpayers.”

“Shortcuts” Shortcut Taxpayer Rights: “Non-Audits,” IRS Math Errors, Lack of Notice, and Delays. To keep up with its rising workload, the IRS is increasingly relying on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherently imperfect, so the taxpayer’s return position often turns out to be correct. Moreover, taxpayers subject to audits are entitled to established taxpayer rights protections. But an increasing number of IRS adjustments are not classified as audits, so these protections often do not apply. Throughout the report, Olson describes IRS practices that “harm taxpayers by acting on assumptions of noncompliance arrived at by automated processes that do not solicit, encourage, or allow taxpayer response.”

Non-Audits and Automated Examinations. In 2010 alone, the IRS made about 15 million contacts with individual taxpayers to adjust their tax liabilities, but it treated only about ten percent (1.6 million) as audits. Thus, in the majority of cases, the IRS’s actions did not give rise to traditional audit protections, including the right to avoid repetitive and unnecessary examinations and the right to seek review of the IRS’s determination in the U.S. Tax Court before tax is assessed. Even where the IRS designated reviews of individual taxpayer returns as “audits,” it conducted about 78 percent of them by correspondence in a highly automated campus setting where no single IRS employee was responsible for the audit, making it more difficult for the taxpayer to communicate with the IRS about his or her case.

Some “Math Errors” May Be Corrected Using IRS Data. In 2010, the IRS issued notices correcting 10.6 million “math errors,” up from four million in 2005. These notices are tax assessments that presumably result from mathematical or clerical errors. Unless a taxpayer disputes the IRS assessment within a limited timeframe, it may not be appealed to the Tax Court. The report notes that math error authority is increasingly used where there is disagreement over a facts-and-circumstances issue. The report says that math error notices are often vague and do not state the perceived error with specificity, making it difficult, if not impossible, for affected taxpayers to determine what has changed on their returns and whether to accept or contest the adjustments. Taxpayers whose returns are correct sometimes do not respond because they do not know what is being asked of them. IRS math error notices also are sometimes inaccurate. When the IRS used math error authority in 2010 to disallow exemptions for dependent children on about 300,000 returns, it ultimately had to reverse about 55 percent of the adjustments. Of the 184,000 corrected math errors, a Taxpayer Advocate Service (TAS) sample showed the IRS had internal data to immediately resolve 56 percent of these reversals, and thus could have avoided denying eligible taxpayers their dependency exemptions and related tax credits and refunds.

The IRS Determines Some Taxpayers Have Committed Fraud Without Notifying Them and Giving Them an Opportunity to Respond. Under a program designed to detect returns relating to a scheme known as “Operation Mass Mail,” the IRS declined to process about 900,000 returns in 2011. In most situations where the IRS identifies questionable claims, it sends notices to the affected taxpayers to give them an opportunity to contest the IRS’s position. In these cases, however, the IRS simply “auto-voided” the returns, providing the individuals who had submitted them with no notice of the IRS action. Yet in tens of thousands of these cases, the IRS later marked the accounts with a code that indicates it had erred and the return had been submitted by a legitimate taxpayer. The report expresses concern that this “auto-void” procedure violates fundamental notions of due process, as individuals whom the government suspects of fraud – a serious charge – normally are given notice and an opportunity to respond before the government takes adverse action.

Substantial Delays to Receive Large Refunds. Among taxpayers who sought assistance from TAS after their refunds were withheld on a suspicion of fraud, 75 percent received relief. These taxpayers had to wait an average of nearly six months overall to receive their refunds. The average refund amount was $5,600, a significant sum for most households. Thus, these delays can create significant financial hardships.
“In light of the IRS’s indiscriminate use of automation to avoid personal contact with taxpayers and the sheer volume of work to be accomplished,” Olson wrote, “the IRS is increasingly in danger of judging taxpayers as noncompliant when in fact they are not.”

Taxpayer Service Concerns: Delays and Non-Responses to Taxpayer Inquiries. Two key indicators of taxpayer service are the IRS’s ability to answer taxpayer telephone calls and the IRS’s ability to respond to taxpayer correspondence. From FY 2004 to FY 2011, the percentage of calls that the IRS answered from taxpayers seeking to speak with a telephone assistor dropped from 87 percent to 70 percent.

Over the same period, the IRS’s ability to timely process taxpayer correspondence also declined. Comparing the final week of FY 2004 with the final week of FY 2011, the backlog of correspondence in the tax adjustments inventory jumped by 158 percent (from 357,151 to 920,768), and the percentage of correspondence in this inventory classified as “over-age” (i.e., 45 days or older, with issues that have not been resolved) increased by 309 percent (from 11.5 percent to 47.0 percent of correspondence).

“The decline in these key measures is deeply disturbing,” the report says. “Telephone calls and correspondence are the two main ways taxpayers communicate with the IRS. Few government agencies or businesses would be satisfied if their customer service departments were unable to answer three out of every ten calls, nor would they be content when nearly half of all correspondence takes more than 6½ weeks to answer.”

Increased Diversity of the Taxpayer Population Presents Challenges. When the federal individual income tax was enacted in 1913, it applied to high-income taxpayers. The individual taxpayer population in 1913 was estimated at 358,000, grew to 47.1 million in 1944, and stands at 141.2 million today. The taxpayer population has become more diverse over time due to demographic developments as well as expansions in the scope of the tax law. With one tax return filed for about every two people in the United States each year, demographic trends – including ethnicity, economics, gender, age, and geography – are having an impact on both taxpayer service needs and IRS compliance initiatives.

Revenue Consequences of IRS Underfunding. The report says inadequate funding for the IRS contributes to many of these problems and means the IRS cannot adequately pursue unpaid tax liabilities. The report points out that the IRS functions as the “accounts receivable” department of the federal government, as it collects more than 90 percent of all federal revenue and therefore provides the funds that make almost all other federal spending possible. On a budget of $12.1 billion, the IRS collected $2.42 trillion in FY 2011. In other words, for every $1 that Congress appropriated for the IRS, the IRS collected about $200 in return. However, current federal budgeting rules do not take into account that a dollar appropriated for the IRS typically generates substantially more than a dollar in additional tax collections, leaving the agency substantially underfunded to do its job and limiting its ability to close the tax gap and thereby help reduce the federal budget deficit.

The report points out that the size of the tax gap raises important equity concerns, because compliant taxpayers end up carrying a disproportionate share of the tax burden. For 2001, the most recent year for which a complete tax gap estimate existed when the report was written, the IRS estimated it was unable to collect $290 billion in taxes. Since there were then 108 million households in the United States, the average household paid a “noncompliance surtax” of almost $2,700 to enable the federal government to raise the same revenue it would have collected if all taxpayers had reported their income and paid their taxes in full. “That is not a burden we should expect our nation’s taxpayers to bear lightly,” the report says. [Last week, the IRS released updated tax gap estimates. For 2006, the IRS estimated it was unable to collect $385 billion in taxes when there were 114 million households, producing an updated “noncompliance surtax” of nearly $3,400 per household.]

National Taxpayer Advocate Recommendation. In light of the IRS’s unique role as the federal revenue collector, the National Taxpayer Advocate recommends that Congress develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.

TAXPAYER BILL OF RIGHTS

The report urges Congress to codify a Taxpayer Bill of Rights that would clearly list the major rights and responsibilities of taxpayers. “The U.S. tax system is based on a social contract between the government and its taxpayers,” Olson wrote. “Taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so.”

Most Taxpayers Don’t Know Their Rights. Over the past two decades, Congress has enacted three significant taxpayer rights’ bills, but the number of bills and the lack of publicity have muddled the message. The report describes a recent taxpayer survey in which 55 percent of respondents said they did not believe they had rights before the IRS and 61 percent did not know what their rights are.

“I believe taxpayers and tax administration will benefit from an explicit statement of what taxpayers have a right to expect from their government and what the government has a right to expect from its taxpayers,” Olson said.

10 Taxpayer Rights. The report recommends that Congress organize taxpayer rights under the following ten broad principles: (1) right to be informed; (2) right to be assisted; (3) right to be heard; (4) right to pay no more than the correct amount of tax; (5) right of appeal; (6) right to certainty; (7) right to privacy; (8) right to confidentiality; (9) right to representation; and (10) right to a fair and just tax system.

5 Taxpayer Responsibilities. To help taxpayers understand what the law requires of them, the report further recommends that Congress organize taxpayer responsibilities under the following five principles: (1) obligation to be honest; (2) obligation to be cooperative; (3) obligation to provide accurate information and documents on time; (4) obligation to keep records; and (5) obligation to pay taxes on time.

The report summarizes recommendations the Advocate has made in past reports to create additional taxpayer rights and recommends that those rights be incorporated into Taxpayer Bill of Rights legislation. “It has been 13½ years since we have had major taxpayer rights legislation,” Olson wrote. “Our laws have not kept pace with our notions of procedural fairness in 21st century tax administration, particularly given our tax system’s expanded and diverse taxpayer base and duties.”

OTHER KEY ISSUES ADDRESSED

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 22 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 13 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

Among other things, the report contains:

• A comprehensive overview of the nearly 100-year history of the U.S. tax system, which details how the income tax expanded from a “class tax” to a “mass tax,” how the IRS has changed from focusing on personal, local service to automated, centralized processes, and how the mission of the IRS has expanded from pure tax collector to disburser of federal benefits as well.
• An analysis of the IRS’s current examination strategy that discusses the IRS’s increasing use of automated procedures not technically classified as audits to adjust tax liabilities. The report argues that these procedures deprive taxpayers of traditional audit rights and make it difficult for taxpayers to discuss their cases directly with an IRS examiner.
• A research study on the impact of tax liens on taxpayer compliance behavior. The results suggest the overuse of liens may undermine tax collection by reducing payment compliance, reducing filing compliance, and reducing the amount of income earned (and thus the amount of tax due) by taxpayers against whom liens have been filed.
• A recommendation that Congress modify the circumstances under which the personal information of decedents, including their names, Social Security numbers, and dates of birth, are made available to the public shortly after their deaths. Such information is used by identity thieves to commit tax fraud.
• A “Most Serious Problem” discussing the IRS’s policy change in applying key terms of the IRS’s 2009 Offshore Voluntary Disclosure Program more than a year after the application deadline had passed. The report states that the policy change contravenes the IRS’s written pledge that “under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”
• An update on the IRS’s progress in developing and implementing a system to register and test federal tax return preparers.
• A recommendation that Congress authorize the IRS to issue refunds in hardship cases during a government shutdown. When a government shutdown seemed imminent during the 2011 filing season, the IRS and the Treasury Department concluded that the IRS would have been legally barred from paying certain refunds or taking other actions that would benefit or minimize harm to taxpayers during the shutdown.

* * * * *

About the Taxpayer Advocate Service

The Taxpayer Advocate Service is an independent organization within the IRS. TAS employees help taxpayers who are experiencing economic difficulties, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving problems with the IRS; and taxpayers who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, you can reach TAS by calling 1-877–777–4778 (toll-free). For more information, go to www.TaxpayerAdvocate.irs.gov or www.irs.gov/advocate.

Related Items:
• Executive Summary: 2011 Annual Report to Congress
• Complete Report: 2011 Annual Report to Congress

Do I Need to File a Tax Return This Year?

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, visit www.irs.gov.

With the beginning of 2012 nearly here, day traders and other investors may be focusing on year-end opportunities to lower their taxes, such as accepting limited losses in a portfolio, according to Forbes contributor Gregg Fisher.

While these issues are relevant at the end of the year, according to Fisher, the tendency to forget about tax planning for most of the year is problematic and can lead to a last-minute rush that results in poorer outcomes than a more comprehensive, long-term approach.

The main point is that most such strategies can be more effective if they are integrated into a trader's strategy over time, whereas attempting to adjust investments, income and other financial considerations at the end of the year may lead to difficulties, rushing and costly mistakes. Specific accounting tips and assistance may be available from a professional firm that can help day traders determine the best way to prepare for tax time, whether that means making end-of-year adjustments or implementing a plan over the course of an entire fiscal year.

These considerations may become more important in the future if capital gains tax rates increase or the tax system is otherwise reformed in a way that increases the burdens on day traders, which is possible. If no legislative action is taken, the capital gains tax rate will increase substantially when its current cut expires.

Avoiding common mistakes with business deductions

When day trading for a living, one common issue is what business expenses traders can actually write off as they relate to their business.

While the current tax code allows business owners to write off any "ordinary and necessary" business costs, FOXBusiness' Bonnie Lee says that the incorrect interpretation of that rule has caused many business owners a great deal of trouble through the years.

One of the first mistakes some people have made is trying to deduct personal expenses under the guise of needing to appear professional for business reasons. Lee says that in one recent case, a news anchor attempted to write off her clothing and makeup purchases. While they may have been used at work, they could also be used for general purposes, making them non-deductible.

In short, Lee says the only way personal expenses can be deducted is if they are used solely for work purposes, and could not be used for other settings, such as a uniform with a company logo - which traders won't have.

For traders, many costs may be shared for both business and personal purposes, such as internet or mobile phone costs. In these situations, she says business owners should keep firm records of their accounts and only deduct use proportionally.

By consulting with an accounting professional to go over their tax records, traders may be able to avoid the time and energy involved in a full IRS audit, and prevent the penalties that may come along with one.

Payroll tax battle at a standstill

Congressional leaders have left Washington, D.C. without reaching a compromise on the payroll tax extension, and it appears that the rate will jump back up 2 percentage points on January 1.

Lawmakers in the Senate passed a 60-day extension to the tax reduction in order to buy more time to work out a compromise, but others in the House refused to sign that bill and instead began packing up for the scheduled break.

Some lawmakers have called for the president to call them back to the nation's capital in order to work on the bill. The president himself has admonished lawmakers for playing what one called 'high-stakes poker.'"

While the payroll tax itself will have little impact on those running their own day trading companies, continued negotiation over the extension of the tax cut could have a significant impact.

In order to pay for the bill, lawmakers have proposed a number of different measures, such as raising the capital gains tax rate or imposing a tax on financial transactions, both of which would have significant negative repercussions. Other proposals would levy an additional tax on those making more than $1 million.

Several economists have said that the failure to extend the tax cut will have significant negative implications for the economy as a whole, which means lawmakers may eventually come to some sort of deal. The increase in payroll taxes from 4.2 to 6.2 percent would cut the biweekly paycheck of the average American by about $40, the Los Angeles Times reports.

Six Year-End Tips to Reduce 2011 Taxes

The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.

Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don't Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.

For more year-end tax information and to access all IRS forms and publications, visit the IRS website at http://www.irs.gov.

The IRS continues to feast on S firms that pay very low salaries to owners

In many cases, S firm owners take low salaries to they can receive the bulk of the corporation's profits as dividends, which are not subject to payroll taxes. IRS and the courts balk at this practice. In a recent case, a CPA took a $24,000 salary in a year when his share of the S firm's profits was around $200,000. A district court agreed with the IRS that his pay was unreasonably low and ruled that the dividends are properly reclassified as salary and are hit with payroll taxes.

(Watson, D.C., Iowa)

IRS Announces 2012 Standard Mileage Rates

WASHINGTON — The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Protect Your Personal Information: The IRS Does Not Initiate Taxpayer Communications through Email

Phishing is a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information. All unsolicited email claiming to be from either the IRS or any other IRS-related components such as the Office of Professional Responsibility or EFTPS, should be reported. Forward the email as-is, to IRS at phishing@irs.gov. Search “phishing” on IRS.gov for additional information.

Little time remains to save on 2011 taxes, MainStreet notes, but there are still some options and accounting tips savvy individuals can explore and use.

For example, because the Internal Revenue Service allows medical expenses above 7.5 percent of an individual's adjusted gross income to be deducted, it may be wise to take care of any medical issues before the end of the year. Refilling prescriptions, attending check-ups, scheduling any doctor visits and exams and other steps can add up. While it may not be worth it for a taxpayer too far below the 7.5 percent threshold to qualify, others could save significantly by paying outstanding medical bills, buying any needed medical supplies and otherwise logging expenses this December.

The source notes individuals can also track their gas mileage when driving to and from medical appointments. It may also be possible to make a monthly insurance payment early, or time the renewal of long-term care coverage.

For those who are planning to deduct their state and local sales taxes on federal returns, rather than income taxes, the source indicates, now maybe a good time to buy a new car. While this might be wasteful for some, those who need one now or will soon can benefit significantly from the deduction. Similarly, it may be wise to purchase any other large and expensive items before the end of this year and the beginning of 2012.

Paying mortgage interest early can be another deductible expense, as long as the payment is received on time. Similarly, charitable donations can be written off, as long as they are properly documented.

Taxpayers should examine overlooked opportunities

Many taxpayers may overpay every year by missing significant deductions and credits, according to Kiplinger, and would benefit from following a few accounting tips.

One of these is the state and local sales tax deduction. When filing federal returns, citizens must choose between taking a deduction for state and local sales taxes or state and local income taxes. For those in states which have no income tax, the choice is made for them, and all that is necessary is to remember to claim the sales tax deduction.

Taxpayers with a choice will generally benefit more from the income tax deduction, according to the source, but may experience an exception if they made a major vehicle purchase or bought homebuilding materials. Such items are expensive, and may push the sales tax deduction higher than the one for income taxes.

Investors and day traders who make their money in the form of capital gains might also benefit significantly more from taking the sales tax deduction, since they may have low incomes in tax policy terms even if the amount they make is comparable to or greater than that typical of salaried workers.

The self-employed who qualify for Medicare have a unique opportunity to deduct the cost of premiums for some Medicare coverage as well as supplemental policies, even if they are not itemizing deductions.

Investors who have their mutual fund dividends automatically invested in further shares often forget to account for their increased tax basis in the fund, according to the source, resulting in greater effective taxes on capital gains when they redeem shares.

Estimated Payments for the Self Employed

For most employees, employers deduct Social Security and Medicare taxes from each paycheck to support retirement income and Medicare coverage. However, self-employed taxpayers pay for coverage through self employment tax. Generally, if you carry on a trade or business as a sole proprietor, an independent contractor, a member of a partnership that carries on a trade or business, or are otherwise in business for yourself, then you are considered self-employed.

Many self-employed people will have to make quarterly estimated tax payments. It’s important to remember that your self-employment tax will increase the total federal tax you owe. Be sure to take this into account when determining the amount of estimated tax to pay each quarter.

Publication 1518 (Rev. 11-2011) Department of the Treasury Internal Revenue Service

IRS audit terminology

Day traders, the self-employed, small business owners and others in a similar position may be more likely to be called for an Internal Revenue Service audit, because business deductions and expenses can be more difficult to quantify.

For those who work at home, the IRS may be concerned with the possibility that expenses attributed to business are actually personal. As a result, it is wise to understand some of the basics of an IRS audit.

According to one expert, basic audit terminology is a good place to start. Enrolled agent Bonnie Lee explained several of the most important terms for FOX Business. For example, "lavish" or "extravagant" are terms frequently applied to excessive meal, entertainment or travel deductions. Whether an expense is extravagant depends on the context.

If spending appears to have been essentially a vacation, it is likely to be judged inappropriate by an auditor. If it seems to have been important to closing a business deal with a major impact on the company, then it may be accepted. The context of the audited individual's or company's available funds and similar expenses may also come into account.

Opposing terms are "ordinary" and "necessary". These denote activities or items which are commonly required due to the nature of the business. Such expenses vary between industries, so restaurants, day trading firms and manufacturers might have very different lists of ordinary and necessary expenses.

These terms may only scratch the surface, but knowing them can help any individual understand that the IRS is looking for during the process. Just because an expense is questioned does not keep it from being recognized as legitimate when examined more closely.