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.