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.

Proper record keeping important for small business tax time and in case of audits

Tax time can be stressful for those with day trading companies, and even more so if record-keeping isn't a strong suit. In order to properly file, and especially in the case of an Internal Revenue Service audit, creating, organizing and holding onto the right documents and financial data is key.

Should a business owner be faced with an audit - which is uncommon for the smallest of businesses, although certain triggers may bring more scrutiny from the IRS - a penalty may be assessed for neglecting to keep records. This doesn't mean comprehensive bookkeeping, but the failure to produce evidence of income and expenses can certainly result in a fine.

One of the most important steps, and one often overlooked, is keeping business and personal expenses separate. Even for day traders without a formal home office or equipment solely for business use, any deductions against items or services that could be considered personal as well should be documented. Simply marking the division between office and home use on an internet utility bill is an acceptable means of documentation.

No matter what means of record keeping are utilized, it's best to keep files organized. This will make tax time easier, and in the event of an audit, will speed up the process. Many IRS auditors are accountants, and will appreciate a well-maintained set of records rather than an out-of-order pile of dog-eared receipts.

As bill payment and money transferal become increasingly automated, losing track of copies of statements may become easier. Small business owners should either download and backup electronic receipts and statements or print a hard copy to physically file.

Data security important for small businesses using cloud computing

Many small businesses such as day trading companies are turning to cloud computing for easy and affordable data storage and applications. For traders, this means taking care to keep files secure, as networks, servers and web channels are prone to cyber attacks and failures than can result in money lost from data corruption or compliance penalties.

Choosing the right services is key to maintaining security. One of the simplest means of saving money through cloud computing is basic office Software-as-a-Service, such as Microsoft Live or Google Docs. These hosted program suites, which include word processing, spreadsheets, presentations and other types of file creation, can be significantly less expensive than hard drive-based software, especially for start-ups or business owners investing in new hardware.

When choosing a data storage provider, such as a backup system or a file-hosting site, it's smart to investigate security procedures. For top safety of sensitive files such as financial transactions, data should be encrypted, sent to a server with an up-to-date firewall and fully password protected - meaning the user is the only person with access to the files, including the service provider.

Traders, along with a large percentage of other small businesses and consumers, already use a number of cloud computing services. Web-based email, for example, is part of the cloud, as are many smartphone and tablet apps. Ensuring data safety with these Software-as-a-Service options can be realized with hardware security programs that can help keep malicious intent such as malware at bay.