Hot Diggity! Tax Credits for Summer Camp!

Parents Can Get Credit for Sending Kids to Day Camp

Here’s a tax break for the busy summer. Many working parents must arrange for care of their children under 13 years of age during the school vacation period. A popular solution — with a tax benefit — is a day camp program.

The cost of day camp can count as an expense towards the child and dependent care credit. Expenses for overnight camps do not qualify. If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.
The credit is generally 20% to 35% of non-reimbursed expenses; up to $3000 in expenses for one child and up to $6000 for two or more children. The actual credit is also based on your income. The 35% rate applies if your income is under $15,000; the 20% rate, if your income is over $43,000.

For more information, check out IRS Publication 503, Child and Dependent Care Expenses available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Working Abroad, Paying Uncle Sam

Question:
I'm an American living in Poland (beautiful country!) where I work for a Polish import-export company. Do I have to pay income taxes on my earnings?

Answer:
I'm sorry to give you such an indefinite answer, but my response has to be, "It depends." The rule is that a U.S. citizen or permanent resident is generally subject to U.S. tax on total worldwide income. However, if you are a citizen or resident alien who lives and works abroad, you might qualify to exclude all or part of your foreign earned income. If you are a United States citizen with a tax home in a foreign country and you meet the bona fide residence test or physical presence test, you may exclude up to the maximum limit allowed for the taxable year. Resident aliens of the United States with a tax home in a foreign country may be eligible for the exclusion if they meet the physical presence test.

The physical presence test can be used by any United States citizen or resident alien. You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12–month period can begin with any day of any calendar month.
If you violate U.S. restrictions that prohibit travel to certain countries, you will not be able to count your presence or residence in those countries in meeting the bona fide residence test or the physical presence test.

Confused? Be sure to consult a professional tax consultant.

Who's Responsible for Payroll Taxes Now?

Question: I was the secretary of a masonry company that defaulted on its payroll taxes. First, they didn't file, and when they finally got around to filing, they took forever in paying the payroll taxes. Last year, the company (a corporation) dissolved. Here's the problem: I just got a letter from the IRS saying that I'm responsible for $50,000 worth of payroll taxes through a Civil Trust Fund Penalty. How am I responsible?

Answer:
I'm sorry to hear about your situation. You were a secretary at the office, and I suspect that you had check-writing powers in your office. Even having check-writing authority might be enough to make you liable for the unpaid employment taxes.

The thing that makes a Civil Trust Fund Penalty so onerous is that it can be assessed not just against a company that fails to pay employment taxes, but also against individuals at the company. Anyone at the company who collects or pays withheld income and employment taxes can be liable if that person willfully fails to collect or pay them. That means a company officer, an employee with withholding authority, even individuals with authority to disburse funds.

In other words, if you have check signing authority, even if you were just a secretary, you can be as liable as the president of the company. If you don't pay or appeal in a timely fashion, the IRS can and will impose liens and levies against you in an effort to collect.

The Civil Trust Fund Penalty

Every company with employees is required to withhold a portion of the employee's paycheck and to forward it to the IRS. The withheld portion is called employment or trust fund tax -- it's money withheld for income tax, social secuirty, and Medicare taxes which is held "in trust" by the employer until it's paid to the Treasury.

What happens when the company fails to withhold, account for or deposit the employment taxes? The IRS introduces a nightmare called the Civil Trust Fund Penalty. Also known as the 100 percent penalty or trust fund recovery penalty, the Civil Trust Fund Penalty is a mechanism which allows the IRS to impose penalties on the delayed payment.

What makes the Civil Trust Fund Penalty so onerous is that it can be assessed not only to the company, but to individual officers and employees of the company responsible for handling employment taxes. If you have employment tax issues, consult a professional as soon as possible.

Bankruptcy and the Collections Statute of Limitations

Question:
I have a federal tax from 2004 ($15,000). In 2005, I declared Chapter 7 bankruptcy. Unfortunately, my federal tax debt wasn't discharged, and after I spent a year in bankruptcy, I came out and the IRS was first to ask for their money. How long does the IRS have to collect on my tax debt?

Answer:
It's a great question. As I indicated in another post, bankruptcy might seem like an attractive option for taxpayers, but it rarely solves the problem. Recent bankruptcy laws have made discharge of tax debt near impossible to achieve. What I've seen happen again and again is this: A taxpayer has a tax debt (along with other debt), and he asks an attorney for advice. The attorney means well and tells the taxpayer that his tax debt can be discharged. The taxpayer files Chapter 7 or Chapter 13 bankruptcy and learns -- too late -- that the tax debt doesn't qualify for discharge.

What happens then? The taxpayer comes out of bankruptcy, and the IRS is standing there with an empty plate, asking for money owed.

Your question goes to how long the IRS has to collect on that tax debt. The Internal Revenue Code is clear on this point: The IRS has 10 years from date of assessment to collect an outstanding tax debt. At the end of the 10 year period, the debt simply goes away. The IRS can no longer it.

Unfortunately, bankruptcy has an unfortunate effect on the collection statute of limitations. When a taxpayer files bankruptcy, the IRS just adds the time spent in bankruptcy PLUS SIX MONTHS to the collection statute of limitations. In other words, if your tax debt isn't discharged in bankruptcy, you've just given the IRS at least an extra six months to collect from you.

Bankruptcy Isn't What It's Cracked Up to Be

Is it worth declaring bankruptcy to avoid a burdensome tax debt? For better or worse, the answer is: Probably not. In almost all cases, tax debt survives a Chapter 7 or Chapter 13 bankruptcy.

First a word about taxes and bankruptcy in general: Some tax debt can never be discharged through bankruptcy. Tax debt arising from unfiled tax returns cannot be discharged. So, for example, if you fail to file your 2005 return, and the IRS files a substitute for return on your behalf, any assessed taxes from 2005 cannot be discharged. The only way to avoid this situation is to file your return (even if you are filing over the SFR).

So is there any tax debt that can be discharged by bankruptcy? The general answer is yes. Chapter 7 provides for full discharge of allowable debt, and Chapter 13 provides a payment plan to repay some debts with the rest being discharged. That being said, tax debt will not be discharged unless the tax payer can demonstrate that they have met certain requirements. The requirements are these:

• The tax debt must be related to a tax return that was due at least three years before the tax payer files bankruptcy
• The tax debt must be related to a tax return that was filed at least two years before the tax payer files for bankruptcy
• The IRS must assess the tax at least 240 days before the tax payer files for bankruptcy
• The tax return cannot be returned for fraud
• The tax pay cannot be guilty of any intentional act of evading the tax laws

What are the effects of filing bankruptcy? Be warned -- it's been my experience that most people who file bankruptcy either cannot meet the requirements listed above (and so do not have their tax debts discharged) or just fail to complete the bankruptcy process . Instead of having their debts discharged, their bankruptcy is merely dismissed, and the tax payer is back to Square One.

It's true that filing for bankruptcy puts an automatic stay on IRS collection efforts against you. During bankruptcy, the IRS is prohibited from imposing a lien or levy. That's the good news. The bad news is that bankruptcy extends the Collections statute of limitations. That means if some of your tax debt survives bankruptcy, the IRS now has additional time to collect it.

If you're considering bankruptcy as a means to avoid tax debt, consult a professional before you do anything.

I Didn't File, but I Got Assessed Anyway -- Why?

From time to time even the best-intentioned tax payer can neglect to file an income tax return. When that happens, the IRS will often file a return on that tax payer's behalf -- it's called a Substitute for Return (SFR). And it's no favor.

Let's look at an example. Suppose Joe Smith failed to file his 2005 tax return. What happens? Typically, the IRS will file a return on Joe's behalf within 2.5 years (courtesy the Automated Substitute for Return System). The IRS calculates Joe's taxes by assessing his gross income for 2005, without regard to any specific deductions or exemptions for which he might qualify. The result is that Joe is assessed a tax much higher than he might have had if he prepared and filed the tax himself. Joe won't know about this until he receives a demand letter from the IRS.

The best solution, of course, is for a tax payer to prepare and file tax returns in a timely manner. But even where the IRS has filed a SFR, it's in the tax payer's best interest to file. By papering the SFR, a tax payer can take full advantage of the deductions and exemptions to which he is entitled, even if he's filing his return long after the return was actually due.

If you've received an assessment for a year you haven't filed, there's still time to make things right. Consult a tax professional and paper over the SFR.

ISPY UPDATE: IRS Raises Mileage Allowance

Citing high fuel prices, the IRS is raising the automobile mileage rate that businesses and others can claim. The rate will increase from 50.5 cents a mile to 58.5 cents a mile.

But is it enough?

What's This Notice of Federal Tax Lien I just got in the mail?

If you're behind in paying your taxes, you may soon be receiving a Notice of Federal Tax Lien. The Federal Tax Lien is just one of many collection tools in the IRS bag of tricks, but it remains one of the most devastating.

Unlike a levy, a lien doesn't give the IRS the right to take title to a particular property you might own (for example, a house or car). Instead, a lien is like a floating YOU OWE US note the IRS sends to all of your creditors and the major credit reporting agencies. Try to sell assets of any value, and the IRS is first in line to take the money you would otherwise receive. The end result? Your tax debt becomes a matter of public record and your credit is harmed. Typically, the IRS will not release a lien until 30 days after the tax debt is paid in full.

In most cases, the IRS will send a notice of a federal tax lien before perfecting their interest against your property. Usually the IRS will send a notice of a federal tax lien after they have issued a demand letter for payment. If the letter is ignored or you fail to make adequate payment arrangements, the IRS can issue a notice of federal tax lien letter, which advises you that a lien has been imposed against you. But take note -- even if you don't get the notice in the mail, the IRS may already claim a lien against you. The so-called "silent lien" lets the IRS make a claim against any individual who owes them without notice.

If you receive a Notice of Federal Tax Lien, you need to take action soon. Consult with a professional to determine what your next step should be.

Penalty Abatement -- Not So Easy

Along with death and taxes, nothing is more certain in this world than the penalties you will pay the IRS if you fail to file your tax returns or fail to pay an assessed tax. Failing to file a return and pay the amount owed can, given time, spiral to 45 percent of the tax owed. Clearly, failing to file and pay can have severe consequences. The IRS expects you to file and pay on time.

But is there any relief if you fail to file or can't pay at the time tax is assessed?

The IRS does provide for penalty abatement, but be forewarned. Contrary to popular opinion, the IRS won't remove failure to file or failure to pay penalties out of professional courtesy. If you want to have penalties removed, be prepared to make substantial arguments.

The IRS will waive penalties only if the tax payer can make substantive arguments based on reasonable cause. "I forgot," "I don't have the money to pay," "I had to send my kid to college" are all common excuses, but none of them meet the reasonable cause basis of penalty abatement. More acceptable are claims of illness or deaths in the close family, major accounting errors in spite of all due diligence, and bad advice from a tax professional.

Even if you think you qualify for penalty abatement, be prepared to document your arguments. Without documentation, the IRS is likely to disallow your penalty abatement (forcing you to appeal). And be prepared for a long fight. Current IRS statistics showing a growing trend to deny abatement requests. The use of a tax professional is definitely advised.

Don't Gamble with the IRS

Trips to Las Vegas and Atlantic City are lots of fun, but woe the man who wins and ignores the tax implications.

First, the bald facts. The Internal Revenue Code requires all U.S. citizens to report their gambling income on their tax returns, regardless of location. In other words, it doesn't matter if you beat the house in Atlantic City, NJ, Reno, NV, or Monte Carlo, Monaco. (Compare with other countries like the United Kingdom, where there is no tax on gambling income). Furthermore, most tax payers are not allowed to "net" their gambling income. That is, they cannot combine their gains and losses for the year and then report only the total.

Instead, a tax payer has to add the winnings for each gambling session and report that total as income. A tax payer can report the winnings on Line 21 (Other Earnings) of the Form 1040.

Gambling losses can be deducted, but only to the extent of winnings reported in the year.

There are two key steps a tax payer can take from running afoul the IRS when gambling:

1) As a general rule, a tax payer should withhold 25 percent of winnings.
2) The tax payer should keep a ledger of winnings and losses for each gambling session.

If you have gambling winnings or losses, I urge you to consult a professional when preparing your taxes.

Wesley Snipes, Actor, Millionaire, Cautionary Tale

There are people in this country (and you probably live with a few of them) who think everything in Hollywood is good and golden. These are the folks who can watch the descent of Britney Spears and Lindsay Lohan from cute pop stars to wrecked, plastic tabloid fodder and think -- Why not me?

For those people, there's nothing that can be done except making them comfortable and keeping them out of direct sunlight.

The rest of us, though, should take a good look at Hollywood and take a lesson from actor Wesley Snipes. Snipes, best known for the Blade vampire trilogy, was sentenced to three years in prison for willfully failing to file his income tax returns this past April. He was convicted in February on three misdemeanor counts of failing to file by a federal court in Florida. Snipes was acquitted of the more serious charges of felony conspiracy and tax fraud. (You can read more about the Snipes case here)

There's a lesson here, and here it is: It can happen to you.

Don't misunderstand. There are plenty of people in the country who have not filed income tax returns and who walk free today. Undoubtedly the IRS targeted Mr. Snipes and his cohorts (including his accountant and a tax protester organization to which Mr. Snipes belonged) because Snipes is a popular and bankable Hollywood star. Wealth and fame can make you a fat target. But the IRS does nothing without calculation, and the Snipes trial was meant to send a message. And the message has been heard: No one is immune from criminal prosecution if they don't file their tax returns.

Even before the Snipes case, the IRS was increasing efforts to enforce tax return compliance through penalties and other tactics. In recent years, the IRS has expanded the statute of limitations to pursue unfiled tax returns to six years from the date the return was due. The Service has also added a $25,000 penalty for each unfiled tax return (in addition to the threat of prison). The IRS has beefed up civil penalties as well. The Internal Revenue Code (the administrative laws governing the IRS's authority to collect taxes) lets the IRS impose a penalty of up to 25 percent of the amount owed for unfiled returns.

If you don't file, the IRS is likely to file on your behalf. This is no gift. While the IRS-created return (called a "Substitute for Return" or SFR) relieves you of your obligation to file, it does you no favors. The SFR only considers your income earned for a given year. It provides only one exemption and one deduction. In other words, an SFR does not take into consideration any of your actual expenses. It's a losing proposition for the tax payer.

The best defense against the criminal and civil penalties is to file your tax returns now. You might not have the paperwork, you might be afraid that filing will bring all the wrath of the IRS on you, or you might just hope the problem will go away. Put those issues aside and contact a tax professional who can help.

Take a lesson from Wesley Snipes.