IRS E-File: A History

 

FS-2011-10, June 2011

Within 25 years, the mere trickle of 25,000 electronically filled individual tax returns has turned into a torrent of more than 100 million a year and led to a permanent change in the way Americans file their taxes.

And it started with one IRS employee having to manually turn on a modem every time tax returns were e-filed, a dedicated research and project office staff and an admittedly awkward use of the distinctive “Mission Impossible” theme.

The IRS e-file surpassed a landmark: 1 billion individual Form 1040 tax returns received and processed safely and securely. IRS Commissioner Doug Shulman has called IRS e-file one of the federal government’s most successful modernization programs.

IRS e-file has come a long way from the 25,000 returns submitted by five tax preparers in 1986.

In the 1980s, efficient tax collection was becoming more difficult because of the complex, time-consuming and error-prone process of converting paper returns and information documents into a form that could be processed by machine. Even the mere storage of paper tax and information returns was becoming costly as more and more space was needed for the burgeoning reams of required paper forms and documents.

Even as tax practitioners were starting to use computers to prepare clients taxes, the IRS still forced them to print and mail returns because of the processing system.
Enter IRS e-file. The initial idea sprang from the IRS Research Division, which ran tests to prove the technical feasibility of Electronic Filing System (EFS), a concept it believed would simply the processing method.

In 1986, a pilot program was launched to test the costs and benefits of EFS and to gauge acceptance by preparers and taxpayers. Only five tax preparers in three metropolitan areas – Cincinnati, Raleigh-Durham and Phoenix – agreed to participate. Then, the system could only process returns that were due refunds.

“The processing system at that time consisted of a Mitron and a Zilog, which most people have never heard of,” recalled retired IRS employee Leonard Holt, who served as a branch manager in the e-file project office. The tax preparer would call a designated number at the Cincinnati Service Center and an IRS employee would plug the phone into the Mitron, which Holt described as a modem with a tape drive.

When the transmission was finished, the IRS employee would transfer the tape to the Zilog, a super mini-computer, which would massage the data into files that the IRS’ Unisys System could process.

To send the acknowledgement, the IRS employee would have to telephone the tax preparer who would plug the phone into his own modem and reverse the transmission process.

Still, the “electronic” process seemed promising. Holt and former IRS employee Mike Jackman, discussing e-file one day after work, sketched the IRS e-file process onto a napkin along with the creation of an e-File Project Office and the equipment needed to move the concept from beyond the research stage.

Mercedes del Toro, also now retired, became a part of the e-file project office team because she had training in COBOL, a computer programming language. She developed the specifications for the Form 1065 for partnerships and Form 1041 for trusts which also were being e-filed along with the Form 1040.

“My first day on the job started by leafing through the many Internal Revenue Manual pages on my cluttered desk,” recalls del Toro. After lunch, she told her boss the job would take six months; her boss said she had one month. “Thank God for overtime, coffee, good health, sense of humor and a wonderful team.” It wasn’t pretty, but the job was done on time.

In 1987, 66 preparers from seven cities participated and filed 78,000 tax returns. That year, electronic Direct Deposit was added to put the refunds directly in the bank accounts.

By 1988, the IRS moved to an IBM Series I processing system, the 16-bit minicomputer, which finally eliminated the need for an IRS employee to plug the phone into a modem. And tax preparers were starting to become curious.

IRS National Account Manager Aaron Welch was in the IRS’ Baltimore District in 1988 and recalls when officials from headquarters had to explain to tax preparers what e-file was all about because few other IRS employees understood it.

“We had about 12,000 e-file returns in Baltimore District that first year. That included all of Maryland and Washington, D.C. The second year we had about 60,000, and everybody celebrated. This year, taxpayers in Maryland and D.C. e-filed over 2 million federal returns," Welch said.

Once e-file became operational almost the entire project office was conscripted into marketing the new product to tax preparers.

Laurie Barrett, who now works for IRS Portal Business Management, recalls traveling around Colorado trying to convince tax preparers to make the investment into modems and join electronic filing. A promotional video featured the distinctive theme from “Mission Impossible” and Greg Morris, who played electronic expert Barney Collier in the hit television show, was the video spokesman promoting e-file. In the beginning, the theme song brought laughs from the audience, recalled Barrett, who served as an IRS district e-file coordinator when the program started.

Eileen McCrady, former chief, systems development branch and later marketing branch chief, remembers: “Tax preparers were not buying any of it. Most people figured it was a plot to capture additional information for audits.” Actually, e-filed returns are so accurate that it decreases the chances of hearing from the IRS. In the early days, the number of participating tax preparers was so small that McCrady kept a list, ironically on paper, in her desk. Even at the IRS the use of computers was limited and McCrady often shared one computer with six colleagues.

In 1990, IRS e-file became operational nationwide and 4.2 million returns were filed electronically.

From the beginning, IRS e-file received a tremendous boost when two major tax preparation firms, H&R Block and Jackson-Hewitt, agreed to give it a try. More tax professionals became willing to give it a chance.

And, the e-file seminars eventually became the IRS Tax Forums which now annually draw more than 20,000 tax preparers who learn about the latest tax changes and other IRS activities as well as e-file.

IRS e-file has proven to be a win-win for all involved. Taxpayers get faster refunds, in as few as 10 days if they use direct deposit. Or, they get payment options to file now and pay later. An e-filed return is far more accurate. It has an error rate of 1 percent compared to 20 percent for a paper return.

The IRS currently is phasing in its Modernized e-File (MeF) system, the next generation of electronic filing. MeF means acknowledgements will be sent within minutes as opposed to 48 hours. If a return is rejected, a more detailed message will allow taxpayers to quickly correct errors and resend the return.

MeF uses a transactional based platform that allows individual returns to be transmitted to the IRS. Legacy e-file is based on batch processing that required many returns to be sent at once several times a day.

MeF and the Customer Account Data Engine (CADE), which will replace the IRS master file tapes, will provide the foundation for the future electronic transactions by taxpayers and by tax preparers, eventually providing real-time access to accounts and speeding refunds to a matter of a few days instead of a few weeks.

Now, e-file no longer is the exception; it’s the norm.

E-FILE HISTORICAL TIMELINE

1986: Initial filing season pilot with 5 tax preparers in 3 cities; 25,000 returns filed. The program could only accept simple returns that were due a refund.

1987: Pilot expanded to 7 cities; 78,000 returns filed. Direct Deposit was added as a benefit.

1988: Pilot expanded to 16 IRS districts; 583,000 returns filed. The Form 1065 (partnerships) and Form 1041 (trusts) are added to the e-file list.

1989: Pilot expands to 36 states; 1.1 million returns filed.

1990: E-File expands nationwide; 4.2 million returns filed.

1992: Telefile pilot debuts for 1040-EZ filers to e-file via telephone. The IRS begins to accept individual tax returns where tax is owed and checks can be mailed via paper voucher.

1998: Congress passes IRS RRA 98 containing a provision setting a goal of an 80 percent e-file rate for “all federal tax and information returns.”

1999: Electronic payments through credit cards or direct debit introduced; IRS pilots alternative programs to allow taxpayers to sign returns electronically instead of mailing a signature form.

2002: IRS allows taxpayers to sign e-file returns using a Personal Identification Number (PIN) which made the e-file process entirely paperless.

2003: Free File debuts; IRS partners with Free File Alliance, a consortium of tax software companies, to make free tax preparation software and free e-file available to most individual tax payers. In a major step for businesses, e-file is expanded to the quarterly Form 941 for employment taxes and the annual Form 944 for small businesses.

2004: Modernized e-File (MeF), the next generation of IRS e-file, makes its debut, accepting business and information returns such as the Forms 1120, 1120-S and 990 series.

2005: E-filed returns cross the 50 percent threshold; 68.4 million returns filed. Telefile ends after years of declining use as users migrated to tax software and e-file..
2006: MeF becomes mandatory for businesses and exempt organizations with assets of $50 million or more.

2007: MeF threshold for businesses and exempt organizations lowered to assets of $10 million or more.

2009: Congress passes a provision requiring tax preparers who file more than 10 individual tax returns to file electronically; IRS phases in the requirement, setting the threshold at 100 or more for 2011 and 11 or more for 2012.

2010: MeF begins a roll out for the Form 1040 series and 23 related forms which will take three or more years to make all the related forms available; IRS stops mailing paper Form 1040 packages.

2011: E-filed returns cross the 100 million threshold in one filing season; cumulative total exceeded 1 billion returns. Approximately three out of every four individual tax returns were filed electronically.

Tax Challenges of Business Income

 

FS-2008-20, April 2008

WASHINGTON—Internal Revenue Service research indicates that understated business income contributes significantly to the tax gap, with the majority understated by small businesses.

To assist small business and self-employed taxpayers better understand their reporting obligations, this fact sheet addresses the issue of income and how to determine gross income.

Business Income, Gross Receipts or Sales

If there is a connection between any income received and a business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if the business did not exist and operate.

Small business owners and self-employed taxpayers must report on their tax returns all income received from their businesses unless specifically excluded by law. In most cases, business income will be in the form of cash, checks and credit card charges.

But business income can be in other forms, such as property or services. There are many forms, including: bartering, real estate rents, personal property rents, interest and dividend income, canceled debt, promissory notes, lost income payments, damages, economic injury payments, as well as kickbacks.

All income earned is taxable. Directing payment of income to a third party does not remove the reporting and payment requirements for small businesses and self-employed taxpayers.

Cost of Goods Sold

Some businesses may make or buy goods to sell. If so, these businesses may deduct the cost of goods sold (COGS) from their gross receipts. To determine these costs, the value of inventory at the beginning and end of the year must be calculated.

There are several factors that go into determining COGS, including: inventory at the beginning of the year; purchases less cost of items withdrawn for personal use; labor costs (generally applies to manufacturing and mining operations); materials and supplies (generally a manufacturing cost); other costs (generally applies to manufacturing and mining operations); and inventory at the end of the year.

Inventory, net purchases, cost of labor, materials and supplies, and other costs are added together. Inventory at the end of the year is subtracted from this total to determine COGS.

Gross Income

To calculate gross income, first determine net receipts (gross receipts minus returns and allowances) and minus the cost of goods sold. Returns and allowances include cash or credit refunds made to customers, rebates and other allowances off the actual sales price. Then add any other income, including fuel tax credits. Gross income must be determined first before deducting business expenses.

Tools to Use

There are tools available to assist small business owners and the self-employed track and report income such as the use of: a formal set of books and records with strong; accounting/financial computer software; and separate bank accounts for business and personal income and expenses.

Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient recordkeeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid.

The Small Business and Self-Employed One-Stop Resource is a Web based tool. It contains a wealth of information to educate business owners and the self-employed on their unique tax filing and reporting obligations.

Another Web based tool is the Online Learning and Educational Products section of IRS.gov which allows business owners to view a streaming video of an IRS Small Business Workshop, order the Small Business Workshop on DVD, take an IRS course, or complete an online, self-directed version of a workshop taught live around the country.

These tools can help to more accurately determine income and expenses as well. There are benefits beyond accurate income and expense reporting to be gained. Formalized financial records will help small businesses when it is time to apply for loans or efforts to obtain capital for expansion.

Links:
• Publication 334, Tax Guide for Small Business
• Publication 583, Starting a Business and Keeping Records

Wage Compensation for S Corporation Officers

FS-2008-25, August 2008

Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages.  Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.  Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes.  S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

This fact sheet clarifies information that small business taxpayers should understand regarding the tax law for corporate officers who perform services.

Who’s an employee of the corporation?

Generally, an officer of a corporation is an employee of the corporation.  The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. Courts have consistently held that S corporation officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes.

The Treasury Regulations provide an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee.

What's a Reasonable Salary?

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly.  However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Some factors considered by the courts in determining reasonable compensation:

• Training and experience

• Duties and responsibilities

• Time and effort devoted to the business

• Dividend history

• Payments to non-shareholder employees

• Timing and manner of paying bonuses to key people

• What comparable businesses pay for similar services

• Compensation agreements

• The use of a formula to determine compensation

Medical Insurance Premiums treated as wages.

The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.

A 2-percent shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation.   Previously, “established by the S corporation” meant that the medical care coverage had to be in the name of the S corporation.

In Notice 2008-1, the IRS stated that if the medical coverage plan is in the name of the 2percent shareholder and not in the name of the S corporation, a medical care plan can be considered to be established by the S corporation if: the S corporation either paid or reimbursed the 2percent shareholder for the premiums and reported the premium payment or reimbursement as wages on the 2percent shareholder’s Form W-2.

Payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2.
Schedule K-1 (Form 1120S) and Form 1099 should not be used as an alternative to the Form W-2 to report this additional compensation.

Looking for a new job? You may be able to deduct the cost of your job search on your tax return.

If you’re one of the many people searching for a job right now, you may be able to deduct some of your expenses, such as attending career fairs, on your tax return as long as you are looking for a new job in your current occupation. Here are a few things to keep in mind:

· Job search expenses fall into the category of miscellaneous itemized deductions on Schedule A, Itemized Deductions. If your total itemized deductions are higher than the standard deduction, it is generally better to choose to include your itemized deductions. Also, in most cases these expenses must exceed your adjusted gross income by 2 percent to provide a tax benefit.

· Your expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.

· You can deduct the fees you pay for employment and outplacement agencies. If your employer pays you back in a later year for these fees, you must include the amount in your gross income up to the amount of your tax benefit in the earlier year.

· You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers.

· If you travel to a different area to look for a new job, you may be able to deduct travel expenses to and from that area. You can deduct the travel expenses only if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or primarily to look for a new job.

· You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.

· You cannot deduct job search expenses if you are looking for a job for the first time.

For more information about job search expenses, read IRS Publication 529,Miscellaneous Deductions. This publication is available at the IRS website, IRS.gov, or by calling 800-TAX-FORM (800-829-3676).

____________________________________________________________________

NOTE TO EDITOR: Below are links to IRS publications, tax topics and videos describing the tax benefits available to people searching for jobs.

· IRS Publication 529, Miscellaneous Deductions

· Tax Topic 508, Miscellaneous Expenses

· Tax Topic 511, Business Travel Expenses

· YouTube: Job Search Expenses: English, Spanish, ASL

Use IRS Withholding Calculator to adjust your withholding

As of March 18, the Internal Revenue Service had issued more than 63 million refunds with an average refund of $3,004.

The larger the tax refund you receive, the more money you’ve paid throughout the year because your withholding does not accurately reflect the tax you owed. Of course, there are some exceptions, such as special tax credits, that may be the cause of a larger refund. On the other hand, you could have owed tax when you filed your tax return this year. Either way, it may be time to evaluate your tax withholding and determine whether or not it needs to be adjusted.

If you are an employee, the IRS Withholding Calculator can help you determine whether you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate, to avoid having too much or too little federal income tax withheld from your pay. You can use your results from the calculator to help fill out the form. You’ll find the IRS Withholding Calculator located at www.irs.gov — just enter the word calculator in the search box. You can also use the Form W-4 worksheets in Publication 919, How Do I Adjust My Tax Withholding?

Major life changes also could mean a necessary change in your withholding. Marriage, divorce, death of a dependent, and the birth or adoption of a child are all life changes that can result in a need to change the number of exemptions you claim on your W-4. Check your withholding if you had personal or financial changes in your life or if there were changes in the law that might affect your tax liability.

You may want to consider using the IRS Withholding Calculator to reevaluate your tax withholding for 2011, your estimated tax payments or both.

___________________________________________________________________

Related Items on IRS.gov

• Publication 919, How Do I Adjust my Tax Withholding?
• IRS Withholding Calculator
• Form W-4, Employee’s Withholding Allowance Certificate

Are you an employee, self-employed or an independent contractor? Find out the difference.

The question of whether you are an employee or a self-employed independent contractor is very important and may not always be easy to answer. You should understand the category you fall under, since it'll affect how you pay your taxes.

You are an employee if –

Your payer has the right to direct and control your activity. The factors of control fall into three key categories:

• Behavioral control
• Financial control, and
• The relationship between you and your payer.

No one single fact determines worker classification, rather all of the facts and circumstances of a relationship weigh in the correct worker classification determination.

If you are an employee, you are required to report the wages you received during the calendar year on your personal income tax return because they are taxable income. Your employer is required to report wages paid to you during the year on a Form W-2. Your employer is also required to ask you to fill out a Form W-4 and you are required to return that form to your employer. Form W-4 directs your employer on how much tax to withhold from your pay. If you are unsure how much to request be withheld on your Form W-4, check the IRS Withholding Calculator for guidance.

You are an independent contractor if –

You have the right to direct and control the most important aspects of your activity.

People such as contractors, subcontractors and auctioneers, who maintain an independent trade, business or profession in which they offer their services to the public, are generally independent contractors.

If you are an independent contractor, your income earned will be reported to you by the payer on a Form 1099-MISC, unless the payer pays you less than $600 in the calendar year. However, you must report all the income you earned during the year, even if your client does not issue a Form 1099-MISC for your services.

As an independent contractor you are self-employed and are generally required to attach a business return to the annual income tax return that you file and to pay estimated tax quarterly. Self-employed individuals generally have to pay self-employment tax (Social Security and Medicare tax) as well as income tax. To read more on your tax obligations or for more information on estimated tax, go to the Self-Employed Individuals Tax Center on IRS.gov.

If your worker status is unclear –

You or your payer can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS to help determine your status.

Additionally, The IRS developed Form 8919, Uncollected Social Security and Medicare Tax on Wages, to simplify the process for employees to report their share of uncollected Social Security and Medicare taxes due on their compensation when their employers have misclassified them as independent contractors.

Tax Tips: Record Keeping

Six Facts the IRS Wants You to Know about the Alternative Minimum Tax

 
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for 2010.
1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.
2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
4. The AMT exemption amounts are set by law for each filing status.
5. For tax year 2010, Congress raised the AMT exemption amounts to the following levels: 
$72,450 for a married couple filing a joint return and qualifying widows and  widowers;
$47,450 for singles and heads of household;
$36,225 for a married person filing separately.
6.  The minimum AMT exemption amount for a child whose unearned income is taxed at the parents'  tax rate has increased to $6,700 for 2010.
Use the IRS AMT Assistant to determine whether you may be subject to the AMT. Taxpayers can find more information about the Alternative Minimum Tax and how it impacts them by accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
 
Links:
AMT Assistant
IRS Form 6251, Alternative Minimum Tax—Individuals

Ten Facts for Mortgage Debt Forgiveness

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676). Links: Form 982 Form 1099-C

Checking the Status of Your Refund

 

If you already filed your federal tax return and are due a refund, you have several options to check on your refund. Here are eight things the IRS wants you to know about checking the status of your refund:

1. Online Access to Refund Information Where’s My Refund? or ¿Dónde está mi reembolso? are interactive tools on http://www.irs.gov and are the fastest, easiest way to get information about your federal income tax refund. Whether you split your refund among several accounts, opted for direct deposit into one account, used part of your refund to buy U.S. Savings Bonds or asked the IRS to mail you a check, Where’s My Refund? and ¿Dónde está mi reembolso? give you online access to your refund information, 24 hours a day, 7 days a week. It’s quick, easy and secure.

2. When to Check Refund Status If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will generally be available three to four weeks after mailing your return.

3. What You Need to Check Refund Status When checking the status of your refund, have your federal tax return handy. To get your personalized refund information you must enter:

• Your Social Security Number or Individual Taxpayer Identification Number
• Your filing status which will be Single, Married Filing Joint Return, Married.
• Filing Separate Return, Head of Household, or Qualifying Widow(er).
• Exact whole dollar refund amount shown on your tax return.

4. What the Online Tool Will Tell You Once you enter your personal information, you could get several responses, including:

• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. In this instance, you may be able to change or correct your address online using Where’s My Refund?

5. Customized Information Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund.  For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you may be able to start a refund trace.

6. Visually Impaired Taxpayers Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

7. Toll-free Number If you do not have internet access, you can check the status of your refund in English or Spanish by calling the IRS Refund Hotline at 800-829-1954 or the IRS TeleTax System at 800-829-4477. When calling, you must provide your or your spouse’s Social Security number, filing status and the exact whole dollar refund amount shown on your return.

8. IRS2Go This is the IRS’ first smartphone application that lets taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

Links:

• Where’s My Refund?
• ¿Dónde está mi reembolso?

YouTube Videos:

IRS2Go  English  |  ASL 

IRS Has a Smartphone App!

Keep track of your refund with the IRS App.

Tax Scams

Six Facts about IRS Publication 17

 

Starting with “What’s New for 2010” IRS Publication 17, Your Federal Income Tax, takes you step by step through each part of your individual Federal Income tax return.  This comprehensive booklet explains the tax law in a way that will help you better understand your taxes so that you pay only as much as you owe and no more.

Here are the top six things the IRS wants you to know about Publication 17.

1. Publication 17, Your Federal Income Tax, is available on the IRS website at http://www.irs.gov and contains a wealth of information for individual taxpayers.
2. The online version of Publication 17 contains electronic links that make finding your answer simple.  Both the downloadable PDF and online 2010 Publication 17 have thousands of helpful hyperlinks.
3. Publication 17 is packed with basic tax-filing information and tips on what income to report and how to report it.
4. Publication 17 also includes information on figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and how to claim valuable tax credits.
5. Publication 17(SP) El Impuestos Federal sobre los Ingresos is available in Spanish.
6. You can get a hard copy of Publication 17 for free. To get a copy, visit http://www.irs.gov or call 800-TAX-FORM (800-829-3676).

Links:

• Publication 17, Your Federal Income Tax
• Publication 17, Your Federal Income Tax (PDF 2085K)

Increased Start-Up Expense Deduction Available for 2010

When starting a new business the amount of first year qualified business start-up expenses that can be expensed are limited. Start-up costs that cannot be deducted in the first year may be amortized or written-off over 180 months starting with the month the business begins.

Under prior law, you could generally only deduct up to $5,000 in start-up costs in year one. The Small Business Jobs Act of 2010 has double the first year write-off to $10,000. The first year deduction is also limited by the amount the total start-up costs exceed a phase-out threshold of $60,000. For every dollar your start-up costs exceed $60,000 you must reduce your first year write-off of $10,000 until it reaches zero.

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Extender Bill)

IRS News Release: Tax Season Starts on Time for Most Taxpayers; Those Affected by Late Tax Breaks Can File in Mid-to Late February

Announced January 20, 2011 - Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction.

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As a result of the December 17, 2010 tax law changes, the Internal Revenue Service announced on December 23, 2010 that the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns.

Due to late tax breaks certain filers will have to wait until Mid-to Late February to file their tax return. Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid-late February.
• Taxpayer claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students -covering up to $4,000 of tuition and fees paid to a post-secondary institution-is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket expenses of up to $250. The educator expense is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

People claiming any of these three items will need to wait to file their tax returns until tax processing systems are ready. The Internal Revenue Service plans a Feb. 14 start date for processing tax returns delayed by the tax law changes. The IRS needed the extra time to update its systems to accommodate the tax law changes without disrupting other operations tied to the filing season.

Additional Information:

• IRS to Start Processing Delayed Returns on Feb. 14; Most People Unaffected and Can File Now (added 1/20/11)
• IRS Kicks Off 2011 Tax Season with Deadline Extended to April 18; Taxpayers Impacted by Recent Tax Breaks Can File Starting in Mid- to Late February
• Tax Season Starts on Time for Most Taxpayers; Those Affected by Late Tax Breaks Can File in Mid- to Late February
• Forms Affected By the Extender Provisions
  

Medical and Dental Expenses

 

If you itemize your deductions on Form 1040, Schedule A, you may be able to deduct expenses you paid in 2010 for medical care – including dental – for yourself, your spouse, and your dependents. Here are six things the IRS wants you to know about medical and dental expenses and other benefits.

1.     You may deduct only the amount by which your total medical care expenses for the year exceed 7.5 percent of your adjusted gross income. You do this calculation on Form 1040, Schedule A in computing the amount deductible.

2.     You can only include the medical expenses you paid during the year. Your total medical expenses for the year must be reduced by any reimbursement. It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

3.     You may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child. You can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn't meet the gross income or joint return test.

4.     A deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription except for insulin.

5.     You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance may be deducted. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.

6.     Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if you pay qualified medical expenses.

For additional information on medical deductions and benefits, see Publication 502, Medical and Dental Expenses or Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 502, Medical and Dental Expenses (PDF)

Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (PDF) 

Making Work Pay Credit

The Making Work Pay Credit allows a dollar for dollar reduction of your taxes equal to 6.2 percent of your wages up to a maximum credit of $400 for single filers, $800 if you’re married and file jointly.  the credit will be available for 2009 and 2010.  Through the end of 2010

Uncle Sam put limitations on who will be eligible to take the credit. For high income taxpayers, those with modified adjusted gross incomes exceeding $75,00 for single filers, $150,000 for joint filers, the credit will be reduced by 2 percent of your income in excess of these limits.  For example, if you were a single taxpayer with modified adjusted gross income of $90,000, ($15,000 over the $75,000 limit) your Making Work pay credit would be $100.  This is calculated by multiplying your $15,000 excess income by 2 percent to get your phase-out of $300 and then subtracting your phase out from the $400 maximum credit allowed.  Other limitations disallow the credit for nonresident aliens and dependents claimed on another taxpayer’s return.

American Opportunity Credit Replaces the Hope Credit

If you need help paying for college, you’ll be glad to hear about the American Opportunity Credit.  The new education credit modifies and expands the Hope credit for tax years 2010 and 2011.  The plan is to make the credit permanent and index it for inflation.

The credit provides undergraduates a dollar for dollar reduction of taxes, up to $2,500 of the first $4,000 of qualifying educational expenses.  Qualified expenses have been expanded from the Hope credit rules.  In addition to tuition, they included expenditures for required course materials such as books, supplies and equipment needed for a course whether or not the materials are purchased from the school.

Unlike the Hope credit, the American Opportunity Credit can be used for all four college years and is refundable up to $ 1,000.  You can receive a refund of up to forty percent of the credit, even though you owe no tax.  The full credit is available for taxpayers with modified adjusted gross income of $80,000 or less, $160,000 or less for married couples filing jointly.  The credit is phased out for taxpayers with incomes above these levels.

Phase-Outs Eliminated in 2010

The high income phase-outs for itemized deductions and personal exemptions have been repealed for 2010.

Itemized deductions are expenses an individual taxpayer can report on their tax returns to reduce taxable income.  A personal exemption is a stated amount allowed by the government to reduce taxable income.  Individuals are allowed to claim a personal exemption for themselves and one for each dependent they support.

Both itemized deductions and personal exemptions are subject to phase-out limits.  In other words, if your income exceeds certain thresholds both the itemized deduction and your personal exemptions will be reduced.  In 2010, however, those income limits have been repealed but are scheduled to resume in 2011.

New Law Eases Cell Phone Reporting

In 1989, when the old cell phone rules were developed, cell phones were expensive and considered a luxury item used primarily by executives.  Congress decided to tax them the same way it taxes the personal uses of employer-provided automobiles.  Under this classification, called “listed property”, employers are denied a tax deduction unless they document the cell pho9ne business use and business purpose.  Employees were required to include the value of their personal use in their income.

Starting in 2010, cell phones and similar telecommunication devices used for business are no longer subject to the “listed property” reporting requirements.  This means employers may deduct the cost of providing cell phones to employees for business-related use without having to satisfy the strict substantiation requirements for listed property.

Four Tax Tips about Tip Income

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes. Here are four things the IRS wants you to know about tip income:

1. Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to tax.

2. Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.

3. Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.

4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income and Publication 1244 which are available at http://www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676)

Links:

• IRS Publication 1244
• IRS Publication 531

Two Tax Credits to Help Pay Higher Education Costs

There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information about these credits see IRS Publication 970, Tax Benefits for Education available at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

How Long Do I Need to Keep My Tax Records?

There are many records and documents, such as your W-2, 1099 interest and dividend statements, and so on, that support the numbers you put on your tax return.  You’ll need these documents should the IRS select your return for audit.  Most IRS examinations go smoothly and quickly if you are well organized and can produce support for any numbers in question.  ON the other hand, audits can become a nightmare if you’re unprepared and can’t prove what’s been reported.  The first step to being prepared is to organize the records at the time you’re preparing the return and then keep them with your return.  If some records need to be stored in other locations, make a copy of the document for your tax return file.  If you get questioned, trying to reassemble records after a couple years have past by can be time consuming and stressful.

Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.  How long you need to keep your records depends on the circumstance.  The general rule, which follows the statute of limitations, is to keep your tax records a minimum of three years.  There are a number of exceptions to the three year rule.  For example, if the document will affect a future tax return, such as the purchase of real estate, the three year rule won’t start until the transaction closes, that is when you sell real estate.  Documents, such as a medical bill, affecting only the current year can usually be destroyed after three years.

Being able to properly support your tax return is important. What to keep and how long you will need to retain your documents can be confusing.  Your tax preparer is familiar with your return and can answer your questions taking into consideration your specific situation.

IRS Reminds Small Charities to Check Their Reporting Requirements Because They May Have Gotten Simpler

WASHINGTON — The Internal Revenue Service today announced that small tax-exempt organizations may be able to shift to the simpler Form 990-N (e-Postcard) for their 2010 annual information reporting.

The IRS today issued guidance (Revenue Procedure 2011-15) that will allow more tax-exempt organizations to file the e-Postcard rather than the Form 990-EZ or the standard Form 990.

For tax years beginning on or after Jan. 1, 2010, most tax-exempt organizations whose gross annual receipts are normally $50,000 or less can file the e-Postcard. The threshold was previously set at $25,000 or less. (However, supporting organizations of any size must file the standard Form 990 or, if eligible, Form 990-EZ).

A tax-exempt organization’s annual gross receipts or total assets are used to determine which of the three versions of Form 990 it is required to file. IRS.gov contains information about which form to file.

The Pension Protection Act of 2006 made important changes to rules regarding tax-exempt organizations’ annual filing requirements, which took effect as of the beginning of 2007.

First, it mandated that small tax-exempt organizations, other than churches and church-related organizations, file an annual notice with the IRS if they were too small to file Form 990 or Form 990-EZ. (The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement.) Second, it required all supporting organizations, regardless of their size, to file the standard Form 990 or Form 990-EZ. Finally, the law specifies that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.

Any tax-exempt organization that has not yet complied with these new requirements should do so immediately. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

How to Track Your Tax Refund

Wondering where your tax refund could be? Just watch the video to find out how to track your tax refund.

New Hiring Incentives

During 2010 the Hiring Incentives to Restore Employment (HIRE) Act gives employers a financial incentive to hire new employees by combining forgiveness for employer paid Social Security taxes along with an additional tax credit if the new employee stays on the payroll for at least 52 weeks.

To be eligible the new employee must begin full or part0time employment from February 3,2010 through December 31, 2010.  The new employee must not have been employed more than 40 hours during the 60 days prior to his or her hire date.  In addition, the new employee cannot have displaced a current employee unless the prior employee voluntarily quit or was terminated for cause.

The new law exempts employers from having to pay the 6.2 percent employer’s portion of the Social Security reported on From 941.  The employee portion of the Social Security tax must still be deducted from the employee and reported as normal.

In addition to Social Security forgiveness the new law provides for a retained worker credit.  If the qualified new hire is employed for at least 52 consecutive weeks the employer will receive an additional tax credit equal to the lesser of $1,000 or 6.2 percent of the wages paid.  During the 52 week period the employee’s pay during the last 26 weeks must be equal to at lest 80 percent of the pay during the first 26 weeks.  The law excludes domestic workers and those eligible for the foreign earned income exclusion.

Many small business owners preparing their own Form 941s have overlooked taking these new tax benefits and should talk with their tax preparer to see how to get this corrected.

Eight Facts About Filing Status

The first step to filing your federal income tax return is to determine which filing status to use. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child.

Here are eight facts about the five filing status options the IRS wants you to know so that you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.

2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.

5. If your spouse died during the year and you did not remarry during 2010, usually you may still file a joint return with that spouse for the year of death.

6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.

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

8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2008 or 2009, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine your filing status. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.

Link:

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

How to Deal With a Federal Tax Lien

Federal Tax Liens

Whenever you owe taxes to the U.S. Treasury and don't pay, a claim against you by the federal government arises by law. (Internal Revenue Code § 6321.) This claim is called a tax lien. The existence of the government's claim is not public information-at least initially-and so it is sometimes called a "secret" or "statutory" or "automatic" lien.

The tax lien automatically attaches to just about everything you own or have a right in. If you owe interest and penalties on the tax, which is often the case, the lien covers these amounts as well.
States may also have tax lien rights.

Notice of Federal Tax Lien

If the IRS sends you a valid tax bill and you don't pay it, you may receive a written demand to pay. This paper is called a CP-501 notice, referring to the IRS number on the right-hand corner. If you don't pay within 30 days, the IRS has to the right to file a notice in the public records showing your tax debt. This paper is officially called a Notice of Federal Tax Lien. The IRS files over 500,000 notices each year in the county and/or state public records offices where you live, work, or own real estate. In the few states without county recording systems, the IRS sends the Notice of Federal Tax Lien to the secretary of state's office. The state or county fee for recording the tax lien is paid by the IRS and added to your bill.

The IRS does not check first to see if you actually own real estate before recording the lien notice. It has no reason to. Even if you don't own property now, you might later and the IRS gets first dibs on the proceeds from its sale or financing.

EXAMPLE: Joyce owes the IRS and lives in Orange County with her Aunt Mildred. The IRS records a Notice of Federal Tax Lien at the county recorder's office, even though Joyce owns no real estate. Aunt Mildred dies and leaves her home to Joyce. The IRS's lien now attaches to the house. Joyce won't be able to sell the house with a clear title without first paying off the IRS. And Joyce won't get rid of the lien by getting rid of the property. Any buyer takes the property with the IRS lien on it. And the IRS then has two sources of collection-Joyce and the property held by the buyer.

Effect of a Recorded Notice of Federal Tax Lien

Just as a recorded mortgage tells anyone who searches the public records or pulls your credit report that you owe on your home, a Notice of Federal Tax Lien shows the world that you owe the IRS.

A recorded tax lien damages your borrowing ability by scaring off potential creditors or lenders, making it difficult for you to finance any purchases or get a home loan. Tax lien notices are picked up by credit reporting agencies, such as Experian, Equifax, and TransUnion.

Neutralizing a Recorded Federal Tax /Lien

Keep in mind that the automatic, secret, or statutory tax lien and a recorded Notice of Federal Tax Lien are two distinct things.

You can't escape a valid automatic tax lien without (a) paying the tax, interest, and penalties owed, (b) eliminating it in bankruptcy, (c) reducing and paying it through an Offer in Compromise, or (d) having the time limit for collections run. An automatic tax lien will not appear in any public record, such as a county recorder's office. Hence, it's sometimes called a silent or secret tax lien.

A recorded Notice of Federal Tax Lien tells the world your secret. The best way to get rid of it is to get an IRS Certificate of Release of Federal Tax Lien. The IRS will issue a Certificate of Release if you fully pay the tax owed, discharge it in bankruptcy, or pay it through an Offer in Compromise or if the time limit for IRS collections has run out.

The IRS will not reduce the original amount shown on a tax lien as you make payments. So, if the lien starts out at $100,000 and you pay it down to $1,000, the lien will show as $100,000 until the last penny is paid. Only then will the IRS issue the Certificate of Release.

When the tax is paid in full, eliminated, or reduced and paid through an Offer in Compromise or bankruptcy or the time for collections has lapsed, the IRS must issue the Certificate of Release (Form 668Z) within 30 days. Once you get the Certificate of Release, you should record it (if the IRS doesn't) and pay the recording fee in the counties where the IRS filed the lien. Also send a copy to the major credit reporting agencies to make sure it gets into your file.

Unfortunately, the original recorded IRS lien notice is not erased by the lien release. Credit bureaus can and do report the original lien-and the release-as long as ten years after the recording.
If the IRS Records a Tax Lien

Legally, the IRS must notify you in writing and give you a chance to pay or try to prevent the lien from being recorded before sending the notice to the public records offices. But if you've moved or the notice is lost in the mail, you may never get the warning and only learn of it when you apply for credit or a loan-and are turned down.

You can appeal an IRS tax lien notice filing to the IRS ¬Appeals Office. First request a telephone conference with the manager of the IRS unit filing the lien. If the manager turns you down, fax or mail a completed Form 9423, Collection Appeal Request, to the collection office. (A copy with instructions is at the IRS website, www.irs.gov.)

The appeal request is usually decided within five business days. The appeals officer looks at whether the collectors followed correct procedures and considers the facts and circumstances of your case. The officer should telephone you, so list your work and home telephone numbers in your letter. Most taxpayers lose.

Avoiding or Eliminating a Tax Lien

A recorded tax lien can be the kiss of death on your credit rating. It may effectively prevent you from selling or refinancing real estate. It won't, however affect your right to sell personal property, such as a motor vehicle, boat, or furnishings.

The best way to deal with a tax lien is to avoid one in the first place.

For some, a tax lien is just one more black mark on their credit report and won't make it much worse. But you should respond to an IRS letter threatening a lien filing by contacting the IRS at the telephone number on the letter, or calling 800-829-1040, or calling the Taxpayer Advocate Service. Be ready to convince the IRS that you fall into the category "Will filing notice impair collection of the tax liability?" Point out that a tax lien will kill your chance of getting a bank loan, for example.

If you tried but failed to convince the IRS to forgo recording a tax lien, here are your options after the lien notice has been filed:

- Appeal the lien filing. The IRS has five business days after filing the lien to provide written notice to the taxpayer. This must include notice of the right to request a hearing within 30 days from the sixth day after the lien filing. If you win the appeal, the lien will be withdrawn; unfortunately, the fact of the lien filing will still appear on your credit report. (Internal Revenue Code §/6320.)

- Pay in full. If you don't have the funds, can you borrow from friends or relatives? It is better to owe just about anyone other than the IRS. The IRS must record a release within 30 days of full payment, but often the agency doesn't follow through. Call the IRS Centralized Lien Processing Office at 800-913-6050 to verify the release was filed. Or, obtain a copy of your credit report. If it's still in the report, call the Taxpayer Advocate Service for fastest service. (See Chapter 8.)

- Request a partial discharge. If you own several assets that are encumbered by the tax lien and want to use one to pay off the IRS, ask for a discharge from the tax lien. The IRS will likely do this.

Frederick W Daily is a tax attorney, author and former tax law professor. He has over 35 years experience in helping folks and businesses deal with the IRS disputes. He has appeared on hundreds of radio and TV programs including Good Morning America. He is regularly quoted as a tax expert in the publications such as New York Times, Wall Street Journal and Money magazine. He is the author of best selling books such as "Tax Savvy for Small Business" and "Stand Up to the IRS." For more information see http://www.taxattorneydaily.com

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