Posted on by Jan Roberg

Innocent Spouse Relief

Innocent spouse relief form 8857

If you had no knowledge of your ex-spouse’s business dealings and tax issues, you may be eligible for innocent spouse relief from the IRS.

 

Innocent Spouse and Injured Spouse are two terms that often get confused when people are looking at IRS issues. You are an injured spouse if the IRS takes your tax refund to pay for a debt that is owed by your spouse. You may be able to retrieve some (if not all) of that money by filing an injured spouse claim. For more information on that see Injured Spouse Relief: http://robergtaxsolutions.com/2011/03/injured-spouse-relief/

 

Innocent Spouse is where your spouse (or rather ex-spouse) has done something where there is tax liability for which you don’t have any responsibility for. Let me give you an example:

 

Abusive spouse is running around and gambling behind your back. You’re living in a hovel while spouse is living large, playing at the casino and spending money on fancy hotels and alcohol. You finally escape the situation and divorce bad spouse only to find that the IRS is after you for spouse’s tax debt from the gambling winnings. You had no knowledge of the money, and the spouse was forging your signature on the tax returns. This is where you would file for innocent spouse relief.

 

It used to be that you had to file an innocent spouse claim within two years of the actual tax return. Most innocent spouses weren’t able to file that quickly. It often takes longer than that to realize there’s a problem, or get out of an abusive situation. Fortunately, the IRS realized that and they’ve eliminated the two year rule. If you have applied for innocent spouse relief before and were denied because of the two-year rule, you may re-apply.

 

There are three types of Innocent Spouse Relief:

 

Innocent Spouse Relief – you filed a joint return and there is understated tax that is due to erroneous items like unreported income or unsubstantiated deductions, and you had no knowledge of these things. (Example, you get an audit letter about income your ex had that you had no knowledge of.)

Separation of Liability Relief – this is where an unpaid tax liability is divided between you and your ex-spouse for taxes that were filed while together. No refunds are granted in this case, only a separation of liability for unpaid taxes. (You get divorced and you agree that you will pay $X amount of tax which was your responsibility and your ex will pay $Y amount. You pay your share and your ex doesn’t so the IRS goes after you for the tax money. This is a good time to file for Separation of Liability Relief.)

Equitable Relief – if you don’t qualify under one of the above categories but it would be grossly unfair to force you to pay the tax, like in the abusive spouse example above.

 

A couple of other general things you need to know. First, you can’t have transferred assets or done anything fraudulently try to avoid paying taxes. You either had to not know about the tax owed or you were forced to sign documents against your will. Often, there is some type of abuse in these innocent spouse cases, you will be required to substantiate that. This isn’t an easy process. The worst part is if you file for Innocent Spouse Relief, your ex will be informed. If you are the victim of an abuser, you need to make sure that you are physically safe before you file this type of claim.

 

To explore if you might qualify for Innocent Spouse Relief, try this interactive questionnaire on the IRS website: http://www.irs.gov/Individuals/Explore-if-you-are-an-Eligible-Innocent-Spouse

 

Here’s the form that you file for Innocent Spouse Relief: http://www.irs.gov/pub/irs-pdf/f8857.pdf

 

You file this separately; it does not go with your tax return. It gets mailed to

 

Internal Revenue Service
Innocent Spouse
Stop 840-F
PO Box 120053
Covington, KY 41012

 

OR,

 

You may fax the Form 8857 and attachments to the IRS at 855-233-8558.

 

Make sure that you put your social security number on every page of the attachments.

Posted on by Jan Roberg

Common Law Marriage and Your Tax Return

The married couple

Photo by Carrie Phisher on Flickr.com.

I often get contacted by people who are facing an audit based upon their “family relationship.” The IRS will send an inquiry about a person’s relationship to a child in an EIC claim and the person being audited will say that he or she is “common law” married to the child’s birth parent.

Here’s the thing: the rules for common law marriage are very specific. I know that a lot of people seem to think that a couple is common law married if they live together for seven years. That’s just not true. (I used to believe that too, it’s something I was told when I was a kid.)

But in reality, there are only certain states that recognize common law marriage. If a couple is deemed common law married in one of those states and then move to a non-common law marriage state, the new state still has to recognize the marriage.

In most common law states, you can’t just say you’re married, you have to “hold yourself out to be married”. For example: you call yourselves husband and wife, you file joint income tax returns, you use the same last name.

If you have a common law marriage, and you end your relationship, then you must get a divorce even though you never had a wedding.

If you’re going to argue to the IRS that you have a common law marriage, you need to know the facts. First, you need to know which states recognize common law marriage in the first place:

  • Alabama
  • Colorado
  • District of Columbia
  • Georgia (if created before January 1, 1997)
  • Idaho (if created before January 1, 1996)
  • Iowa
  • Kansas
  • Montana
  • New Hampshire (but only for inheritance purposes, this won’t work on your tax return)
  • New Mexico
  • Ohio (if created before October 10, 1991)
  • Oklahoma (but there’s conflict in the courts, marriages created before November 1, 1998 are recognized, common law marriages after that date may not be recognized)
  • Pennsylavania (if created before January 1, 2005)
  • Rhode Island
  • South Carolina
  • Texas
  • Utah

If you live in one of these common law states, you will need to check with your state to find out the rules that make you qualify as married. This link gives you an outline of some of the state requirements. http://www.uscis.gov/ilink/docView/AFM/HTML/AFM/0-0-0-1/0-0-0-26573/0-0-0-30679.html

Common law marriage is not to be taken lightly; it’s marriage. Before you use the common law marriage argument with the IRS, make sure you’re serioius about being married.

Posted on by Jan Roberg

Investment Art

Painting by Mark Witzling reprinted with permission. For other paintings, please visit http://www.markwitzlingart.com/index.html

I recently went out with a bunch of my artist friends and the talk turned to some billionaire heiress who purchased a plastic toilet seat piece of art for $2 million dollars as an investment. Now I couldn’t authenticate the $2 million toilet seat story for this blog post, but we sure did have a lively conversation contemplating what someone would do with a $2 million piece of toilet seat art.

 

Since I’m an accountant, not an artist, I couldn’t help but think about the tax implications of that investment. (Yes, I’m that big of a geek.)

 

I love to buy art.  Although I wouldn’t count any of my purchases as “investments”, the gallery owners and auctioneers will often talk about the investment quality of a purchase.  One of my favorite art stories happened to a former employer of mine who really did purchase a piece of art as an investment.

 

I’m going to call him Fred for this story. (I’m changing his name to protect the innocent. Fred‘s basically a good guy.) Anyway, Fred had been talked into purchasing a $10,000 piece of investment art at a gallery while he was on a trip. It was a large piece; 3 feet high and 6 feet wide.

 

The gallery owner told Fred that it was by a “breakout” artist and this was going to be his signature piece. He also said that the artist was old and would probably die soon and the value of the art piece would go up substantially when the artist died. The gallery owner called it a great “investment piece.”

 

So Fred bought the art and somehow it wound up in my office. “Wow,” I hear you say, “You must have been really important to get a $10,000 piece of art in your office!” Sadly, that’s the wrong assumption. You see, this $10,000 piece of investment art was butt ugly. Fred hated it; he only bought it because he thought it was a good investment.  I was awarded the art on my wall because I was the lowest ranking person with wall space big enough for it to fit on.  Did I mention it was ugly?

 

So I got the art on my wall, and Fred waited for the art to appreciate so he could sell it and get rid of it. Sadly, the artist wasn’t gaining fame at the rapid rate that the gallery owner had implied. And apparently, the artist wasn’t as close to death as was implied either. (And let’s be real, isn’t it kind of morbid to make an investment based on the idea that somebody’s going to die and their art value will go up because they’re dead?)

 

I left the company long before the art appreciated.  But who knows?  Fred did have a knack for making money and I wouldn’t be surprised if that art did go up in value.

 

So how does that work if it does?  Let’s say Fred’s painting is now worth $50,000 and he wants to sell it.  Collectible art is taxed at the 28% tax rate.  If Fred just sold the painting directly to a buyer himself, he’d pay tax on $40,000—that’s the $50,000 he made less the $10,000 he paid for the art in the first place.

 

Most likely, he’d use a gallery or auction house to sell the painting and they’d take a commission.  The commission would be deductible as well.  So if the gallery charged a $15,000 commission, then Fred would pay 28% on $25,000  ($50,000 less the $15,000 less the $10,000.)

 

Purchasing art as an investment has its ups and downs.  It can be very risky—like Fred’s piece, or very rewarding—like the woman who purchased a Renoir for $7 at a flea market.  http://www.timesdispatch.com/news/local/article_f88cd6ec-80f2-591f-b8cf-0effeccca114.html

 

I vote for purchasing art you like.  That way, you get to be around beautiful things you like to be around.  If it happens to become more valuable, great.  If not, you have beautiful things you like to be around—and that’s a winning investment.

Posted on by Jan Roberg

Help! I Got an IRS Letter About My Education Tax Credit!

The Chalk Board

Photo by Jack Amick at Flickr.com

Did you receive a letter from the IRS denying your Education Tax Credit?  Before you give up on that important tax benefit, take a few minutes to see if perhaps you can reclaim it.

 

First—did you have your taxes done by H&R Block?  They had a little glitch in their tax program early in the tax season.  Although most of those tax returns have been fixed, if you had an H&R Block prepared return, make sure you call them and let them know about the problem.  They will take care of it.  If you cannot reach your local HR Block tax preparer, then call their national number at 1 (800) HRBLOCK.  Be patient with the automated answering service.  Eventually you will get through to a human being who can help you.

 

So you got a letter and you didn’t use H&R Block?  Well that’s not so surprising.  Although Block had all the publicity for their software having a glitch, it turns out they weren’t the only ones.  (They were just the biggest and got all the blame.)

 

Before you write the IRS a check (or accept a smaller refund), take a look at your Education Tax Credit Form (number 8863) and see if it was done correctly.  Here’s where I’m finding mistakes:

 

Question number 23:  Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 prior tax years?

 

The question means:  Have you claimed a Hope or American Opportunity credit 4 times already for this particular student?  The way it reads, it seems like it’s asking if you’ve ever claimed it at all in the last 4 years.  You want to answer NO (unless of course you’ve already gotten the credit 4 times already.)

 

Many people have been answering YES.  If you say YES, you don’t qualify for the American Opportunity Credit; you only qualify for the Lifetime Learning Credit which is smaller.

 

What I’ve been seeing is that some programs have let the American Opportunity credit carry through on the 1040 even though the taxpayer said YES.   Usually, the software “idiot light” tells you about the error, but not all tax software did that.  And the question is so confusing that it’s an easy mistake to make.  Once the IRS reviews the returns, they’re catching the YES and sending out letters.

 

So, if this is your problem, you don’t need to amend your tax return.  Just call the IRS at 1 800 829-1040 and talk to someone there.  You will be able to fax a corrected form 8863 form to them and they’ll take care of it right away saving you a couple of weeks of waiting.

 

If you had a different IRS problem with the Education Tax Credit, please post about it.  Thanks.

Posted on by Jan Roberg

Can You Lose Your Job if You Complain About the IRS?

IRS Building

Photo by Adam Fagen at Flickr.com

It appears that complaining about the IRS cost news anchorman Larry Connors his job this week.  It’s kind of sad; Mr. Connors has been a local media celebrity for 37 years.  First, for the full disclosure; Larry Connors is not a client of mine.  If he were, I wouldn’t be allowed to discuss his case due to confidentiality laws.  Since I don’t represent Mr. Connors (I‘ve never even met him), clearly there are things I don’t know about his case.  That said, as an enrolled agent, I do IRS representation and I have experience with how the IRS handles these issues.

 

The whole thing boils down to a post Larry Connors made on his Facebook page.  The page has been removed, but here’s the quote that he posted on May 13th:

 

“I don’t accept ‘conspiracy theories,’ but I do know that almost immediately after the interview, the IRS started hammering me. … Can I prove it? At this time, no. But it is a fact that since that April 2012 interview … the IRS has been pressuring me.”

 

The interview he’s talking about is one where Mr. Connors interviewed President Obama and asked him a rather pointed question about Mr. Obama’s vacations in light of the current economic crisis.  Here is a link to that interview if you would like to see it.  It’s only a minute 18 seconds long:  http://www.youtube.com/watch?v=8CookYzmUZk

 

The other important piece of information is that Larry Connors’ tax issues actually date back to 2008 and that he was paying his back taxes on a monthly installment agreement since the summer of 2011.   Mr. Connors did not mention this fact in his Facebook post.

 

So those are the facts as presented by the press.  Here’s what I think—

 

My best guess is that Mr. Connors made one of his monthly installment payments late.  I’ve seen this happen to my own clients; you only have to be late on one payment by only one day and the IRS has the right to cancel your installment agreement – and they will.  And they can be really nasty about it.   Really nasty.  My clients often say they feel like they’re being persecuted.

 

So, here you have Mr. Connors doing an interview with the president that he’s been told went too far.  Shortly after the interview he receives IRS nasty-grams and eventually has a lien slapped on his home.  (Note that he’s been paying his installment agreement the whole time here, it’s possible that at the time he is unaware that there was a late payment.)    Then he sees the news story about certain groups being targeted by the IRS for political reasons.  Is it unreasonable for him to think that he might have been a political target?  I don’t think so.

 

The day the main IRS story broke, one of my not for profit clients called and said, “Did you see the news?  That’s what happened to us!”  Her group was required to jump through hoops and wait for months to obtain their status while other non-profit groups leap-frogged right past them without a hitch.  (I know, I was the one doing the paperwork.)  I confess, before I learned more about the actual groups involved, I sort of thought my client might have been one of the targeted agencies although I now know they weren’t in that group.

 

Now Larry Connors is out of a job because his employer claims he has a bias against the IRS.  Dear KMOV, I have a news flash for you:   Everybody has a bias against the IRS!   But that said, Mr. Connors is a respected 37-year veteran journalist.  His Facebook post was an opinion, not a news story.  If he had found proof that the IRS really was pressuring him because of the interview—what would have been the lead news story at six o’clock!  Clearly he knows the difference between news and opinion.

 

Here’s my opinion:  A 37-year veteran costs a whole lot more in payroll than someone younger with less experience.  And a 66 year old anchorman doesn’t look as pretty in HD as some of the sweet young reporters do.  I think KMOV is using the Mr. Connors’ IRS Facebook post as an excuse to break his employment contract and reduce their operating costs.  I think that’s the real story, but I don’t expect you to hear that on the KMOV news.

 

Since his dismissal, Mr. Connors and his attorneys have filed a lawsuit.  Good luck, Larry!

Posted on by Jan Roberg

How Long Should I Hold My Tax Returns? Forever If You Live in Missouri!

Missouri State Line

Photo by Jimmy Emerson at Flickr.com

Forever!  That’s what I said.  I realize that I’ve made posts about keeping your tax returns before and I’ve said ten years, or even less, but I’ve changed my mind.  Keep your tax returns forever!  Keep your W-2s also.

 

Why am I going all crazy about this?  Because it seems the state of Missouri doesn’t care how old your old tax issues are.  If they think you owe back taxes, there is no statute of limitations.  Let me repeat that—NO STATUTE OF LIMITATIONS!

 

Over the past few months I’ve seen them go after people for back taxes from 2000, 1999, 1995, and my favorite:  1987.  Yes, 1987, that’s 26 years ago.  If you were asked to produce your tax returns from 26 years ago, could you?  I couldn’t.

 

Here’s the thing—if Missouri believes that you have not filed, or that you perhaps filed but still owe, you’re going to need to provide some sort of proof of payment or filing.  If you didn’t keep your tax returns, how can you prove it?

 

Here’s how it works:  Let’s say you filed your federal taxes back in 2000 but for whatever reason your Missouri return was never received by the state.  If you had a state tax liability of $1,000 back then, with penalties and interest added, you’d owe $1902 today  (May 2013).  That’s almost double your tax liability.  But it’s not just the fact that your tax liability doubled—Missouri has no record of the withholding you paid.  It’s quite possible that you already paid all of your taxes with your withholding, but since Missouri doesn’t track that information, they have no record that you already paid those taxes.  Unless you’ve held onto your W2s from back then, you can’t prove you’ve already paid and Missouri is going to want their money.

 

So, I have officially changed my position.  From now on, I say keep all of your tax returns and your W-2s forever.  It’s okay if they are digital copies, but it’s absolutely essential that you retain those copies.  Hopefully, you won’t need them.  But if you do, you’ll be glad you’ve got ‘em.

Posted on by Jan Roberg

How To Claim a Youth Opportunities Program Tax Credit for Missouri

Kids In The Middle® (KITM) is a 501 (c) 3 nonprofit organization that helps children, parents and families thrive during and after divorce through counseling, education and support.

________________________________________________________________________

I was recently at a gala fundraising event for an organization called Kids in the Middle.  Kids in the Middle is a not for profit group that helps children cope with the issue of their parents divorcing.   It’s an awesome organization and here’s a link if you want to learn more about them:  http://www.kidsinthemiddle.org/

 

One of the cool things about Kids In the Middle is that a donation to their organization can qualify you for a Missouri Youth Opportunity Tax Credit (YOP). If you live in Missouri, donating to a Missouri Tax Credit Organization is a really sweet deal.

 

Let me tell you about how it works.  Let’s say you want to donate $1000 to Kids in the Middle.  (The minimum donation for the tax credit is $100.)  When you donate money to an organization that qualifies for a YOP tax credit, you get a credit of 50% of what you donated against your Missouri taxes.  So if you donate $1000 to Kids in the Middle, you get $500 taken off of your Missouri income tax return next April.   That’s a pretty good bang for the buck right there isn’t it?

 

But, it’s even better than that.  If you itemize your deductions, your donation also counts as a charitable contribution as well.  So if you’re in the 25% tax bracket, then you’re saving another $250 on your federal taxes, plus another $60 off of your Missouri taxes on top of the $500 you’ve already saved.   So if you’re in the 25% tax bracket, your $1,000 donation really only cost you $160!  If you’re in a higher tax bracket, your donation will cost you even less!  How cool is that?

 

Full disclosure, (I’m a tax geek can‘t help it) because you’re going to pay lower state taxes for doing this in 2013, you’re going to have a lower state tax deduction on your 2014 federal tax return.  That means your federal taxes will be $125 higher in 2014.  You’re still coming out way ahead, but I just needed to point that part out.

 

When I was at the gala, people were donating left and right–mostly because the charity is such a good organization, but I think the YOP tax credit really sweetens the pot.  And afterwards, people were asking how do you claim the tax credit anyway?  That’s something I can help you with.

 

Claiming the Missouri tax credit isn’t difficult at all!  The important thing is that you’re going to need the form that you’re mailed authorizing the tax credit.  You’ve got to have that form so once it’s mailed to you, don’t lose it.  You need the code on there and you need to mail it in with your tax return.  With Kids in the Middle, it’s going to be a two step process.

 

First, after you make your donation, you’ll receive a notification letter and an application for the tax credit.  You’ll have to fill out that form and mail it back to Kids in the Middle.  Then you’ll receive your Certification letter from the Missouri Department of Economic Development.  That’s the form you’ll need for your tax return.  Don’t lose that.  Your regular receipt from Kids in the Middle won’t work on your tax return.  You must have the Certification letter for the tax credit.

 

When tax time rolls around, you’re going to fill out form MO-TC.  Here’s a link to see what it looks like:  http://dor.mo.gov/forms/MO-TC_2011.pdf As you can see, there’s not much to it.  The amount of the tax credit will get carried over to line 37 of your Missouri 1040 tax return.

 

You will have to mail your Missouri return instead of e-filing because you’ll have to attach the certification letter along with the tax credit form to your tax return.  But that’s about all there is to it; get a form, complete the MO-TC document, claim the deduction, attach the paperwork to your tax return, and mail.  It’s that easy to do a really good thing.

Posted on by Jan Roberg

The Tonight Show Tax Credit

Jay Leno

Photo by bernie.levine (new year, new beginning) on Flickr.com

I usually write about Missouri tax credits, that’s my state, but today I get to talk about New York.  I love New York, it’s a wonderful place, but this new tax credit proposal has me shaking my head.

 

Have you heard about it?  New York’s new state budget has a tax credit for (and I’m going to quote directly from the New York Daily News) “A talk or variety program that filmed at least five seasons outside the state prior to its first relocated season in New York.” There are more requirements here; the show has to be filmed in front of a studio audience of at least 200 people and has to have an annual production budget of at least $30 million.

 

Can you say, “Tonight Show?”  Honestly, can you think of any other show that even meets that criteria?

 

This new tax credit will pay for 30% of the production costs of the show.   Do the math here—the show has to have an annual production budget of at least $30 million, and the state will pay 30 percent of the budget—that’s a lot of money.

 

In fairness, New York has had tax credits for the film and television industry for years.  The New York State film production credit program has helped hundreds of projects get made in New York and that film production has generated millions of dollars of revenue to New York.   The cost of the tax credit to New York is around $420 million in lost tax revenue annually.   One of the key provisions of the old bill was that the film or television projects had to originate in New York.

 

But this new credit—well it sounds a bit targeted.  Really targeted.  NBC has already started building Jimmy Fallon a new studio over at 30 Rock—supposedly for his Late Night show—NBC has not announced that it will actually move the Tonight Show from California.

 

Call me crazy, but if New York wanted to pay me $9 million to move my business over there, I’d be packing my bags in a heartbeat.

 

I recognize that states are vying to pull businesses from other states to boost their economies during this economic downtime.  State legislatures all over the country are playing games with tax credits.  I don’t really think it’s good for the country as a whole, but I can’t stop it either.

 

But a Tonight Show Tax Credit?  Is this really in the best interests of the people of New York State?  I’m not seeing it.  Maybe it’s because I’m still from Missouri, and you’ll have to “show me.”

 

Here are two great links to check out:

http://www.nydailynews.com/entertainment/tv-movies/exclusive-tentative-state-budget-jimmy-fallon-tax-credit-article-1.1295513

http://theweek.com/article/index/241792/should-new-york-use-tax-credits-to-woo-jimmy-fallon-and-the-tonight-show

Posted on by Jan Roberg

Filing an Extension for Your Personal Taxes

To the finish

Photo by david.ian.roberts on Flickr.com

Are you late filing your taxes this year? You’re not alone. It seems that many people are behind.

 

It’s important to know that an extension gives you an extension of time to file your tax return; it’s not an extension of time to pay your taxes. I think a lot of people want to file extensions because they owe and they think it will give them more time to pay. It doesn’t.

 

The penalty for paying late is ½ of 1% per month. So, let’s say that you owe $10,000 on your taxes. You file an extension, but don’t pay anything towards what you owe. When you actually file and pay in October, instead of owing $1000, you’re going to owe an extra $300. (.005 times $10,000 times 6 months = 300)

 

No matter what, if you’re not ready to file your taxes before April 15th, do file an extension. Although the late payment penalty is ½ of 1% per month, the penalty for not filing (or filing an extension) is 5% per month. That’s ten times as much as the late payment penalty. You don’t want to have to pay that.

 

If you need to file an extension—that is, ask for more time to file your taxes, here are three ways to do it:

 

1. File electronically, using tax software. If you don’t have tax software already, you can use the 1040.com software on this website. Here’s a link: Do Your Own Taxes

 

2. You can mail in a paper copy of the extension form. It’s called a 4868. Here’s a link: IRS Extension Form

 

3. You can make a payment towards your taxes with a credit or a debit card. And that will give you an automatic extension for your taxes. If you just want to make a payment, it’s pretty easy. You’ll start at the IRS website, and chose your payment provider from there. Here’s the link:  IRS Direct Pay

 

So if you can’t get those taxes done before filing time, do get that extension filed.  If you owe the IRS, it could save you some money!