Taking the Stress Out of Dealing with the IRS

Few things can be scarier for taxpayers than receiving mail from the Internal Revenue Service. No matter how intimidating it might be, always open the mail. Always.

Sometimes, those letters can be good news. More often than not, however, the IRS is sending you a notice because they want more information from you or they have determined that there is a problem with your return. But even when the news isn’t great, you still want to open the mail timely because IRS notices are generally subject to strict deadlines. If you miss those deadlines, your options for contesting a change to your return could be limited.

One of the more daunting letters from IRS is a CP3219B Notice. The formal title is “Statutory Notice of Deficiency” but it’s more commonly referred to as a 90 day letter or simply, a Notice of Deficiency. The purpose of the notice is to let you know that the IRS intends to assess a tax deficiency. It further informs you of your right to petition the United States Tax Court if you don’t agree with the changes.

This letter is never your first point of contact with IRS. Some time before you receive a Notice of Deficiency, the IRS would have sent you a previous notice asking you to compare your information as listed on your return with the information the IRS has received, or otherwise provide more information to IRS. It may also be sent when you have failed to file a tax return. The Notice of Deficiency is the next step, either in response to information that you’ve submitted or because the IRS didn’t hear from you. The Notice will focus on a very specific issue (or issues) involving your tax return.

The Notice of Deficiency isn’t a bill. However, you do have the option of paying the additional tax as assessed by the IRS. If you agree with the proposed changes on the Notice of Deficiency, the IRS asks that you complete, sign and return a form 4089, Notice of Deficiency – Waiver (it will be included with your Notice of Deficiency). You can send payment with that form or the IRS will later send you a bill together with any interest and applicable penalties.

If you don’t agree with the additional tax as proposed, you have a couple of options:

• § You can respond to the Statutory Notice of Deficiency directly; or
• § You can petition the United States Tax Court by the due date shown on the notice.

If you respond to the Notice by sending additional information to IRS, it’s important to understand that your response does not extend the deadline to file a petition with the U.S Tax Court. You have 90 days (150 if the notice was addressed outside the United States) to file the petition. No extensions.

You don’t have to have an attorney to file in Tax Court though it may be advisable. There is a $60 filing fee due when the petition is filed. The filing of your case also postpones collection of the tax until the matter is resolved. Be advised, though, that if you can’t pay the tax due, filing in Tax Court is not the way to extend collections statutes or establish a payment plan.

If your matter totals $50,000 or less (including additions), you can opt to filing a small tax case. There are special rules for these kinds of cases. On the plus side, this track is faster and generally less formal (a bonus, in particular, if you’re filing yourself). On the minus side, it’s important to understand that a judgment in small tax cases is not appealable.

But what if you don’t respond to the IRS and you don’t want to file a petition in Tax Court? If you don’t do anything by the due date, the IRS has the authority to assess the tax and try to collect from you. At that point, your options are more limited than before and generally focus on resolving collections matters.

The takeaway here? Open your mail, read the notice carefully and follow the instructions. If you have concerns or questions, contact your tax professional. (We at Potts’ Taxes specialize in handling IRS notices and taxpayer representation.) But don’t wait too long: deadlines are important. And in the case of a Notice of Deficiency, those deadlines cannot be extended.

For all the talk about tax changes at the end of 2012, many people are still left wondering what it means for them.

While many issues were resolved, a lot of taxpayers still aren’t sure how their tax returns and deductions are affected.

If you’re one of those people, brush up on these 13 deductions before tackling your tax return. They are worth reviewing, as they could lower your tax bill.

1. Traditional IRA contributions. You have until April 15, 2013, to contribute up to $5,000 to a traditional IRA for 2012 and, if you qualify, deduct it on your tax return. Here are some guidelines:

• If you were 50 or older on the last day of 2012, you can contribute up to $6,000.

• If you (and your spouse if you’re married) weren’t covered by an employer’s retirement plan in 2012, you can generally deduct your contribution in full.

• If you were covered by an employer plan, you can only take a full deduction if your modified adjusted gross income was $58,000 or less ($92,000 or less for married couples filing jointly). Your deduction is reduced if your modified adjusted gross income was more than $58,000 but less than $68,000 ($92,000 and $112,000 for married couples filing jointly). Above those levels, you may still contribute, but you can’t take a deduction.

• If your spouse was covered by a retirement plan at work but you weren’t, you’re eligible to take a full or partial deduction if your combined adjusted gross income was below $183,000. See IRS Publication 590 for more details.

2. Self-employed retirement plans. If you work for yourself, you can open a Simplified Employee Pension IRA by April 15, 2013, and deduct your contribution on your 2012 return. SEP IRAs may be an easy way to create your own retirement plan, and they can allow much higher contributions than traditional IRAs. Contributing to a SEP IRA does not exclude you from making an IRA contribution, but it may affect whether you can take a deduction for it. (A SEP IRA is considered an employer-sponsored plan).

3. Mortgage interest. You’re allowed to deduct interest paid on your primary mortgage, as well as home equity loans, home improvement loans and lines of credit. In general, you may deduct interest on up to $1 million of primary mortgage debt and up to $100,000 of home equity balances.

4. State and local taxes. The federal government generally allows taxpayers to deduct property and income taxes paid to state and local governments.

5. Sales tax. If you didn’t pay much state income tax — or live in a state that doesn’t tax income at all — you may be able to choose to deduct sales tax instead. And you typically don’t need receipts — simply calculate an assumed amount using an IRS table or online calculator.

6. Charitable gifts. Donations to charity may ease your tax burden, but only if you have the right documentation. Cash contributions — regardless of the amount — require a canceled check or dated receipt. Any contribution of $250 or more requires bank or payroll deduction records or a written acknowledgment from the charity. Noncash contributions valued at more than $5,000 generally require an appraisal.

7. Education costs. Up to $2,500 in interest on loans for qualified higher education expenses may be deductible if your adjusted gross income is less than $75,000 ($150,000 if you’re married and filing a joint return). A portion of your tuition and fees may be deductible if your adjusted gross income is $80,000 or less ($160,000 on a joint return). There are also two tax credits for college costs: the American Opportunity Credit and the Lifetime Learning Credit (See IRS Publication 970).

8. Medical and dental costs. The government sets a high hurdle for these expenses: You may be able to only deduct them if they exceed 7.5% of your adjusted gross income. Be aware that the Patient Protection and Affordable Care Act decreases this deduction for the 2013 tax year because those expenses generally will be deductible only if they exceed 10% of your adjusted gross income. The law does include a temporary waiver for seniors and their spouses if either has reached age 65 before the close of tax years 2013-2016.

9. Health insurance. Self-employed taxpayers get a break on one of their biggest financial headaches. In general, they may be able to deduct all of their health insurance premiums.

10. Health savings accounts. If your family was covered by a high-deductible health insurance plan in 2012, you may be able to contribute up to $6,250 to a health savings account ($3,100 if it only covered yourself). Contributions are deductible, and withdrawals for qualified medical expenses are tax-free. Similar to IRAs, you have until April 15, 2013, to contribute for the 2012 tax year.

11. Job-related moving expenses. If you moved to take a new job, you may be able to deduct your expenses if you pass these two IRS tests:

• Your new job must be at least 50 miles farther from your old home than your old job. If you didn’t have a previous job, your new one must be at least 50 miles from your old home. If you’re in the military with permanent change of station orders, you do not have to meet these rules.

• If you’re an employee, you must work full time for at least 39 weeks during the 12 months after you arrive in the general area of your new job. If you’re self-employed, you have to work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months.

12. Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you may be able to deduct lodging expenses, half the cost of your meals and 55.5 cents per mile for travel. You also can deduct tolls and parking fees.

13. Out-of-pocket teacher expenses. Teachers, aides, counselors and principals — kindergarten through 12th grade — should be able to deduct up to $250 for classroom supplies purchased in 2012.

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

3. You must include all capital gains in your income.

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses. If you e-file your tax return, the software will do this for you.

This is specifically from the state of Virginia but probably applies to all taxing authorities.

The Department receives numerous tax returns containing an enclosed “proof of receipt” letter and postage-paid envelope that ask the Department to return the letter as proof of receipt.  Unfortunately, the Department does not have the staff to handle this additional workload and is unable to acknowledge receipt of packages or shipments sent outside of standard mail services designed to accomplish this.

If you would like your return, letter or package tracked, the Department recommends that you use courier services or mail methods that specialize in mail tracking.  Be aware that if you choose Certified Mail, there will be a delay in the Department’s receipt of your item(s).