Last Minute Tax Tips

The government remains open for business, and your taxes are due soon.  This year it is delayed a little bit, to April 18^th.  (One more weekend of going to the office for me!) So there is a little time to do some last minute “planning” -- or should we say remediation -- presumably last-minute and planning can’t really be combined. 

First off – while it’s too late for the Roth conversion deal (two years to pay the tax liability if you converted a traditional IRA to a Roth before 12/31/10) you can still take a 2010 deduction by contributing to a traditional IRA by the 18^th.  The same holds true for contributing funds to a qualified Health Savings Account ($6,150 for family, $3,050 for individuals). 

Another good reminder is to make sure you’ve got all your charitable donations noted.  If you give via payroll deduction, you don’t get a letter, but you can count the donation as an offset to your taxable income.

Not to encourage marital strife, but it’s worth checking to make sure filing jointly is the best plan.  One example where this might work is if one spouse has fairly big medical bills, but the couple’s combined income makes the threshold for getting the medical deduction out of reach.  This is not a one-variable decision, so you need to see the final difference on the return before you make a change.  Still – it’s worth checking.

Finally, this little nugget from the GAO in their report to Congress on how the IRS is doing this year.  While avoiding a shut down, apparently the IRS is hampered by restrictions on checking for mathematical errors on returns, unless they do a full audit.  According to the report, if the IRS doesn’t have the permission in the existing 13 Math Error Authority designations, they can’t check for a mistake (or fraud) unless the return gets audited.  An example cited in the report is for the Residential Energy Credit, which this year had a lifetime cap put on of $1,500.  I checked a number of returns this season to make sure the limit wasn’t exceeded.  Apparently the IRS won’t be doing the same.   It’s awkward to advocate for tax compliance when the government doesn’t even pretend that enforcement is consistent.    (Oops, more late tax season crankiness!  Good thing we’re almost done.) 

IRS Closed in April?!

Would the IRS get an extension, if there’s a government shut down this week?  Would penalties and interest be reduced by the days of the shutdown?  Would you get interest on your refund for days when the “CLOSED” sign was up?  Do filing deadlines move?  What about notice deadlines?

In Congressional testimony this week, IRS Commissioner Doug Shulman acknowledged that the agency is in discussions with the White House about what to do if they aren’t allowed to stay open during filing season.  The last set of contingency plans was done for an October shutdown.  The existing program calls for checks still going out, but no processing of tax returns.  No processing of tax returns in April?! Shulman was mum on the specifics, beyond suggesting that the complexity of shutdown contingencies increases at you get closer to April 18^th.  One has to wonder why Congress needs a hearing to find this particular insight. 

Shulman also talked about how cutting the IRS budget as proposed for this year would save $600 million and cost $4 billion in lost revenue.  Presumably Congressional representatives schooled in the years before “No Child Left Behind” are struggling to figure out the mathematics of this equation.   (Apologies for the late in tax season snarkiness.  I’ll stop now.)

On a more helpful note, the Wall Street Journal’s last minute tax advice column has a tiny reminder at the end that’s really important if it applies to you.  People who have a non-US bank account, or a bunch of small bank accounts off-shore that at any point in the year totaled $10,000 or more, need to note this on their tax return.  In addition you have to file a special form with Treasury by June 30.  They tell you on IRS.gov that there are no extensions for compliance on this one.  Assuming the IRS is open for business on June 30^th, this is one deadline not to miss.  The success of going after tax cheats outside the US is increasing the scope of the search.  Mess up anywhere on this topic and your chances of doing more than your fair share of deficit reduction increase greatly.

E-Filing Safety Tips

Last year, 70% of all individual returns were e-filed, and it’s likely to go up this year with the general growth of consumer technology use and new tax preparer requirements.  This year the IRS requires any tax preparation enterprise that files 100 or more returns to default to e-filing.  The taxpayer can request to opt-out, but the tax preparer has to e-file unless the taxpayer specifically says no.  In many ways this makes sense, as it is faster, more accurate and cheaper  -- try 19-cents e-processing cost vs. $3.29 for paper returns.    While I default to agreeing with anything that is associated with the words cheaper and easier, I did start to wonder about risks associated with e-filing. 

The main issue is security.  Your tax return is an identity thief's version of the code to enter Fort Knox.  If you’re e-filing with a direct deposit option for your refund (which is a good idea) both your social security number and your bank account are in that file.  This certainly means you want to do due diligence on how your e-filing is being done.  The IRS lets you file with them for free  if your income is less than $58,000 a year.  If you make more than that, you can still use the IRS e-file site, but you have to enter all your information on the “fillable forms” that the site uses.  If you use tax software there is typically functionality embedded that helps you e-file.  Again, this is where you want to check out how it works in advance.  There are also web-based filing services, which I would approach with significant caution.

Beyond an actual interception of your return during filing there are two other things to watch for.  As I mentioned in an October post on preventing cybercrime, a popular phishing scam is to send you an e-mail ostensibly from the IRS.  What you need to remember is that the IRS doesn’t do e-mail.   

 "The IRS will never e-mail you about your taxes – never," IRS spokesman Dan Boone said in a Feb. 28 aol.com article

If you do get “contacted” by the IRS in an e-mail the advice is to simply forward the fraudsters work to phishing@irs.gov and let them take it from there. 

Another concern is that if you’re using tax software, chances are the program lets you save a copy on your computer.  Saving your tax return is helpful, if it’s kept in a safe place, as in not on your PC or lap top. If you have a laptop and it gets stolen, there’s no happy ending to that story.  Also, if you have peer-to-peer file sharing software on your machine, it’s possible you could end up accidentally sharing this info with the wrong person.

All of this is not to say stick with pencil and paper.  It is however, a call to add to the top of your tax to-do list a security plan.  The only thing that can be generated from tax filing that is worse than an audit is identity theft. 



Taxable Fringe Benefits

For all those called to serve at the front lines of IRC compliance, time and energy management collide nonstop for the next two months.  As a member of this particular group, I've noticed an increasing interest on my part in managing how I spend my time at work.  This perspective presumably accounts for my intrigue with a story from the WSJ  about Congressional Representatives who use their government offices for lodging as well as work.  While I’ll admit to wanting to take the occasional nap in the office these days, actually sleeping there is pretty unappealing.  However, 33 House members have openly acknowledged literally snoozing on the job (outside of business hours).  According to the organization Citizens for Ethics and Responsibility in Washington  these folks may have good intentions, but are breaking the law on several counts. 

 Living in a House office violates the prohibition on using taxpayer resources for anything other than the performance of official duties.  The Members' Handbook states that the Member Representational Allowance may not be used for personal expenses. 

Further, under the Internal Revenue Code, members who sleep in their offices are receiving a taxable benefit. The IRS treats lodging as a taxable fringe benefit unless it is offered on the employer's business premises, is for the employer's convenience, and is required as a condition of employment. As living in a House office clearly is not a condition of serving in Congress, members must pay taxes for imputed income based on the fair market value of their lodging.

This got me musing about my response if one of these Representatives were a client of mine.  Would I advise them they’ve got “taxable fringe”?  It's a particularly tricky situation because when delivering the bad news that an item is taxable or not deductible I usually remind the person that they are paying me to tell them what the rules are.  I don’t make the rules and neither do they.  Of course, in this case though, we are talking about someone who actually does directly impact the rules on taxes.  In particular the House is the first stop on the train when it comes to tax legislation.  While remaining a committed member of the frugality caucus, I also think as a rule maker it’s important to be a rule follower. 

Of course, wherever you've got a Congress person in a confined space for a period of time, there are usually a number of professionals who want to join them.  What isn’t addressed here is what if you are in a line of work that would make attendance at a Congressional office sleep over party deductible?  The rules are the same for everyone in this case.  If it’s a requirement of your employer, keep your receipts and log any non-reimbursed mileage.

Common Sense for the Tax Code

The AICPA list of  suggestions to Congress for tax code changes caught my eye this week.  (After all, for those of us “inside baseball” tax season has already started, so it’s hard to get my brain thinking about other topics.)  For some reason known only to a secret cell at the Institute they came up with a list of 13 suggestions.  In a world full of  catchy improvement- list titles like “7 Habits”, “10 Best”,  “A-List for….” only a group of accountants would release the 2010 Compendium Of Legislative Proposals .  That said, what the authors lack in communications sizzle they make up for in common sense.  Not that we need to go through all 13, but here are my nominees for the  “Tackling the Tax Code Trifecta” (perhaps descriptive overkill in the opposite direction).

The first involves tax breaks around higher education.  The AICPA points out that there are 9 different credits or deductions related to paying or higher education.  Eligibility for each of these tax incentives varies by non-financial factors and then there are 6 different levels of phase out based on the taxpayer income.  According to the Compendium detail,  roughly 10-million families attempt to use these incentives annually.  The Treasury Department estimates 19% of eligible families skip the benefits and erroneous claims to education credits made by those the hardy souls who do apply have cost Uncle Sam $232 million. 

The AICPA recommends the creation of a single credit for all post-secondary expenses to be awarded on a per student rather than per taxpayer basis. There’s also advocacy for a uniform definition of qualified higher education expenses and consistent income phase-outs for all education incentives. 

My second winner on the list involves a similar approach for mileage deductions. What could be bad about standardizing mileage rates so there is one for business expenses and another for  personal costs related to charitable, medical and moving transit?  The authors of the Compendium want non- business deductions to be half of those for commerce related deductions.  I personally have always been puzzled by the particularly miserly charity deduction.  If you drive a meals on wheels route it’s 14-cents a mile off your AGI, and that’s only if you itemize. 

Third place on my list is probably less important than the previous two for most people.  It’s a recommendation to allow a deduction for AGI related to attorney fees and court costs connected to litigation that gives you taxable income. Again, this doesn’t apply to most people, but if you’ve gone through the courts and prevailed, that somehow feels like it’s not regular income.  My guess is most recipients would happily give back the money if they could avoid the wrong that was done to them.  What not let individuals deduct the costs the same way a business would?  Right now the law is a patchwork of eligibility based on the kind of litigation and the type of award. 

My cynical default is that these changes won’t make it into the tax code, but if you don’t ask, then you already know the answer…