It’s cold and snowy out today in [entity display="Philadelphia" type="place" active="true" key="pa/philadelphia"]Philadelphia[/entity] and across much of the country. It’s the kind of day where you really should stay inside and get things done… like maybe your taxes.
The IRS previously declared that the 2012 tax season has officially kicked off and this week, the IRS proclaimed that the 2012 electronic tax return filing season (or e-file to you and me) was now open for business.

The IRS has come a long way from the 1980s when e-file was still a novelty. In 1986, only 25,000 returns were e-filed. Last year, the IRS took on [entity display="McDonald's" type="organization" subtype="company" active="true" key="mcdonalds" ticker="MCD" exchange="NYSE"]McDonald’s-[/entity]like numbers, announcing more than “one billion served” in total. Of those, more than 112 million income tax returns were e-filed in 2011, representing 77% of all individual returns filed. The numbers are climbing so quickly that the IRS hasn’t automatically put forms in the mail for a couple of years now.

Why does the IRS encourage e-file? In a word: cost. When you e-file, you’re not just saving paper, you’re saving tax dollars. IRS Commissioner Doug Shulman claims that “an e-file return costs us 20 times less to process than a paper return, this program means a more efficient government that has saved America’s taxpayers hundreds of millions of dollars.”

The IRS also claims that e-file is faster, more efficient and more accurate for taxpayers. Statistically, error rates for e-filed returns are just 1%, compared to a 20% error rate for traditional paper returns.

If you want to e-file, you aren’t locked in to doing your returns yourself. There a few ways taxpayers can e-file their tax returns: using a tax return preparer, using software programs like TurboTax or TaxACT on your home computer or through IRS Free File. No matter which option you choose, be aware that the IRS does not charge for e-file. Fees associated with e-file might be imposed by your preparer or the software program but there is no charge from IRS.

Also keep in mind that e-filing doesn’t mean that you have to pay early if you owe – and it doesn’t mean that you have to use a credit card. You can e-file early and still pay with a payment voucher all the way up to April 17 (the due date for taxes this year). You can use a credit card to pay or pay by check. For the younguns, checks are those paper things from banks that women like me keep in their pocketbooks; believe it or not, you can use them to pay for stuff (in my hometown, you can still buy groceries with them).

Finally, what about those RALs (Refund Anticipation Loans)? I know you think they’re faster than the alternative but consider this: if you e-file and use direct deposit, you can get your money back in about 10 days, sometimes even faster. And not a penny of interest out of your pocket. [entity display="Promise" type="organization" subtype="company" active="true" key="promise" ticker="PMSEY" exchange="OTC"]Promise[/entity] me that you’ll think about it.

If you’re not ready to file today (because, for example, your forms haven’t arrived yet), you could try finding a tax preparer that you like or spend the day opening mail and getting organized.

Of course, all of that said, I know what I’m going to do: go play in the snow with the kiddos and the dog (yes, that’s my dog in the picture above). Enjoy your day!

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Form W-2, check.

Form 1099-Misc, check.

Form 1098, check.

Form 1099-K… wait, what?

Yep, there’s a new form from the IRS out this year and one might be landing in your mailbox soon. The federal form 1099-K, Merchant Card and Third Party Network Payments, will debut early this year: forms 1099-K are due to merchants by January 31, 2012. Electronically filed 1099-Ks are due to the IRS April 2, 2012 (normally March 31), while paper 1099-Ks are due February 28, 2012.

So what is the new form 1099-K? It looks like this (downloads as a pdf and yep, no longer in draft form!).

And here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will be reported to the IRS via the form 1099-K. A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

In plain talk, this means that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment for their wares.

But not every dollar will count. Reporting is only required when gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee. So the occasional sale of a crocheted toilet paper roll cover over the internet? Not likely to merit the issuance of a 1099-K. But a successful online store? That’s another story.

It’s the first year of reporting so there’s bound to be a lot of confusion. As a result, the IRS will delay penalty provisions and withholding requirements until January 1, 2013, for entities required to issue the forms 1099-K. The reporting, however, is moving forward.

The point of the law is to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Read: the IRS thinks you’re cheating. And some of you are. That explains the whole tax gap problem. This is yet another effort to step up compliance. Taxpayers who receive those forms 1099-K are going to be expected to report the income. Don’t get caught off guard.

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My seven year old has a penchant for getting herself into trouble. She’s that kind of kid who pushes boundaries to see exactly how far she can get. Lucky for her, she also has a pretty quick wit and a couple of looks up her sleeve. When she gets into trouble, she peers up at me and begs, “One more chance!” You, of course, know exactly why she does this: I usually give in.

Yeah, I know better. But I do it anyway. I feel like maybe this time – this time – she’ll learn her lesson.

The IRS isn’t so very different. In a surprise move, the IRS has announced that they’re giving “One more chance!” to those folks with offshore accounts.

It’s deja vu all over again. In February 2011, IRS Commissioner Doug Shulman announced the Offshore Voluntary Disclosure Initiative (OVDI), saying:

As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them. (emphasis added)

Only last year, I totally expected it. This move, I’ll admit, I didn’t see coming. I thought “once and for all” really meant once and for all.

I guess $4.4 billion can change your mind pretty quickly. That’s the total amount of taxes collected by the IRS under the previous two programs, one in 2009 and the most recent in 2011. That total is expected to climb as the IRS processes the 2011 disclosures, including those which were extended due to Hurricane Irene.

The new program hopes to further increase compliance and – hopefully – add some more dollars to the Treasury. But there’s a catch – and it’s a pretty big one: there are no rules.

Okay, maybe that’s a bit dramatic. There are some rules. The IRS just reserves the right to change them at any time.

For example, there’s no deadline for compliance. That’s the kind of thing that is going to give tax professionals like me a headache. We like deadlines. But the IRS has not set a deadline. They can end the program at any time.

Also? The existing terms of the program may change at any time going forward. According to the IRS, they “may increase penalties in the program for all or some taxpayers or defined classes of taxpayers.”

So, er, I guess the strategy is to keep taxpayers guessing? Or encourage compliance as early as possible?

For the record, as it exists right now, individuals who participate in the program will pay a penalty of 27.5% (up from 25% in the 2011 program) of the highest aggregate balance in foreign bank accounts or value of foreign assets during the eight full tax years prior to the disclosure. As in 2011, if circumstances warrant, some taxpayers will be eligible for penalties of just 5% or 12.5%.

To qualify, participants in the program must file all original and amended tax returns for up to years prior to the disclosure. Payment must also be made for the taxes and interest due as well as applicable penalties.

Further, taxpayers who have come forward since the previous OVDI closed last year will be eligible to participate in the new program.

Again, that could all change. But that’s how it stands as of now.

For its part, the IRS believes that this new opportunity is a good one for taxpayers. Commissioner Shulman offers:

As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.

This is a tricky area. I’ve been critical of the underlying laws requiring disclosure. I believe that it pulls too many taxpayers into noncompliance by accident. Under the rules, taxpayers who pay taxes on their foreign income but don’t properly disclose the specific accounts are breaking the law. And taxpayers who have modest foreign accounts for things like paying tuition for study abroad programs, internships or travel, can find themselves noncompliant. Also at risk? Executives and workers in the US on temporary visas and dual citizens. Not your run of the mill tax scofflaws as the IRS would paint them. But folks who just didn’t understand and comply with the rules.

So, in that regard, I think that these efforts to give taxpayers “One more chance!” make sense. I’m just not a fan of the constantly moving target now in effect.

Yes, yes, taxpayers should get compliant as soon as possible. And I don’t believe in rewarding those who wait.

But – and I know this is crazy talk – maybe there’s an alternative to disclosure program after disclosure program meant to weed out the bad guys? Maybe we should change the rules altogether. Why not rewrite the laws so that people who weren’t intended to get caught up in the whole mess to begin with aren’t affected? I know that would take some effort on the part of Congress and (deep breath) cooperation (and goodness knows that’s asking for a lot) but wouldn’t it make more sense?

*Sigh* For now, it is what it is.

Of course, if the “One more chance!” thing doesn’t work, we can always try what we do to the seven year old: straight to bed with no TV and no more dancing in your room.

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The IRS has announced that the 2012 tax season is officially open. Well, sort of. The IRS has opened its doors for the season but what you can do just yet is still limited: e-file and Free File returns won’t be accepted until January 17, 2012. Today, however, you can (and should) start getting your information in order. The IRS opening the tax season is kind of the equivalent of catchers and pitchers reporting for spring training.

The IRS also announced that taxpayers will have a couple of extra days to file their 2011 tax returns in 2012. Taxpayers will have until Tuesday, April 17, 2012, to file their 2011 tax returns and pay any tax due. Make a note. It’s not Monday, April 16, 2012, as some media outlets are reporting.

Here’s why there’s some confusion: April 15 falls on a Sunday this year. So, you skip to the next business day which would normally be Monday, April 16. However, April 16 is also Emancipation Day, a holiday observed in Washington, D.C. Emancipation Day marks the anniversary of the day that President Lincoln signed the Compensated Emancipation Act which freed 3,100 slaves in the District, making DC residents the “first freed” by the federal government. The holiday was celebrated annually after the Civil War for many years; there was a break in the observance of the holiday in 1901 and celebrations didn’t resume until more than 100 years later. In 2005, Emancipation Day was made an official public holiday in the D.C. That’s significant because under federal law, D.C. holidays which are observed have an impact on tax deadlines in the same way that federal holidays do. That means that Tax Day cannot land on April 16, so taxpayers all over the country have the benefit of the extension to April 17, 2012.

Don’t assume that the extra two days moves all individual federal income tax deadlines forward because it does not. The overseas exception due date will still be June 15, 2012 and individual federal income tax returns on extension will be due on October 15, 2012 (not simply 6 months forward to October 17, 2012).

So taking all of that into consideration, as of today, you have 102 days left before Tax Day. Yep, that’s actually three extra days: it’s a leap year.

Will the extra days help out taxpayers? I don’t think so. But it certainly can’t hurt.

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The IRS has announced that tax-exempt organizations with January and February filing due dates will have until March 30, 2012. If you are affected, you don’t need to file anything to get the March 30 extension as it’s automatic.

The extension only affects a handful of orgs since most charities operate on a calendar year basis and have a May 15 filing deadline. However, orgs with a fiscal year that ended on August 31 or September 30 in 2011 would generally have a filing deadline of January 17, 2012, or February 15, 2012, respectively. Those deadlines are pushed to March 30, 2012. The extension also applies to organizations that already obtained an initial three-month filing extension and now have an extended filing deadline that falls on January 17, 2012, or February 15, 2012.

The extension applies to affected organizations filing Forms 990, 990-EZ, 990-PF, or 1120-POL. Form 990-N filers will not be affected.

So what’s the reason for the IRS’ generosity? Technical stuff, apparently. The IRS notes that part of the e-file system that processes electronically filed returns of tax-exempt organizations will be off-line during January and February 2012 “in order to facilitate systems and programming changes.” The rest of the e-file system – for individual and business taxpayers – is supposed to be fine.

And – I know this is crazy talk – the IRS will also let you file on paper. If your is are normally required to file electronically, you have the option of filing on paper while the electronic filing system is off-line.

Further details are in Notice 2012-4 (downloads as a pdf).

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The IRS has issued the 2012 optional standard mileage rates used for deducting the costs of operating an automobile for business, charitable, medical or moving purposes. They are:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

These rates are effective as of January 1, 2012 and reflect very little in the way of movement from those rates which were effective as of July 1, 2011 (a rare mid-year change). The rate for business miles has not been changed while the rate for medical or moving purposes actually went down by a half cent (yes, really).

The rate for charitable organizations remains unchanged and has for nearly 15 years. That rate is not adjusted for the cost of living (yes, it’s shameful) and is set by Congress.

Under the current rules, you can generally use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. I know that seems odd but it’s a quirky little provision that might save you a few tax dollars.

Taxpayers also have the option of deducting “actual car expenses” rather than the standard mileage rate. “Actual car expenses” are exactly as advertised on the tin: the actual costs allocable to the use of the car. This includes depreciation or lease payments, maintenance and repairs, tires, the cost of gas, oil, insurance, and license and registration fees. To figure your deduction, total your expenses each year. The portion attributable to the business use of the car is and deductible; if the car is used for personal and for business use, the costs must be pro-rated.

Keep in mind that timing and ownership are important when deciding which method to use. If you want to use the standard mileage rate and you own the car, you have to claim it in the first year the car is available for use in your business; in later years, you can claim either the standard mileage rate or actual expenses. However, if you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. You must make the choice by the due date, including extensions, of your return and you cannot revoke the choice.

Regardless of whether you choose the standard mileage rate or actual car expenses, parking fees, tolls, interest and taxes are separately deductible for business, medical, moving and charitable purposes. Be sure and keep good receipts to substantiate those costs.

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This week, the IRS released Notice 1036 (downloads as a pdf) outlining the percentage method income tax withholding tables and the Social Security withholding rate for 2012. The Notice assumes no tax deal for 2012 but does include this warning:

At the time this notice was prepared for release, Congress was discussing a possible change to the tax rate for the employee’s share of social security tax. Check for updates at www.irs.gov/notice1036.

The page at www.irs.gov/notice1036 is operational but fairly empty. Here’s a glimpse:

Yep. So far, there’s nothing there. But if that changes, I’ll be sure to let you know.

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There are very few people that I like dealing with less than the folks who administer my student loans for law school. Undergrad, I managed just fine. But when I moved to Pennsylvania, I was forced to deal with the Pennsylvania Higher Assistance Agency (PHEAA). If you’ve ever dealt with PHEAA, you know they’re a mess. They’re disorganized and rude. And it certainly didn’t help their reputation when, in 2006, details emerged of alleged overspending on the likes of massages, golf outings, expensive cigars and falconry lessons for board members and millions of dollars in bonuses.

Then Governor Ed Rendell (D) promised a clean-up of the quasi-public agency. It apparently didn’t come fast enough.

The agency’s quarterly report has revealed that it is paying more than $12 million to the IRS to settle an investigation into proceeds from its tax-exempt bonds. The investigation focused on a violation of federal tax laws intended to prevent tax-exempt borrowers, like PHEAA, from profiting from bond proceeds. Tax-exempt organizations which make money this way are supposed to turn the profit over to the government. PHEAA, apparently, didn’t do this.

The agency had initially set aside $3 million to pay a potential fine but it appears that the IRS felt that the violations warranted a larger penalty. The IRS won’t comment on the specifics of the matter and PHEAA remains rather tight-lipped.

But this just isn’t about PHEAA. Other state student-loan agencies have been similarly targeted; the Vermont Student Assistance Corp. has announced that it is in similar negotiations with the IRS. The IRS is concerned about how these agencies are treating the loans – and what kind of profit they’re making as a result. As the audits heat up, it will be interesting to see how the industry responds.

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The IRS has announced that it has $153.3 million in undelivered tax refund checks because of mailing address errors. There are 99,123 taxpayers who are due refund checks, making the average check a whopping $1,547.

If you think you might be owed some cash, you can check with the IRS by using the online “Where’s My Refund?” tool. You’ll need to provide your Social [entity id="section_21" style="padding: 1px; color: #fff; background: #336699;" class="forbes_entity" active="true" item_id="section_21" key="/security" display="Security" natural_id="channel_3section_21" type="section" active="false"]Security[/entity] number, filing status as reported on your last return and the amount of your refund. If you don’t have access to the internet (which is curious since you’re reading this), you can also call 1-800-829-1954.

Tax forms and other correspondences from the IRS are mailed to the last address clearly and concisely provided by the taxpayer, so be sure to update your address on your tax return. You can also update your address at any time using federal form 8822 (downloads as a pdf).

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Yes, it’s another spammy email purporting to be from the IRS. This one has, as its subject, “IRS-SUBJ1″ and claims to be from the IRS Tax Notification Department (support@irs.gov) though the IP address appears to actually be located in the Republic of Korea.

The email says:

Dear Taxpayer!

You are encouraged to pay a penalty for the failure to file income tax returns prior to January 31, 2011.

Note, IRC [Section 6038(b)(1)]

provides for a monetary penalty of $10,000 for each [Form 5471]

that is filed after the due date of the income tax return or does not include the complete and accurate information described in [Section 6038(a)].

No penalty will be imposed if the company shows that the late filing was due to reasonable cause.

For more information please refer to attached file.

Thanks,

Internal Revenue Service United States Department of the Treasury.

Tue, 29 Nov 2011 15:45:01 +0900

For the record, the form 5471 is a real tax form; it’s a reporting form for taxpayers who have an interest in foreign corporations which means that most taxpayers aren’t required to file one.

The email comes with an attachment in a zip file. Don’t click on the attachment. Delete it or forward it to phishing@irs.gov for investigation.

As always, remember that the IRS will never initiate contact with you via email.

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