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IRS news/announcements

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I’ll be the first to admit that the Tax Code is filled with crazy acronyms – like FBAR, EITC, and AGI – and convoluted titles (my current favorite is “IRS Facilitated Self-Assistance”). In fact, the Tax Code and the IRS tend to be painfully over descriptive when naming credits, deductions, and the like.

What you won’t see in the Tax Code – or in the IRS Regs – are titles of credits and deductions that have absolutely nothing to do with the actual credit or deduction. So don’t believe anyone who tells you that you can claim a credit, like a college credit, for doing something completely unrelated. Apparently, there are a number of schemes making the rounds right now in an attempt to convince taxpayers differently. Most of them are targeted to senior citizens and are related to college credits.

*Spoiler alert* You have to actually attend college to claim a college-related credit.

Anyone who is telling you different is lying. You can’t get a refund based on the American Opportunity Tax Credit if you’re not enrolled in or paying for college.

The IRS has been cracking down on this scheme in recent weeks, with IRS Commissioner Doug Shulman saying:

This is a disgraceful effort by scam artists to take advantage of people by giving them false hopes of a nonexistent refund. We want to warn innocent taxpayers about this new scheme before more people get trapped.

My favorite variation? The IRS has reported that a version is making the rounds touting that the college credit is available to compensate people for paying taxes on groceries. Yes, groceries. The two are in no way related. Trust me. I went to a lot of years of college and could barely afford to buy groceries. The only way to get the college credit is to attend and pay for college.

Also important to understand for 2012? There is no stimulus payment or rebate check coming your way. Nada. Zip. Nothing. And there’s nothing you can do to conjure one up – not going to college, not working from home and not simply aging. There’s nothing special for churchgoers and you’re not going to be compensated with a check in lieu of the Making Work Pay Credit. Don’t believe anyone who says otherwise.

Be smart. You don’t get a pass from IRS if you fall victim to one of these scams. You will have to pay back any refund that you might receive as a result of these scams if you get caught. You will likely also be subject to penalty and interest which can add up pretty quickly.

Here’s my rule of thumb: if it feels too good to be true, it probably is. So run away – fast – from anyone telling you that you can collect a paycheck from IRS for doing nothing. If that were true, you’d see it in my column… and I’d be standing in line next to you.

It’s March 29, do you know where your refund is?

It’s possible that it’s in someone else’s mailbox. Thieves are becoming more sophisticated these days with the Internal Revenue Service (IRS) posting “identity theft” and “phishing” at the top of the list for Dirty Dozen Tax Scams of 2012. Increasingly, dishonest persons are using information gleaned from stolen financials, internet scams, and phishing schemes to empty bank accounts and file fraudulent tax returns in order to snag bogus refunds.

During tax season, these efforts are on the rise with the IRS reporting that, as of March 9, 2012, they had stopped 215,000 questionable returns with $1.15 billion in claimed refunds from filters specifically targeting refund fraud. (report downloads as a pdf). And it’s not just small-time crooks and thieves: some so-called “boiler room” operations are on a massive scale. As a result, you need to take steps to protect yourself and your valuable financial information.

Even the most diligent taxpayers can’t completely stop the professionals, however. That’s why IRS is considering taking the bold steps of sharing information with the police in order to stem the tide of tax refund fraud and identity theft, beginning in Tampa, Florida.

Fraud is especially rampant in Tampa with damages from stolen Social Security numbers and financials topping $130 million in 2011 alone. Detective Sal Augeri, Tampa Police Department, emphasized the size of the problem in his testimony to the Senate Finance Committee (downloads as a pdf), saying:

“The tax refund fraud scams mirrors the spread of crack cocaine here in Tampa.”

That’s why, in what’s considered a groundbreaking move, the IRS is considering a pilot program in Tampa that would allow the IRS to work together with the police in instances of suspected fraud. While this seems like a no-brainer, it may actually be illegal under current law. Augeri stressed this in his testimony, noting, “As you are aware, tax code prevents the IRS from sharing information with local law enforcement.”

Believe it or not, prior to 1977, taxpayer information was considered public record and the rules regarding disclosure were left to the Executive branch (report downloads as a pdf). That caused concern about the dissemination of taxpayer information for nontax purposes. Congress took matters into its own hands in 1976 and revised Section 6103 of the Tax Code, eliminating Executive discretion.

Now, under the current Tax Code, Section 6103 limits disclosure of taxpayer information except under specific circumstances. At Section 6103(i)(2), disclosure is authorized in response to requests from federal agencies for use in criminal investigations. There appears to be no corresponding exception in IRC §6103 that allows for the release of identity theft information to state or local agencies, leading Steven Miller of the IRS to remark, “We are limited in what we can supply to local law enforcement.”

Augeri echoed this frustration, noting that in September of 2011, a targeted effort led to 47 arrests for identity theft and credit card fraud. During the arrests, several cars were seized, including a Mercedes, Jaguar, BMW, and a Bentley Rolls Royce. Despite the arrests and seizures, there have been no federal indictments for tax fraud. More disturbing, adds Augeri, is that none of those arrested appeared to have slowed their tax fraud activities.

Senator Bill Nelson (D-FL) wants to change that. Nelson held a hearing at the Senate Finance Committee to tout his proposed legislation, the Identity Theft and Tax Fraud Prevention Act, to allow, among other things, more taxpayer information sharing between the IRS and local law enforcement. Seizing on a point made by Augeri, Nelson said about the increasing problem of identity theft (testimony downloads as a pdf), “People describe it as cocaine on a card.” His legislation would, he touted, protect taxpayers from an expanding identity theft crisis.

Some worry, however, that changing the safeguards currently in place might do more harm than good. Nina Olson, the National Taxpayer Advocate, cautioned that once local law enforcement has access to taxpayers’ returns, they could be shared with other people (testimony downloads as a pdf). She suggested that, “[i]f we place a greater value on protecting taxpayers against identity theft and the Treasury against fraudulent refund claims, we may need to make a substantial shift in the way the IRS does business. Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly.”

Considering that Congress just slashed the IRS’ budget, I’m guessing we can rule the last bit out. And forcing taxpayers to wait longer for refunds? I can only imagine the backlash.

Realistically, I think that some level of cooperation between local law enforcement agencies and IRS is going to have to continue in order to stop identity theft and tax fraud, giving up what was until now sacrosanct taxpayer privacy in order to protect taxpayers. Is it worth it?

Many years ago, a crack unit of specialists from Big Four audit firms and boutique consultancy firms – were working on the mean streets of Broadway to South Street on the East River in Lower Manhattan. These men promptly escaped from the financial district to the nation’s capital. Today, they are wanted by the government. As in really wanted by the government. The IRS is recruiting high-powered talent, the big guns, in their efforts to crack down on companies shifting profits overseas to avoid federal taxes. If there is a problem, if no one else can help, and if the IRS can find them, maybe they can hire them…

It sounds like something out of a TV show. It has all of the elements: intrigue, drama, international waters, and now, an elite team hired to come in and change the world. Or at least that’s the plan.

The IRS has, in the past few months, significantly ramped up its emphasis on transfer pricing enforcement. Transfer pricing is a tricky concept affecting multinational corporations. In a typical scenario, a parent company may set up several subsidiary companies all over the world and move goods, services, and assets from one to another. Those transactions are supposed to be “arm’s length,” meaning that the goods, services, and assets are transferred for the same price as they would have between unrelated parties. But that’s not what happens. With a wink and a nudge, transactions are structured to shift profits from high tax countries (like the U.S.) to low tax countries (like Ireland) to cut their tax bills.

Many countries have been making noise in an effort to curb transfer pricing abuse, but the US has, until recently, remained oddly silent. In fact, the US has been content for years to allow other countries and organizations like the Organization for Economic Cooperation and Development, or OECD, which issued a report on Transfer Pricing Simplification Measures in June of 2011 (note that it opens as a large pdf), to take the lead.

Now, the US is finally causing a stir by putting together its own A Team, an elite group of tax specialists. The IRS showed its commitment last year by hiring Samuel “Face” Maruca to serve in the newly created position of transfer pricing director. Maruca is a highly respected tax attorney originally from the law firm of Covington & Burling. His job at IRS is to recruit the private sector’s top talent for the IRS’ mission.

Maruca will report directly to the Large and Mid-Size Business Division Deputy Commissioner, Mike “Hannibal” Danilack. Danilack comes to the IRS from Burt, Staples and Maner, LLP, a law firm that specializes in international tax law. Prior to this, he worked as a principal at Deloitte Tax, LLP, focusing on cross-border tax matters.

The team’s pilot is John “Howling Mad” Hinding, who is the Director of the Office of Associate Chief Counsel, Advance Pricing Agreement (APA) Program. Hinding drives the APA program which will shift from the office of IRS Chief Counsel to an office under Maruca.

Bringing the muscle is Doug “Bad Attitude” Shulman, whose plans tend to be unorthodox but effective. As the current IRS Commissioner, Shulman has been quietly making changes that would serve as the backdrop for this new crack team.

And who is in the team’s sights? A number of multinational companies. Tops on the list are those in the pharmaceutical and high-tech sectors, the same ones (like Apple, Microsoft, Oracle, and Pfizer) setting up shop overseas in such garden spots as Ireland, the Netherlands, and the Caymans.

Will the team be a success? Most tax professionals, myself included, tend to think that it’s going to be an uphill battle for IRS. After all, there are billions and billions of dollars at stake.

But the IRS might have a little wind in its sails. Last year, IRS settled a transfer pricing case with Western Union for $1.2 billion (yes, with a b); prior to that, the IRS had not made significant transfer pricing enforcement news since 2006 when it settled with GlaxoSmith Kline for $3.4 billion (also with a b). But two huge wins in the space of five years might be enough to give the IRS the confidence it needs to chase more companies (it’s reminiscent of the strategy with banking secrecy issues and UBS).

To make a statement, though, IRS will have to bring more bodies on board for enforcement. With the acquisition of Maruca, forty positions have been filled as of yet and the IRS has plans for more new hires, despite an agency budget crunch.  Those who have already joined the task force include professionals from such firms as KPMG and Ernst & Young and law firms like Mayer Brown and Horst Frisch.

So what’s bringing the top talent to IRS? A commitment to justice? A desire to make a difference? An obsession with transfer pricing? Maybe.

Or maybe it’s the economy. As private sector jobs dry up – or turn out to be not as swell as advertised – a steady government job now has more appeal than it did before. That’s how Maruca has been able to fill 40 of the nearly 60 positions available on his squad even in a climate when the IRS budget is meager.

This new talent has been, for years, toiling on the other side, working for the opposition. Now, the group, a virtual tax law dream team, is being called, in some circles, an IRS SWAT team. Whether the IRS is bringing Special Weapons and Tactics remains to be seen – but they are clearly bringing their A Team.

And c’mon, you know you’re thinking it, so say it with me: I love it when a plan comes together.

I hate standardized tests. My daughter, a straight-A student at her elementary school, was freaking out over taking the PSSAs, the state-issued assessment tests in Pennsylvania, this week. She was a bundle of nervous energy, talking through a litany of “what if?” questions, all of which appeared to revolve around some kind of worst-case scenario. I suspect she will be on pins and needles until the results are announced.

The waiting game for test results is often stressful. Fortunately, for many tax preparers, the waiting game for the new return preparer competency test is coming to an end: the IRS has begun providing test results to those who have taken the test. Preparers who score at least 350 on the 120 question test (a perfect score is 500) will receive a passing grade. Those preparers who pass and have successfully completed a tax compliance check will be given the designation of Registered Tax Return Preparer.

For now, test results are being sent to tax preparers by letter. However, after April 16, 2012, results will be made available to preparers at the testing site immediately after testing is complete.

The test is part of the IRS effort to regulate preparers. Preparers have nearly two years to take the test. In addition, all paid tax return preparers must have a Preparer Tax Identification Number (PTIN) and pay an annual fee. Certain return preparers must also complete 15 hours of continuing education annually. Certified Public Accountants, attorneys (hooray!), and Enrolled Agents are exempt from the new continuing education and testing requirements. Also exempt are non-signing preparers supervised by CPAs, attorneys, or Enrolled Agents and those who do not prepare the federal form 1040 series.

You can schedule the test online at IRS.gov/ptin. Be prepared: it’s not cheap ($116). That fee is in addition to the annual PTIN registration fee and any fees for continuing education.

It’s tough out there these days and increasingly, taxpayers are scurrying away from their tax obligations for fear that they won’t be able to pay. As a practitioner, I’ve seen the drill plenty of time: lay low and hope the IRS doesn’t come looking for you.

That rarely works. And when IRS does catch up to you, it tends to be much worse. You usually want to come to them before they come to you.

With that in mind, the IRS has announced a major expansion of its “Fresh Start” initiative in order to help struggling taxpayers. IRS Commissioner Doug Shulman said, about the program:

We have an obligation to work with taxpayers who are struggling to make ends meet. This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers.

Here’s what the IRS has to offer struggling taxpayers:

1, Penalty Relief. The IRS has announced penalty relief for the unemployed on failure-to-pay penalties. Under the new rules, a six-month grace period on failure-to-pay penalties will be made available to taxpayers; interest on unpaid taxes will continue to accrue during this time. The grace period is available for the tax year 2011 only and limited to balances that are $50,000 and under. The tax, interest and any other penalties must be fully paid by October 15, 2012.

Taxpayers who qualify for the relief are those wage earners who have been unemployed at least 30 consecutive days during 2011 or through April 17, 2012, and self-employed individuals who experienced a dip in business income of at least 25% due to the economy. There are also income limitations: $200,000 for taxpayers filing married filing jointly or $100,000 for taxpayers filing single or head of household.

To apply for relief, taxpayers meeting the eligibility criteria will need to complete a new federal form 1127A (downloads as a pdf).

2, Streamlined Collections. The IRS has also announced that the threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000. This means that taxpayers who owe up to $50,000 in back taxes, including penalty and interest, can enter into a streamlined agreement with the IRS to pay the balance over time. The amount of time to pay has also been extended to 72 months (up from 60 months). Penalties may be reduced but interest will continue to accrue while the balance is outstanding.

To take advantage of the new threshold, taxpayers need to file a Collection Information Statement, federal form 433-A or federal form 433-F (each will download as a pdf).

If you have questions about eligibility, you’ll want to contact your tax pro or call the IRS at 1.800.829.1040. Hopefully, these small steps from IRS will help some taxpayers get back on their feet.

The IRS has extra cash: more than $1 billion in extra cash. And some of it might belong to you.

More than one million taxpayers who were due a refund failed to file a federal income tax return in 2008, resulting in more than $1 billion sitting and waiting to be collected. The IRS estimates that half of those refunds are worth more than $600 each.

How much is a billion dollars? I know we throw around these “illions” anymore (millions, billions, trillions) like they’re nothing but it’s a lot of money. How much? If the IRS gave away a dollar an hour, it would take them more than 114,155 years to get rid of $1 billion. Yeah.

Who is owed the most money? By the numbers, the IRS estimates that more folks in California (122,500) are owed refunds than taxpayers in any other state; the state with the least number of taxpayers owed a refund is Vermont (1,700). Taxpayers in Oregon are due the least average refund ($527) while taxpayers in Wyoming are owed the largest average refund ($773).

If you are due a refund, you have to file a return. The return must be filed (meaning signed, properly addressed, and postmarked) no later than Tuesday, April 17, 2012. If you are due a refund, there is no penalty for filing late. However, after April 17, 2012, the statute of limitations will have run for 2008 returns and you’ll be out of luck and your share will become the property of the U.S. Government.

Why might you be due a refund? Maybe you had too much withholding from your wages or made too much him quarterly payments. You might have been eligible for the Recovery Rebate Credit because you didn’t get a stimulus check that year (assuming you were entitled to one). You might have also been eligible for the Earned Income Tax Credit (EITC). These are refundable credits – but you can’t receive the benefit of them unless you file.

Of course, if you owe the feds money (for student loans or back taxes, for example) or if your refund is otherwise earmarked for seizure (such as child support obligations), your refund will be offset by the amounts owed.

If you need a copy of the 2008 tax form, you can download one as a pdf here, visit the IRS website or call toll-free 800-TAX-FORM (800-829-3676). Remember that you’ll need your forms W-2, 1098, 1099 or 5498 from 2008 in order to file; if you don’t have them, request copies from your employer, bank or other payer. If that doesn’t work, you can try ordering them from IRS.gov, filing a federal form 4506-T (downloads as a pdf), or by calling 800-908-9946.

The IRS was kind enough to reply to my request for information about the discrepancy in filing dates for the form 1099 series and the W-2 series. They acknowledged that I was “right about the difference between 1099s and W-2s” but declined to comment on any sort of penalty relief for those who might be affected by the confusion.

Instead, the IRS stated:

Please note that most employers, banks, and other payers now file W-2 and 1099 series forms electronically. The due date for e-filed returns is normally March 31, but, because that’s a Saturday this year, businesses actually have until April 2, 2012, to e-file.

The point is well taken regarding e-filed returns. And I know the IRS is desperate for folks to e-file. But not everyone e-files. The rule is:

If you are required to file 250 or more information returns, you must file these returns electronically. The 250-or-more requirement applies separately to each type of form. For example, if you must file 500 Forms 1098 and 100 Forms 1099-A, you must file Forms 1098 electronically, but you are not required to file Forms 1099-A electronically. The electronic filing requirement does not apply if you request and receive a waiver.

You see, with all due respect to my friends at Ernst & Young and the other big accounting firms, as well as those in the banking industry, and large employers and companies like IBM and Apple, I’m not worried about you. I think you’ll be okay. You already know the rules and you generally pay tax professionals a pretty decent sum to make sure that you don’t miss important deadlines.

But I am concerned about our small business owners, including accounting firms that aren’t in the Big Four, those that don’t file 250 or more information returns. Tax rules can be complicated. And it seems more and more that we’re operating under the assumption that everyone is on the same playing field when they’re clearly not.

I hope that IRS – and those in Congress – remember our small businesses when they write the rules and draft legislation; those businesses are increasingly being overlooked. That entrepreneurial spirit that made America great is getting squashed underneath a myriad of small business-unfriendly legislation.

I see it in my own neighborhood. In Philadelphia, corner stores are disappearing. You don’t see many shoeshine guys at the train station anymore. I can’t find anyone to fix my back door because there are few handyman type businesses in operation. Is it all about taxes? Of course not. I realize there are practical and cultural reasons why we see fewer small businesses opening their doors. But a complex Tax Code, combined with a shifting sense of what is manageable, is certainly contributing to the problem.

The Internal Revenue Service (IRS) IRS has announced its “Dirty Dozen” tax scams for 2012. There are some familiar scams making the list this year with a handful of new-ish ones thrown in for good measure. The best way to protect yourself is to know what you’re up against. Be informed. Here’s the dish on this year’s Dirty Dozen tax scams:

1. Identity Theft. It’s no surprise to see identity theft at the top of the list for 2012. There’s been a definite increase in efforts across the board to steal identities. With respect to the IRS, the information is used to file fraudulent tax returns in order to get a bogus refund. And it can happen to anyone – trust me, someone did this to my mother (grr).

As an effort to get a handle on the problem, the IRS is cracking down. Now, together with the Tax Division of the Department of Justice and local U.S. Attorneys’ offices, the IRS is actively investigating instances of fraud and identity theft and prosecuting those responsible. If you believe your personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.

2. Phishing. Also near the top of the list: phishing. Phishing scams usually involve fake emails and bogus web sites. The idea is to get you to turn over personal information or to click on a link that may install malware on your computer that can track your keystrokes or otherwise glean access to your financial information. Recent examples can be found here and here.

I’ve preached it before: the IRS does not initiate contact with taxpayers about your tax account by email. Ever.

3. Return Preparer Fraud. Most tax pros are good people. Some are not. Some will take your refund, charge too much for services or talk you into claiming deductions or credits for which you are not entitled. I’ve seen it all. And it usually comes back to haunt you.

Make good choices when you seek out your tax professional. If you don’t feel good about your preparer, it is perfectly okay to walk away. You’re not in a committed relationship, you don’t have to lie about staying home to wash your hair. Find someone who has proper credentials, returns calls, and answers your questions. Avoid preparers who are rude and patronizing, hard to locate when you have a question, and who bases their fees on percentages of your refund. You can find more tips on finding a tax professional here.

4. Hiding Income Offshore. Offshore accounts are totally legitimate. However, using offshore accounts to hide income for tax purposes is illegal. Identifying taxpayers using offshore accounts to evade taxation is a top IRS priority. Reporting offshore income is mandatory for U.S. taxpayers. Reporting offshore accounts is required if the aggregate of those accounts reaches $10,000 in any calendar year. Failure to comply can result in some pretty nasty penalties and potential criminal prosecution.

If you need to comply and you haven’t yet done so, the IRS has a limited amnesty program available for taxpayers. Ask your tax professional for more information.

5. “Free Money” from the IRS & Tax Scams Involving Social Security. C’mon folks. If the government were giving out money, would it stay a secret for long? Be wary of scams touting “free money” from the IRS or Social Security rebates; these have been popping up all over the country but have seemed to focus on churches as a way of sucking you in. Don’t fall for it.

6. False/Inflated Income and Expenses. There are lots of ways to couch this scam. The IRS refers to it as “including income that was never earned… in order to maximize refundable credits such as the Earned Income Tax Credit.” I call it plain ol’ lying. There’s a simple way not to get caught up in this scam, often proposed by unscrupulous preparers (see #3 above): don’t make stuff up.

7. False Form 1099 Refund Claims. I can’t understand why this scam won’t die. The premise underneath this scam is that the federal government maintains secret accounts for taxpayers and all you have to do to get it is file a fake form 1099 Original Issue Discount (OID) with the IRS. Read that out loud and see if you can do it without bursting out laughing halfway through. Secret accounts. Fake tax forms. It sounds like a bad movie. If you get involved with such nonsense, you will be subject to penalties and possible criminal prosecution.

8. Frivolous Arguments. You have every right to make a legitimate argument to reduce your tax liability. You don’t have the right to just make stuff up (see again #6). The IRS has heard just about every crazy argument under the sun and time after time, these are shot down in court. They range from “The filing of a tax return is voluntary” to “Only foreign-source income is taxable” to my personal favorite, “Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment.” All bogus. So are the notions of reparation tax credits, corporation sole, Social Security refunds, and the form 1040 not being legitimate because it doesn’t have an OMB control number as required by the Paperwork Reduction Act. Don’t waste your time with these arguments. Doing so can subject you to penalties and possibly land you in prison.

9. Falsely Claiming Zero Wages. Again, if it has the word “fake” or “phony” or “false” in front of it, you know it’s wrong. So filing a phony information return is wrong and illegal. There is a scam that suggests that if you file a federal form 4852 (Substitute Form W-2) or a “corrected” Form 1099, you can reduce your income to zero and get a refund. Um, no. This never works. Ask Wesley Snipes.

10. Abuse of Charitable Organizations and Deductions. There are a couple of scams stemming from charitable deductions. In one arrangement, donors don’t really relinquish control over assets for which they claim a deduction. Let me help you out on this: if you don’t actually give it to anyone, not a gift, ‘kay? And when you do make a legitimate donation, make sure the value is stated correctly. Nobody’s paying $100 for those nasty acid-washed jeans. And that china set that’s missing a few teacups and a serving platter, not a full set anymore. Let’s be honest: there’s a reason you’re getting rid of most of that stuff. Note it appropriately.

11. Disguised Corporate Ownership. Lawyers like me like to set up corporate entities for all kinds of reasons from liability protection to gifting opportunities. Setting up corporate entities to try and confuse the IRS for purposes of tax avoidance or money laundering, however, is not a legitimate corporate purpose. The general rule here is that you can’t do something one way for tax purposes that you couldn’t do another: you can’t make something deductible simply by tossing it into a company.

12. Misuse of Trusts. I love trusts. I think they can be really great ways to plan for incapacity, consolidate and manage assets, provide privacy for beneficiaries, and effectuate distribution from an estate. Structured properly, trusts can even assist with asset protection and tax savings. They can’t be used to hide assets from creditors or avoid paying legitimate taxes on income and estates. If it sounds too good to be true, it probably is. Make sure you understand the real benefits of any trusts before you sign on the dotted line.

Inevitably when a taxpayer comes to me after getting pulled into one of these type scams, they start out by saying something like, “It didn’t sound right but…”  Stop right there. That’s all you need. If it doesn’t sound/feel/smell right, walk away. Or ask for a second opinion. I know an extra phone call feels like a hassle but look at it this way: would you rather be calling your tax lawyer now or your criminal lawyer later… from prison? I think we know the answer to that one.

Remember the newly expanded tax credit for hiring veterans that was passed last year?

The Internal Revenue Service (IRS) has finally issued more guidance on the credit. The Returning Heroes and Wounded Warriors Work Opportunity Tax Credits were part of the VOW to Hire Heroes Act of 2011, which was announced on Veterans Day last year. The credit gives employers a tax credit for hiring qualified veterans. A qualified veteran is defined as a veteran with aggregate periods of unemployment of at least 4 weeks but less than 6 months in the year prior to being hired or with aggregate periods of unemployment of 6 months or more in the year prior to being hired.

The law allows employers a tax credit per veteran. The maximum credit is applicable for employers who hire vets with service-related disabilities. Other factors that affect the amount of the credit include the length of the veteran’s unemployment before hire, hours worked and the amount of wages paid. Also important? Whether the employer is a for-profit employer or a tax-exempt organization.

The IRS has also released the applicable forms. The federal form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, (downloads as a pdf) must be filed by June 19, 2012, for employers who make a qualified vet hire between November 22, 2011, and May 22, 2012. Eligible employers who make a hire after May 22, 2012, must file the federal form 8850 within 28 days after work begins.

The IRS has confirmed that the form 8850 may be transmitted electronically or via fax, assuming that the state workforce agencies accept submissions in those formats.

To claim the credit, an employer figures the amount on the federal form 5884, Work Opportunity Credit, (downloads as a pdf) and entered on a federal form 3800, General Business Credit, (downloads as a pdf) to be filed together with the employer’s income tax return.

For more information, check out Notice 2012-13 (downloads as a pdf).

One of the frustrating things from a tax professional’s point of view about the magically shifting world of tax credits and deductions on the whims of Congress is that it confuses taxpayers. For 2011, tops on the list of things taxpayers can’t understand is the disappearance of the Making Work Pay Credit. But second? Repayment of the first time homebuyer’s credit.

In case you’ve forgotten all about it, let me quickly refresh your memory. As part of the Housing and Economic Recovery Act of 2008 (HERA) in order to make the realtor lobby happy jump-start the economy, Congress passed a tax credit for first-time homebuyers. Taxpayers who had not owned a principal residence for the three-year period prior to the purchase of a new home were allowed a credit if they purchased a new home between April 9, 2008, and July 1, 2009. For qualifying taxpayers, the credit was up to $7,500 and it was refundable, meaning that if the amount to be refunded exceeded any tax liability, the overage would be issued to the taxpayer.

It wasn’t a freebie. The tax credit must be repaid over a 15-year period or when the house is sold if there is sufficient capital gain from the sale. Payments must begin two years after the credit is claimed, so taxpayers who take the credit in 2008 must begin repayment with the 2010 tax return and taxpayers who take the credit in 2009 would begin repayment on the 2011 tax return. The repayment is a straight line repayment over 15 years with no interest and is “paid” back via a federal income tax return.

But here’s where it gets confusing. In 2009, bowing to continued pressure from the realtor lobby by popular demand, Congress subsequently changed the terms of the credit. As a result, there were two sets of rules in effect for the first half of 2009. Since the change was made mid-year, taxpayers had the option of claiming the first time homebuyer’s credit under the 2008 rules or the 2009 rules. For almost all taxpayers, the 2009 rules were more advantageous because, under those rules, the credit did not have to be repaid.

What that means from a practical standpoint is that taxpayers are now scratching their heads trying to figure out whether they claimed the credit, which version of the credit they claimed, how much credit they originally needed to repay (if any), and how much credit remains unpaid.

It’s taken a bit but the IRS now has an online system available to help out: the First Time Homebuyer Credit Account Look-up. To use the system, you’ll need your Social Security number, date of birth, street address, and zip code. The system is supposed to allow taxpayers access to information about the balance of the First Time Homebuyer Credit; total amount of the credit; annual installment repayment amount and the amount paid back to date.

Supposed to. If it’s not working, you can call a special toll free number at IRS to access information about your account: 1.800.919.0352.