Archive for Form 1040


Big Changes for Medical Expenses

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The tax law has changed when it comes to deducting Medical Expenses

Stethoscope_The_Budget_ProfessionalIf you itemize deductions on Form 1040, Schedule A, Itemized Deductions, new rules may affect your medical expense deduction. The new rules raise the threshold that unreimbursed medical and dental expenses you paid for yourself, your spouse, and your dependents must reach before a deduction is allowed.

Most people who itemize deductions on Sch A can claim deductions for unreimbursed medical expenses.  These are medical expenses not covered by health insurance, paid by an employer, or paid by any other source. Medical expenses must exceed 10 percent (10%) of your Adjusted Gross Income (AGI) to be deductible. Previously, the law permitted deductions for unreimbursed expenses only in excess of 7.5% of AGI.

How does the math work?

Example:  Jane is 32 years old. Jane’s 2013 Form 1040 shows an AGI (Adjusted Gross Income) of $50,000.  10% of $50,000 is $5,000. During the year, Jane paid $6,000 out of pocket for doctor and clinic co-pays, eye glasses, contact lens, chiropractor, and prescriptions. Jane can only deduct medical expenses that exceed the 10% threshold of $5000. Jane’s total 2013 medical expense deduction is $1000. (6000 – 5000 = 1000)

Example: Carl is 28, and his Form 1040 shows an AGI of $32,000.  10% of $32,000 = $3200.  Carl’s medical bills for the year total $1000.  Carl cannot claim a tax deduction for medical expenses.  His expenses do not go over the 10% threshold.

Temporary exemption for taxpayers age 65 and older

Congress decided not to fleece our senior citizens on this one, at least not for a few years. This new tax law does not apply if you are age 65 or older.  There is a temporary exemption for individuals age 65 and older until Dec. 31, 2016. If you are 65 years or older, you may continue to deduct total medical expenses that exceed 7.5% of your adjusted gross income through 2016. If you are married and only one of you is age 65 or older, you may still deduct total medical expenses that exceed 7.5% of your adjusted gross income.

This exemption is temporary. Beginning Jan. 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.

What records should I keep for each medical expense?

For each medical expense, you should keep a record of:

  • The name and address of each medical care provider you paid
  • The date of each payment
  • The amount of each payment

You should also keep a statement or itemized invoice showing the following:

  • A description of the medical care received
  • Who received the care
  • The nature and purpose of the medical expenses

Note: Taxpayers often overlook the deduction for mileage as it relates to medical care. You can deduct 24 cents a mile for every mile you drove your car for medical reasons. This includes mileage to and from the doctor, the hospital, the clinic, therapy, Weight Watchers **, etc. Keep a written mileage log to verify this deduction.

Note: Same-sex married couples are recognized as married for federal tax purposes. You are considered married if you were lawfully married in a state or foreign country whose laws authorize the marriage of two individuals of the same sex – even if the state or foreign country where you live now does not recognize same-sex marriage. (17 down, 33 to go)

** If your doctor has diagnosed you for a specific disease, such as obesity, hypertension, or heart disease, fees you pay for membership in a weight reduction group as well as fees for attendance at periodic meetings are considered medical expenses.


For more information, see 
IRS Pub 502 "Medical and Dental Expenses"


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Don’t Pay This Tax Bill!

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Green piggy bank with tax bill of $1000


The email caught me off-guard. It was short and to the point:

Hello again! I have a question for you. We received a letter from the state saying that adjustments need to be made to our income tax return and that we owe $580. It says that if we disagree then we can send them back more information. Do you have any suggestions on what we should do?

My first reaction was to snort and say, “No way!”

My next reaction was concern – concern that this was a new tax client, and first return filed out of the gate they receive a letter from the state demanding money instead of the $350 tax refund they were owed. My third reaction was to groan, knowing that somewhere between the envelope being opened at the state tax office and input into the state computer system, a W-2 had been lost.  How long would this take to fix?

The adjustment notice from the state told the taxpayer that a change had been made in the amount of withholding they had claimed. Because the withholding amount used in the state calculation was less than what was claimed on the return, an anticipated refund was suddenly a balance due.

Quickly checking the math in the notice against my records, it took me about two minutes to find the mistake and verify my fear.

The total state income tax withholding my client claimed on his tax return was $1690.00. The state adjusted that withholding down and used a figure of $830.00.

$1690 – $830 = $860.00

Somewhere, $860 in state withholding had evaporated between the time the return was prepared and the time the state processed the paper. The first thing I did was check the state withholding amounts on the W-2’s of the taxpayer.

Guess what. One of the W-2’s had state income tax withholding of $860.00. It was pretty easy to see that a missing W-2 caused the problem. This is actually a very common mistake at the final processing level. It’s also a common mistake for the taxpayer to forget to include his W-2 with his filed return, or to make a math error when adding his withholding among multiple W-2’s.

This error, although it wasn’t made by the taxpayer, is going to take some time and effort to fix. I’ll write a letter disputing the notice the taxpayer received, explaining the missing W-2 is the reason the withholding was adjusted down. Copies of the W-2 must be attached to the letter to substantiate the case. I’ll make liberal use a bright yellow highlighter to make my point. Once the state receives that information, they will make an adjustment on the case and issue the taxpayer his refund – a few months late.

Hopefully, the adjustments will be agreed to and made without incident. The first correspondence might not do the trick – it may take another letter or a phone call. Remember, they lost the W-2 in the first place!

You should never take any letter from any tax agency, telling you a mistake was made and you owe a bill, as gospel. If you don’t understand the adjustments the tax agency is making to your tax return and your account, contact your tax preparer and discuss your case. Take all letters you’ve received from the tax entity to your preparer.

When you’re dealing with changes being made to your tax return:

  • Make sure you understand completely and agree with the changes being made to your tax return before they are made.
  • Don’t ignore tax correspondence – all letters are sent out on a timed schedule and by law you have certain appeal rights, but if you’ve got 60 days to respond and you don’t decide to answer until Day 90, you’re out of time and too late.   Once Day 60 passes with no contact from you, their changes will become permanent.  If the law says you’ve got 60 days, that means 60 days, not 61.
  • If you choose to ignore the tax agency letters and blow your appeal time frame, the changes will become permanent.
  • If you don’t agree with the proposed changes to your account, present your case in a clear and concise manner. Include copies of the original correspondence to you, your reply, and all exhibits needed to back up your argument.  Keep everything brief but to the point.  They’ve already made the changes. You will have to change their mind.
  • If you prepared your own taxes and don’t know whether you made a mistake or not, make an appointment with a local tax professional and show them the letter. Ask your friends and neighbors for referrals. The best tax experts are often found locally. Personally, I would avoid any of the large tax prep companies and go with a local tax preparer or accountant that comes highly recommended.

Have you ever been on the receiving end of an IRS or state tax agency collection letter?

Were you able to resolve the situation without trading in your first-born?


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Form 1040.  Request an extension and get more time to file!

I may not make the federal income tax filing deadline next week.  My tax return is not done, the fat lady is not singing yet.  I’m going out of town at the end of this week, and I’ll be gone all weekend.  I’ve set aside Friday for my own “tax work”, and what I can’t get done that day, I’ll have to finish up Monday.  Hopefully I can hit the “submit” button before Midnight!

If I can’t get my tax return completed in time, I can file a request for an extension.  Filing for an extension will give me another 6 months to file.  My tax return won’t be due until October 15, 2013.  Filing an extension, however, will not give me extra time to pay.  If I will owe the IRS money, they want me to pay that with the extension request.  They’re willing to wait on the paperwork, but they’re not willing to wait on their money.

Five Things You Need To Know About Filing For An Extension

1.  Filing Form 4868 by mail is the most common way to request an extension (Application for Automatic Extension of Time to File U.S Individual Tax Return).  Pick up a blank Form 4868 at your local library, or download and print from the IRS website.  Fill in the form – it’s short, only a few lines, and attach a check if you think you’re going to owe a balance due.  You don’t have to know to the penny what the bill will be, but take a good guess and write a check for all of it or a large portion of it.  Pay what you can afford.  The IRS will look favorably upon you if you pay now instead of when you file.  You’ve got to get this form in the mail and postmarked before Midnight, April 15.   CLICK HERE FOR FORM 4868

2.  The easiest way to file for an extension is using Free File at the IRS website.  Everyone is eligible to go to the IRS website and use Free File to e-file an extension request.  There are no limitations on this service, income or otherwise, as there is if you’re using Free File to send in a tax return.  Just like your tax return, you’ve got to e-file the extension request before Midnight April 15, and the receipt you’ll get when you file the request is your proof you made the deadline.  This receipt is important – print it and save it.  Put it with your tax return paperwork.  GO HERE FOR FREE FILE

3.  If you do use e-file for your extension request, you can pay any balance due by using the website option to transfer money from your checking or savings account.  You’ll need your bank routing number and account number in order to pay using electronic funds withdrawal, so have your checkbook handy when you sit down at your computer.  CLICK HERE FOR MORE INFO

4.  Do you have your return finished before the deadline, but find you owe money that you don’t have?  File your tax return on time, even if you owe money and can’t pay.  Don’t file an extension.  Send in your return and pay what you can, then call the IRS in about 30-45 days and request a payment plan.  You can also download an application from the IRS website and submit this with your tax return, asking for an installment arrangement that will allow you to make monthly payments (Form 9465, Installment Agreement Request).  The IRS website  has an online tool (Online Payment Agreement) that you can use to apply for a payment plan online.  If you owe money and there is absolutely no way to pay due to unemployment, illness, etc., call the IRS.  There are things they can do that will give you a breather until you can get on your feet again.  The entire time you owe money to the IRS, there is going to be interest and penalties added, and those fees compound daily.  Pay the IRS off as soon as you can.



5.  Asking for more time to file does not give you more time to pay your taxes.  Tax law says that the tax is due on the money when the money is earned.  This is April 2013 – and the money you owe taxes on was earned in 2012.  You should have been paying Estimated Payments during the year, and not be in a balance due situation now – per the tax code.  If you don’t have the tax you owe paid by the April 15 filing deadline, you will be assessed penalties and interest.  If you can afford it, pay as much as you can with your extension request.  If you still owe, make time to contact the IRS and request a payment plan.  You do not want your account to go to Collections!

Do you feel the need to file an extension?  If not, how fast did you spend your tax refund?

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File Your Federal Taxes For Free

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File your taxes for free


April 15th is right around the corner! Have you filed your tax return yet? The Federal FAFSA (Free Application for Federal Student Aid) deadline is June 30th, and many states have deadlines coming up. Colleges can have their own FAFSA deadline, too. If you or a family member need financial aid to attend college, you should get the information in before the deadline in order to qualify for maximum awards.

If you have a college student that worked a job in 2012 and needs to file to report that income and get a tax refund, there are free choices on-line that will keep that refund money in the student’s pocket rather than the preparers.

NOTE: even if your student does not have any taxable income to report, a tax return should still be filed claiming $0 income. When you do this you document that no income was received by the student, and this shows need. Showing need means more financial aid! If at all possible, file a 1040EZ or a 1040A for the student in lieu of a “long form” 1040 – this works in their favor and will allow you to skip about half of the FAFSA questions, too.


File Your Taxes For Free

There are many tax-prep companies offering free federal income tax filing this year. Some of these may also file your state return for free – and some will charge a fee. If you find that you are going to be charged a fee to file your state return, go to your state website and check for free filing. Many states offer free on-line filing of state income tax returns, and they’ll have on-line, fillable forms that will do the math for you at the click of a button.

IRS First.  Always.

ALWAYS start your search for free income tax filing on the IRS website! The companies listed there have agreed to offer free filing for being listed on the IRS site. It’s possible, if you access the same company from a source other than the IRS website, you will be charged a filing fee or charged for other products and/or services.

The list of “Free File Companies” can be found at the link below. This is the official IRS website. Be sure and read the eligibility criteria for each company carefully before selecting one – your Adjusted Gross Income (AGI), age, state of residence, whether you are in the military, or whether you qualify for EIC (Earned Income Credit) may affect what company you are able to use. If your AGI falls under $57,000, you should be able to file your federal tax return free of charge.


Form 1040.  File Your Taxes Free!

Are You Familiar With Tax Prep?  Try Free Fillable Forms

If you are comfortable filling in your tax return information without any interview questions, if you recognize the fields on a tax return and can easily determine what is “wages” vs “what is what” when it comes to the financial information you are reporting, you may want to use


  • Free Fillable Forms are on-line, electronic versions of paper IRS tax forms.
  • You can choose a 1040, 1040A, or 1040EZ.
  • The online form program will do the math for you.
  • You must have last years tax return available and the exact amount of AGI (Adjusted Gross Income) in order to file.
  • You can print your return.
  • Can file an extension.
  • Not for use by paid preparers!
  • You cannot file any state returns using Free Fillable Forms.


 Save Time by Prepping

In order to be successful and spend as little time as possible filing your tax returns, gather all of the current filing year supporting paperwork you will need. Have a copy of last year’s tax return handy – you won’t be able to file anything electronically without last years AGI or an IRS PIN number.

Direct Deposit is Quick

Use Direct Deposit and get your refund in about 10 working days. When you file electronically and use Direct Deposit, you can check your refund status within 72 hours of filing.



I Owe, I Owe, It’s Off To Pay the Tax Man I Go

Do you owe money to the IRS?

You may find out after filling out all that tax info that you owe a balance due. It’s OK – file electronically anyway, and file before April 15th so you don’t incur a penalty. There are many ways to pay the IRS – they, like every other business out there, will take your credit or debit card:


Click here for more information on how to file your Federal taxes free of charge!


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Categories : Form 1040, Free Stuff, IRS, Taxes
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5 Tax Law Changes That Benefit You

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Tax Money The American Taxpayer Relief Act, or ATRA, was signed into law on January 2, 2013. Be thankful the law was passed. There were many tax provisions that expired in 2011 and 2012, and the ATRA not only extended those into the future, but made many of the extensions retroactive. Quite a few of the provisions were also made permanent.

Here are five tax “breaks” that are fairly common, and used widely. Many of you reading right now have relied on these to decrease your tax liability in the past (more than likely increasing your refund), and probably didn’t have any idea the credits had expired. But – Congress (finally!) acted, did the right thing, and gave you the tax deductions back. You’re paying less tax because of these tax law changes – and less tax is always a good thing!


The two most popular education related tax deductions are the Tuition and Fees Deduction, (Form 8917), and the deduction for Educator Expenses. Both of these tax benefits expired in 2011. The ATRA made retroactive to 2012, and extended through 2017, both of these “above-the-line” deductions.

Above-the-line means adjustments (subtractions) to total income, in order to calculate Adjusted Gross Income. This type of deduction is usually more beneficial to you than “below-the-line” adjustments, which lead to Taxable Income.

Educator Expenses allow elementary and secondary school teachers, who work at least 900 hours a year, to take a deduction for classroom supplies they paid out of their own pocket.  Paper, pencils, software, books, paint, rulers, etc. – but the deduction is capped at $250.  (If you are married filing joint, and your spouse is also a qualifying teacher, you can each take the deduction of $250, for a total of $500).  Most of the teachers I know spend a lot more than $250 on class supplies during the school year.  Write your Congressman.  This deduction needs to be  higher!

The Tuition and Fees deduction allows you to claim a deduction of up to $4000 for qualified tuition expenses for you and/or your spouse, and/or your dependent.  This deduction comes straight off of your Total Income.  Less income means less tax.  Note:  this deduction is phased out depending on income.


If you itemize deductions using Schedule A, this deduction may be a good one for you depending on your situation. This tax benefit gives you the option of deducting state and local sales and use taxes, instead of state and local income taxes. This deduction also expired in 2011.

The ATRA reinstated this benefit, made it retroactive to 2012, and extended it through 2013. Take note – this deduction is due to expire at the end of this year, 2013. You’ll be able to claim it on your 2012 and 2013 Form 1040, but not 2014. (Unless the tax laws change again, and this is included)


Mortgage insurance premiums are just that – mortgage insurance that the lender charged you, and added to your house payment, as insurance to cover him in case you defaulted on your loan. If you have an FHA loan written after December 31, 2006, you’re probably paying mortgage insurance. Many private lenders charge these fees, too.

This tax benefit allows you to deduct, as mortgage interest on Schedule A, your mortgage insurance premiums.

This tax benefit expired in 2011. It was reinstated, retroactive to 2012, and extended through 2013. Take note, this deduction expires at the end of this year. You’ll be able to claim it on your 2012 and 2013 Form 1040, but not 2014. (Unless the tax laws change again, and this is included)


This credit has been around for quite a few years, and it’s expired and been reinstated a couple of times already. This tax law change covers Residential Energy Credits, Form 5695.

If you’ve put new windows or doors in your house, installed a new furnace, heat pump, or AC unit, replaced a water heater, added solar or skylights – and quite a few more options – you may know about this credit. It’s been a sales pitch for utility companies and heating & cooling companies for many years.

The deduction expired for good in 2011, but was reinstated retroactive to 2012, and extended through 2013 by the American Taxpayer Relief Act. This credit is usually equal to 10% of what a homeowner spends making eligible energy improvements or upgrades to his home.

Unfortunately, the credit is now capped at $500 (down from a maximum of $1500 in 2009 and 2010), and now the calculation has a little twist called a lifetime limitation.

If you have claimed the credit in the past, specifically in tax years 2006, 2007, 2009, 2010, and 2011, you are required to subtract those used credits from the $500 you’re allowed for 2012.

Let’s say in 2007 you had a qualified window installed in your bathroom, and it cost you $250. In 2012, you installed an eligible, energy efficient back door for a total cost of $500. Remember, you are allowed a maximum credit of $500. Even though you spent $500 for the door, you cannot write off the entire door purchase. You must subtract the $250 credit used in 2007 for the window from the $500 maximum credit allowed.

$500 – $250 = $250

You can deduct $250 of the $500 you spent for the door. I bet the salesman said you’d be able to “take the whole door off your taxes”, didn’t he?

This credit usually covers equipment and the cost of the labor to install. However, there are some energy saving items that qualify for the credit, but the labor to install them does not. You can find specifics about this and any other credit at the IRS website


Well, hallelujah and it’s about time, Congress!

Without this tax law change, 30 million middle class Americans would have had to pay Alternative Minimum Tax on their 2012 returns – this is UP from 4 million in 2012! That’s a difference of 26 million!  26 million!

This tax was created to catch the wealthy person who was taking a lot of tax write-offs, and make them pay something because of all those write-offs. But, the way the tax loopholes are also written, the wealthy are often able to avoid paying this tax – and instead the law catches many people in the middle class and lower middle class and adds thousands to their tax bills!

Do you think you could have been one of the 26 million paying a higher tax bill based on your income, exemptions, and the type of deductions you claim? I’ve seen AMT impact people in a very negative way, and often when they were not liable.

The AMT Patch is permanent, but exemption amounts are higher than in the past, and will now be indexed to inflation.

Congress should eliminate Alternative Minimum Tax altogether – and maybe they will.  There are a few savvy Congressmen trying to repeal this tax as we speak.


Suppose the American Taxpayer Relief Act had not been signed into law on January 2nd.  How many of the above tax deductions would you have lost because they expired?

Would your tax bill have gone up?

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Ready! Aim! File!

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Picture of Form 1040 and Tax Man Maze

The sun rose as the starting gate dropped! Hard drives fired up all over this land! Bits and bytes were thrown into the ether, much like that dancing eye in The Twilight Zone opening credits. Millions of returns were filed today and I certainly hope the government servers were up to the deluge.

The IRS began accepting and processing federal income tax returns today. This was the first day that you could file your tax return electronically or by mail. Were you one of the many that sent your tax return into cyberspace?

Got your refund spent yet?

Because of the tax law changes Congress made in January, the IRS had to delay the beginning of the tax filing season.

When Congress passed the American Taxpayer Relief Act (ATRA) on January 1, many of the tax law changes were retroactive back to last year. Forms had to be updated and computer programming had to be changed and tested before any processing could begin.

Beginning today the first of an estimated 120 million households will file a personal tax return for the year 2012. 80% of these households will file electronically.

The IRS continues to tell taxpayers that filing electronically is their best option.

Not everyone can file today. The IRS didn’t get everything fixed in time. If you are claiming Residential Energy Credits, Depreciation, Education Credits, and General Business Credits, among others, your tax return won’t be accepted until late February and possibly into March.

Something tells me the IRS is going to offer the employees a whole lot of overtime this processing season.

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Big Changes to Office in Home Deduction

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Woman working in home office

IRS Changes Office In Home Deduction

Do you own a home based business? Do you own a small business and use a room in your home as an office away from the office? Do you work for a company that requires you to keep an office in your home, too?

If you use part of your home as an office for your business, it just got easier to claim the Home Office Deduction!

Beginning January 1, 2013, instead of keeping track of the percentages of square feet and stacks of a dozen different expenses in order to calculate the Home Office Deduction, you can now claim a flat rate. Read on – this may save you some time and record keeping this year.

The IRS will now allow you to claim an “optional” deduction instead of the usual “regular” percentage based deduction for business use of your home. This simplified, “optional” deduction is calculated at a flat $5.00 per square foot, up to 300 feet, with a $1500.00 cap for the year.


  • If your home office is 100 square feet, your Home Office Deduction would be $500 (100 x 5 = 500)
  • If your home office is 250 square feet, he or deduction would be $1250 (250 x 5 = 1250)
  • Simply take the square footage of your home office, multiply it by $5 per square foot and you have your deduction amount.
  • If your home office is 400 square feet and you elect to take the optional method, your deduction will be capped at 300 feet and $1500.

According to the IRS, tax payers spend 1.6 million hours a year on record keeping and paperwork for the Office in Home Deduction. By using a flat rate based on space used, people will save a lot of time and effort.

Claim Mortgage Interest & Real Estate Taxes on Schedule A

You can still claim home real estate taxes, allowable home mortgage interest, and casualty losses for the filing year as itemized deductions on Schedule A. No longer will these expenses be allocated between personal and business use if using the optional method. Depreciation on your home cannot be taken when using the optional method.

Business expenses not related to your home are still deducted as regular business expenses, no change there. These include employee wages, office supplies, stamps, advertising, office equipment, etc. You will continue to claim regular business expenses on Schedule C or the appropriate business form.

Qualified Business Use Is Still the Rule

The old requirement that the home office space must be used regularly and exclusively for only business still applies when using the optional method. Qualified business use is still the rule!

The rule that limits the office in home deduction to income earned by the business is also still in effect.

Year By Year Determination

The good news is, the IRS will allow you a year–by–year determination with this deduction. If you decide to use the optional method for filing year 2013, you can still change and go back to claiming actual expenses for 2014. If you want to flip back to the optional method in 2015, you can do that. Be aware that once you file that original tax return for the year that you claim either the optional or regular method you cannot go back and change that election. An election for any taxable year, once made, is irrevocable.

Need More Info?

You can find out more about the new optional method HERE

Do you qualify to claim the Home Office Deduction? Find out HERE

Contact the IRS

The IRS welcomes comments about the new law. You can contact the IRS if you’d like to tell them what you think:

E-mail to: Include “Rev. Proc. 2013-13” in the subject line.

Mail to: Internal Revenue Service, CC:PA:LPD:PR (Rev. Proc. 2013-13), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Hand deliver to: CC:PA:LPD:PR (Rev. Proc. 2013-13), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.




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IRS Letter in the Mailbox!

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A friend of mine from the West Coast called last night, and mentioned during our conversation that he had received a letter from the Internal Revenue Service. According to that letter, he owes the IRS a tax bill of $942 due to unemployment he failed to report on his tax return – from 2009.

My friend sold his home in the Midwest and moved to the West Coast over a year ago. All of his tax records and receipts are still packed away in moving boxes, and at this point he has no idea if the IRS is correct in their tax assessment or not. It may or may not be a mistake – the IRS does make mistakes, believe it or not.

There is a reason your Social Security number is required when you open any sort of bank account, or when you start a new job, or file for benefits such as Unemployment Compensation, Social Security, or Medicare. Anytime anyone pays you money through the calendar year, whether that be wages, interest on a time deposit account, a check for contract work done as a 1099 contractor, barter exchanges, sale of a residence, unemployment, sick pay, a sale of stock, the closing of a retirement fund (and many more not listed here) that income is reported to the IRS.

The IRS has a record of your income for any given year, and it comes from every source that paid you money and was required to report that income to the government. How does the IRS keep track of all of this money and who it was paid to? By a Social Security Number!

When you file your tax return for the calendar year, it is very important that you furnish your tax preparer records of ALL of the income you received. Err on the side of caution and give your tax gal anything and everything – a good tax preparer knows the difference between types of income and what needs to be reported and what doesn’t.

The IRS selects filed tax returns and compares the income that was claimed on that return against what is showing in the IRS records for that year. If there is a discrepancy and it looks like you didn’t report all of your income, the IRS will calculate the bill and mail it to you. Usually, along with the difference in tax you owe, penalties and interest are also added. If you’re looking at two or three years worth of interest, as my friend is, the bill can add up fast.

When an IRS letter is sent to a taxpayer, it will cover a specific subject and tell you exactly what you need to do to resolve the situation. Maybe you can clear things up with a phone call, or a fax, or a visit to a field office in your area. Perhaps you’ll need to write a check – the important thing is to never, ever ignore IRS Correspondence. Give any letter your prompt attention, and resolve the issue as quickly as possible. Keep all IRS Correspondence in your tax records, even after the situation is resolved. You may need that documentation in the future.

In the case of my friend, he needs to do a few things before he simply writes that check to the IRS.  He should:

  • find his Form 1040 U.S. Individual Income Tax Return for 2009
  • locate the state issued 1099-G showing total Unemployment Compensation paid to him that year
  • compare the 1099-G amount to what was entered on the tax return
  • compare how much Unemployment Compensation was claimed on the return to what the IRS says was reported to them

(Note: In 2009, due to the American Recovery and Reinvestment Act (ARRA), the first $2400 in Unemployment received by an individual was not taxable. Usually, all Unemployment is 100% taxable – in 2009, there was a temporary exemption granted as part of the government stimulus package. My friend needs to take that calculation into consideration when he is comparing those numbers)

If my friend can clearly see that he is wrong and the IRS is right, there isn’t much he can do other than pay the bill.  If his numbers do not agree with what the IRS states in the letter, he will call and speak to an IRS telephone agent.  Hopefully the situation can be resolved with one phone call, but it might not be.  Whatever the case, he will have to follow through and take care of the situation before it  turns into a bigger issue.

This is also a lesson in why it is very important to save all filed tax returns and the supporting documentation.  My friend has no idea what box this paperwork is in, or if that box is in his garage, or his sister’s basement – he may end up paying the bill because he can’t easily find what he needs to prove his case in the timeframe he is allowed.

In 2009, my friend prepared his own tax return using a software program.  If he had used a paid preparer, he may have been able to go back to that person and retrieve copies of the return and the supporting paperwork.  Depending on the preparer, they might have taken over at that point and called the IRS on his behalf.  At the very least, the preparer should be able to look at the IRS letter, look at the return in question, and explain the situation to the client.

If you receive correspondence from the IRS:

  • Don’t throw the letter away.  Open it, read it, and follow through in the time frame specified.
  • IRS correspondence will give you a specific reason why the letter was issued, and tell you what you need to do to resolve the situation.
  • In the case of a bill received, if you agree with the IRS you may not have to reply at all, you may simply need to write a check and mail.
  • If you do not agree with the IRS, call or write to the IRS as soon as possible, and tell them why you don’t agree.
  • Keep copies of all tax returns and all supporting documentation.
  • Keep all IRS letters received, and file them with your tax records.
  • If you receive an IRS letter and paid a preparer to complete your tax return for the year in question, contact the preparer and ask for their help.
  • The IRS will never send you an email.  All correspondence sent out by the IRS is sent regular snail mail.


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Categories : Form 1040, IRS
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