IRS may share tax info with police to fight fraud

By Patrick Temple-West

WASHINGTON | Tue Mar 20, 2012 6:37pm EDT

WASHINGTON (Reuters) - A surge in tax refund fraud and identity theft has prompted the Internal Revenue Service to consider sharing more tax return information with police, a senior official told a congressional hearing on Tuesday.

In a move that could spark concerns over personal privacy, the IRS said it is considering a pilot program in Tampa, Florida, where identity theft and refund fraud are rife.

"We are limited in what we can supply to local law enforcement," said Steven Miller, deputy IRS commissioner for services and enforcement.

Tax return information is normally kept tightly secret by the IRS. Under the program, exceptions could be made, with the permission of victims of identity theft and tax refund fraud, so that bogus tax return documents could be shared with police.

Tampa has seen a rash of identity theft and tax refund fraud cases since last year, totaling $130 million in stolen funds. Suspected wrongdoers steal Social Security numbers and file returns seeking tax refunds, using an abandoned home or another phony address as a delivery point.

Democratic Senator Bill Nelson of Florida held the hearing to tout his legislation to allow more taxpayer information sharing between the IRS and local law enforcement.

No date has been set for the Tampa program to begin, according to IRS.

In 1976, Congress made it a crime for IRS workers to share taxpayer information.

"There was a reason why we are limited in providing to local law enforcement, in an unfettered matter, tax returns," Miller said. "Congress has treated tax return information as sacrosanct."

Nina Olson, the national taxpayer advocate at the IRS, supported some information sharing, but cautioned that once local law enforcement has access to taxpayers' returns, they could be shared with other people.

Congress should modify the IRS information-sharing prohibition but limit the disclosure of the information for any purpose other than law enforcement, she said.

(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh; Desking by Lisa Shumaker)

 

Individual Retirement Accounts (IRAs)

The top annual contribution for traditional or Roth IRAs remains at $5,000 for 2011. If you’re age 50 or older by the end of 2011, you can make an additional $1,000 “catch-up” contribution.

You cannot contribute more than your qualifying income for the year, but if your spouse has little or no income, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your earnings.

Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Also, you must begin to take minimum required distributions from the IRA once you reach age 70 ½, but this does not apply to Roth IRAs.

Roth IRA contributions are not deductible, but you can withdraw them at any time tax free. You can also withdraw earnings on contributions tax free after five years if you are age 59½ or older, disabled or paying qualifying first-time homebuyer expenses.

Earnings on both types of IRAs accumulate tax free until distributions are made.

You have until the filing deadline of April 17, 2012 to open and contribute to an IRA for 2011. But why wait? The sooner you contribute, the longer your money grows tax deferred or tax free.

Capital Gains Tax

The maximum tax rate on net capital gains remains at 15% for 2011. If you’re in the 10% or 15% income tax bracket, your tax rate on net capital gains is zero, and you will not be taxed for 2011. The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended these tax rates through 2012.


To qualify for long-term tax treatment, an asset must generally be held for more than one year before it is sold. Capital gains on investments held for one year or less are taxed at regular income tax rates.

Selling Your Home

Excluding the gain on the sale of a home is another major incentive for buying a home.

If you meet certain requirements, you can keep a significant portion of the profit of the sale of your principal residence without having to pay tax on the gain. Any gain is taxed as a capital gain so the amount owed is not as high. However, any losses on the sale of a principal residence are not deductible.

When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). If you realize a gain on the sale greater than the exclusion, that amount is taxed at capital-gains rates.

To qualify, you must have owned and used your home as a principal residence for at least an aggregate of two of the five years preceding the sale.

The exclusion is available even if you took temporary absences, including vacations, or rented out the home while not living there.

Special rules are provided for sales of the home due to certain health issues, employment reasons or unforeseen circumstances, and for members of the uniformed services.

Keep in mind that if you took a First-time Homebuyer Credit, you may have to repay or recapture some or all of the loan/credit in 2011. Also, if you used your residence as a home office, you may need to make other adjustments.

Job Search Tax Benefit

For many of us, we spend the majority of our day on the job and the hours we typically devote to our work seem to grow even greater during rocky economic times. However, in addition to a paycheck, experience and hopefully some degree of satisfaction, we receive a number of benefits that have important tax implications, one of which pertains to our job search efforts.

Many unreimbursed expenses incurred as a result of employment are deductible as miscellaneous itemized deductions, though they can only be claimed to the extent they are greater than 2% of adjusted gross income.

Included among these expenses are job search costs. These expenses are deductible if the search is for a job in the same line of work, regardless of whether a new position is obtained. However, if a period of unemployment is lengthy, the IRS may disallow the deduction. Also, expenses for finding a first job are not deductible.

American Opportunity Tax Credit

For 2011 and 2012, the American Opportunity Tax Credit, previously known as the Hope Scholarship Credit, is available to each eligible student and for the first four years of college or other postsecondary school that leads to a degree, certificate or other recognized educational credential. It does not apply to graduate-level courses.

The maximum credit is $2,500 per student for each year and 40% of the credit is refundable, meaning it can reduce your liability below zero and you can receive up to $1,000 even if you owe no taxes.

The credit applies to 100% of the first $2,000 of costs and 25% of the next $2,000 of costs. This means you must spend at least $4,000 to obtain the maximum credit of $2,500.

Costs include tuition as well as student-activity fees required for enrollment and attendance. They also include books, supplies and equipment needed for a course of study that must be purchased from the educational institution as a condition of enrollment or attendance.

This credit is allowed against the AMT.

Information Reporting Penalties

A penalty may be imposed if you fail to file any correct and timely information statement with the IRS, or if you fail to furnish a correct and timely information statement to the payee. The amounts of these penalties have increased in 2011.

Both penalties are now $100 per return, reduced to $30 for returns fewer than 30 days late and to $60 for returns 30 or more days late that are filed before Aug. 1. The penalties are capped at a certain amount, depending on the amount of the per-return penalty and the gross receipts of the business. The penalties may be waived for reasonable cause or increased in cases of intentional disregard.

In summary: (1) the new information reporting requirements enacted in 2010 are not gone, as if they never existed, (2) the IRS will now receive more information about merchants who accept credit cards and (3) higher penalties will apply to businesses that do not correctly and in a timely manner file information statements.

Dependent Care Tax Credit

Working parents know how expensive child care can be. The Dependent Care Tax Credit aims to ease some of the burden.

Basically, the credit works like this: If you pay someone to care for a dependent under age 13, you may be eligible for a tax credit of up to $2,100. The credit is a percentage of qualifying expenses that range from 20% to 35%, depending on your AGI. You must have earned income to receive the credit and if married, file a joint return.

The dollar limit on the expenses toward which you can apply the credit percentage is $3,000 for the care of one qualified dependent and $6,000 for the care of two or more. Thus, the maximum credit allowed in 2011 is $1,050 if you have one qualified dependent and $2,100 if you have two or more qualified dependents.

I should note that the dependent care credit is reduced by the value of qualifying day care provided by your employer under a written, non-discriminatory plan, which generally is not taxable up to $5,000 ($2,500 if married filing separately).

This credit is not restricted to child-related care costs. If you pay someone to look after an incapacitated spouse or dependent of any age, such as a parent or disabled family member, you may also be eligible for this tax break.

Credit Card Transactions

Beginning with Jan. 31, 2012, by Jan. 31 of each year, merchants conducting credit card, debit card or gift card transactions may receive a Form 1099-K from the card processing company reporting the gross amount paid to the merchant during the prior year. Payments made through a third-party settlement network, such as PayPal or eBay, will be reported only if the payee receives more than $20,000 in aggregate and the total number of payment transactions exceeds 200.

Form 1099-K is a new form for the 2012 tax year, implemented to ensure that businesses, especially small businesses, pay tax on their credit and debit card income, especially from online sales. Even merchants who already properly report their credit and debit card income are affected by this new requirement because they must establish new accounting procedures. This is because Form 1099-K will report the gross amount received through payment cards, and therefore you must reconcile the form with your own records to take into account fees, returned items, cash back and other similar amounts.

Pay attention to requests for filing W-9 forms from your credit card vendors as the card processing company may be required to institute backup withholding on your credit card transactions if you do not provide them with a correct taxpayer identification number, such as an EIN. The IRS has delayed this requirement until after 2012, however. The IRS also has provided that for payments made to a third party settlement network, backup withholding will not apply to payees who receive fewer than 200 payment transactions, even if they receive more than $20,000 in payments.

Adoption Credit

There is good news for people who are planning to adopt a child under age 18 or a person incapable of self-care due to physical or mental challenges because there are two tax benefits that offset escalating adoption expenses.

In 2011, the adoption credit, which is fully refundable, rose to a maximum of $13,360 per child. Parents who work for companies with an Adoption Assistance Program can receive up to a $13,360 reimbursement from their employer for qualified adoption expenses without paying taxes on that benefit.

When adopting a child who is a United States citizen or resident, the family is permitted to take the credit in the year following the year when the actual expense was incurred. These expenses may be taken as a credit even if the adoption ultimately is not completed. Where a foreign adoption is involved, the family may not deduct any expenses, regardless of the year incurred, until the adoption is final.

When you adopt a child with special needs, you are allowed to claim the full credit regardless of actual expenses paid.

Bonus Depreciation

An additional depreciation that was implemented to encourage asset purchases is the provision for bonus depreciation. You can use the bonus depreciation rules to write off the entire cost of certain business property you first placed in use in 2011. This rule, known as first-year bonus depreciation, allows you to write off 100 percent of your costs in 2011. For property placed in service in 2012, the bonus depreciation allowance is decreased to 50 percent of the property’s cost. Any remaining cost not fully deducted under the bonus depreciation rules is subject to the regular depreciation rules. Thus, it must be deducted over a period of several years.

The allowance generally applies to tangible personal property, including property with a recovery period of 20 years or fewer, office equipment, computer software and certain leasehold improvements. The property must be new, it can’t be used.

By providing immediate tax relief, improving cash flow and providing additional capital for reinvestment in the business, this rule delivers a number of benefits to small business owners. It is important to properly coordinate between using the Section 179 rules versus the bonus depreciation rules as there can be tax consequences to each choice.

Child Tax Credit

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended the Child Tax Credit to tax years 2011 and 2012.

The credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent – your son, daughter, adopted child who lived with you all year, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals. The child must also be a U.S. citizen, resident or national. The Child Tax Credit is in addition to the child’s dependency exemption.

That means if you have three children, the child credit can potentially reduce your tax bill by $3,000.

Section 179 Expense Deduction

The Section 179 expense deduction is an expensing provision that applies to tangible business property placed in service during the tax year. By claiming it, you can deduct the full cost of newly purchased equipment in the year of purchase and, in the process, you receive a larger tax benefit, improve cash flow and have additional capital to invest.

Regardless of whether you made the purchase with cash or credit, the maximum write-off on a per-taxpayer basis is:

· $500,000 in 2011

· $139,000 in 2012

You are eligible for the deduction on a wide range of property purchases, from computer software to office equipment. For 2011, the deduction also is available for qualified restaurant, leasehold and retail improvement property. This expansion is not available in 2012, unfortunately.

You need to keep in mind that the deduction is reduced by every dollar more than $2 million. So, for example, if you spend $2.5 million or more on eligible property, your Section 179 expense deduction will be zero. Normal depreciation rules will then apply. In 2012, the $2 million dollar limit decreased to $560,000, and the deduction reaches zero for amounts more than $699,000.

The Section 179 expense deduction is limited and cannot be greater than your business’s taxable income and it does not apply to property you inherited or initially purchased for personal use, even if you later change it to a business use.