Your Tax Refund and Offsets to Pay Your Unpaid Debts

If you can’t pay your taxes in full, the IRS will work with you. But you should know that back taxes or certain past due debts can reduce your federal tax refund. The Treasury Offset Program can use all or part of your federal refund to settle certain unpaid federal or state debts. Here are five facts to know about tax refund offsets.
1.    Bureau of the Fiscal Service.  The Department of Treasury’s Bureau of the Fiscal Service, or BFS, runs the Treasury Offset Program.

2.    Offsets to Pay Certain Debts.  Past due federal tax debt may reduce your tax refund. The BFS may also use part or all of your tax refund to pay certain other debts such as:

  • Past-due child and parent support.
  • Federal agency non-tax debts, such as a delinquent student loan.
  • State income tax obligations.
  • Certain unemployment compensation debts owed to a state.

3.    Notified by Mail.  The BFS will mail you a notice if it offsets any part of your refund to pay your debt. The notice will list the original refund and offset amount. It will also include the agency that received the offset payment. It will also give their contact information.

4.    How to Dispute Offset.  If you wish to dispute the offset, you should contact the agency that received the offset payment. Do not contact the IRS.

5.    Injured Spouse Allocation.  You may be entitled to part or all of the offset if you filed a joint tax return with your spouse. This rule applies if your spouse is solely responsible for the debt. To get your part of the refund, file Form 8379, Injured Spouse Allocation. You can view, download or print tax forms on IRS.gov/forms at any time.

Health Care Law: Refund Offsets and the Individual Shared Responsibility Payment

The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.

If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media. You can also subscribe to IRS Tax Tips or any of our e-news subscriptions.

Advertisements

Hiring Freeze and Furloughs – Part 3 IRS CUTS

In his memo to employees, Koskinen said the IRS will extend its hiring freeze through FY 2015. “As a result of the hiring freeze and assuming normal attrition rates, we expect to lose between 3,000 and 4,000 additional full-time employees,” he wrote. “The total reduction in full-time staffing between FY 2010 and FY 2015 is expected to be between 16,000 and 17,000.”

Koskinen said the IRS has tried to protect critical areas as much as it could during the process of assessing the impact of the budget cuts. “We will still work to deliver as smooth a filing season as possible,” he said. “We will maintain IT systems critical to the filing season and tax enforcement. This commitment also includes providing appropriate training and technology support for you and your colleagues to help you do your job.”

However, even with all of the anticipated reductions, he warned, the IRS still faces a remaining budget shortfall and may need to shut down for two days later this year after tax season and furlough IRS employees.

“Unfortunately, this means at this time we need to plan for the possibility of a shutdown of IRS operations for two days later this fiscal year, which will involve furloughing employees on those days,” said Koskinen.

He said the IRS plans to work with the National Treasury Employees Union on this possibility, and will fulfill the IRS’s bargaining obligations with the NTEU.

Responding to the National Taxpayer Advocate report on Wednesday, NTEU national president Colleen M. Kelley said. “The nation, along with the IRS workforce, is suffering from the $1.2 billion worth of budget cuts the IRS has endured since fiscal year 2010. It is appalling to me that only half of the callers will be able to get through to a customer service representative during this filing season, that Taxpayer Assistance Centers will be forced to turn people away and that millions of people who file paper returns will see their refunds delayed.”

“This is an area of major concern for me and the entire IRS leadership team,” said Koskinen. “Shutting down the IRS will be a last resort, but I want to be upfront with you about the problem. I know even a day’s worth of pay makes a huge difference in household budgets and family situations. While we will continue to do the best we can to avoid this action, the cuts in the budget are so deep that we may have no other choice.”

He added that if a furlough becomes necessary, the goal will be to minimize disruption to employees and IRS operations as well as taxpayers and the tax professional community. “The timing for these dates would be late in the fiscal year, so between now and then we can do everything possible to avoid them,” he wrote.

IRS – PART 2 – Enforcement Cuts

The IRS will also see enforcement cuts of more than $160 million, Koskinen noted. The reduced staffing in enforcement will result in fewer audit and collection cases, including at least 46,000 fewer individual and business audit closures and more than 280,000 fewer Automated Collection System and Field Collection case closures.

“As a result of the hiring freeze, we will lose about 1,800 enforcement personnel through attrition during FY 2015,” Koskinen added. “The reduced enforcement staffing for just FY 2015 means the government will lose at least $2 billion in revenue that otherwise would have been collected.”

He also anticipates cuts in overtime and temporary staff hours of more than $180 million. This will lead to delays in refunds for some taxpayers who file on paper or make errors, with longer delays in correspondence between the IRS and taxpayers, as well as on the phone lines.

“We realize there will be growing inventories in Accounts Management, and taxpayer correspondence will face lengthy delays,” Kosiknen wrote. “Taxpayer service diminished further over the phone and in person. We now anticipate an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call us will actually reach us. During fiscal year 2014, 64 percent were able to get through. Those who do reach us will face extended wait times that are unacceptable to all of us.”

Olson wrote in her report to Congress about the declines in customer service at the IRS. She said the IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43 percent. Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times. In addition, she pointed out, the IRS will answer far fewer tax-law questions than in past years.

“During the upcoming filing season, it will not answer any tax-law questions except ‘basic’ ones,” Olson wrote.  “After the filing season, it will not answer any tax-law questions at all, leaving the roughly 15 million taxpayers who file later in the year unable to get answers to their questions by calling or visiting IRS offices.” Tax return preparation assistance has been eliminated, according to Olson.

Save Twice with the Saver’s Credit

If you are a low-to-moderate income worker, you can take steps now to save two ways for the same amount. With the saver’s credit you can save for your retirement and save on your taxes with a special tax credit. Here are six tips you should know about this credit:
1. Save for retirement. The formal name of the saver’s credit is the retirement savings contributions credit. You may be able to claim this tax credit in addition to any other tax savings that also apply. The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans.
2. Save on taxes. The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000, or $2,000 for married couples. The credit you receive is often much less, due in part because of the deductions and other credits you may claim.
3. Income limits. Income limits vary based on your filing status. You may be able to claim the saver’s credit if you’re a:
• Married couple filing jointly with income up to $60,000 in 2014 or $61,000 in 2015.
• Head of Household with income up to $45,000 in 2014 or $45,750 in 2015.
• Married person filing separately or single with income up to $30,000 in 2014 or $30,500 in 2015.
4. When to contribute. If you’re eligible you still have time to contribute and get the saver’s credit on your 2014 tax return. You have until April 15, 2015, to set up a new IRA or add money to an existing IRA for 2014. You must make an elective deferral (contribution) by the end of the year to a 401(k) plan or similar workplace program.
If you can’t set aside money for this year you may want to schedule your 2015 contributions soon so your employer can begin withholding them in January.
5. Special rules apply. Other special rules that apply to the credit include:
• You must be at least 18 years of age.
• You can’t have been a full-time student in 2014.
• Another person can’t claim you as a dependent on their tax return.
6. Visit IRS.gov. You figure your credit amount based on your filing status, adjusted gross income, tax liability and the amount of your qualified contribution. Other rules also apply. For more information visit IRS.gov.
If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media. Subscribe to IRS Tax Tips or any of our e-news subscriptions.

IRS Tip Sheet on Gambling Income and Losses

 

 

Whether you like to play the ponies, roll the dice or pull the slots, your gambling winnings are taxable. You must report all your gambling income on your tax return. If you’re a casual gambler, odds are good that these basic tax tips can help you at tax time next year:

1. Gambling income.  Gambling income includes winnings from lotteries, horse racing and casinos. It also includes cash prizes and the fair market value of prizes like cars and trips.

2. Payer tax form.  If you win, you may get a Form W-2G, Certain Gambling Winnings, from the payer. The IRS also gets a copy of the W-2G. The payer issues the form depending on the type of game you played, the amount of your winnings and other factors. You’ll also get the form if the payer withholds taxes from what you won.

3. How to report winnings.  You must report all your gambling winnings as income. This is true even if you don’t receive a Form W-2G. You normally report your winnings for the year on your tax return as ‘other income.’

4. How to deduct losses.  You can deduct your gambling losses on Schedule A, Itemized Deductions. The amount you can deduct is limited to the amount of the gambling income you report on your return.

5. Keep gambling receipts.  You should keep track of your wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets.

For more on this topic see Publications 525, Taxable and Nontaxable Income, and 529, Miscellaneous Deductions. Both are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Get Credit for Child and Dependent Care This Summer

Many parents pay for childcare or day camps in the summer while they work. If this applies to you, your costs may qualify for a federal tax credit that can lower your taxes. Here are 10 facts that you should know about the Child and Dependent Care Credit:

1. Your expenses must be for the care of one or more qualifying persons. Your dependent child or children under age 13 usually qualify. For more about this rule see Publication 503, Child and Dependent Care Expenses.

2. Your expenses for care must be work-related. This means that you must pay for the care so you can work or look for work. This rule also applies to your spouse if you file a joint return. Your spouse meets this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care.

3. You must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Your spouse must also have earned income if you file jointly. Your spouse is treated as having earned income for any month that they are a full-time student or incapable of self-care. This rule also applies to you if you file a joint return. Refer to Publication 503 for more details.

4. As a rule, if you’re married you must file a joint return to take the credit. But this rule doesn’t apply if you’re legally separated or if you and your spouse live apart.

5. You may qualify for the credit whether you pay for care at home, at a daycare facility or at a day camp.

6. The credit is a percentage of the qualified expenses you pay. It can be as much as 35 percent of your expenses, depending on your income.

7. The total expense that you can use for the credit in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

8. Overnight camp or summer school tutoring costs do not qualify. You can’t include the cost of care provided by your spouse or your child who is under age 19 at the end of the year. You also cannot count the cost of care given by a person you can claim as your dependent. Special rules apply if you get dependent care benefits from your employer.

9. Keep all your receipts and records. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your tax return.

10. Remember that this credit is not just a summer tax benefit. You may be able to claim it for care you pay for throughout the year.

For more on this topic, see Publication 503 on IRS.gov. You can also call 800-TAX-FORM (800-829-3676) to have it mailed to you.

 

Husband’s Joint Return Negated by Wife’s Subsequently Filed Separate Return

 

 

The Tax Court held that a taxpayer was not entitled to the filing status of married filing jointly where, after he had filed a joint return but before the return’s due date, his wife filed a separate return. Accordingly, the court found he was not entitled to dependency exemption deductions for his two children, the child tax credit, the additional child tax credit, or the earned income credit. Bruce v. Comm’r, T.C. Summary 2014-46 (5/12/14).

Jason Bruce and his former wife, Jazsmine, were married in 2008, and they had a son who was born in 2008. Jazsmine also had a daughter from a previous relationship. Jason had worked as a technician on an aircraft carrier in the U.S. Navy since 1997, and he was deployed on sea duty intermittently throughout 2010. His family lived in Navy housing in 2009. Jason, Jazsmine, and the children moved into Jazsmine’s mother’s house in January 2010. During 2010 Jason, Jazsmine, and the children mostly lived at Jazsmine’s mother’s house, but also spent time at Jason’s mother’s house. In March 2010, Jason initiated divorce proceedings. Jason continued to live with Jazsmine and the children at his mother-in-law’s house at least until December 2010 when he moved out.

Jason and Jazsmine had filed a 2009 joint federal income tax return after their first year of marriage, claiming dependency exemption deductions for the two children and the child tax credit, the additional child tax credit, and the earned income credit. In January 2011, Jason electronically filed a 2010 return, claiming the status of married filing jointly. The return showed an overpayment of $4,581. In February 2011, Jason informed Jazsmine that he had filed a joint tax return for 2010 and that he intended to share the refund with her. Jazsmine did not object to the joint filing but indicated that she would consult her mother’s friend who “does taxes” to claim deductions for certain school expenses. Jazsmine also provided her bank information to Jason after he mentioned sharing the refund. Also in February 2011, the Bruces’ divorce was finalized. In March 2011, unbeknownst to Jason, Jazsmine filed a 2010 federal income tax return, claiming head of household filing status. She also claimed the two minor children as dependents.

In a deficiency notice dated July 11, 2012, the IRS determined that Jason was not entitled to the filing status of married filing jointly and adjusted his filing status to married filing separately. The IRS also disallowed his claimed dependency exemption deductions, the child tax credit, the additional child tax credit, and the earned income credit and imposed the accuracy-related penalty under Code Sec. 6662(a).

Code Sec. 6013(a) allows spouses to file a joint return. The married filing jointly status does not apply to a federal income tax return unless both spouses intend to make a joint return. However, the failure of one spouse to sign the return does not negate the intent of filing a joint return by the non-signing spouse. Where spouses file a joint return with respect to a tax year, neither spouse may thereafter elect married filing separately status for that tax year if the time for filing the tax return of either spouse has expired.

Code Sec. 151(c) allows an exemption deduction for each dependent claimed by a taxpayer. Code Sec. 152(a) defines dependent as a “qualifying child” or a “qualifying relative.” Furthermore, under Code Sec. 152(c)(1), a qualifying child is as an individual: (1) who bears a designated relationship to the taxpayer; (2) who shares the same principal place of abode as the taxpayer; (3) who meets specific age requirements; (4) who has not provided over one-half of his or her own support; and (5) who has not filed a joint return. Generally, the residency test is satisfied if the individual has the same principal place of abode as the taxpayer for more than one-half of the tax year for which the dependency exemption deduction is claimed. Temporary absences due to special circumstances, such as military service, are not treated as absences for purposes of determining the residency requirement.

Where a child meets the qualifying test for more than one taxpayer, special tiebreaker rules come into play. The applicable rule for this case states that if an individual may be claimed as a qualifying child by one or both parents and they do not file a joint return, the child is treated as the qualifying child of the parent with whom the child lived for the longer period during the tax year. Code Sec. 152(c)(4)(B). Additionally, if the child lived with both parents for the same amount of time, the child is treated as the qualifying child of the parent with the higher AGI.

The Tax Court upheld the IRS’s adjustment of Jason’s filing status to married filing separately. According to the Tax Court, even if Jazsmine had tacitly agreed to filing a joint 2010 return, it was undisputed that she subsequently filed a separate tax return before the time for either spouse to file a return had expired. Since Jazsmine had timely filed a separate return in March 2011, Jason was not entitled to the filing status of married filing jointly for 2010.

The Tax Court then held that Jason was not entitled to the dependency exemption deductions for the children for 2010. While the court found that the children lived most of 2010 with both parents and thus meet the qualifying child test for both Jason and Jazsmine, it concluded that the children lived with Jazsmine for a slightly longer period during 2010. Thus, under the tiebreaker rules, the children were treated as Jazsmine’s qualifying children for 2010. The court also concluded that, because Jason was not entitled to dependency exemption deductions with respect to the children for 2010, he was not entitled to the child tax credit or the additional child tax credit for each child for the 2010 tax year. Nor, the court said, was he entitled to the earned income credit for 2010.

With respect to the accuracy-related penalty, the Tax Court found that Jason credibly testified that he believed Jazsmine did not have her own income in 2010 and that it was reasonable for him to believe that a joint filing would be beneficial to the couple. Therefore, the court held that he was not liable for the accuracy-related penalty.

For a discussion of joint filing status, see Parker Tax ¶10,530.

Ten Things to Know about IRS Notices and Letters

 

Each year, the IRS sends millions of notices and letters to taxpayers for a variety of reasons. Here are ten things to know in case one shows up in your mailbox.

1. Don’t panic. You often only need to respond to take care of a notice.

2. There are many reasons why the IRS may send a letter or notice. It typically is about a specific issue on your federal tax return or tax account. A notice may tell you about changes to your account or ask you for more information. It could also tell you that you must make a payment.

3. Each notice has specific instructions about what you need to do.

4. You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.

5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.

6. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

7. You shouldn’t have to call or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.

8. Keep copies of any notices you receive with your other tax records.

9. The IRS sends letters and notices by mail. We do not contact people by email or social media to ask for personal or financial information.

10. For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Tips on Making Estimated Tax Payments

 

If you don’t have taxes withheld from your pay, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you’re self-employed you normally have to pay your taxes this way.

Here are six tips you should know about estimated taxes:

1. You should pay estimated taxes in 2014 if you expect to owe $1,000 or more when you file your federal tax return. Special rules apply to farmers and fishermen.

2. Estimate the amount of income you expect to receive for the year to determine the amount of taxes you may owe. Make sure that you take into account any tax deductions and credits that you will be eligible to claim. Life changes during the year, such as a change in marital status or the birth of a child, can affect your taxes.

3. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 16 and Sept. 15 in 2014, and Jan. 15, 2015.

4. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. If you mail your payments to the IRS, use the payment vouchers that come with Form 1040-ES, Estimated Tax for Individuals.

5. Check out the electronic payment options on IRS.gov. The Electronic Filing Tax Payment System is a free and easy way to make your payments electronically.

6. Use Form 1040-ES and its instructions to figure your estimated taxes.
 

Five Facts about Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.

Here are five important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. For more about the various types, see Publication 525, Taxable and Nontaxable Income.

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

4. You can choose to have federal income tax withheld from your unemployment. You make this choice using Form W-4V, Voluntary Withholding Request. If you do not choose to have tax withheld, you may have to make estimated tax payments during the year.

5. If you are facing financial difficulties, you should visit IRS.gov. “What Ifs” for Struggling Taxpayers explains the tax effect of events such as the loss of a job. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, contact the IRS as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

For more details, see IRS Publications 17, Your Federal Income Tax, or IRS Publication 525. You can download these booklets and Form W-4V at IRS.gov. You may also order them by calling 800-TAX-FORM (800-829-3676).
Additional IRS References: