Fewer than expected claim phone tax refund

Some 'may have skipped over it,' says IRS chief
WASHINGTON (MarketWatch) -- The Internal Revenue Service has had fewer-than-expected taxpayers claim a one-time refund of sales taxes on long-distance phone service on their 2006 income-tax returns, the nation's top tax collector said Tuesday.

The refund, which is available this year only, stems from a court decision that found that the telephone excise tax, which was first put on the books in 1898 to help pay for the Spanish-American War, was no longer applicable. Taxpayers can claim a refund based on the 3% excise tax they paid on long-distance calls from March 2003 through July 2006.

But the IRS is finding that the refund is being claimed on only 69% or 79% of returns, IRS Commissioner Mark Everson said at a National Press Club luncheon Tuesday. While not every taxpayer is eligible for the refund, the IRS expected to see more claims.

"We think some people may have skipped over it on the form -- even with the software, in some instances -- just completing the return as they did last year. We've been surprised by that," Everson said.

Depending on the circumstances, taxpayers can file for a refund of as much as $60 without having to produce any paperwork. For example, a taxpayer filing with one exemption can claim $30; two exemptions, $40; three exemptions, $50; and four or more exemptions, $60.
For example, a married couple filing a joint return with two dependent children would be eligible for the maximum standard amount of $60.

Taxpayers seeking bigger refunds must produce old phone records to back up their claim. While some taxpayers may be missing out, Everson said the IRS also saw what appeared to be early efforts to fraudulently claim the refund, with some taxpayers allegedly falsely claiming more than $10,000 in refunds.

"That's a lot of phone usage. Even my teenage kids can't generate that much phone usage," Everson joked.

A crackdown by IRS agents earlier this year appeared to chill such efforts, Everson said.

Everson said the agency has responded well to factors that promised to make this spring one of the most complicated filing seasons in memory. Among the complications, Congress waited until late in 2006 to retroactively extend a number of tax breaks that had already expired.

Also, the IRS for the first time has allowed filers to split their refund and have it sent electronically to different financial institutions, Everson noted, adding that Congress didn't approve the budget for the IRS and many other agencies until February -- four months into the current fiscal year.

"I would suggest to you, with three weeks to go, so far so good," Everson said.
Electronic filing remains on the rise, he said, and the agency managed to work the renewed tax provisions into its own software and worked with companies that provide software packages to filers by the beginning of February, he said.

Everson said surprisingly few taxpayers are taking advantage of the split refund. Of 74 million returns processed so far, only 55,000 have taken advantage of the option, he said.

How To: File Taxes for Free

All seem best for taxpayers with straightforward, uncomplicated tax returns. A few have been recommended by readers, but I have yet to try them. If you have worked with any of them, let us know the good and the bad.

The Internal Revenue Service deems that taxpayers with an adjusted gross income of $52,000 or less in 2006 can file taxes at no charge. That means 70 percent of taxpayers (95 million) can file their taxes for free. Here's a full list of IRS-approved services you can use for e-filing.
All of the following services are on that list and some basic versions are available for free for others taxpayers, too.

TaxACT Standard - Free for filling out and e-filing federal tax forms, either on web-based forms or by downloading forms onto your computer. The free service says it includes over-the-phone and web technical support, but it does not include state tax forms. You'll pay $12.95 for those.

TaxSlayer - Free for active duty military personnel. And only $9.95 to prepare federal and state tax returns online.

H&R Block TaxCut Free File - For taxpayers age 50 and under with an adjusted gross income of $52,000.

TurboTax Freedom Edition - Free for taxpayers with an adjusted gross income (AGI) of $28,500; taxpayers who qualify for the Earned Income Tax Credit and have an and AGI of $38,348; and active duty military members with an AGI of $52,000.

CompleteTax - Free for taxpayers with an AGI of $29,000.
For more info, check out this about.com page, which has reviews on free and for-fee tax-preparation tools and software.

Tax Cheats Are Out to Get You

Itching to get your due from Uncle Sam? There are plenty of folks -- legit and otherwise -- who will happily help you get a faster or bigger refund. My advice? Don't fall for any of the come-ons, no matter how tempting they sound.

The best-case scenario: You'll pay triple-digit interest rates to borrow your own money for a few weeks. Worst-case: You'll share a jail cell with the con who promised to sweet-talk the IRS on your behalf.

Loathsome but legalThe most common tax-time pitch is the "instant refund," which gives you access to your refund money to tide you over until the IRS sends the official check. In 2004 (the most recent stats available), one in 10 taxpayers got a short-term refund anticipation loan (RAL), according to the Consumer Federation of America and the National Consumer Law Center.

Although RALs are offered by legit businesses, the loan terms rival those of the neighborhood loan shark. Small fees ($30 here, $59 there) add up. On the average refund this year ($2,150), forking over $100 to cover loan costs puts your effective APR at 178%. (No, that's not a typo.) Add in admin fees and you're looking at a 235% APR. (Again, not a typo.)

The hidden fees and misleading marketing of RALs have gotten two tax-prep giants in trouble with the law. A few years ago, H&R Block found itself staring down the business end of a class action lawsuit for neglecting to reveal e-filing, loan document preparation, and administrative fees that could triple the cost of a customer's loan. Just last month, Jackson Hewitt agreed to pay $4 million in consumer restitution for similar abuses. (FYI: Both companies still peddle these products, though probably with more frank fee disclosure.)

Need speed?If you really can't wait for your refund check, consider e-filing your tax return. (The average fee for electronic filing is $23, according to the National Society of Accountants.) It's interest-free and fast -- boasting a turnaround time of three weeks or less. If you prefer the hard-copy filing, you can shave off several days of waiting by having your refund electronically deposited into your bank account.

Scams, shenanigans, frauds, and fiendsDon't put your guard down after you dodge the RAL rigmarole. The cons are out in full force, too. Typical ploys falsely promise to reduce or altogether eliminate your tax bill. (See also: "I've got some valuable swamp land in Florida I'm willing to part with for a song.") The "zero wages" and the mysterious "form 843 tax abatement" schemes, for example, encourage filers to falsify information on legitimate IRS forms in the hopes that a blizzard of paperwork will distract the Feds.

Other scams encourage taxpayers to illegally hide income in an offshore bank or brokerage or move money into a tax-exempt supporting organization or a donor-advised fund while still maintaining control over the money. (Both no-nos.)

Also beware of phishing scams where ne'er-do-wells pose as IRS agents or other legitimate financial institutions (notifying filers of an audit or outstanding refund) to get taxpayers to reveal personal financial information. Click "delete" ASAP. The IRS doesn't email. Anyone. Ever.
If headaches, fines, prison, and steep penalties are your idea of fun, then go ahead and sign on the shady dotted line. If you do fall prey to any of these scams or suspect tax fraud, report it to the IRS via Form 3949-A. Here are some tips on staying on the right side of the law with Uncle Sam.

Mailbox mayhemAnd, finally, this entry comes from the "just because you're paranoid doesn't mean they're not after you" file. Christmas for fraudsters starts in January. That's when information-rich tax-related documents begin to snake through the postal system. According to CNET, about 8% of identity theft cases are linked to mailbox breaches.

Keep a watch on lock-pickers by keeping a running list of everyone who pays you -- employer, banks, brokerages, etc. (Here's a simple way to organize your tax paperwork.) Check off the names as soon as you receive a copy of what they filed to the IRS. Track down docs that are missing in action by mid-February by contacting the original source.

What You Need To Know About Taxes If You're Getting Married

It may not be high on the list of wedding planning activities, but there are a few simple steps that can help keep tax issues from interrupting your newly wedded bliss. If you recently married, check out your new tax situation. You might save money or even prevent the problem of a missing refund check.The first things to handle are changes of name and address. Later, as tax season approaches, consider whether or not you'll itemize deductions, which tax return form is right for you and what filing status you'll use.

No one should delay the cake cutting or honeymoon because of taxes. But here are some helpful hints for later:

Use Your Correct Name
You must provide correct names and identification numbers to claim personal exemptions on your tax return. If you changed your name upon marrying, let the Social Security Administration know and update your Social Security card so the number matches your new name. Use Form SS-5, Application for a Social Security Card.

Change of Address
If you or your spouse has a new address, notify the U.S. Postal Service so that it will be able to forward any tax refunds or IRS correspondence. The Postal Service will also pass your new address on to IRS for updating. You may also notify to notify the IRS directly by filing Form 8822.

Refund Checks
Each year, the Postal Service returns thousands of tax refund checks as undeliverable, usually because the addressee has moved. Notifying both the Postal Service and the IRS of an address change in a timely manner can help ensure the proper delivery of any refund checks. To check the status of a tax refund, go to the IRS web site and use the "Where's My Refund?" service.

Changing Filing Status
Your marital status on December 31 determines whether you are considered married for that year. Married persons may file their federal income tax return either jointly or separately in any given year. Choosing the right filing status may save you money.

A joint return (Married Filing Jointly) allows spouses to combine their income and to deduct combined deductions and expenses on a single tax return. Both spouses must sign the return and both are held responsible for the contents.

With separate returns (Married Filing Separately), each spouse signs, files and is responsible for his or her own tax return. Each is taxed on his or her own income, and can take only his or her individual deductions and credits. If one spouse itemizes deductions, the other must also.

Which filing status should you select? It depends entirely on your specific situation. You should consider sitting down with a tax professional to make a determination.

IRS pushes back tax filing deadline

Taxpayers around the country will get an extra two days, until April 17, to file 2006 returns and pay taxes owed, the Internal Revenue Service said Wednesday.

The two-day reprieve comes about because April 15, the usual tax day, falls on a Sunday this year and April 16 is Emancipation Day, a legal holiday in the District of Columbia. The IRS said holidays observed in the nation's capital have an impact nationwide.

The tax agency had previously announced that residents of the District of Columbia and six eastern states would have an April 17 deadline because they are served by an IRS processing facility in Massachusetts, where Patriots Day will be observed on April 16.

The IRS said the April 17 deadline will apply to actions including:

_2006 federal individual income tax returns, whether filed electronically or on paper.
_Requests for an automatic six-month tax-filing extension.
_2006 balance due payments.
_Tax-year 2006 contributions to a Roth or traditional IRA.

Emancipation Day marks the April 16, 1862, signing by Abraham Lincoln of the Compensated Emancipation Act, which freed slaves in the District of Columbia. It is not a federal holiday, and IRS offices will be open.

In 2008 taxpayers will again face the usual April 15 deadline. The next year that Emancipation Day could affect filing deadlines is 2011.

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their first home, paying the premiums on a life insurance policy in an irrevocable trust, or moving appreciated assets to a younger generation, annual gifting will touch the lives of millions of Americans. But before the transfer is made, an investor should spend some time looking at the investment and the tax ramifications of the property to be passed.

Much of the gifting itself will be done under the Annual Gift Tax Exclusion, a method that alleviates both a gift tax and the need to report the transfer. This exclusion applies to gifts only between individuals. Gifts made to charities and other organizations fall under a completely different set of rules.

The transfer is not deductible by the donor nor is it taxable to the recipient. Currently (in calendar year 2005), the annual exclusion is set at $11,000. In the future, this can be adjusted for inflation, but only in $1,000 increments. Spouses can increase their gifts to others to a maximum of $22,000 and, finally, gifts between spouses, like love, knows no limits.

Most transfers are done for one of two reasons. In the past, passing along property to diminish the value of an estate and, therefore, estate taxes was a major consideration in estate planning. This is still used extensively for larger estates but, under current law, fewer estates are subject to the tax. If the estate has no tax exposure (and if nursing care is taken care of), many advisors recommend not to gift at all but, instead, toallow the assets to receive a "stepped up" tax basis upon death.

Gifting to allow for current use of assets has been and continues to be popular. Often a parent wants to see a child use the gift immediately in order to enjoy an extended vacation or to make a major purchase. Here, it is expected that any gift of securities will be converted into cash with the appropriate tax paid.

Both donors and recipients should be aware that various gifts for educational or medical purposes may not reduce the annual exclusion. You should check with your tax advisor to determine whether this applies to a your specific situation.

Certain kinds of property (real estate, art, collectibles, closely held business interests, etc) should be appraised before a transfer is made. Consulting an expert in the particular field is usually a good idea to calculate the fair market value of the property.

Another circumstance requiring professional help is when "spending down" an estate for Medicaid purposes. An elder law attorney should be consulted for help in this area.

The actual gift of marketable securities or cash is fairly straightforward. Giving a check to someone or journaling over securities is enough to complete the gift. However, before making the gift, you should understand some of the potential tax considerations.

Let's first look at stock that has appreciated in value. Remember, whatever tax basis the donor in the gifted property will become the recipient's tax basis. If the donor is in a higher tax bracket than the recipient, it is often wise to gift the stock to the recipient and let the recipient sell the stock at his or her lower tax bracket.

If the fair market value of the stock is below the donor's original cost, then the donee must use the fair market value of the property as of the date of the gift in determining his or her tax basis. If you find yourself in this situation, the donor should consider selling the asset and then gifting the cash proceeds to the recipient.

Obviously, there will be times when a gift needs to be made regardless of the consequences; but, when time allows, you should do your homework to see what works to your best advantage.

Understanding Basic Tax Terms

If your like many, you don't always understand what people are talking about when it comes to Taxes. It's important to know the main tax terminology, especially when tax season comes around. Knowing the basics will make tax season less of a hassle for you, and maybe even save you some money. There are hundreds of terms; Below are some of the most important:

Tax Form
A Tax Form is the form that is filled out and submitted to your government to report all of your tax information for the past year.

Audit
An audit refers to an unbiased examination and evaluation of the financial statements of an individual or organization such as a business. Audit's are performed for the purpose of ensuring that accounting records are fair and consistent, and are following the guidelines laid out for the individual or organization.

Capital Gain
Capital Gain refers to the amount of money made on Capital during a given tax period. For example if you own a house, and over the past year the value of your house increased by twenty thousand dollars, you would have to claim this twenty thousand dollars as a capital gain in your income taxes.

Capital Loss
Capital Gain refers to the amount of money Lost on Capital during a given tax period. For example if you own a house, and over the past year the value of your house decreased by twenty thousand dollars, you would have to claim this twenty thousand dollars as a capital loss in your income taxes.

Child Tax Credit
Child tax credits are tax credits that are given to the caregivers for each dependent child, that at the end of the tax year is under 17.

Flat Tax
Flat tax refers to a system where everyone is taxed at the same rate, regardless of how much they earn.

Gross Income
Gross income is an individuals or corporations total income before any taxes or deductions have been applied to the sum.

Net Income
Net Income is the total amount of income after all deductions and expenses.

Property Tax
Property tax is a tax that is assessed on real estate value by a local government.

Tax Strategy - Let Washington Pay for Your Corvette, Porsche, or Air Plane

Deducting Your Auto Expenses

Auto deductions are a very complex topic. So, to clarify, we are not going to attempt to cover all of the intricacies of the subject. Instead, we will cover some of the most-used provisions and provide you with a better understanding of some of the associated issues.

In keeping with one of our primary strategies, what we are interested in doing with our automobiles is to convert as much of their use as possible to legitimate business purposes.

That's because personal auto use is not deductible. As a result, the object here is to maximize the amount of auto use you can attribute to business purposes and document that usage properly.

Strategy One: The Actual Method vs. the Standard Method

There are two methods that you can use to deduct your automobile usage. For the most part, you can choose the method that provides the greatest method to you. The first method is the "actual"(expense) method. The other is the "IRS" (standard) method.

The Actual Method.

This method requires that you keep track of your actual auto expenses and then compute the percentage of business use. So, you can deduct the business percentage of all operating expenses such as gasoline, insurance, licenses, maintenance, cleaning, etc.

Your parking fees and tolls can be deducted in full.

One simple way to track your individual expenses is to put them on your company credit card. That way, your monthly statement will provide you with a breakdown of these costs. You should also put them into a tax diary to have the most complete documentation possible.

Most accountants are comfortable if you give them an approximation of the percentage of time you use your auto for business. Your daily diary will help to substantiate this amount. I often hear them suggest a figure between 70% and 90% if you are a full time business person.

As a result, you will attribute that figure (say 80%) as a business deduction and the balance is a personal expense. Note: if you use this method, you cannot switch to the standard method later on.

The Standard method.

The Standard Method involves tracking your actual business mileage use and multiplying the number of business miles you drive by the IRS rate.

There are three different ways to track your mileage. You may choose the method your prefer.
Strategy 1a. The three ways of tracking your miles.

Method #1. This is called the Every Day, Every Trip method. This is the most complete method. It requires you to track each and every trip that you take for business purposes. You must notate your miles at the beginning of each business trip and again when the trip is completed.

Then, subtract the difference and you've got your miles traveled. It is best if you actually keep the notation of the beginning miles and the ending mileage in your diary. If you want a really thorough record, you should document your business use and personal use each day. But, let's face it, most of us have better things to do with our time.

Method #2. Another method that is acceptable to the I.R.S. is to track each trip you take for a period of three months. The three-month period is considered a good reflection of your average auto usage for tax purposes. Then, all you need to do at the end of the year is multiply this number by four to determine yearly usage.

Tax Strategies, Tips, and Deductions

Method #3. The "one week per month method". With this method, you track each of your business trips during say, the first week of the month. You repeat this each month and take an average of your mileage as your deduction. 2002 Rates: This year, the mileage deduction is 36.5 cents per mile.

Simplified Technique:

There is a short cut to tracking your mileage. Most people have a certain number of places that the travel to regularly. It may be certain of your client's offices or a hotel where you meet with people regularly. You can determine the miles once, and keep it on file. For example, keep a record in your diary that it is 55 miles round trip to a particular client's office. Then, each time you travel there, simply use the already established mileage in your diary.

Hot Tip:

As outlined above, most people track the mileage that we incur for business purposes and forget about the mileage traveled for personal use. As a result, the assumption is that you are driving for personal reasons, and you only record a trip if it is for business reasons. To use a computer term, the "default" is personal mileage and we only get to deduct what we actually track. If you forget to track a particular trip, you lose the deduction.

There is an alternative that may prove easier for you. Make your "default" business usage, and only track the personal miles. So long as you do this consistently, this is perfectly acceptable to the I.R.S. and, for those of us who use our cars mostly for business, this method substantially limits the amount of record keeping we must do.

Whether you use the actual method or the standard method is a decision that you should make after consulting with your tax professional.

Strategy 2: The Two Car Strategy.

The purpose of this strategy is for you to get a greater tax benefit if you already have two cars: one for personal use and one for business. So, if you already have two cars in your family, use this strategy to your advantage, but don't go out and purchase a second car just to implement it. This strategy takes into account not only the typical costs associated with auto usage, but also the depreciation expense as well. You can imagine that if you only drive one car for business, the maximum business use percentage you can achieve is 100 percent. If you drive two cars for business, is it possible to drive both the first and second car 100% for business? Yes! That's because your business use is based on the business miles that you drive.

But, can you still get a net benefit of using two cars for business even if you use the second car less than 100% percent for business? Again, the answer is yes.

Part of the benefit is that you can depreciate what is called the "basis" of your car. Because the "second" car was used for personal purposes, you determine its basis on the day that you convert the car to business use. On that day, you determine its basis by comparing cost and market value of the car and using the lower of the two.

Here, the cost is what you paid for the car originally plus any capital improvements that you have made to it. For example, a capital improvement would be any amounts you spend to re-build or re-place the engine. So, if you purchased the car several years ago for $8,000, and today it has a retail book value of $5,000, and you haven't made any capital improvements, your basis for computing depreciation is $5,000.

Let's look at an example (thanks to Sandy Botkin, C.P.A., Esq.) Two Cars One car Car 1 Car 2

Business/Personal use

Mileage for Business 22,000 18,000 4,000
Total Mileage for Year 24,000 20,000 7,800

% Business Use 92% 90% 51%

Deduction Calculations Gas and Oil 1,540 1,260 280.
Insurance 800 800 600.
Repairs and Maintenance 600 600 600.
Tag and Licenses 100 100 80.
Wash and Wax 230 230 202.
Other 50 50 50.
Total Op. Expenses 3,320 3,040 1,812.
Business Use % x 92% x 90% x 51%.
Business Total 3,054 2,736 924.
Depreciation 2,815 2,754 1,540.
Total Deductions 5,869 5,490 2,464.
Extra Deductions $2,085.00.
Note: Assuming value of each car is $16,000.

Tax Help

The point here is that simply by converting some of your usage of your second car over to business use, you can get far more benefit than the 2% of the business usage that you "give up" on your first car. The lesson, enroll the use of your second family car into the business.

Note: There is one disadvantage of the "two car" strategy. You cannot use the simplified tracking technique outlined above. You must track the actual usage for each business trip.

Change to the Old Rule: The old rule allowed the maximum standard rate for only the first 15,000 business miles an auto was driven during a year. And, once the auto had accumulated 60,000 business miles at the maximum IRS optional rate that automobile was considered fully depreciated and you had to switch to 14 cents per mile. Under the new rules, the per mile rate applies to all business miles. There is no 15,000 mile annual limit or 60,000 mile maximum.

Strategy 3. Buying vs. Leasing Your Auto:

The rule for tax purposes is: Buy your cars, don't lease them, to obtain the best after-tax return on your car investment. Reasoning: The after-tax cost is greater to lease than to purchase both business and personal cars. The difference is about 10% in favor of purchasing.

Contrast this with a wealth building concept. You should buy appreciating assets and lease depreciating assets. Under this rule, it would seem that typically, your better option overall is to lease your vehicle because it is probably a depreciating asset.

Note: This might not be true for certain collector's cars, etc. that appreciate over time.
The bigger picture: If you plan to drive the car for two years or less, lease it. If you plan to keep it for four years or more, purchase it. In between two and four years, it's a tossup.

So how do you reconcile these conflicting rules? Here are a few more guidelines that set out the non-tax leasing advantages. Leasing is a good idea if you meet a few of the underlying criteria:
1. Your financial income does not vary from year to year.

2. It is important to drive a new vehicle in your business.

3. You don't like to own cars for many years.

4. You generally drive less than 15,000 miles per year.

5. Your credit rating could use some improvement.

6. You hate auto repairs and dislike leaving your car at the "shop".

7. You are an employee who uses a car for business and don't have the money to purchase the car with cash.

8. You quickly tire of the same car.

Strategy 4. Identify supplies and equipment used to maintain your business car.

Look around your basement and garage, or wherever you store tools and cleaning supplies. Make a list of the items you use on your car. You will probably find a battery charger, battery cables, and maybe even a battery tester, and various other tools. You can deduct these items two ways: If the cost of the tool is more than $100, it should be capitalized and depreciated. If the cost is less than $100 for an individual item or group of small tools, its normal to expense such items in the year they are purchased.

Proof: Since you will be sorting through old acquisitions, it's likely you won't have receipts. Take photographs because they can represent reasonable substitute evidence.

Strategy 5. Deduct the Cost of Garaging Your Car

If you must pay separately for the cost of keeping your car in a garage, you can deduct this cost as a business expense. Your call to action.

Decide on the best way and most convenient way for you to track your auto expenses. Which of the four methods is most practical and beneficial to you. Review the different ways with your accountant or C.P.A. Also, determine if you can take advantage of the two-car strategy.

Need a Copy of Your Tax Return Information?

Taxpayers have two easy and convenient options for getting copies of their federal tax return information - tax return transcripts and tax account transcripts - by phone or by mail.

A tax return transcript shows most line items from the tax return (Form 1040, 1040A or 1040EZ) as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes you, your representative or the IRS made after the return was filed. In many cases, a return transcript will meet the requirements of lending institutions such as those offering mortgages and student loans.

A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income.

Request either transcript by calling 1-800-829-1040, or order by mail using IRS Form 4506-T, Request for Transcript of Tax Return. The IRS does not charge a fee for transcripts, which are available for the current and three prior calendar years. Allow two weeks for delivery.

If you need a photocopy of a previously processed tax return and attachments, complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. There is a fee of $39 for each tax period requested. Copies are generally available for the current and past 6 years.