Tax Law Blog | IRS Tax Attorneys

In a policy change that could benefit thousands of people, the federal government announced Friday that its tax credit for first-time homebuyers can now be used to help pay closing costs on mortgages insured by the Federal Housing Administration.

The economic stimulus bill passed in February allows first-time homebuyers a tax credit equal to 10 percent of the home’s purchase price or $8,000, whichever is less, when they file their federal income taxes. But under the plan announced Friday, buyers using FHA-insured loans will be allowed to treat the tax credit as additional down payment funds, or use it to pay for the closing costs that are typically incurred when a mortgage is funded.

“Families will now be able to apply their anticipated tax credit toward their home purchase right away,” said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, which oversees FHA.

Donovan announced the new use for the home-buying tax credit at a meeting of the National Association of Home Builders’ board of directors, in Washington, D.C.

He also said the government is putting “safeguards in place” to ensure that lenders who are offering the tax-credit advances are not charging “excessive” fees for the service. In a letter to FHA-approved lenders, the agency said fees of more than 2.5 percent of the tax credit are excessive.

FHA loans are insured by the Federal Housing Administration and made through its approved lenders. The loans, whose upper limit is $729,750 in Santa Clara County, typically have lower interest rates than traditional mortgages.

Only qualified buyers using FHA loans can use the tax credit toward down payment or closing costs. Other buyers can take the tax credit when they file their income tax returns.

A few weeks ago, the housing industry was abuzz with news that FHA might allow borrowers to use the tax credit to replace the 3.5 percent minimum down payment required for FHA-insured loans. But the government quickly backpedaled on that idea, which would have resulted in more no-money-down, foreclosure-prone mortgages.

Friday, Donovan specified that FHA borrowers will still need to make down payments of at least 3.5 percent of a home’s purchase price. But the tax credit can be used as an additional down payment amount, which may help borrowers secure a lower interest rate on their loans. It may also be used to pay for closing costs — such as the fees charged for title searches or mortgage applications — which sometimes total thousands of dollars.

Local real estate agents said the change to the tax credit program will help the local housing market somewhat.

“Overall, it is a good thing,” said Karl Lee, a Milpitas broker who is president-elect of the Santa Clara County Association of Realtors.

But the change won’t affect the current market for bank-owned properties, he said. Recently in Santa Clara County, banked-owned, post-foreclosure properties have been garnering multiple purchase offers. And the banks prefer to accept offers on their “REO” (real-estate-owned) properties from non-FHA borrowers when possible, he said, because FHA loans usually take longer to close than traditional loans.

“It may not help with the REO piece of the market,” he said of the new use for the tax credit, “but for the rest of the market it will be a positive impact.”

The tax credit applies to home purchases that close before Dec. 1.

Tax Lawyers:

Chicago Tax Attorneys

Ohio IRS Tax Attorney
Source

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. “It illustrates how severe the recession has been.”

For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

“These are staggering numbers,” Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.

“It’s one of the drivers of the ongoing expansion of the federal budget deficit,” says John Lonski, chief economist for Moody’s Investors Service. The Congressional Budget Office projects a $1.7 trillion budget deficit for fiscal year 2009.

The other deficit driver is government spending, which, the AIER’s report says, is the main culprit for the federal budget deficit.

The White House thinks that tax revenue will increase in 2011, thanks in part to the stimulus package, says the report from AIER, an independent economic research institute. But it warns, “Even if that does happen, the administration also projects that government spending will be so much higher each year that large deficits will continue, and the national debt held by the public will double over the next 10 years.”

The government may have a hard time trimming spending to reduce the deficit when the recession ends. The 77 million Baby Boomers— those born in 1946 through 1964 — will start tapping their federal retirement benefits soon, which means increased government outlays for Social Security and Medicare.

“It will be doubly difficult for federal government to reduce expenditures and narrow the deficit as rapidly as they did following previous recessions,” Lonski says. At the end of the last major recession, in 1981, Boomers were in their 30s. Their incomes were expanding, as was their appetite for goods and services.

The Boomers now are in their 50s and 60s and unlikely to keep increasing incomes for long, which means that revenue from income taxes could flatten in the next few years. Also, Lonski says, they are more likely to save for retirement than spend — and consumer spending is a big driver of the economy.

“The American consumer led us out of previous recessions with some semblance of gusto,” Lonski says. “They’re too old to do it now.”

Source

Chicago Criminal Tax Attorneys are here.

An investigation by The Daily Telegraph has discovered nine cabinet ministers and more than 30 junior ministers have claimed back the cost of personal tax advice on their expenses, whereas millions of voters forced to complete self-assessment forms are prevented from writing off the cost of employing an accountant.

Ministers have said their expenses claims for accountancy bills were allowed within parliamentary rules as stipulated by their ”Green Book’’.

However, in an unusual intervention, HMRC told The Daily Telegraph on Tuesday night that MPs were not exempt from tax laws and that tax must be paid on some expenses.

In a statement it said: “It’s a general principle of tax law that accountancy fees incurred in connection with the completion of a personal tax return are not deductible.

“This is because the costs of complying with the law are not an allowable expense against tax. This rule applies across the board.”

It also emerged that MPs had already been given specific guidance by HMRC prohibiting such tax- free claims, which accountants say constitute a “benefit in kind” and should be taxed.

Issued in 2005, the guidance states that “accountancy fees incurred in the preparation of the self assessment tax return or related expense claims” are “not allowed” as tax expenses.

Mike Warburton, an accountant at Grant Thornton, said: “HMRC produces very helpful guidance for MPs, which explains exactly what is allowable.

“MPs are responsible for their own tax affairs and for making their own declarations to the authorities.”

Dozens of ministers face the threat of a tax investigation into their claims. Senior Conservatives are not believed to have claimed for accountancy fees.

David Cameron said on Tuesday that he would force any Conservative MPs to repay any money they had claimed for tax advice. The Conservative leader said news of the claims for tax advice “beggars belief” and were “completely wrong”.

Speaking in North Wales, Mr Cameron said: “The thing about Government ministers getting the taxpayer to pay for accountants to fill in their tax returns, it never occurred to me that this was something people would do.
More »

California’s perpetual budget crisis and voters’ rejection of five budget-related ballot measures last week have renewed the perennial debate over whether Californians are, to borrow a comparison from “The Three Bears,” taxed too much, too little or just about right.

Much of the positioning is ideological, and therefore immune to being affected by data and fact.

Any level of taxation is too high to those on the political right, and no level is sufficient to those on the left. But for those who are less ideologically rigid, relative tax burden is significant because it shows where we stand vis-a-vis other states and is an indication of whether we are getting sufficient bang for the public buck.

Historically, at least until the tax revolt that began with Proposition 13 in 1978, California was a relatively high-tax, high-service state.

Data from the Washington-based Tax Foundation rank California as having the nation’s third-highest state-local tax burden in 1978, at 11.7 percent of personal income. The national average at the time was 10.3 percent.

Proposition 13, which slashed property taxes, and the state tax cuts quickly enacted by the Legislature to demonstrate that it had gotten the anti-tax message, dropped California to 22nd in 1979, at 9.8 percent of income.

Full Story

The North Carolina House has tentatively approved changing the state’s corporate tax laws to make them more attractive to billion-dollar investments.

The House voted 81-31 Tuesday in favor of a bill changed last week to push companies to counties where unemployment is high. A final House vote is scheduled Wednesday.

While the law makes no reference to a specific business, The Associated Press reported last week that the company targeted by state business recuriters is Apple Inc., which is considering a $1 billion data center.

The tax changes would alter how corporate income taxes are calculated by giving breaks to companies with large shares of their property in North Carolina but a relatively small share of U.S. sales in the state.

Another Senate vote would be needed due to House changes.

Source

US retail giant Wal-Mart has lost a legal battle to reclaim USD33.5m in tax it paid to the state of North Carolina in a case that may have implications for the way in which US businesses organize their corporate structures.

Wal-Mart was appealing the USD33.5m bill for back taxes, penalties and interest imposed by North Carolina, which had argued that rental payments made by the company to a Wal-Mart subsidiary were improper. However, the state Court of Appeals ruled on May 19 that the state Secretary of Revenue “acted within his lawful authority” when he assessed additional taxes against the company.

“The language of the statute is broad, allowing the secretary to require combined reporting if he finds as a fact that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this state,” wrote Judge Donna Stroud in her opinion, which was supported by the two other judges on the panel.

North Carolina assessed the additional taxes on Wal-Mart after taking issue with the way in which the company had organized its business to claim a large state tax deduction.

Under this structure, Wal-Mart transferred ownership of all of its stores to a Wal-Mart subsidiary. In most states, this enables Wal-Mart to deduct the “rent” it pays the subsidiary (i.e., the rent it pays itself) from the income that is subject to state corporate taxes. The subsidiary receiving the rent isn’t taxed because it qualifies as a tax-exempt Real Estate Investment Trust under federal and state law – provided it distributes at least 90% of its income in dividends.

According to a 2007 Wall Street Journal report, this structure saved the retailer USD230m in taxes in many states over a four-year period.

The North Carolina Appeals Court decision could strengthen the cases of other states which are seeking to outlaw such practices, and could affect other companies with similar arrangements to those of Wal-Mart.

The company, however, could appeal the latest decision to the state’s Supreme Court.

While Wal-Mart was still reviewing its legal options at the time of writing, a company spokesperson said that taxpayers should be able to rely on “clearly defined laws that are reasonably and fairly enforced.”

Source

The Internal Revenue Service’s Advisory Committee on Tax Exempt and Government Entities (ACT) will hold a public meeting on June 10, when the panel will submit its latest round of recommendations to senior IRS executives.

Ten newly named members of the panel (listed below) will also be introduced at the public meeting. They will begin two-year terms and join 11 returning members.

ACT includes external stakeholders and representatives who deal with employee retirement plans, tax-exempt organizations, tax-exempt bonds and federal, state, local and Indian tribal governments. ACT members are appointed by the Secretary of the Treasury and generally serve two-year terms. They advise the IRS on operational policies and procedures.

At the public meeting, four ACT project teams will present the following four reports that include recommendations:
More »

Most New Jersey homeowners, already paying the highest property taxes in the nation, will not see a property tax rebate check next year under Gov. Jon Corzine’s revised 2010 budget proposal.

The updated budget, released Tuesday by Treasurer David Rousseau, keeps rebates for seniors and the disabled but eliminates them for everyone else.

Corzine’s original proposal, released in March, got rid of rebates for those earning more than $75,000. But with updated revenue projections coming up $2 billion short for the 2010 budget year, Rousseau said rebates were not sustainable this year.

“We simply cannot spend money that we don’t have,” Rousseau told the Assembly Budget Committee members Tuesday.

The move would save the state nearly a billion dollars and cost homeowners $950 on average; renters would miss out on an average $75 rebate, according to the Treasury Department.

New Jersey taxpayers already pay $7,000 a year on average in property taxes, or about twice the national average. Property tax rebate checks have been around since 1977.

Assembly Budget Chairman Louis D. Greenwald said the rebates should be restored “as soon as the economy turns around.”

Corzine’s revised budget also raises income taxes on the wealthy, reduces the amount of education and preschool funding he proposed in March and raises taxes on HMOs, among other things.

Earlier Tuesday, budget analyst David Rosen told lawmakers that income tax collections in budget year 2009 plummeted 19 percent and are projected to be nearly 10 percent down in the 2010 budget year, which begins in July.

“This is certainly the worst revenue report I’ve given to this Legislature and one that I never thought I’d be giving,” said Rosen, who has worked for OLS for 25 years.

Rosen said he expects a slow economic recovery, predicting that it would be at least 2014 before tax collections return to 2008 levels.

New Jersey’s revenue picture has deteriorated throughout the year. With income taxes, business and sales taxes each generating hundreds of millions less than anticipated and a constitutional requirement to keep the budget in balance, Corzine has had to make additional cuts to make up for the unexpected shortfall.

Last week, he announced that he will take $450 million from New Jersey’s rainy day fund, put off making aid payments to public school districts until July and trim the state’s contribution to the employee pension fund by $150 million to rebalance this year’s budget.

He also plans to cut another $150 million from state government with less than two months to go in the current fiscal year.

Republicans have criticized the Democratic governor , up for re-election in November , for using one-time fixes to plug budget holes, something he promised he wouldn’t do when he was running for office in 2005.

“It’s like musical chairs, and someone is going to be without a chair if we keep this up,” said Assemblyman Joseph Malone, R-Bordentown.

Under the budget revisions announced Tuesday, top earners in New Jersey will see an increase in income taxes. Millionaires will be taxed another half-percent and those making $400,000 to $500,000 will be taxed at 8 percent instead of 6.7 percent.

Business leaders said the tax increases will only serve to drive out high-income residents, who provide those most taxes.

“It’s an easy answer to say, ‘Tax the rich.’ But in the long-term, it will erode the tax base,” said Howard Cohen, managing partner and CEO of Edison-based accounting firm Amper, Politziner & Mattia.

Rousseau said income tax increase would affect about 61,000 of the nearly 4 million tax filers in New Jersey.

Besides rebate cuts, Corzine is reducing his proposed increase in education funding. He originally proposed a $300 million increase, but has reduced that to $271 million. That reduction includes getting rid of a planned expansion of preschool education in poor districts, saving $25 million.

The new plan also raises taxes on HMOs by 1 percent, which could result in higher premiums.

The budget proposal requires legislative approval by July 1, the start of the new fiscal year, and under the state constitution must be balanced.

Source

The Massachusetts Senate voted last night to increase the sales tax, lift the sales tax exemption on alcohol, and allow cities and towns to raise meals and hotel taxes, brushing aside criticism that higher taxes would hurt Massachusetts businesses by driving consumers over the border, particularly to tax-free New Hampshire.

The Senate plan, which cleared the House in April, would push the sales tax from 5 percent to 6.25 percent, while generating an estimated $633 million to offset deep cuts in services for the poor, elderly, and disabled.

Lifting the sales tax exemption on alcohol sold at package stores would raise another $80 million for those services, senators said. Allowing cities and towns to impose a 2 percentage point increase in taxes on hotels and restaurant meals will help offset cuts in state aid to municipalities, senators said.

At 6.25 percent, Massachusetts would have the second highest sales tax rate of the six New England states plus New York. Only eight states nationwide have a higher rate.

Governor Deval Patrick has threatened to veto any broad-based tax increases, unless the Legislature also overhauls the state transportation agencies, pension system, and ethics laws.

His aides were not available for comment last night, but his threat carries little weight because of the vote tallies.

The Senate voted 29-10 in favor of the sales tax increase, joining the House in mustering a veto-proof majority. Senate President Therese Murray described the sales tax increase as the least punitive of tax options needed to restore services for the most vulnerable.

“I think this is probably the more fair way to go if we have to raise revenue and, unfortunately, we have to raise revenue,” she told reporters after the vote. She said that although the budget’s proposed cuts will not be completely reversed, there will at least be “some money put back into those programs.”

Money from the sales tax increase, senators said, would be spent on a multitude of services. Among them: $4 million for summer jobs for at-risk youth, $5 million for workforce training, $6 million for regional tourist councils, $36 million for special education, and $10 million for rental housing assistance to enable 1,700 families to stay in their homes.

Senator Gale D. Candaras, a Wilbraham Democrat, seemed to speak for the Democratic majority when she declared on the floor that there was “absolutely no good card in the hand,” when it came to raising taxes.

Still, she said, “this sales tax will fund a lot of very important programs, at least in part for some of the most vulnerable citizens.”

Opponents warned that a higher sales tax would hurt the state’s ability to recover from the recession.

“Maybe we should call this the New Hampshire economic stimulus bill,” Senator Robert L. Hedlund, a Weymouth Republican, said with sarcasm.

Read More

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise program for “pennies on the dollar”.

Three Types of OICs

The IRS may accept an offer in compromise based on three grounds:

1. Doubt as to Collectibility - Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.

Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s  monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.

2. Doubt as to Liability - A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.

Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and  the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005.  Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.

3. Effective Tax Administration - There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.

Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
OIC Payment Options

In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise.  Taxpayers may chose to pay their offer in compromise in one of three payment options:

1. Lump Sum Cash Offer - Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance.  A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.

If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.

2. Short Term Periodic Payment Offer - Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.

3. Deferred Periodic Payment Offer - Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.

The IRS is not bound by either the offer amount or the terms proposed by the taxpayer.  The OIC investigator may negotiate a different offer amount and terms, when appropriate.  The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
Payments and Application Fees

When filing an offer in compromise, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment.  All payments should be made by check or money order made payable to the United States Treasury.  Practitioners who file multiple OICs at the same time should not combine application fees for multiple clients.

The Form 656-PPV, Offer in Compromise Payment Voucher, included in the Form 656, should be completed and attached to any periodic payment(s) that becomes due. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.  For offers originally sent to Holtsville, NY, send payments to:  P.O. Box 9011, Holtsville, NY 11742. For offers originally sent to Memphis, TN, send payments to: AMC Stop 880, P.O. Box 30834, Memphis, TN 38130-0634.

The OIC application fee reduces the assessed tax or other amounts due.  The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or a completed Form 656-A and Offer in Compromise Application Fee and Payment Worksheet is included with the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.

Click for more FAQ about tax.