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The Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past.

“This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” said IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

This announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

In certain circumstances, the changes announced today include:

• Revising the calculation for the taxpayer’s future income.
• Allowing taxpayers to repay their student loans.
• Allowing taxpayers to pay state and local delinquent taxes.
• Expanding the Allowable Living Expense allowance category and amount.

In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

Allowable Living Expenses

The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

This is another in a series of steps to help struggling taxpayers under the Fresh Start initiative.

In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made changes to lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. And, earlier this year, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Income that you receive for the rental of your vacation home must generally be reported on your federal income tax return.

However, if you rent the property for only a short time each year, you may not be required to report the rental income.

Below are tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:

• Rental Income and Expenses Rental income, as well as certain rental expenses that can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.
• Limitation on Vacation Home Rentals  When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.
• Special Rule for Limited Rental Use  If you use a vacation home as a residence and rent it for fewer than 15 days per year, you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.

Question:   Do tuition and related expenses paid to attend a private high school qualify for an education credit?

Answer:   No. Expenses paid to attend a private high school do not qualify for an education credit because a high school is not an eligible educational institution.In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution.  In addition, in order to be an eligible educational institution, the school must be eligible to participate in a student aid program administered by the Department of Education.

Question:   What expenses qualify for an education credit?

Answer:   Expenses that qualify for an education credit are qualified tuition and related expenses paid by the taxpayer during the taxable year.  Qualified tuition and related expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent at an eligible educational institution for courses of instruction.  An eligible educational institution means a college, university, vocational school or other postsecondary educational institution that is accredited and eligible to participate in the student aid programs administered by the Department of Education.Qualified tuition and related expenses do not include the following types of expenses: Expenses related to any course of instruction or education involving sports, games or hobbies, or to any noncredit course (unless the course is part of the student’s degree program or, in the case of the Lifetime Learning Credit, the student takes the course to improve job skills), Student activity fees (unless required for enrollment or attendance), Athletic fees (unless required for enrollment or attendance), Costs of room and board, Insurance premiums or medical expenses (including student health fees), Transportation expenses, and Other personal, living or family expenses. In general, qualified tuition and related expenses generally do not include the costs of books, supplies and equipment, because eligible educational institutions usually do not require payment of those costs to the institution as a condition of the student’s enrollment or attendance.  For taxable years 2009 through 2012, however, qualified tuition and related expenses include costs of course materials, as well as tuition and fees, required for the student’s enrollment or attendance at an eligible education institution.

Question:   Who can claim the Hope Credit or the American Opportunity Credit?

Answer:   Generally, you can claim the Hope Credit if all three of the following requirements are met: You pay qualified tuition and related expenses for the first 2 years of postsecondary education. The tuition and related expenses are for an eligible student. The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return. You cannot claim the Hope Credit if any of the following applies: Your filing status is married filing separately. You are listed as a dependent in the Exemptions section of another person’s tax return (such as your parents’). Your modified adjusted gross income is above a certain dollar limitation. You (or your spouse) were a nonresident alien for any part of the tax year, and the nonresident alien did not elect to be treated as a resident alien for tax purposes. You claim the Lifetime Learning Credit for the same student in the same year. In general, the Hope Credit is based on tuition and related expenses required for enrollment or attendance at an eligible educational institution. For a taxpayer to claim the Hope Credit, the student for whom you pay tuition and related expenses must be an eligible student. To be an eligible student, generally, the student must: Not have had expenses that were used to figure a Hope Credit in any 2 earlier tax years. Not have completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before this tax year. Must have been enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year. Must have been free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year. For tax years 2009, 2010, 2011, and 2012, the American Opportunity Tax Credit modifies the Hope Credit as follows: The maximum amount of the credit is increased to $2,500.00. The credit can now be claimed for the first 4 years, not 2, of postsecondary education. The modified adjusted gross income limitations are increased. Qualified expenses include course materials. Generally, 40% of the Hope Credit is now refundable (up to $1,000). However, for a student who attended an educational institution located in a Midwest disaster area, you can choose instead to claim the credit under the previous rules, but then you must use the previous rules for all students for whom you claim the credit.

If you’re self-employed and paying for medical, dental or long-term care insurance, the IRS wants to remind you about a special tax deduction for some insurance premiums paid for you, your spouse, and your dependents.

Starting in tax year 2011, this deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.

You must be one of the following to qualify:

• A self-employed individual with a net profit reported on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
• A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., box 14, code A.
• A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.

The insurance plan must be established under your business.

• For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
• For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
• For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

 

Question: What is a split refund?

Answer: A split refund lets you divide your refund, in any proportion you want, and direct deposit the funds in up to three different accounts with U.S. financial institutions.

 

Question: What are the benefits of splitting my refund?

Answer: By splitting your refund, you get the convenience of directing some of your refund to your checking account for immediate needs and sending some to savings for future use. Plus, you get the safety and speed of direct deposit, meaning you will have access to your refund faster than if you opt to receive a paper check.

Instead of choosing between depositing your refund into a checking or saving account and later moving part of your refund to another account, you can allocate your refund among up to three different accounts and send your money where you want it the first time.

 

Question: Does my refund have to exceed a certain amount to split it into different accounts?

Answer: Your deposit to each account must be at least $1.00.

 

Question: Must I file electronically to split my refund?

Answer: No, you can split your refund regardless of whether you file electronically or on paper.