It is possible to eliminate all delinquent taxes in a Chapter 7 bankruptcy. In general, there is a multiple-step test to determine whether tax debt can be eliminated. First, you should order tax transcripts directly from the IRS. Depending on your tax situation, you might want to order transcripts for the past 10 years.

More importantly, Joe, you cannot be afraid of the IRS. I know most people consider the IRS to be like any other debt collector. This could not be further from the truth. In my experience, the IRS is easy to work with. Whether it is because they do not have the same pressures as debt collectors or whether the government simply hires more patient people, I don’t know. But the IRS is the only debt collector that does not get angry when told “I cannot pay right now.”

Unlike a debt collector who will try to corner you into a position and demand payment so that your delinquent account can be resolved, the IRS is not going anywhere. Instead, the agent simply wants to know what is going on. Communication is the key to working with the IRS. Hiding from the IRS is counterproductive and usually will result in more problems.

Here are the significant parts of the step-by-step analysis attorneys use before advising a client about the status of delinquent taxes. Please note that there are exceptions to each of the following points:

Filed tax returns: You must have filed all tax returns. You may have requested an extension for filing; this could affect your ability to eliminate the delinquent taxes.

Taxes are at least three years old: The taxes you include in the petition must be at least three years old. For example, if you filed your tax returns on time and still owe taxes from 2003, then it is possible that these taxes can be eliminated.

No IRS assessment in the past 180 days: This is a very important part in determining whether the delinquent taxes are dischargeable. As you can imagine, the IRS does not just sit back hoping you’ll pay. Unfortunately, there are too many issues to discuss in this column regarding tax assessment and the categorization of the taxes. But at a minimum, you can review the tax transcripts to determine whether the IRS has assessed your tax returns in the last 180 days.

You did not try to evade the IRS: This issue must be considered on a case-by-case basis. Even though you can pass the other three tests, the IRS could challenge your bankruptcy. The above tests do not apply if the IRS believes that you have tried to avoid paying taxes and can prove that you had money available to pay.

For example, I heard a story from the IRS in which a debtor owed delinquent taxes and earned a good income. However, the debtor decided to deposit all his paychecks into his girlfriend’s checking account in order to show that he personally had no income. The IRS discovered this fact and challenged his bankruptcy on the grounds that he was intentionally evading his obligations. The IRS won. As a result, the debtor now has a bankruptcy on his record and thousands in tax debt that must be paid back, with interest and penalties.

Additionally, I once was hired by a debtor who filed a bankruptcy five days too early and could not eliminate a significant amount of IRS debt. As a result, the debtor was forced into a Chapter 13 bankruptcy rather than eliminating all his delinquent taxes. Had an attorney reviewed the transcripts prior to filing, these taxes may have been eliminated.

You do not need a bankruptcy attorney to determine whether your IRS taxes are dischargeable. However, an attorney would let you know whether it is likely that the taxes can be eliminated. Even if you do not hire one to file your bankruptcy, it may be worth the cost to have an attorney review your tax transcripts.

Bankrate

@IRSTax

Although the alternative minimum tax (AMT) was intended to apply to high-income taxpayers who take advantage of loopholes (called “tax preferences” in professional lingo), it can also apply to middle-income taxpayers who haven’t planned their taxes thoroughly enough. In fact, the AMT is hitting more and more taxpayers each year, and without annual patches, it would increase taxes on millions of taxpayers.You’re probably not familiar with all of the issues surrounding the AMT — but in this case, ignorance isn’t necessarily bliss. Let’s take a few minutes to see where you and the AMT might meet.

The characteristics most likely to give rise to AMT liability for “ordinary” taxpayers who do not operate businesses are:

• A large number of personal exemptions.
• A large amount of state and local taxes paid.
• A large amount of miscellaneous itemized deductions.
• A large amount of deductible medical expenses.
• The bargain element of incentive stock options.
• A large amount of capital gains.

If you have any of these issues on your tax return, or any combination of them, you could have the unpleasant obligation of paying the AMT.

Personal exemptions
While personal exemptions are allowed to reduce your regular tax, they are not allowed for AMT purposes. Consider the little old lady who lived in a shoe, of nursery-rhyme fame. She had seven children, so between herself and her kids, those personal exemptions allowed her to reduce her regular taxable income by about $27,200 — eight personal exemptions at $3,400 each — in 2007.

But for AMT purposes, personal exemptions are ignored. It’s possible that these personal exemptions, coupled with some other tax issues, could introduce that little old lady to the AMT. Living in a shoe might not be her biggest problem.

There’s no real way to “plan” your personal exemptions for AMT purposes. After all, you’re obviously not going to kick a son or daughter out the door to reduce your personal exemptions. But you might be able to plan other tax items that could trigger the AMT, if you know that your significant personal exemptions already put you at risk.

State and local taxes
State, local, and other taxes that you pay and claim as itemized deductions on Schedule A are not allowed as deductions for AMT purposes. If possible, you should try to pay state and local taxes in years when you won’t face the AMT; otherwise, they’ll give you absolutely no tax relief. Whenever possible, know when you’re in the AMT zone, and do your best to move these tax payments to another year when the AMT won’t bother you.

Suppose that you’re subject to the AMT this year, but you expect to avoid it next year. You should try to defer your state and local tax payments until next year. Doing so might lead to underpayment penalties at the state or local level, but in most cases, those underpayment penalties are small potatoes compared with the potential tax dollars you might save.

Likewise, if you expect to be subject to only the regular tax for this year, and the AMT the following year, your tax payments should be accelerated into this year whenever possible. Just remember that the IRS will not allow a deduction for state and local income taxes unless the taxpayer reasonably believes the taxes were owed when paid. Therefore, you can accelerate your deduction for state income taxes by making estimated tax payments, but only if your reasonable computations indicate that those taxes are actually owed.

In addition, real property taxes cannot be deducted until they are actually paid to the taxing authority. If you pay property taxes through a mortgage lender, you’ll need the lender’s cooperation in paying the taxes before the due date if you want to accelerate or defer the deduction. But if you make your own property-tax payments, you have free rein regarding the timing of the payments. Again, deferring those payments might lead to some penalties, but the tax savings could be well worth it.

Medical expenses
Medical expenses can be deducted for AMT purposes, but they must exceed 10% of adjusted gross income, instead of 7.5% for regular tax purposes. Thus, as with the deduction for state and local taxes, you might be able to time medical deductions to avoid the AMT, or at least obtain the maximum benefit from the deductions. Again, medical problems and expenses aren’t something you can usually plan, but you do have a bit of control over when you pay medical bills. So think about the acceleration and deferral methods that we discussed here when dealing with medical-expense payments.

Miscellaneous itemized deductions
Miscellaneous itemized deductions that are greater than 2% of your adjusted gross income are deductible for normal tax purposes, but they are not deductible for AMT purposes. These expenses include unreimbursed employee business expenses, expenses for the production of income, tax-return preparation expenses, and many others too numerous to mention here. Unlike with the previous items, you do have much more control over these expenses. If you know they’ll be large, make sure to do your AMT planning so you don’t lose the tax benefit of these expenses.

Large capital gains
You might have heard that the lower tax rates for capital gains will not trigger the dreaded AMT. That’s only partially true. For AMT purposes, you’ll also receive a lower rate on long-term capital gains. But because of the workings of the AMT, a large long-term capital gain could trigger some AMT taxes. So if you’ve done well with your long-term investments and are looking to liquidate, you should at the very least review your AMT consequences and determine what (if any) impact such a sale would have. If you look before you leap, you can potentially take steps to minimize your AMT taxes — for example, by selling only part of the investment in each of two or three tax years.

Incentive stock options (ISOs)
If you receive ISOs from your employer, beware. The bargain element — the difference between your exercise price and the fair market value of the stock on the exercise date — is considered a tax preference for AMT purposes. Although you’ll owe no regular tax on this bargain element, it could certainly trigger the AMT. For many of you, this could be a very large trigger for the AMT. ISO issues are much too complicated to discuss here in any detail. Just know that if you’re exercising ISOs, you have potentially big AMT issues.

The IRS has no official publication on the AMT, but it does provide an online worksheet that might help with your AMT planning. As of now, the worksheet hasn’t been updated for the 2007 tax year, but you can enter your information in the existing worksheet, find out how close you might be to getting smacked by the AMT, and even play some “what if” games for future planning purposes. Spend a few minutes with the worksheet to see how the AMT might affect your specific tax situation going forward.

This article was originally published on Sept. 22, 2006. It has been updated.

The Motley Fool

@IRSTax

Here, according to the IRS, are the 10 most common taxpayer mistakes:

Claiming the wrong filing status

Sorry, you can’t just choose to file single or married. Your marital status is determined as of Dec. 31. Anything before that date really doesn’t matter for tax purposes. You file either jointly or married filing separately. You may qualify for “head of household,” but you have to satisfy all the requirements. You don’t qualify just because you consider yourself the head of your household.Claiming the wrong status could kill your eligibility for the child tax credit, the earned-income credit and exemptions for dependents. Check out the instructions for Form 1040 for detailed information to help you select your correct filing status.

Omitting or using wrong Social Security numbers

The Social Security numbers you list for your dependents, the earned-income credit and the child tax credit must match your dependents’ Social Security cards. Otherwise, the IRS computers will reject your credits and deductions.If you’re still doing your return by hand, put down that stone tablet you’re reading and pay attention. Make sure your handwriting is legible, at least on your tax return. Although to be fair, I suspect that many of these mistakes attributed to taxpayer error actually result from bad inputting by the IRS.

Failing to use correct forms and schedules

Think of the IRS as a vast bureaucracy that responds to the dictates of an outdated computer system for audit direction. You don’t want to anger the computer gods.

If you file your employee business expenses on Schedule A without attaching Form 2106, the computer’s going to click. The more the computer clicks, the more likely that you will get audited.So, be nice to the computer. Correctly file all of the appropriate forms.

Failing to sign and date the return

This one is easy. If you don’t sign the return, you haven’t filed. Both spouses must sign a joint return. If you haven’t filed, you’re going to be subject to all kinds of penalties, not to mention interest on any amounts not paid in full.The only reason not to sign the return is if the numbers on it would constitute perjury. Do you think the IRS wouldn’t notice?

Claiming ineligible dependents

When the IRS started requiring Social Security numbers for claimed dependents, millions of dependents disappeared. I suspect most of them sulked back to their doghouses, flew to their bird cages or jumped back into their aquariums.In any case, the qualification criteria to claim a dependent are technical and very specific. With nontraditional families, there are the exceptions, the exclusions to the exceptions, the exceptions when the exclusions don’t apply and the special rules for the third Wednesday each month.

You’ll have to meet each of at least four qualifications. Follow the flowchart in the instructions for your Form 1040. But it’s not simple.

Misusing — or not using — the earned-income credit

This one I blame on Congress. It’s a provision to help the poorest in our nation, but lawmakers designed it to be one of the most convoluted provisions in our tax code.It’s so bad that the IRS reports failure to claim the earned-income credit as its No. 6 top taxpayer mistake and incorrectly claiming the credit as No. 7.

Lots of crooks — and unwitting but misinformed taxpayers — illegally claim the credit. Many of those whom the credit was designed to aid lack the tax sophistication or the dollars necessary to hire a professional to claim those dollars.

Losing receipts

Receipts can mean deductions and tax savings. So, hunt down all those charitable organizations to which you contributed and make them give you a receipt for the donation. If you made more than one donation, get a receipt for each one. The receipt needs the date, the amount, the name of the charity. No receipt means no deduction.We’re not done yet. Start hunting down receipts for medical expenses. Perhaps you spent enough on health care that your expenses exceed the 7.5% income threshold. The total expenses that exceed 7.5% of your adjusted gross income are deductible. And don’t forget: These can include health insurance premiums.

And don’t forget the paperwork to prove property tax and mortgage deductions.

Failing to report domestic workers

Even if you don’t want to be a Supreme Court justice or the U.S. attorney general, you still have to pay the payroll taxes on your nanny, housecleaner or in-home caregiver.Sorry, it’s the law. If you pay $1,500 or more in 2007 (or $1,600 in 2008) to any one household employee, you’re going to have to withhold, and match, both Social Security (6.2%) and Medicare (1.45%) taxes. You must file Schedule H to compute and report the liability.

You’ll owe federal unemployment taxes if you pay wages of $1,000 or more in any calendar quarter to household employees. You may also owe state employment and disability taxes.

If you pay certain related parties, or employees under age 18 who qualify, you may escape liability. See Publication 926 for details.

Failing to report all income

You can’t avoid reporting all of your income just because you don’t get a W-2 form or a 1099. Not all income is reported on 1099s. That doesn’t excuse you from having to pay tax on it. The fact that there’s no reporting to the IRS doesn’t prevent the agency from auditing your receipts and reconciling your bank deposits with your reported income.Unreported income can lead to civil and criminal sanctions. I don’t care how lucky you feel. The potential consequences aren’t worth the risk.

Failing to check for the alternative minimum tax

The AMT, or “awfully mean tax,” was created to catch high-income taxpayers who used allowable deductions and credits to wipe out too much tax liability. It’s an alternative computation of your tax, with different deductions, add-backs and flat rates.You pay the higher of your regular tax or that computed under the AMT.

Unfortunately, because it hasn’t been updated to reflect inflation since the original bill was passed, the AMT has been projected to hit about 19 million families in 2007, including 64% of households earning $100,000 to $200,000.

You might not think you’re a victim, at least until you get that letter from the IRS with penalties and interest. The IRS has an AMT estimation calculator on its Web site, but, to be sure, run through Form 6251.

MSN Money

@IRSTax

Do you have what it takes to self-file?

• Are you generally familiar with your tax situation? For example, do you know your filing status, understand what tax breaks (credits and deductions) you are eligible to claim and follow tax law changes enough to know what changes might affect you?
• Are you comfortable doing research if you encounter a tax question with which you’re not familiar?
• Are you organized? Do you keep good records to help you complete the forms?
• Do you prefer that no one else see your personal and financial details?

If you answered “yes” to these questions, doing your taxes yourself shouldn’t be too much of a problem.

Why you might want a tax pro

• You are intimidated by the whole tax-filing process.
• You don’t want to devote the time necessary to prepare your return.
• You’ve had a major change in your life that’s going to make filing more complex this year.
• You believe that by hiring a tax pro, you’ll save more than enough on your tax bill to cover the cost.

@IRSTax

Clearing Past Debt With the IRS

It is possible to eliminate all delinquent taxes in a Chapter 7 bankruptcy. In general, there is a multiple-step test to determine whether tax debt can be eliminated. First, you should order tax transcripts directly from the IRS. Depending on your tax situation, you might want to order transcripts for the past 10 years.

More importantly, Joe, you cannot be afraid of the IRS. I know most people consider the IRS to be like any other debt collector. This could not be further from the truth. In my experience, the IRS is easy to work with. Whether it is because they do not have the same pressures as debt collectors or whether the government simply hires more patient people, I don’t know. But the IRS is the only debt collector that does not get angry when told “I cannot pay right now.”

Unlike a debt collector who will try to corner you into a position and demand payment so that your delinquent account can be resolved, the IRS is not going anywhere. Instead, the agent simply wants to know what is going on. Communication is the key to working with the IRS. Hiding from the IRS is counterproductive and usually will result in more problems.

Here are the significant parts of the step-by-step analysis attorneys use before advising a client about the status of delinquent taxes. Please note that there are exceptions to each of the following points:

Filed tax returns: You must have filed all tax returns. You may have requested an extension for filing; this could affect your ability to eliminate the delinquent taxes.

Taxes are at least three years old: The taxes you include in the petition must be at least three years old. For example, if you filed your tax returns on time and still owe taxes from 2003, then it is possible that these taxes can be eliminated.

No IRS assessment in the past 180 days: This is a very important part in determining whether the delinquent taxes are dischargeable. As you can imagine, the IRS does not just sit back hoping you’ll pay. Unfortunately, there are too many issues to discuss in this column regarding tax assessment and the categorization of the taxes. But at a minimum, you can review the tax transcripts to determine whether the IRS has assessed your tax returns in the last 180 days.

You did not try to evade the IRS: This issue must be considered on a case-by-case basis. Even though you can pass the other three tests, the IRS could challenge your bankruptcy. The above tests do not apply if the IRS believes that you have tried to avoid paying taxes and can prove that you had money available to pay.

For example, I heard a story from the IRS in which a debtor owed delinquent taxes and earned a good income. However, the debtor decided to deposit all his paychecks into his girlfriend’s checking account in order to show that he personally had no income. The IRS discovered this fact and challenged his bankruptcy on the grounds that he was intentionally evading his obligations. The IRS won. As a result, the debtor now has a bankruptcy on his record and thousands in tax debt that must be paid back, with interest and penalties.

Additionally, I once was hired by a debtor who filed a bankruptcy five days too early and could not eliminate a significant amount of IRS debt. As a result, the debtor was forced into a Chapter 13 bankruptcy rather than eliminating all his delinquent taxes. Had an attorney reviewed the transcripts prior to filing, these taxes may have been eliminated.

You do not need a bankruptcy attorney to determine whether your IRS taxes are dischargeable. However, an attorney would let you know whether it is likely that the taxes can be eliminated. Even if you do not hire one to file your bankruptcy, it may be worth the cost to have an attorney review your tax transcripts.

Bankrate

@IRSTax

If your pay from work involves compensation through tips, then the IRS would like you to be aware of a few facts about tip income. Here are four key points to keep in mind: 

1. Tips are taxable Tips are subject to federal income, Social Security and Medicare taxes.  The value of non-cash tips, such as tickets, passes or other items of value, is also considered income and subject to tax.

2. Include tips on your tax return You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.

3. Report tips to your employer If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes. 

4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income, and Publication 1244 which are available at www.irs.gov. Both can be ordered by calling 800-TAX-FORM (800-829-3676).

A Broward County couple was charged Monday with cashing millions of dollars of income-tax refund checks issued by the U.S. government to people under investigation for stealing others’ identities to file alleged fake tax returns.

Wilson Lau and Kate Yuee Lau of Coral Springs were charged with bilking the government in the first of a series of tax-fraud cases expected to be filed in federal court. The husband was also charged with aggravated identity theft.

The Laus, who operated American Quick Cash Depot in Oakland Park, are accused of conspiring to “enrich themselves by charging a fee for fraudulently obtained …tax-refund checks’’ bearing forged endorsements, according to the charges. The 75-year-old husband and his 54-year-old wife will be arraigned in Fort Lauderdale federal court Tuesday.

Investigators, led by the Internal Revenue Service and Secret Service, cited two instances last year when the Laus cashed checks — one for $5,415 and another for $9,391 — that “were stolen and bore falsely made and forged endorsements and signatures.”

The forfeiture filed by the U.S. Attorney’s Office revealed the magnitude of the couple’s alleged crime: The Laus processed a total of $5.26 million in fraudulently obtained tax-refund checks, according to court documents. It was unclear how much they pocketed in commissions for processing them.

The couple’s attorney, Robert Buschel, could not be reached for comment.

The Internal Revenue Service can’t keep up with surging tax cheating and isn’t sufficiently collecting revenue or helping confused taxpayers because Congress isn’t giving it enough money to do its job, a government watchdog said Wednesday.

To cope with its growing and increasingly complex tasks, the agency is relying more on computer software designed to weed out fraud, Nina E. Olson, the national taxpayer advocate, said in her annual report to lawmakers.

But errors are abundant, creating even more work for the agency when taxpayers dispute its findings, the report said. In addition, it said the agency is increasingly relying on computer systems to evaluate tax returns that sometimes end up eroding taxpayers’ rights, and people are having a harder time getting through to the IRS by telephone or letter, she said.

More

@IRSTax

The Internal Revenue Service today opened the 2012 tax filing season by announcing that taxpayers have until April 17 to file their tax returns. The IRS encourages taxpayers to e-file as it is the best way to ensure accurate tax returns and get faster refunds.

The IRS also announced a number of improvements to help make this tax season easy for taxpayers. This includes new navigation features and helpful information on IRS.gov and a new pilot to allow taxpayers to use interactive video to get help with tax issues.

“At the IRS, we’re working hard to make the process of filing your taxes as quick and easy as possible,” said IRS Commissioner Doug Shulman. “Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start.”

Taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16. According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns.

The IRS expects to receive more than 144 million individual tax returns this year, with most of those being filed by the April 17 deadline.

The IRS will begin accepting e-file and Free File returns on Jan. 17, 2012. Additional details about e-file and Free File will be announced later this month. IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $57,000 or less can choose from approximately 20 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.

The IRS also reminds paid tax return preparers they must have and include a Preparer Tax Identification Number (PTIN) on all returns they prepare. All PTINs must be renewed for 2011. Tax return preparers can obtain or renew PTINs online.

Assistance Options

The IRS continues to focus on taxpayer service. The best way for taxpayers to get answers to their questions is by visiting the IRS website at IRS.gov. The IRS has updated the front page of the IRS website to make it easier for taxpayers to get key forms, information and file tax returns. The front page also has links to taxpayer-friendly videos on the IRS YouTube channel. More improvements are planned for IRS.gov in the months ahead.

Last year, the IRS unveiled IRS2Go, its first smartphone application that lets taxpayers check on the status of their tax refund and obtain helpful tax information. The IRS reminds Apple users that they can download the free IRS2Go application by visiting the Apple App Store and Android users can visit the Android Marketplace to download the free IRS2Go app.

Individuals making $50,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly. Information on these programs can be found at IRS.gov.

For tax law questions or account inquiries, taxpayers can also call our toll-free number (7 a.m. to 7 p.m. local time) or visit a taxpayer assistance center, the locations of which are listed on IRS.gov.

Virtual Service

The IRS has begun a new pilot program where taxpayers can get assistance through two-way video conferencing.  The IRS is conducting a limited roll out of this new video conferencing technology at 10 IRS offices and two other sites, and may expand to further sites in the future. A list of locations is available on IRS.gov.

Check for a Refund

Once taxpayers file their federal return, they can track the status of their refunds by using the “Where’s My Refund?” tool, which taxpayers can get to using the IRS2Go phone app or from the front page of www.IRS.gov.  By providing their Taxpayer Identification Numbers, filing status, and the exact whole dollar amount of their anticipated refund taxpayers can generally get information about their refund 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

Source