Due Diligence FAQs

http://www.eitc.irs.gov/rptoolkit/faqs/duediligence/

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Following are some of the questions preparers asked us about fulfilling their Due Diligence requirements and our answers:

Note: We have placed sections changed by the new due diligence requirements finalized in December 2011 in green.

Preparer Question		IRS Answer
What are the changes to the EITCdue diligence requirements finalized in December 2011 and when are they effective?		Here's a summary of the changes:  All paid tax return preparers who determine the eligibility for, or the amount of, the EITC are now subject to the EITC due diligence requirements and to the penalty under section 6695(g) of the Internal Revenue Code for failure to comply. This includes preparers who sign the return, preparers who prepare the EITC portion but do not sign the return, and the employers of these preparers. Record retention period changed to three years after the later of the date the return was due or the date it was transferred in final form by the preparer to the next person in  the filing process. Preparer must now keep copies of any documents that the client provides and the preparer used to determine eligibility for or amount of EITC. Preparer is required to use Form 8867 and submit it with every EITC tax return or claim for refund. The amount of the penalty increased from $100 to $500 to conform to the statutory language of section 6695(g), as amended by the United States-Korea Free Trade Agreement Implementation Act. See our Preparer Due Diligence page for more information. The changes are effective for returns for tax years ending on or after 12/31/2011.
I use good return preparation software. Why can't I rely on my software to meet my due diligence requirements?		You cannot depend on your software exclusively. Tax software is a tool to assist you and is not a substitute for your tax law knowledge and professional responsibility. You are the person who can best evaluate the information your client gives you and apply your knowledge of the law to that information. Software cannot be designed to address every possible due diligence issue you may encounter.
What are the new record keeping requirements finalized in December 2011?		You have to keep any document your client gives you that impacts or supports how you determined eligibility for or the amount of EITC. Examples include but are not limited to: Any income documents other than W-2 forms Income or expense documents that support Schedules C or F income including client prepared records of income and expenses Interest income statements Social Security cards Guardianship records Court placement records, etc. The new requirements do not require you to ask for or review any more documents than you would have under the old requirements, but now you are required to keep a copy of any document you received from the client and relied on to determine EITC eligibility or the amount of EITC.
Is it true that if I employ other preparers and they don't meet their due diligence requirements, my firm can be penalized?		Yes, it's true. IRS can assess penalties against a firm that employs others to prepare tax returns if the employee does not meet EITC due diligence requirements. But, only if one of the following apply: Management participated in or, prior to the time the return was filed, knew of the failure to comply with the due diligence requirements; or The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or The firm establishes appropriate compliance procedures but disregards those procedures through willfulness, recklessness, or gross indifference, including ignoring facts that would lead a person of reasonable prudence and competence to investigate or figure out the employee was not complying.
How can I as an employer protect myself from penalties caused by my employees not meeting their EITC due diligence requirements?		If you employ other preparers, here are some examples of how you can protect yourself from EITC due diligence penalties: Review your current office procedures to make sure they address all appropriate EITC due diligence requirements. Review your procedures with your employees to make sure they clearly understand their responsibilities and your expectations of them. Conduct annual EITC due diligence training or instruct your staff to complete the online module that we offer in both English and Spanish. Test your employee's knowledge of due diligence and your procedures. Perform recurring quality review checks on your employee's work including credit computations, questions they asked clients, documents they reviewed, and the records kept.
Must I use Form 8867 as part of the due diligence process?		Yes, you are required to complete, submit, and keep the Form 8867 for every EITC return or claim. You submit the form as part of an electronic return or attach it to a paper return.
Are we required to actually go over the questions on the Form 8867with the client and mark the forms with the answer? Or, can we later fill those forms out based on the client interview and still meet our due diligence requirement?		The Form 8867 is a checklist paid preparers are required to complete to meet their due diligence requirement. The intention is not to use the checklist to interview your clients. Most of your clients do not have the tax law background to answer the questions as written. IRS expects you to ask the right questions to get the information needed to complete the Form 8867. Completing the Form 8867 is just one of your due diligence requirements. If your interview covers all other aspects of your due diligence requirements, you can use the information to complete the Form 8867 as you prepare the return.
I am a paid tax preprarer, do I have to submit Form  8867 with the return or just keep with my records?		For returns or claims for refund from tax years ending on or after 12/31/2011, you are required to submit the Form 8867 either as part of the electronic file sent to the IRS or attached to a paper return. And, you must keep a copy of the completed form as part of your records for three years from the latest of the following dates that apply:   The due date of the tax return (not including extensions); The date the return was filed (if you signed the return and filed it electronically); The date the return was presented to the taxpayer for signature (if you signed the return and did not file it electronically); or The date you submitted the EITC part of the return to the preparer who signed the return (if you prepared the EITC portion of the return but another preparer signed the return). Store the checklist in either paper or electronic format but you need to produce it if audited.
To document my compliance with EITC due diligence, is it sufficient to keep a copy of Form 8867 that is signed and dated by my client?		Keeping a signed and dated Form 8867 in your records may be sufficient to document when and from whom you got the return information, but you must also keep the computation worksheet and written documentation to support your compliance with the knowledge requirement. The knowledge requirement states you must not know, or have reason to know that any information used in determining your client's eligibility for or the amount of, EITC is incorrect. You must ask additional questions if the information your client gives you seems incorrect, incomplete or inconsistent. You are required to document the questions asked and the answers given at the time of the interview. You can keep the documentation either electronically or on paper.
When questioning a client who reports income that seemsinadequate to support a family, is it sufficient to accept an answer that Government benefits are received? Do we need to specify the type and amount?		Questioning the source and amount of income used to support a household for EITC due diligence has two purposes. One is to ensure your client is reporting all income that contributes to their total earned income and AGI. There is no support test for EITC. The other purpose is to ensure no other person is eligible to claim EITC or any other child-related benefits. The due diligence requirement is to make additional inquiries if the information you receive from your client appears to be incorrect, incomplete or inconsistent. You also need to know the source of income and amount to determine filing status and dependency exemption.
I know taxpayers need to report all income but what about expenses? What if the client doesn't want to claim business expenses to keep their taxable income higher and qualify for more EITC?		A self-employed individual is required to report all business income and deduct all allowable  business expenses. They do not have the option of reporting what is most beneficial. Revenue Ruling 56-407, 1956-2 C.B. 564, addresses whether taxpayers may disregard allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Because the net earnings from self-employment are included in earned income for EITC purposes this ruling is defined by cross-reference to I.R.C. §1402(a). CCA 200022051 also provides insight regarding deduction of Schedule C expenses.
What should a preparer do if he or she feels the taxpayer is not providing all expenses to inflate EITC?		As a preparer, you need to be alert to this type of situation. Part of the knowledge requirement is that you know or have reason to know, so you can't ignore your suspicion. Here is when you need to ask additional questions, document the answers and make a judgment as to whether the answers make sense. If they don't, you have a responsibility to ask additional questions and possibly ask for documentation until you are confident the return you are preparing is accurate. You must also use professional judgment regarding the credibility of your client and the answers you receive. If you are not comfortable with the answers or credibility of the client, then due diligence dictates you do not prepare the return. You may also want to present your client with the newPublication 4717, Help Your Tax Preparer get You the EITC You Deserve. This publication explains preparer's due diligence requirements and the consequences of not filing an accurate return.
Must I review the birth certificateto verify the age of a qualifying child?		No, it's not required. However, if you have reason to question a child's age, you may want to request the birth certificate. If the client provides a birth certificate  and you use it to determine eligibility for or amount of EITC, you need to keep a copy.
How do you handle the situation when you decline to do the EITCclaim? The client then refuses to leave his or her information with you.		Any client has the option of deciding not to complete a return with a preparer and therefore would have no reason to leave information with that preparer. If the preparer wants to report the taxpayer who he thinks will erroneously claim EITC with another preparer use the process described in the Fraud section of the Frequently Asked Questions.
What due diligence is expected of the preparer in this situation: The household is made up of an unmarried couple, their natural child and the grandmother of the child. The child is the qualifying child of all three for EITC. The grandmother is our client and neither one of the parents is our client. The grandmother says they all agreed she should take the credit and she has the highest income. What responsibility do we have to verify this information?		To meet your due diligence requirements, you must ask the appropriate questions and document the questions you asked and your client's answers. You do not have the responsibility to verify the AGI. As a service to your customer, you may want to explain what happens when more than one person uses the same qualifying child-the return may reject or IRS could reverse the claim after an audit. You may also want to present your client with the newPublication 4717, Help Your Tax Preparer get You the EITC You Deserve. This publication explains preparer's due diligence requirements and the consequences of not filing an accurate return.
We have a checklist to make sure our clients are eligible for EITC. We determined they were not and did not claim EITC on the return. But, the IRS sent a letter saying they might qualify. Why?		If your client appears to qualify for EITC but does not, you are instructed to put a "no" on the EITC line. IRS does check for the "no" on the EITC line before sending out a notice. We have heard of this problem previously but never have enough information to determine if it is IRS error, software error or preparer error.
Do due diligence requirements, including the three-year retention, apply to VITA prepared returns?		No. The due diligence requirements apply only to paid return preparers.
Must I review Social Security cards or keep a copy?		No. There is no requirement to review Social Security cards, but it is a best practice to review them. You are more likely to get the child's name and number correct if copied directly from the card. Also, having copies of cards is helpful in resolving e-file rejects. If the client provides a Social Security card and you use it to determine eligibility for or amount of EITC, you need to keep a copy.
How is a preparer selected for an EITC Due Diligence audit?		IRS selects preparers for due diligence visits based on the high likelihood that the returns they prepare are in error. We base the likelihood on a set of standard criteria applied to all EITC returns. SeeWhat to Expect during a Due Diligence Audit for additional information.

EITC Due Diligence Law and Regulation

http://www.eitc.irs.gov/rptoolkit/dd/lawandregs/

Internal Revenue Code §6695 and related regulations set out the EITC Due Diligence requirements and the penalties for failure to comply with them.

Law:

IRC §6695(g) states: Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for, or the amount of, the credit allowable by section 32 shall pay a penalty of $500* for each such failure.

*The penalty amount increased from $100 to $500 for returns required to be filed after December 31, 2011 by the United States-Korea Free Trade Implementation Act signed into law October 21, 2011 View the United States-Korea Free Trade Implementation Act on the Library of Congress site.

Treasury Regulation Information:

 

Treasury issued regulations finalized in December 2011 that affect all EITC claims required to be filed after December 31, 2011. Find the adobe version of the Treasury Decision here.

 

There are four due diligence requirements. Generally, if you prepare EITC claims, you must not only ask all the questions to get the information required on Form 8867, Paid Preparers' Earned Income Credit Checklist, but you must also ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Prepare, submit,  and keep a copy of the Form 8867. Prepare and keep all worksheets showing how the credit was computed. The table below provides more information on recordkeeping requirements. The new requirements are shown in green.

You could be penalized $500 for each time you fail to meet all four due diligence requirements for each EITC claim.

You can find the regulations, Section 1.6695-2, Preparer due diligence requirements for determining earned income credit eligibility" on the Government Printing Office site. The Section 1.6695-2 regulations are available in text or Adobe . (As of February 10, 2012, the GPO site did not reflect the revisions finalized in December 2011,  see Treasury Decision 9570 for the changes.)

Due Diligence Requirements:

 

(New requirements show in green)

 

Requirement	You must:
1. Complete and Submit Eligibility Checklist	Complete Form 8867, Paid Preparer's Earned Income Credit Checklist, to make sure you consider all EITC eligibility criteria for each return prepared.   Complete checklist based on information provided by your client(s).   For returns or claims for refund filed electronically, submit Form 8867 to IRS electronically with the return.   For returns or claims for refund not filed electronically, attach the completed form to any paper return you prepare and file.   For returns or claims for refund you prepare but do not submit directly to the IRS, provide completed Form 8867 to the taxpayer to send with the filed tax return or claim for refund.
2. Computing the Credit	Complete EITC worksheet from the Form 1040 instructions, or Publication 596, Earned Income Credit, or a document with the same information.  The worksheet shows what is included in the computation, that is, self-employment income, total earned income, investment income, and adjusted gross income. Most tax preparation software has the computation worksheet.
3. Knowledge	Know the law and use your knowledge of the law to ensure you are asking your client the right questions to get all relevant facts.   Take into account what your client says and what you know about your client.   Not know or have reason to know any information used to determine your client's eligibility for, or the amount of, EITC is incorrect, inconsistent or incomplete.   Make additional inquiries if a reasonable and well-informed tax return preparer would know the information is incomplete, inconsistent or incorrect.   Document any additional questions you ask and your client's answer at the time of the interview.   The Treasury Regulations give examples of when to apply the knowledge requirement. Find the regulations for tax return preparer due diligence requirements on the Government Printing Office site. Use either this text or thisAdobe version link. (As of February 10, 2012, this site did not cover the new regulations finalized in December 2012 yet. See the Adobe version of the Treasury decision with the revisions.)
4. Keeping Records	Keep a copy of the Form 8867and EIC worksheet, and a record of any additional questions you asked your client to comply with your due diligence requirements and your client's answers to those questions.   Keep copies of any documents your client gives you that you use to determine eligibility for, or the amount of the EITC.   Verify the identity of the person giving you the return information and keep a record of who provided the information and when you got it.   Keep your records in either paper or electronic format, but make sure you can produce if IRS asks for them.   Keep these records for 3 years from the latest date of the following that apply: The original due date of the tax return (This does not include any extension of time for filing.), or If you electronically file the return or claim for refund and sign it as the return preparer, the date the tax return or claim for refund is filed, or If the return or claim for refund is not filed electronically and you sign it as the return preparer, the date you present the tax return or claim for refund to your client for signature; or If you prepare part of the return or claim for refund and another preparer completes and signs the return or claim for refund, you must keep the part of the return you were responsible to complete for 3 years from the date you submit it to the signing tax return preparer. Keep your records in either paper or electronic format, but make sure you can produce if IRS asks for them.

Late on January 1, 2013, Congress passed HR 8 (Tax Relief Extension Act) which extended almost all of the Federal tax provisions that had expired at the end of 2011 and 2012.

Although the Tax Relief Extension Act contains many individual, business, and energy tax provisions that were extended or modified, the following are the ones that will have the most impact on taxpayers filing their 2012 Federal returns this coming filing season.

Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) provisions were permanently extended as follows:

• The exemption amount will be indexed for inflation each year. For 2012 the exemption amounts are:
  • Single/Head of Household: $58, 600
  • Married Filing Joint: $78, 750
  • Married Filing Separate: $39, 375
• All personal nonrefundable credits may be used in calculating the AMT. This also means that the order these credits are taken against regular tax will remain as they currently are.

Individual and Business Provisions
The following individual and business provisions were extended and will apply to Tax Years 2012 and 2013:

• $250 Educator Expense Deduction – Form 1040, line 23
• Tuition and Fees Deduction – Form 8917 and Form 1040, line 34
• Itemized Deduction for Sales Tax – Schedule A, line 5
• Nonbusiness Energy Property Tax Credit reported on Form 5695, Part I
• 15 year straight line depreciation allowed for qualified leasehold restraint and retail improvements
• Tax-free distributions from IRAs for charitable purposes
• Contributions of capital gain real property made for conservation purposes (50% limitation applied instead of 30% limitation)

Section 179 Expense
The following Section 179 provisions were extended and will apply to tax years 2012 and 2013:

• Maximum deduction: $500, 000
• Maximum cost before the limit is reduced: $2, 000, 000
• Qualified Real Property category which includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property which has a Section 179 expense limit of $250, 000.

Adoption Credit
The portions of the Adoption credit that made it a refundable credit and increased the credit amount were not extended. Thus the adoption credit reverts back to being a nonrefundable credit with any excess being allowed to be carried forward for five years. The maximum credit for 2012 will be $12, 650.

Federal Provisions That Were Not Extended
The following Federal provisions were not extended and thus are not applicable for 2012 Federal returns:

• 5 year depreciation for farming business machinery and equipment
• DC First-time homebuyers tax credit

Availability of Form 1040 Instructions and Publication 17
Due to the lateness of the passage of this tax bill and the uncertainty surrounding the above extender provisions the IRS has not yet released the Form 1040 instructions or Publication 17. Now that it has passed, the IRS should be releasing them in the near future.

t is important to set your customers’ expectations for when the IRS will be sending refunds during the upcoming 2013 Filing Season and beyond.

Due to the increase in fraud and identity theft, the IRS is increasing their fraud filters during the processing of all individual returns. This means that a larger number of returns will be reviewed therefore, processing will take longer and the refund will be sent out later for these returns.

The IRS messaging for refunds for the upcoming filing season will be that refunds will be sent to the taxpayer within 21 days from the time the return has been accepted. This message will be the same on the IRS website, “Where’s My Refund?” page, and when a taxpayer calls the IRS help desk.

The refund cycle chart has been eliminated and replaced with an IRS Information Guidelines for the Tax Preparation Community publication.

You will also notice the following changes to the “Where’s My Refund?” tool for the upcoming filing season:

• The expected date of when the refund will be sent will no longer be given when the return begins to be processed.
• The refund status will be presented by way of a status bar as follows:
  • Return Received - From the time the return is received until the refund has been approved the message will be that the return is being processed and that the refund will be sent in less than 21 days.
  • Refund Approved – A date the refund is scheduled to be sent to the bank will be given.
  • Refund Sent – The date the refund was sent.
• The taxpayer will be able to see the status of their return within 24 hours after their return has been accepted.

The IRS has also begun sending out an additional message to taxpayers that they should not be making major purchases during the holiday season solely on the expectation of when they will receive their refund before the bills arrive.

Lastly, the IRS is reminding preparers that they must follow the advertising standards in Publication 3112 (IRS E-File Application and Participation) andPublication 1345 (Handbook for Authorized E-file Providers of Individual Income Tax Returns) regarding faster refunds.

There is a lot to cover; we will begin with tax practice updates that are not related to late legislation, then move on to the Fiscal Cliff Legislation Tax Changes.

 

The 2013 electronic filing season begins on Tuesday, January 22, 2013

 

The “Refund Cycle Chart” will not exist for Tax Season 2013. The IRS has enhanced the “Where’s My Refund” application on www.irs.gov. The IRS issued more than 9 out of 10 refunds to taxpayers in less than 21 days last year. The same results are expected in 2013. The IRS replaced the “Refund Cycle Chart” with Publication 2043. Please print a copy of this publication and make sure all of your preparers understand the how to use this handy tool.

Due to the significant increase in the filing of fraudulent returns and identity theft, the IRS will be increasing their fraud filters for the upcoming filing season. This means more returns will be selected for further review and could result in a delay in the processing of these returns.

In an effort to strengthen the refund process the IRS has made changes to the following forms:

 

Schedule 8812 (Child Tax Credit). The new Schedule 8812 was formerly Form 8812 (Additional Child Tax Credit). The schedule is used to claim the additional child tax credit and is now used to answer a question regarding the substantial presence test for those children that have an ITIN for whom the taxpayer is claiming a child tax credit on their 2012 Federal tax return.

 

Form 8863 (Education Credits). For each persona claiming either the American Opportunity or Lifetime Learning Credit, the following additional information must now be included on the 2012 Form 8863, Part III:

 Name and address of the educational institution the student attended

 Additional questions regarding Form 1098-T

 Additional questions on the eligibility of the student for an education credit for the current year. We recommend that every preparer review the revised Form 8863

 

Schedule 8867 (Paid Preparer’s Earned Income Credit Checklist). In the IRS’s continuing effort to ensure the preparer is following due diligence in preparing EITC returns, a new page 4 has been added to Form 8867. This page has additional questions related to the preparer’s due diligence requirements concerning documentation that the preparer relied on to claim the earned income tax credit for Tax Year 2012, e.g.

 Residency of Qualifying Child(ren)

 Disability of Qualifying Child(ren)

 Schedule C income and existence of business

 

Form W-7 ITIN Application. Interim procedures were initiated by the IRS on June 22, 2012 and remained in force until December 31, 2012. New procedures have been implemented to strengthen the ITIN program and maintain the integrity of the refund process. Some of these changes include:

 Only original documents may accompany the Form W-7

 ITIN applicants must have a tax related purpose for applying for an ITIN

 1040 returns filed with W-7 will be subject to extra scrutiny

 

Certifying Acceptance Agents. The IRS understands there must be alternative options for those applying for an ITIN and cannot send their original passports to the IRS for any length of time. The IRS has added additional requirements to those wishing to become Certifying Acceptance Agents:

 All CAAs must complete a forensic document training course by January 31, 2012

 Proof of completion of forensic document training must be sent to the IRS by February 28, 2013

 All CAAs must purchase tools and publications to stay current with the new regulations.

 Visit www.irs.gov/ITIN to review these new procedures

 

Identity Protection PIN for the Upcoming 2013 Filing Season. The IRS is expanding the number of taxpayers who will receive an Identity Protection Pin (IP PIN) for the upcoming season. All taxpayers that have had an identity theft indicator applied to their IRS tax account will receive an IP PIN that must be included on their 2012 Federal income tax return. This means that approximately 600, 000 taxpayers will receive an IP PIN for the upcoming filing season.

Notice CP01A is the notice the affected taxpayers will receive their IP PIN from the IRS in December of 2012. This notice will include their 6-digit IP PIN and information on the use of the IP PIN.

 

Fiscal Cliff Legislation Tax Changes

 

Payroll Alert! All wage earners will see a 2% increase in January 2013 in their Social Security tax, as Congress did not opt to extend that payroll tax holiday.

 

Personal Tax Credits. The $1, 000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.

 

Permanent extensions.

 Child and dependent care credit rules based on up to $3, 000 of expenses for one dependent or up to $6, 000 for more than one

 The exclusion for employer-provided educational assistance

 The enhanced rules for student loan deductions

 The employer-provided child care credit

 The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts

 Special treatment of tax-exempt bonds for education facilities

 Repeal of the collapsible corporation rules

 

Other personal deductions and exclusions. The following deductions and exclusions are extended through 2013:

 Discharge of qualified principal residence exclusion

 $250 above-the-line teacher deduction

 Mortgage insurance premiums treated as residence interest

 Deduction for state and local taxes

 Above-the-line deduction for tuition

 IRA-to-charity exclusion

 

Other Key elements of the deal:

 Permanently sets Alternative Minimum Tax (AMT) exemption at $50, 600 (single) and $78, 750 (joint filers) for 2012 and adjusts for inflation thereafter

 The itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300, 000 for married filing joint, $275, 000 for head of household, and $250, 000 for single.

 Capital gains tax and dividends tax will be 20% for taxpayers with income over $400, 000 (single) and $450, 000 (joint filers). This does not include the new 3.8% health care tax on investment income above $200, 000 (single) and $250, 000 (joint filers) in adjusted gross income, so the top rate for capital gains and

dividends will be 23.8%. For lower income levels, the tax will be 0%, 15% or 18.8%.

 Continues with the standard deduction for joint filers at 2X single filers (would have otherwise reverted to 1.67X single filers)

 Retained the 10%, 15%, 25%, and 28% income tax brackets from the Bush tax cuts permanently.

 Retains the 33% and 35% income tax brackets from the Bush tax cuts for taxable income under $400, 000.

 A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400, 000 a year, $425, 000 for head of household, and $450, 000 for married filing joint.

 15-year depreciation and IRC 179 expensing allowed on qualified real property through 2013

 Work Opportunity Credit extended through 2013

 Bonus depreciation extended through 2013

 The IRC 179 deduction limitation is $500, 000 for 2012 and 2013

 The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012.

 

New Taxes

 Additional hospital insurance on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed $250, 000 of a joint return, $125, 000 of MFS, and $200, 000 in any other case.

 For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of tax on SE income in excess of the threshold amount.

 The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI

 Effective for cafeteria plan years beginning after December 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2, 500

 

http://www.irs.gov/uac/Newsroom/IRS-Strengthens-Integrity-of-ITIN-System;-Revised-Application-Procedures-in-Effect-for-Upcoming-Filing-Season

IR-2012-98, Nov. 29, 2012

WASHINGTON –– The Internal Revenue Service announced today updated procedures to strengthen the Individual Taxpayer Identification Number (ITIN) program requirements. The new modifications and documentation standards further protect the integrity of the ITIN application and refund processes while helping minimize burden for applicants.

The changes build on previously announced interim procedures.  During the last several months, the IRS gathered feedback from stakeholders and interested groups on how to best safeguard the integrity of and improve procedures for this important tax identification number.

ITINs play a critical role in the tax administration process and assist with the collection of taxes from foreign nationals, resident and nonresident aliens and others who have filing or payment obligations under U.S. law. Designed specifically for tax administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number.

"Our review allowed us to evaluate the program and gather feedback to make needed adjustments, " said IRS Acting Commissioner Steven Miller. "We believe the final rules balance the need for greater integrity for the ITIN and refund processes while minimizing the impact on taxpayers."

The IRS will maintain its new, stronger standard for issuing ITINs. ITIN applications will continue to require original documentation or copies certified by the issuing agency.  In addition, the IRS finalized its earlier decision to no longer accept notarized copies of documents for ITINs. Most of the interim guidelines have been made permanent. Those requirements that changed will provide additional flexibility for people seeking ITINs while continuing the stronger protections.

A key change is that, for the first time, new ITINs will expire after five years. This change will help ensure ITINs are being used for legitimate tax purposes. Taxpayers who still need an ITIN will be able to reapply at the end of the expiration period. This step will provide additional safeguards to the ITIN program to help ensure only people with legitimate tax purposes are using the numbers. In addition, the IRS will explore options, through engagement with interested groups, for deactivating or refreshing the information relating to previously issued ITINs.

As part of its review process, the IRS heard from stakeholders that it is difficult in some instances for individuals to be without documents such as passports for extended periods. As a result, the IRS determined that trusted outlets other than its centralized ITIN processing site need to be available to review original documentation. As part of this recognition, while original documents or copies certified by the issuing agency are still required for most applicants, there will be more options and flexibility for people applying for an ITIN.  These options provide alternatives to mailing in passports and other original documents.

Certifying Acceptance Agents (CAAs) – an important intermediary in the ITIN application process – will be able to engage in the ITIN process by reviewing original documents or copies certified by the issuing agency, but will be subject to new safeguards. CAAs will be required to certify to the IRS that they have verified the authenticity of the documents supporting the ITIN application. For certain ITIN applicants, this provides an option where they will not need to mail original documents such as passports.

With respect to dependent children, in order to adequately substantiate identity and foreign status and protect important child tax credits, ITIN applications submitted to IRS by a CAA will continue to be required to include original documentation. For children under six, one of the documents can include original medical records. For school-age children, the documentation can include original, current year school records such as a report card.

CAAs will now need to meet new requirements and will face stronger due diligence standards to verify the accuracy of supporting documentation. For the first time, only those covered under Circular 230 are eligible to serve as a CAA. Exceptions are made for CAA applicants from financial institutions, gaming facilities,  Low-Income Taxpayer Clinics and Volunteer Income Tax Assistance (VITA) Centers. CAAs will be required to take formal forensic training to help them identify legitimate identification documents. The IRS also plans greater oversight and compliance activities with CAAs to safeguard the ITIN process.

In addition to direct submission of documents to the IRS ITIN centralized site or use of CAAs, ITIN applicants will have several other avenues for verification of their documents.  These options include some key IRS Taxpayer Assistance Centers (TACs), U.S. Tax Attachés in London, Paris, Beijing and Frankfurt,   and at the Low-Income Taxpayer Clinics and Volunteer Income Tax Assistance (VITA) Centers that have CAAs.  The procedure announced Oct. 2, 2012 for foreign students at educational institutions to be certified through the Student Exchange Visitors Program (SEVP) remains.

The finalized procedures are effective Jan. 1, 2013, in time for the 2013 tax-filing season when many ITIN applications are submitted along with a taxpayer’s income tax return. Later in January, participating IRS Taxpayer Assistance Centers will be available to review and certify passports and national identification cards in person for primary, secondary and dependent applicants. The first set of TACs that will review and certify documents for ITINs are located in areas where past ITIN activity has been prevalent. Additional details on participating IRS locations and other rules will be available soon on IRS.gov.

As announced previously, some categories of applicants are not impacted by these documentation changes, including:

• Spouses and dependents of U.S. military personnel who need ITINs.
• Nonresident aliens applying for ITINs for claiming tax treaty benefits.

The IRS also stressed that it will continually monitor and work with interested stakeholders on the ITIN process and intends to make appropriate adjustments to ensure the process works in a fair, balanced fashion that meets the needs of taxpayers and tax administration. Individuals or organizations that want to comment on these procedures can do so by submitting an email toITINProgramOffice@irs.gov .

More details on the permanent procedures and other important information for ITIN applicants are available on IRS.gov.

http://www.irs.gov/uac/2013-Standard-Mileage-Rates-Up-1-Cent-per-Mile-for-Business, -Medical-and-Moving

R-2012-95, Nov. 21, 2012

WASHINGTON — The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven.
• 24 cents per mile driven for medical or moving purposes.
• 14 cents per mile driven in service of charitable organizations.

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

PTIN renewals begin on October 22, 2011.  Before you begin your PTIN renewal application, be sure you have the following available:

• Personal information (name, mailing address, date of birth)
• Business information (name, mailing address, telephone number)
• Explanations for felony convictions (if any) ¹
• Explanations for problems with your U.S. individual or business tax obligations (if any) ¹
• Credit or debit card for the $63.00 PTIN user fee
• If applicable, your supervisor's PTIN (view the Notice 2011-6 fact sheetfor more information)
• If applicable, any U.S.-based professional certification information (CPA, attorney, enrolled agent, enrolled retirement plan agent, enrolled actuary, certified acceptance agent, or state license) including certification number, jurisdiction of issuance, and expiration date

After you renew your PTIN, you will receive information about next steps including testing, fingerprinting, and continuing education requirements (if applicable).

Note: All PTIN correspondence is delivered through secure online messaging in your PTIN account. Use the most up-to-date email address when obtaining your PTIN to ensure that you receive our messages.

If you need additional help with renewing/applying for your PTIN, feel free to call us at 770-877-5565.

2011 Basic Changes

Exemption Amount: $3, 700

Standard Deduction
Basic amounts for 2011 are:
Head of Household - $8, 500
MFJ and Qualifying Widow(er)s - $11, 600
MFS - $5, 800
Single - $5, 800

Additional standard deduction for Aged and Blind:

$1, 150 for each
$1, 450 if the individual is unmarried and not a surviving spouse

Standard Mileage Rates
The rates for 2011 are:

Business purpose (Applies to up to four vehicles):
January 1 – June 30: 51 cents per mile
July 1 – December 31: 55.5 cents per mile
Medical/Moving purposes:
January 1 – June 30: 19 cents per mile
July 1 – December 31: 23.5 centers per mile
Charitable Contributions: 14 cents per mile

Section 179 Expense Limits

Maximum Section 179 deduction: $500, 000
Maximum cost before the limit is reduced: $2, 000, 000

5% Capital Gains rate remains at 0%
The 15% capital gain rate remains the same.

Income from Credit Cards and Schedule C

As a reminder, beginning with calendar year 2011, banks will be issuing new information on Form 1099-K for their 2011 income received via credit cards.
The amounts from Form 1099-K must be reported on a separate line on the 2011 Schedule C.

The new income section for Schedule C will have a new look:

Line 1a: Merchant card and third party payments
Line 1b: Gross receipts or sales not reported on Line 1a
Line 1c: Total Gross Receipts
Line 1d: Returns and allowances plus any “cash back”
included on Line 1a
Line 1e: Net Gross Receipts
There will also be two questions added to Schedule C, E and F asking if the business made any payments in 2011 that require it to file Form(s) 1099 and, if so, did they or will they file all required Form(s) 1099.

If you discover an error after you file your tax return, you can correct it by amending your return.  Here are ten facts from the Internal Revenue Service about amending your federal tax return:

1. When to amend a return You should file an amended return if your filing status, your dependents, your total income or your deductions or credits were reported incorrectly.
2. When NOT to amend a return  In some cases, you do not need to amend your tax return.  The IRS usually corrects math errors or requests missing forms – such as W-2s or schedules – when processing an original return.  In these instances, do not amend your return.
3. Form to use Use Form 1040X, Amended U.S. Individual Income Tax Return, to amend a previously filed Form 1040, 1040A or 1040EZ.  Make sure you check the box for the year of the return you are amending on the Form 1040X. Amended tax returns cannot be filed electronically.
4. Multiple amended returns If you are amending more than one year’s tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS processing center.
5. Form 1040X The Form 1040X has three columns. Column A shows original figures from the original return (if however, the return was previously amended or adjusted by IRS, use the adjusted figures). Column C shows the corrected figures. The difference between Column A and C is shown in Column B.  There is an area on the back of the form to explain the specific changes and the reason for the change.
6. Other forms or schedules If the changes involve other schedules or forms, attach them to the Form 1040X.
7. Additional refund If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X.  You may cash that check while waiting for any additional refund.
8. Additional tax If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.
9. When to file Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
10. Processing time Normal processing time for amended returns is 8 to 12 weeks.

*Source: IRS Summertime Tax Tip 2011-12 www.irs.gov