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Brown Bagger

This section is set up to provide a ready-made Brown Bag Session for you to use with employees and/or managers. Use as is, or adapt this information for a general employee group. You may reproduce as many copies as needed.

IRS Tax Tips — and Other Financial Advice Editor’s note: This article is intended for educational purposes only and should not be construed as a substitute for financial advice. Since individual circumstances may vary widely, always consult a professional well-versed in tax law and/or other financial matters regarding the applicability of recommendations appearing in this article.

he Internal Revenue Service (IRS) audits thousands of individual and business tax returns each year. The audits often result in the IRS requesting additional money from hundreds of taxpayers. As explained by Thomas Evans in this month’s cover article in Employee Assistance Report, taxpayers are currently caught between a weak economy and the IRS, which is under pressure to raise more tax dollars. As a result, the IRS is getting tougher than ever in its efforts to collect back taxes.

The IRS notes that taxpayers who owe additional money shouldn’t panic, but address the matter one step at a time — by first getting sound advice from a reputable accountant, tax attorney, or tax consultant. Not every accountant or attorney has handled cases involving back taxes, so choose counsel with experience dealing with the IRS. Only about 1% of personal income tax returns are audited each year. However, if you are chosen, the experience can be emotionally draining — as a result, you want advice from someone who isn’t a novice in this area.

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Background The IRS is required to assess any additional taxes within three years after a return is filed. There is a six-year statute of limitations if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return. For assessments of taxes or levies filed after Nov. 5, 1990, the IRS cannot collect any tax 10 years after the date of assessment.

Although penalties often account for up to 40% of a given tax bill, they are negotiable — so taxpayers should always try to get penalty charges excused or reduced. Taxpayers also need to review the interDecember 2009

est charge levied by the IRS. It is estimated that the IRS miscalculates interest charges 25% of the time.

Therefore, taxpayers need to determine whether the interest is based on the correct year — and then, check the amount by estimating interest at 1% per month.

Once taxpayers have verified penalties and interest owed, the next step is to prepare an amended tax return(s), calculate the estimated earnings for the year(s) in question, and submit the amended return(s) to the IRS. First the bad news: the taxpayer must be willing to pay the taxes owed and accept the possibility of penalties for evading income taxes. Now the good news: as mentioned, the IRS is often willing to be flexible when an individual voluntarily contacts the IRS and is willing to make restitution. However, taxpayers need to have a plan to pay the IRS for back taxes, as it will fit into their budget, and present it to the IRS. When Taxpayers Can’t Pay If a taxpayer suffers significant hardship as a result of IRS demands, he or she may file a Form 911, Application for Taxpayer Assistance Order.

Visit www.irs.gov. (Editor’s note: Thomas Evans describes a number of potential remedies to common tax problems in this month’s cover story in EAR.) This form allows the Taxpayer Advocate Service (use Publication 1546, The Taxpayer Advocate Service of the IRS) to locate the nearest office that can intervene, review the facts and circumstances of the case, and take appropriate steps allowed by law to relieve the taxpayer’s hardship.

A significant hardship is a situation in which an action by the IRS would prevent a taxpayer from providing for basic necessities such as housing, food, utilities, and transportation, or for a business taxpayer to meet basic expenses such as payroll. For more information, visit www.irs.gov/advocate or call (877) 777-4778.

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Brown Bagger When taxpayers owe the IRS but cannot pay, there are generally three alternatives:  Installment Arrangements: This option allows the taxpayer to pay the IRS over time. In this alternative, the individual is promising to pay the full taxes owed, plus interest, usually in equal monthly installments. However, the IRS will not take collection action while the agreement is in force.  Offer in Compromise: An OIC, also discussed in this month’s cover article in EAR, is an agreement to pay less than the taxes owed. The IRS will compromise taxes based on its doubt as to liability (the individual may not owe the tax) or collectibility (the IRS cannot collect the full amount from the individual).  Bankruptcy: This option may eliminate some income tax liability for taxes more than three years old, provided the individual has filed non-fraudulent tax returns at least two years before declaring bankruptcy. However, this is a drastic and potentially financially devastating choice that could affect the taxpayer negatively for years. In addition, many times filing bankruptcy against the IRS is disallowed by bankruptcy courts.

to challenge an assessment, and usually there is no fee involved. All it takes is a little effort, doing some research at the local tax assessment office, and presenting the case in person. If successful, not only can homeowners cut their tax bill each year — these savings also grow substantially over time because property taxes are generally adjusted annually for inflation.

End-of-Year Tax Tips While individual circumstances vary, excessive debt is no doubt a contributing factor in many instances in which back taxes are owed. (Debt management advice is presented in the handout section on page 4.) However, it’s also worth considering that you may be paying too much in taxes, possibly due to not taking sufficient advantage of legal loopholes. Even if your financial ship is sailing in better waters, the following are several recommendations to consider before 2009 draws to a close:

5 Deduct charitable contributions — One of the most confusing aspects of the income tax system is what qualifies as a tax deduction. Of these, by far the most obscure involve deductions for gifts to charitable organizations. These include, but are not limited to: charitable organizations, such as the Red Cross and United Way; religious institutions, such as churches and religious associations; literary organizations, such as libraries; and educational entities, such as university alumni funds. Charitable contributions cannot total more than 50% of a taxpayer’s adjusted gross income.

If taxpayers receive benefits as a result of contributions, they can deduct only the amount that is over the value of the benefit. For example, if a taxpayer gives an offering to a ministry for $25 and receives in return a book that is worth $10, he or she can deduct $15 as a charitable contribution. In many cases, membership fees or dues can be deducted if they are paid to a qualified charitable organization.

Since the dollar amounts of deductions changes on a regular basis, an accountant or other tax advisor should be consulted.

However, the advisor may not be able to assist if the individual doesn’t have a paper trail.

Consequently, the taxpayer should always hang on to receipts whenever he/she is in doubt whether something counts as a deduction. For additional information, see IRS Publications 17, 526, and 561 and IRS Forms 1040-Schedules A and 8283.

5 Lower real estate taxes — Many people pay too much in property tax year after year without realizing it or ever questioning the validity of the tax assessed. Yet, it is fairly simple to verify the appraised value of a home and to have the taxes reduced if homeowners can prove (by substantiating documentation) that a reduction in property taxes is justified.

Statistics show that more than 60% of homeowners who challenge assessed real estate taxes succeed in reducing their tax liability. No lawyer is needed

5 Don’t overlook medical tax deductions — Recent IRS and court decisions have expanded the definition of medical costs that can be deducted from personal income taxes. Many taxpayers are aware that basic medical deductions may be claimed after they exceed a percentage — currently 7.5% — of a taxpayer’s adjusted gross income. These deductions include the costs of diagnosis, and/or the treatment or prevention of a disease, although the treatment must be specific and not just for general health or cosmetic improvement.

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However, taxpayers have to investigate for themselves whether additional medical expenses are deductible. There needs to be documentation justifying the cost as a medical expense. When this is the case, courts have ruled that the following are among valid medical deductions:  Extra costs for salt-free, fat-free, or other special diets prescribed by a licensed physician or nutritionist;  The cost of transportation to and from an Alcoholics Anonymous Center;  The cost of a guide dog for a blind person, or a reader to assist a blind businessperson while on his or her job;  The cost of travel expenses made necessary by illness or injury; and  The portion of a housekeeper’s salary that goes toward the medical care of a sick resident.

Again, consult with a tax advisor for the most recent rules affecting tax deductions for medical reasons.

Considerations for Your Next Tax Return Recommendations like these will help taxpayers to maximize deductions and minimize what they have to pay in taxes before filing their next return.

However, before sending in your return next spring, bear in mind that while a tax refund may look and feel like free money, it isn’t. In fact, a tax refund could make a big difference for many families who are struggling to make ends meet. Since individual circumstances vary, there is no single “right” answer concerning what to do with a refund. However, the following are some suggestions: Spend — If you choose to spend your next refund in 2010, spend smart for big savings later.

Upgrade appliances to energy-efficient models that can lower electric, gas, and water bills and save money in the long run. Complete car maintenance and home repairs to help add value and preserve the life of your investments.

Save — Placing windfall money in a savings account could make the difference between a financial setback and a financial disaster — especially if you or your spouse should lose a job in the next five months. You work hard for your money, so make your money work hard for you. Depositing $2,000 into a mode of savings that earns, for example, 8% December 2009

Brown Bagger interest can really add up. After five years, it will be worth $2,939. After 10 years, it will be worth $4,318.

Reduce debt — Lowering debt provides the freedom to make smart future financial choices. For consumers struggling with credit card debt, using a refund to accelerate debt payments can be a sound financial decision. If you pay the minimum monthly payment of 4% on a $6,000 credit card debt with an 18% interest rate, it would take more than 13 years to repay. In that time, you would pay more than $3,500 in interest charges.

Pay yourself now, or get back more later — Regardless what people do with it, for many families a tax refund represents the only feasible way of having an extra chunk of money lying around at any time in a given year. If that’s the case, you’ll probably want to keep your W4 withholding form exactly as it is in 2010. On the other hand, if you’re scrimping along from check to check, having extra cash in hand now may be the way to go. (Editor’s note: See the “Preventative counseling” bulleted point in this month’s cover article in EAR.) “Consider reducing the withholding on your W-4 and see more money on your paycheck,” said Cate Williams, vice president of Financial Literacy for Money Management International. “Calculators at www.irs.gov can help you figure your appropriate amount. Just think, if your refund this year was $2,000, you could have increased your take-home pay by $167 a month.”

Summary EA professionals have been inundated in 2009 with requests to assist people with financial struggles, which include trouble with taxes and the IRS. If that is the case, this article — and the cover story — have hopefully provided some suggestions to help resolve these matters.

In other instances, some end-of-year tax tips and related advice may be sufficient to right a financial ship that’s gone only slightly off course. Whatever the circumstances, there’s never been a better time to learn what it takes to be “fiscally fit.”

For more information on Money Management International, visit www.moneymanagement.org. Additional source: Crown Financial Ministries® (www.crown.org).

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Brown Bagger H A N D O U T Use Credit Wisely, Track Expenses

ealing with personal debt is a major problem for many Americans. In fact, according to the Employee Assistance Professionals Association, debt represented the leading financial issue addressed by EAPs in 2008. As mentioned, no doubt the issue also contributes to many tax troubles. Designing a realistic budget will help determine how much credit you can afford — and will safeguard against using credit to supplement income.

Write down specific budget categories that fit your family. No two families are alike, but the following is a sample list:

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 Housing — mortgage (or rent), insurance (homeowners’ or renters’), taxes, electricity, water, sanitation, gas, telephone (land line and/or cell), cable TV/Internet, repairs/maintenance, furnishings (appliances, furniture), cleaning and other supplies (toilet paper, kitchen items, etc), and groceries.  Automobile(s) — payments (loans/leases), gas and oil, insurance, maintenance/repair, other.  Insurance — car, life, medical, other.  Debts — credit cards, loans (not mortgages), other.  Entertainment and recreation — eating out, baby-sitters, hobbies, vacations, club memberships, other.

 Medical expenses (out of pocket) — prescriptions, dentists, doctors, other.  Personal care & clothing — everyday clothing, work-related attire, toiletries, beauty shop, barbershop, other.  Miscellaneous — laundry, postage, subscriptions, pets, pocket money and allowances, other.  Education — tuition, lunches, field trips, books, school supplies, other.  Gifts — Christmas, birthday, etc., donations, other — especially this time of year!

Creating a budget will help you see where you’re spending too much. Sticking with one will help you stay out of financial trouble in 2010. The following are several suggestions: 3 Resist impulse shopping; 3 Cut up credit cards, or at the very least, stash them where you can’t get to them easily; and 3 Be willing to adjust your lifestyle.

Summary Remember the primary rule of budgeting: expenses should ALWAYS fit within earnings. It’s a plan that’ll allow you to live within your means.

This may sound limiting, but the result — fewer money concerns and less stress at work and at home — will be worth it.

Source: “I.O.U.S.A: One Nation. Under Stress. In Debt,” $19.95, Wiley.

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