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Sponsored by Taxsoftware.com   http://www.taxsoftware.com        January 14, 2008        Issue 13

Special Interest Articles

New Forms and Changes for Tax Year 2007

E-Filing Up Over 5 Percent Last Year

AMT Patch Could Delay Filing for Those Affected

IRS Increases Taxpayer Control over Tax Preparer Information; Marketing Restrictions on RALs Proposed

Treasury, IRS Implement Enhanced Standards of Conduct for Preparers; Plan Overhaul of Preparer Regulation

Misclassified Workers to File New Social Security Tax Form 

 

                                                                         

New Forms and Changes  for Tax Year 2007

 

Filing season for Tax Year 2007, as usual, brings new forms and revisions to old forms. Here are the updates for this filing season, and remember to check IRS.gov for the details and most recent changes. One note on federal/state returns this year: Indiana, Louisiana, and South Carolina have elected to mandate individual e-filing for practitioners filing more than 100 returns.

Changes to Form 1040:

Line 23—revised to reflect the extension of the educator expense deduction. The Archer Medical Savings Account deduction will revert back to a write-in on Line 36.

Line 34—revised to reflect the extension of the tuition and fees deduction to be reported on new Form 8917.

Line 44—revised to add a checkbox for additional taxes on certain Health Savings Account (HSA) participants who fail to maintain high deductible health plan coverage.

Lines 47 through 54—reordered due to the expiration of the special rule in IRC 26(a)(2). Note: If Congress later passes legislation to extend the special rule, the lines may be reordered again.

Line 59—revised to add check boxes for Form 4137 and new Form 8919.

Line 71—revised to reflect the refundable credit for prior year minimum tax. The credit for Federal Telephone Excise Tax Paid applied to Tax Year 2006 only and was removed.

New Write-Ins:

  1. Line 15b—“HFD” for qualified HSA funding distribution from and Individual Retirement Account (IRA).
  2. Line 16b—“PSO” for distributions from retirement plans to pay insurance premiums for retired public safety officers.
  3. Line 36—“WBF” deduction for whistleblower fees.
  4. Line 63—“FHTPP” for additional tax on the recapture of a charitable deduction of a fractional interest in tangible personal property.

Form 1040A: 

Line 13—revised to delete Jury Duty pay.

Line 15—revised to reflect educator expenses to delete the deduction for a penalty on early withdrawal of savings. This penalty can only be deducted on Form 1040.

Line 19—revised to reflect tuition and fees deduction using new Form 8917. Jury Duty pay given to an employer can no longer be deducted from Form 1040.

Lines 32 and 33—reversed.

Line 42—Telephone Excise Tax Paid will be removed.

Form 1040EZ:

Line 8—Telephone Excise Tax Paid will be removed. Form 1040EZ-T, Request for Refund of Federal Telephone Excise Tax, will be obsolete.

 

Taxpayer Self-Select PIN: 

When taxpayers choose the Self-Select PIN method to sign their e-filed return, they have an option to choose between two “shared secrets” for authentication. The Self-Select PIN method requires taxpayers to provide their prior year Adjusted Gross Income of the Prior Year PIN used to sign the prior year return.

If tax preparation software allows the entry of both types of shared secrets, taxpayers can match on either entry. For example, if a taxpayer enters both the prior year AGI and prior year PIN for authentication, only one shared secret must match IRS records. In addition, taxpayers filing jointly are not required to use the same shared secret type.

 

Form 1040-SS(PR): 

The U.S. Possessions Form 1040-SS, U.S. Self-Employment Tax Return (including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), and Form 1040-PR, the Spanish-language equivalent, will be introduced to e-file for Tax Year 2007 this year. The initial implementation will be limited processing refund-only claims for the Additional Child Tax Credit for filers in Puerto Rico.

 

New Forms:

Form 1040-SS(PR)—U.S. Self-Employment Tax Return Additional Child Tax Credit

Form 8909—Energy Efficient Appliance Credit

Form 8917—Tuition and Fees Deduction

Form 8919—Uncollected Social Security and Medicare Tax on Wages

New Record attached to 1040-Pr/SS: 499-R/W-2 PR

 

Business Returns: 

Form 1065 e-File (Legacy) Program 

For Tax Year 2007, the 1065 e-File Program will be discontinued. All mandated partnership returns must be filed electronically using the 1065 Modernized e-File (MeF) Program. All mandated partnership returns or partnerships choosing to file electronically must file using the 1065 MeF Program.

New Form 8879-F, IRS e-File Signature Authorization for Form 1041 

Form 8879-F will provide fiduciaries the option to create a PIN to electronically sign Form 1041. The fiduciary may authorize the electronic return originator to enter the PIN on the fiduciary’s behalf.

Unlike Form 8453-F (U.S. Estate or Trust Income Tax Declaration and Signature for Electronic Filing), which must be mailed to the IRS, Form 8879-F will be retained by the transmitter for a period of three years from the due date of the return or IRS received date, whichever is later.  Additional information is in Publication 1437, Procedures for the 1041 e-File Program for Tax Year 2007.

E-Filing Up Over 5 Percent Last Year

E-filing of taxpayer returns in 2007 was up more than 5% over 2006, with e-filing increasing at a record pace.

“We encourage people to consider e-file and Free File,” said IRS Commissioner Mark W. Everson last year. “E-file reduces taxpayer errors and gets refunds back quickly.”

Statistics for the 2007 filing season showed that one of the biggest areas of growth was in e-filing from home. Self-prepared e-filed returns grew more than 8% from 2006, and e-filing from tax professionals increased more than 4%.

Last year also saw an increase in the number of people opting to have refunds directly deposited. By March 22, 2007, 42 million refunds, or 76% of all refunds, were directly deposited.

 The IRS Web site, IRS.gov, proved popular last year as well, with 90 million visits. “Where’s My Refund?” was one of the most-visited features, as taxpayers sought to track the status of their refunds while waiting. 

AMT Patch Could Delay Filing for Those Affected

The IRS announced that the upcoming tax season is expected to start on time for everyone except certain taxpayers potentially affected by late enactment of the Alternative Minimum Tax (AMT) “patch.”

Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January.  However, as many as 13.5 million taxpayers using five forms related to the AMT legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law.

The IRS has targeted Feb. 11, 2008, as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation. The February date allows the IRS enough time to update and test its systems to accommodate the AMT changes without major disruptions to other operations related to the tax season. Both e-filed and paper returns including  the five affected forms will be accepted at the delayed February date.

Although as many as 13.5 million taxpayers will not be able to file their returns until Feb. 11, previous filing patterns show only between 3 to 4 million taxpayers file returns with the five affected forms during the early weeks in the filing season.

“We regret the inconvenience the delay will mean for millions of early tax filers, especially those expecting a refund,” said Linda Stiff, Acting IRS Commissioner.  “We’ve taken extraordinary steps to figure out a way that we can start the filing season on time for most taxpayers, including some using AMT-related forms.  Our goal has always been to make sure we can accurately process tax returns while getting refunds to taxpayers as quickly as possible.”

The delay caused by the AMT patch will affect taxpayers using these five forms:

bullet Form 8863, Education Credits
bullet Form 5695, Residential Energy Credits
bullet Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers
bullet Form 8396, Mortgage Interest Credit
bullet Form 8859, District of Columbia First-Time Homebuyer Credit

While these five forms require significant additional reprogramming due to the AMT patch, the IRS has been able to reprogram its systems to begin processing seven other AMT-related forms, including Form 6251, Alternative Minimum Tax – Individuals.  Taxpayers filing these seven forms should not experience delays in filing, and the IRS expects to begin processing those returns starting on Jan. 14, again, both paper and e-filed.

“E-file is a great option for everyone, especially if they are affected by the AMT,” said Richard Spires, IRS Deputy Commissioner for Operations Support.  “Filing electronically will get people their refunds faster, and e-file greatly reduces the chances for making an error on the AMT or other tax issues.”

In addition to e-filing, there are other simple steps to avoid problems:

bullet Taxpayers filing electronically should make sure to update their tax software in order to get the latest AMT updates.
bullet Taxpayers with $54,000 or less in Adjusted Gross Income can use Free File to electronically file their returns for free.  Free File will only be available by visiting the official IRS Web site at IRS.gov. In all, 90 million taxpayers qualify for this free service.
bullet Taxpayers who use tax software to print out paper copies of tax forms should make sure they update their software before printing out forms.  Taxpayers using paper forms can also visit IRS.gov to get updated copies of AMT forms.

A special section on IRS.gov provides taxpayers with additional information and copies of updated forms affected by the AMT.  Printed tax packages went to the printer in November before the AMT changes were enacted.  The packages reflect the law in effect at the time of printing, but include cautionary language to taxpayers that late legislation was pending.

The IRS is working closely with tax professionals and the tax preparation software community to make sure they can help taxpayers with all of the latest developments on the enactment of the AMT patch and other tax changes.

“The IRS is going to continue to do everything it can to make this a fully successful filing season for the nation’s taxpayers,” Stiff said.  “We will continue to work to keep taxpayers up to date and make this situation as easy as possible for everyone.”
 

IRS Increases Taxpayer Control over Tax Preparer Information; Marketing Restrictions on RALs Proposed

The Treasury Department and the IRS released final regulations and a related revenue procedure giving taxpayers greater protection and control over information on their tax returns that can be held by tax return preparers. The new regulations have broad effect, as more than 60 percent of individual taxpayers use a preparer. IRS and Treasury also issued a separate request for public comment on a proposal to restrict the marketing of refund anticipation loans (RALs) and similar products.

The final rules update disclosure and privacy laws related to preparers for the first time in more than 30 years and bring taxpayer consent requirements into the electronic age—since  currently 57% of all individual taxpayers file their tax returns electronically.  Preparers will have until Jan. 1, 2009, to implement the new consent requirements, giving preparers a full year to make any necessary changes.

The final rules apply to IRS Code section 7216 and a related provision of the Code, section 6713, which provide penalties against tax return preparers who make unauthorized use or disclosure of tax return information.  Regulations published in 1974 provide certain exceptions to the penalties in cases of taxpayer consent.  However, the 1974 regulations did not address issues raised by electronic preparation and filing of tax returns. 

The final rules affirm a general rule in place for more than three decades: that taxpayers, not the IRS, control their own tax return information held by preparers.  The rule provides that, within appropriate limits and safeguards, taxpayers are able to direct preparers to disclose tax return information as taxpayers see fit. 

Federal law already strictly prohibits the IRS from making disclosures of taxpayer return information within its control to third parties except with taxpayer consent or in circumstances set by Congress.  The final rules have no effect on the strict protection of return information in the IRS’s hands and apply only to tax return information held by income tax return preparers.

Among the new rules:

bullet Generally, preparers must obtain taxpayer consent, either by paper or electronically depending on how the return is being filed, before tax return information can be disclosed to any third party or used for any purpose other than filing the return.
bullet If the taxpayer consents to the disclosure and use of his or her information, the consent must identify the intended purpose of the disclosure, identify the recipients, and describe the particular authorized disclosure or use of the information.
bullet Mandatory language informs individual taxpayers that they are not required to sign the consent; that if they sign the consent, federal law may not protect their information from further disclosure; and that if they sign the consent, they can set a time period for the duration of that consent.  If taxpayers fail to set a time period, the consent is valid for a maximum of one year.
bullet To prevent consent requests from individual taxpayers from bring buried in fine print, the rules require the paper consent documents to be in 12-point type on 81/2 by 11 inch paper, and require electronic consent requests to be in the same type as the Web site’s standard text, all to prevent consent requests from being too difficult to read for individual taxpayers.
bullet If a taxpayer declines to provide consent for an unrelated tax preparation disclosure or use request, the preparer cannot make a similar consent request. The intent is to protect taxpayers from being pressured with repeated consent requests regarding the same issue.
bullet Mandatory consent from taxpayers also is required if the tax information is going to be disclosed to a tax preparer located outside the United States.  This provision is intended to ensure taxpayers are informed if their tax information is being sent off-shore for return preparation.  The individual taxpayer’s Social Security number also must be redacted.

Proposed regulations under section 7216 were the subject of many public comments during the comment period in late 2005 and early 2006.  The final regulations summarize many of the comments and explain how these comments were addressed.

One issue that was raised during the comment period was the use by tax return preparers of tax return information to market RALs and similar products, such as Refund Anticipation Checks and Audit Insurance, to taxpayers. Treasury and the IRS are concerned that RALs and similar products may provide preparers with a financial incentive to take improper tax return positions in order to inflate refund claims inappropriately.  In order to give the public an opportunity to comment on this issue, Treasury and the IRS are issuing an Advance Notice of Proposed Rulemaking (ANPRM) that announces they are considering a proposal that tax return preparers be prohibited from disclosing or using taxpayer return information for the purpose of selling products such as RALs.

The ANPRM has a 90-day written comment period after the publication in the Federal Register.  Thereafter, Treasury and the IRS will consider what steps, if any, to take with respect to RALs and similar products.

Treasury, IRS Implement Enhanced Standards of Conduct for Preparers; Plan Overhaul of Preparer Regulation

The Treasury Department and the IRS issued Notice 2008-13, which implements a May 2007 law that expanded the tax return preparer penalty and heightened the standards of conduct that must be met by tax return preparers in order to avoid that penalty.

Notice 2008-13 also solicits input from the tax return preparer community on a planned overhaul of the tax return preparer penalty regime anticipated to be completed by the end of 2008. 

“The plan to take a fresh look at the preparer penalty regulations will be a top priority for us in 2008,” said IRS Chief Counsel Don Korb. “We look forward to receiving comments from all interested parties on their recommendations for the final regulations. Our goal is to complete our work on the overhaul of these rules by the end of 2008.”

For undisclosed positions on a tax return, the new law replaced the realistic possibility standard with a requirement that there be a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. In cases in which the taxpayer discloses the position on the tax return, the notice implements the new law that states there must be a reasonable basis for the tax treatment of the position taken on the tax return.

The notice provides interim rules to implement and interpret these heightened standards. The interim rules will be in effect until the overhaul of the current return preparer penalty regulations is complete. The interim rules emphasize the importance to preparers of understanding the legal basis for positions taken on tax returns, the requirement for taxpayers to disclose certain positions, and the need for preparers to advise taxpayers on the various penalties that can apply when a position is taken on a return that may not be supported by existing law. 

Under the notice, preparers generally can continue to rely on taxpayer representations in preparing returns and can also generally rely on representations of third parties, unless the preparer has reason to know they are wrong.

The new law also expanded the return preparer penalty to cover all tax return preparers, not just income tax return preparers.  Under the notice, preparers of many information returns, however, will not be subject to the new penalty provision unless they willfully understate tax or act in reckless or intentional disregard of the law. The notice also includes examples illustrating how the new standards would apply.

Misclassified Workers to File New Social Security Tax Form 

The IRS has developed a new form for tax year 2007 for employees who have been misclassified as independent contractors by an employer. Form 8919, Uncollected Social Security and Medicare Tax on Wages, will now be used to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation. 

Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes a worker is incorrectly treated as an independent contractor when he or she is actually an employee. When this happens, Form 8919  will be used by workers who performed services for an employer that did not withhold the worker’s share of Social Security and Medicare taxes.

In addition, workers must meet one of several criteria indicating they were an employee while performing the services.  The criteria include:

bullet The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating he or she is an employee of the firm.
bullet The worker has been designated as a section 530 employee by the employer or by the IRS prior to January 1, 1997.
bullet The worker has received other correspondence from the IRS that states he or she is an employee.
bullet The worker was previously treated as an employee by the firm, and he or she is performing services in a similar capacity and under similar direction and control.
bullet The worker’s co-workers are performing similar services under similar direction and control and are treated as employees.
bullet The worker’s co-workers are performing similar services under similar direction and control and filed Form SS-8 for the firm and received a determination that they were employees.
bullet The worker has filed Form SS-8 with the IRS and has not yet received a reply.

By using Form 8919, the worker’s Social Security and Medicare taxes will be credited to their Social Security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

In the past, misclassified workers often used Form 4137 to report their share of Social Security and Medicare taxes. Misclassified workers should no longer use this form. Instead, Form 4137 should now only be used by tipped employees to report Social Security and Medicare taxes on allocated tips and tips not reported to their employers.