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Archive for the ‘Taxes’ Category

As we begin 2005, you’re probably not thinking about taxes at all. This is a mistake as deadlines are approaching for issuing and filing 1099s to independent contractors.

What is a 1099 MISC?

Generally speaking, the IRS requires you to report certain payments you made during the year to independent contractors. The 1099-MISC form is a single page on which you report to total amount you paid to the independent contractor during 2005.

The 1099-MISC forms must be issued to any person you paid at least $600 in rents, services or other income payments. For example, if you hired a contractor to renovate a room in your home and paid them $5,000, a 1099-MISC filing would be required. As with practically any IRS filing, there are additional situations that require a 1099 filing. Any payments to attorneys must be reported regardless of the amount. Royalties totaling over $10 also must be reported. Generally, you are not required to report payments to a corporation.

When and What Must Be Filed?

The 1099-MISC form is a multi-layered carbon form, so make sure the information you provide appears clearly on all of the copies. Once you fill out the form, provide Copy B to the person you are reporting to the IRS by January 31, 2005.

Copy A of the 1099-MISC form is intended for the IRS. You must file it by February 28, 2005 if you are sending the form by mail. If you prefer to file electronically, you have until March 31, 2005.

The IRS has made a major effort to cut down on red tape, but you’ll still find it with 1099-MISC filings. In addition to filing the 1099 with the IRS, you must also file a 1096 form. The 1096 form is the “Annual Summary and Transmittal of U.S. Information Returns” form. It is one page and extremely easy to fill out.

Although the IRS has an excellent web site, you can’t download 1099 forms off of it. The official forms are still multi-layered carbon paper, which means you need to get a physical copy. The IRS should send you the forms in the mail. If they don’t, you can order them off the IRS site or call the IRS to have them sent to you. If all else fails, you can usually find the forms at major post office and public library locations. If you fail to file 1099s, the IRS will penalize you $50 per 1099.

More than a few people have grumbled about filling out 1099s so early in the year, but doing so has indirect benefits. You are forced to start organizing your records for 2005.

Every year, the IRS issues a list of tax scams. The goal is to alert taxpayers to the lack of merit of certain strategies as well as letting everyone know the IRS will not accept them.

2006 Scams

The IRS has kicked out its annual list of highly dubious tax scams for 2006. Promoters often make these strategies sound credible, but they simply aren’t. If a taxpayer attempts to use one of the scams, the IRS will audit and aggressively attack the taxpayer as well as try to identify the promoter for prosecution.

The 2006 list of scams contains most of the traditional claims. There are, however, three new areas being targeted by the IRS. They and a few others are highlighted in the following list.

Two new schemes have worked their way onto the list in 2006. In recent months IRS personnel have noted the emergence of the two scams––“zero wages” and “Form 843 tax abatement”–– in which filers use IRS forms to claim that their tax bills have been wrongly inflated.

Also high on the list in 2006 is “phishing,” a favorite ploy of identity thieves. Over the past few years, the IRS has observed criminals working through the Internet, posing even as representatives of the IRS itself, with the goal of tricking unsuspecting taxpayers into revealing private information that can be used to steal from their financial accounts.

1. Zero Wages – A new addition to the list, the zero wages scam is designed to create a log jam in the system. A taxpayer is supposed to file a tax return with no wages claimed and notice of challenges to any W-2 or 1099 wage reports. In essence, the idea is to not pay taxes while the IRS tries to figure out what is going on. Ultimately, the goal is to get the IRS to accept a zero income tax return, which of course requires no payment of taxes.

2. Form 843 Tax Abatement – The tax abatement strategy is very creative. It is typically used for taxpayers who have failed to file taxes for a few years. In such a situation, the IRS will often assess taxes to the individual based on a variety of factors. The strategy is to abate this assessment and pay not tax by challenging the assessed amount as being calculated incorrectly. The IRS says it doesn’t fly, but it is a very creative strategy.

3. Identity Theft/Phishing. This isn’t so much a tax reduction scam as a nightmare wherein identity thieves try to obtain information from taxpayers by acting as IRS agents. Often they send out email as though they are from the IRS. The IRS never sends emails to taxpayers, so don’t respond to these emails. If you’re not sure, call the IRS and ask them if there is a problem. You can reach the IRS at 800-829-1040.

4 Credit Repair Companies – You see these companies everywhere. Some are legitimate while others are not. The ones that are not charge high fees and do almost nothing other than putting taxpayers on some kind of a payment plan. The IRS is currently revoking the tax-exempt status of many credit repair companies.

5. Offshore Strategies – A traditional area of angst for the IRS, offshore strategies continue to be closely watched. The IRS is hyper sensitive to such strategies and tries to shut them down. In 2005, 68 individuals were charged and convicted for promotion offshore tax scams and thousands of taxpayers were audited with nightmarish results. If you want to go offshore, make sure you get qualified advice from a tax professional and attorney. Don’t buy something off a web site.

There is a fine line between tax evasion and tax avoidance. Tax avoidance is legal while tax evasion is criminal. If you wish to pursue advanced tax planning, make sure you do so with the advice of a tax professional that is going to defend the strategy to the IRS.

With the booming property prices of recent years, more and more people are finding themselves facing a large tax bill when they come to sell their investment properties.  However, did you realize that there is a perfectly legal way of deferring payment of such taxes by utilizing the advantageous 1031 tax code that was introduced by the IRS in the early 1990s?

A 1031 exchange is a way of deferring payment of capital gains tax on certain types of real estate.  Normally when an investment or business property is sold, capital gains tax has to be paid.  However, with 1031 exchanges, by replacing the old property with a like-kind property, within set time limits, payment of capital gains tax can be avoided.

Under the 1031 exchange real estate rules, a seller must have held a property for at least one year and a day for it to qualify.  Another requirement is that both old (relinquished) and new (replacement) 1031 exchange properties must be of a like-kind – either rental properties, vacant land, trade, business or investment properties.

1031 exchanges must be completed within strict time limits.  There is a 45 day Identification Period from the transfer of the old property, in which a replacement property must be identified.  The 1031 exchange rules stipulate that the exchange must be completed within the 180 day Exchange Period.

The 1031 exchange real estate issues are complex, so it is imperative to seek professional advice from a tax advisor or qualified intermediary who can assess your specific circumstances and explain other issues such as the reverse 1031 exchange or TiC rules.  With careful financial planning, you can reinvest your capital gains in future real estate investments, thereby allowing you to leverage your money more efficiently and to reap greater financial benefits.