Monday, 23 April 2012

What if you missed your tax filing deadline?

What if you missed your tax filing deadline?

Hello, it is April 24, and a whole week has gone by after the Tax Day on April 17th.

You must have filed your tax return, or requested an extension at the least. Even if not, do not press the panic button, the IRS is not going to pull you away and penalize you, still it would like to see your return filed, as soon as possible.

After April 17, all your appeals for a tax filing extension would be rejected by the IRS – but do not fret, there are other options you can explore, namely:

a. If you have a refund due, you will not be penalized for late filing, but if you overhaul the 3-year window before you forfeit your refund, you lose your refund. So be sure to file before April 15, 2015. Else, your refund will be converted into a simple donation for the US Treasury J

b. Else, you will have to eke out a late filing penalty - 5 percent of your unpaid balance per month, or part of a month, up to a maximum of 25 percent.

c. If you didn’t pay additional taxes owed by April 17, whether you filed an extension or not, a late payment penalty of one-half of one percent (0.5%) will also accrue each month or part of a month until the balance is paid in full.

If you have a valid reason for failing to file on time, the IRS may consider reduction of penalty charges. Remember, even those who have died are entitled to file a return, and their survivors could end up paying penalties for late filing!

If there’s a legitimate reason you miss the deadline such as a divorce, illness, death in the family, or a natural disaster, you can sometimes get those fees reversed.

When you get a past-due notice, just send a certified letter to the address it came from saying you are “requesting abatement.”  Then explain why you couldn’t file in time.

If you DON’T have a good reason for being late, just file as soon as possible to avoid that extra 4.5% penalty.

How does it work?

Example: Let's say you didn't file your return or extension by the April deadline, and you still owe the IRS an additional $2,000.
Best-case scenario: You file your return in late April of 2012 and submit your payment for $2,000. You would owe an additional $100 for filing late ($2,000 x .05) plus another $10 for late payment ($2,000 x .005) for a total penalty of $110.
(Had you filed your extension by the deadline, your total penalty would only be $10. It pays to file an extension!)
Worst-case scenario: You file your 2011 return in April of 2017, 5 years late, and submit your payment for $2,000. You would owe an additional $500 for filing late ($2,000 x the maximum .25) plus another $500 for late payment ($2,000 x the maximum .25), for a total penalty of $1,000.

Any circumstances while allow me to file late?

If you are out of the country on the April filing deadline, you are allowed two extra months to file your return and pay the amount due, without needing to request an extension.

You're out of the country if:
  • You live outside of the United States or Puerto Rico and your main place of work is outside of the United States or Puerto Rico; or
  • You are in military or naval service outside of the United States or Puerto Rico.
If you need more time, you can request four additional months by filing an extension along with paying any taxes you owe.

Other situations
  • If you have not received Form W-2, or you believe your Form W-2 is incorrect, contact the IRS for a resolution.
  • If you cannot pay the amount of taxes owed, you should file your tax return anyway before the deadline and pay as much as you can to avoid additional penalties. The IRS will send you a bill or notice for the balance due. In some cases the IRS can offer alternative account resolutions if a taxpayer cannot pay in full with the return.
  • If you are self-employed, you must file returns reporting self-employment income within three years of the original filing deadline in order to receive Social Security credits toward your retirement.

If you need to pay additional tax, ensure filing of your return at the earliest. The penalties for not filing are much higher than the penalties for not paying, and the longer you wait, the worse it gets. At least file your return on time, it can always be amended later!

RBI circular on MICR & IFSC codes on passbooks / chequebooks

DPSS (CO) RTGS No. 1934/04.04.002/2011-12

April 20, 2012

The Chairman and Managing Director /
Chief Executive Officer of all banks participating in RTGS, NEFT and NECS

Dear Sir/Madam,

Printing of MICR Code and IFSC Code on Passbook/Statement of Account

As you are aware, the MICR code is necessary for all Electronic Clearing Service (ECS – Credit and Debit) transactions. Similarly, the IFSC code is a pre-requisite for NEFT and RTGS transactions.

2. Currently, the MICR code is available on the cheque leaf along with the IFSC code of the branch. On a review it has been decided that this information should also be made available in the passbook / statement of account of the account holders.

3. Banks are accordingly advised to take necessary steps to provide this information as indicated above in all passbook / statement of account to their account holders.

4. Please acknowledge receipt and furnish an action taken report within 15 days of receipt of the circular.

Yours faithfully,

Chief General Manager
(Vijay Chugh)


Full text of MICR code is :


In MICR technology the information is printed on the instrument with a special type of ink which is made up of magnetic material. On insertion of the instrument in the machine, the printed information is read by the machine. MICR system is beneficial as it minimizes chances of error, clearing of cheques becomes easy and transfer of funds becomes faster in order to facilitate operations.

MICR code consists of 9 digits

First three digits (1-3) denote city and are same/identical as the first three digits of your pin code
For example first three digits of Pin code of  New Delhi =110; hence, first three digits of MICR code of all the bank branches located in New Delhi must be 110.

4-6 digit denotes Bank
Each bank has been given a three digit code for the digits from 4-6 = bank code eg. SBI code is "002"so 4-6 digits of MICR code of all branches of SBI in India would be "002" irrespective of location.

(7-9)Last three digits denote branch code serial wise, which means if Delhi has only one branch of SBI, then its MICR code would be





So if you are in Delhi & your client has given you an MICR code of a bank located in New Delhi which doesn't begin with "110",you can easily tell him his MICR code is wrong.

Change of address & refund cheques - procedure

Here is the procedure to be followed if your refund cheque is not received due to change of address:

1. Ascertain whether your return was filed online or manually

2. If the return is filed online, then the refund would be processed by CPC Bangalore and you need to send a request letter for change in address to CPC Bangalore or

3. If return is filed manually then first it will be processed by the concerned officer and thereafter ECS/ Cheque will be issued by SBI. Draft a letter to the IT department stating that refund cheque is yet to be received due to change of address.

4. Update the PAN Master Database - Apply for change of address in the PAN card in following form “Request for new PAN card / change or correction in PAN data.”

The applicant is required to fill all the columns of the form and tick the boxes on the left margin of the address for communication. He is required to give the following documents also along with the demand draft of Rs 94/- made in favour of “NSDL – PAN” payable at Mumbai for paymen. 

*      Proof of PAN – Copy of PAN Card, Copy of PAN allotment letter
*      Proof of PAN surrendered – Copy of PAN card for the PAN to be surrendered
*      Proof of identity- Copy of Ration card, Driver’s license, Voter’s ID card, passport or any other document
*      Proof of Address – Electricity bill, Telephone Bill, Passport, ration card
*      Proof in support of the change required – proof of the changed address

5. Provide the address which was filled in your ITR and the changed address as updated in the PAN master Database

NOTE: For all your Communication to CPC Bangalore you need to mention your CPC reference no. 

Tax Effective travel packages to Goa - courtesy a 50% luxury tax concession

PANAJI: Planning a vacation in Goa during the monsoon season would be cheaper now, as the hotel industry is designing attractive packages following the concessions provided by the state government.

The Manohar Parrikar-led BJP government has offered 50 per cent concession on the luxury tax to mid and upper segment hotels during the off season.

Reacting to the sops, the tourism and trade industry has said that the relaxation in the luxury tax will help them to mitigate the hike in the air fares which had made off season packages expensive.

Chief minister Manohar Parrikar, who is also the state Finance Minister, has proposed in the budget that all hotels are granted 50 per cent concession of tax payable during the off season commencing from May 01, 2012 to September 30, 2012, subject to prompt payment of tax and filing of returns in time.

Travel and Tourism Association of Goa (TTAG), which has been lobbying for such concession, said the move will help in making monsoon package more attractive, as the skyrocketing air fares had forced the off-season packages to be expensive.

"The hoteliers will be able to pass the benefit of concession directly to the customers," TTAG spokesman Ralph D'Souza said.

Unofficial estimates reveal that around 1,500 medium and big hotels will be benefited from the incentives, while smaller hotels are exempted from paying luxury tax.

Last year's off-season was blessed with the long weekends, which saved the industry from facing losses, D'Souza said adding that the average occupancy was around 75 per cent during weekends and approximately 60 per cent during the week days.

Tax rebates / benefits for electric vehicles?

Looking to invest in mutual funds or fixed deposits to save tax? Why not buy an electric car instead?

The government is looking at a host of options to encourage use of electric vehicles in India, a finance ministry official said. “The rational is that every consumer who shifts from a petrol or diesel to an electric vehicle helps the state by not using imported fuel. Hence we may reward them by offering a time-bound tax rebate,” the official said. “We are also looking at other benefits like lower interest rates (on loans) and toll exemption on national highways.”
A broad policy framework for electric vehicles is being prepared by National Council for Electric Mobility, set up last year, and is expected this month. At present, a direct cash subsidy of 20% is provided on purchase of for all electric cars and two-wheelers. Additionally, state governments give their own incentives such as exemption from sales tax and VAT. However, only one company —Mahindra Reva — makes electric cars in the country.

“Obviously the industry is waiting for a specific policy framework,” the official said. “Various countries subsidise electric vehicles, and we are studying them. More cash incentives is difficult but a tax rebate on the lines of Belgium is possible.”

The Belgian government offers tax deduction of upto 30% including VAT on purchase of a new electric vehicle.

Costlier cars ensure a greener India?

If this proposal of a high-level government panel is accepted, buying a new vehicle could make your wallet much lighter in the years to come. 
To reduce the use of personal vehicles and check vehicular pollution, the sub-committee on financing urban infrastructure during the 12th Plan 
(2012-2017) – headed by urban development secretary Sudhir Krishna – has proposed a series of measures, including levying an urban transport tax on purchase of all new cars and two-wheelers. In its report submitted last month, the panel recommended 7.5% additional tax on purchase of petrol vehicles and 20% on that of diesel vehicles.
This measure, the panel estimates, would help generate Rs. 18,800 crore annually – which would be ploughed back into the proposed Urban Transport Fund, and used for financing and strengthening public transport systems across India.
The report will form part of 12th Plan document on urban transport, which is currently being finalised by the Planning Commission.
"The revenue generated through the proposed levies will be pumped back into the sector to improve city roads, the public bicycle system, parking system, bus rapid transit system and the city bus systems," UD secretary Sudhir Krishna said.
A working group on urban transport, set up by the plan panel, has estimated investments to the tune of Rs.87,000 crore for upgrading and modernising the sector during the 12th Plan.
The committee has also proposed 4% green cess on all existing personalised vehicles. At present, public and private sector enterprises provide insurance at the rate of 3% of the annual insured value for cars as well as two-wheelers. The committee has proposed an additional 4% of the vehicle’s insured value to be collected as green cess. It is estimated that in the first year, the total collection in urban areas from this source would be around Rs. 18,000 crore. A green surcharge of Rs. 2 has also been proposed on petrol sold across India. This would help generate about Rs. 3,100 crore annually.
The committee has estimated that the total revenue generated from these three sources will be around Rs.40,000 crore in the first year itself.
"The above levies will not only help generate a dedicated pool of resources for taking up urban transport projects, but would also serve as a great disincentive for use of personalised vehicles," the report said.
Public transport accounts for only 22% of urban transport in India, as compared to 49% in lower-middle income countries such as Philippines, Venezuela and Egypt.

Sunday, 22 April 2012

No tax levies on course fees for foreign university courses

MUMBAI: The Delhi bench of the Income-tax Appellate Tribunal (ITAT) has held that payment received by a foreign university for offering distance educational courses in India is not taxable.

In the case of Hughes Escorts Communication Ltd (HECL), the taxpayer, the tribunal in March rejected the income-tax department's contention that the income received by a foreign university under affiliate agreement to provide distance education is in the nature of royalty and, therefore, liable for taxation at the rate of 15 % under the provisions of the tax treaty between India and the US.

HECL has an agreement with Tower Innovative Learning Solutions (TILS) Inc USA, a wholly owned subsidiary of eCornell University, to market, promote and provide ancillary services in connection with the distance learning courses offered by the university in India. HECL assists in registering students for eCornell and in collection of fees for its course content.

The ITAT held that in order to consider a payment as royalty, the transaction should have been in the nature of transfer of any right, title, copyright, patent, trade mark, service mark, trade secret and other intellectual property or proprietary rights, which was not the case in the transaction under consideration.

The tribunal said the role of the Indian company was confined to registering students and providing infrastructure for accessing the course material offered by the foreign university.

HECL collects 165,000 per student, of which $2,100 is remitted to eCornell for the course content and $350 as registration charges.

Your pay package structure can be questioned under GAAR tax evasion!

NEW DELHI: Tax avoidance rules proposed in the budget, whose impact on foreign investors has caused an uproar, can potentially also be used to target individual taxpayers.

Tax authorities could use the rules, known as the General Anti-Avoidance Rules, or GAAR, to question the manner in which salaries have been structured if they come to the conclusion that the intent is to reduce tax outgo, industry experts said.

The anti-avoidance rules, part of Budget 2012, can be invoked to deny tax benefit if officials feel the sole purpose of an arrangement is to save tax. They apply to every resident who is a taxpayer in India, including individuals, Indian companies or foreign investors, said tax experts.

Income-tax officers can thus disallow conveyance claims, car lease arrangements or book allowances by dubbing them arrangements to avoid tax, and even levy interest & penalty.

"There is no carve out so GAAR will apply to anyone whether individual, partnership or a firm. If any structure or arrangement is viewed as synthetic or motivated for tax purpose, GAAR can be invoked," said Shefali Goradia, partner, BMR Advisors.

Many Indian companies design compensation packages to include cash reimbursements for various expenditure. Many salaries include reimbursement for conveyance, payments for books, and arrangements in which cars are leased by the company and used by the employee.

Experts said the tax department could come to the conclusion that the sole purpose of these structures is to reduce tax liability of employees and there is no economic benefit from these arrangements.

Car leases, which are widely used, are particularly at risk as the vehicle is effectively owned by the employee though it remains on the company's books. The employee gets to save on some tax as the loan is deducted from his salary.

The only silver lining is that this will apply from the fiscal year beginning April 1, 2012, and past claims will not be opened.

"Introduction of GAAR provisions could also have an unintended impact on individuals enjoying tax breaks under perquisite rules," said Pranay Bhatia, associate partner, Economic Law Practice.

An income-tax official said these rules were aimed at deterring avoidance by companies so salaried taxpayers had nothing to fear. But tax experts said the I-T department needs to frame rules carefully as these could result in harassment.

"GAAR, if allowed to be applied indiscriminately, may impact revenue department's trust-building objective. Therefore, it requires not only careful and precise guidelines but also a good framework for identifying high-risk cases among individuals," said Garg.

HR experts said companies will be forced to tweak compensation packages. "Tax windows have been progressively narrowing...companies' approach would be to move to simple compensation structures that don't get them on the wrong side of the law," said E Balaji, MD & CEO, Ma Foi Randstad India.

Tax officials could also go after companies that facilitate such arrangements rather than picking on individuals who benefit from such arrangements. "GAAR would be relevant in these cases as well, though companies are now moving to flat compensation structures," said Rahul Garg, leader (direct tax), PwC India.

Sunday, 15 April 2012

The Hindu Business Line article - Disclosure initiative with a twist

The Finance Bill, 2012, requires all residents to provide information on foreign assets for taxation, and this includes dividends.
Anubhav Sharma, a US resident, returned to India from USA after a fairly long stint of employment. He stayed abroad for approximately 10 years, and while he was in the US, he invested in mutual funds and shares via a brokerage account. The dividends were reinvested, and taxes were paid as necessary in the US, as he filed a resident US return. Anubhav returned to India a few years ago when he was deputed by his company to oversee their India operations, and he has been working here ever since. Anubhav didn't redeem funds in his brokerage account, and the account continues to yield dividends on his investments, though no fresh investment was made post his return to India.
Anubhav has filed his India tax returns as a resident, since he surrendered his green card. He hasn't reported these dividends on his India return, as dividends are exempt from tax in India, and he assumed that this rule would apply to foreign dividends as well. Anubhav recently came across an article which explained in detail the provisions of the Finance Bill 2012 with reference to assets held abroad.


Though the Bill is yet to be passed in Parliament, the CBDT (Central Board of Direct Taxes) has already notified the new tax forms for this fiscal. The new rules require all residents, including those who aren't ordinarily resident, to provide information on overseas assets owned by them.
Having filed resident returns in USA, Anubhav is quite familiar with the provisions of the Banking Secrecy Act and the FBAR — Foreign Bank Account Reporting in USA which requires all US citizens and resident return filers to disclose all foreign financial assets in excess of $10,000. In fact, 2011 onwards, US requirements have become more stringent in that all citizens must now also file an additional form along with the US tax return, which not only discloses the assets abroad, but also lists the income earned from these assets and the schedule of the tax return on which the said income is listed. There is, of course, a threshold limit for the disclosure. So now, the disclosure ties to the tax return and makes sure that foreign income doesn't escape the tax net.
The Indian government has now embarked on a similar initiative. All resident filers (including those who aren't ordinarily resident) must declare details of bank accounts, financial interest in any entity, immovable property, as well as any foreign account for which they have signature authority. So far, it seems to only be a disclosure or information-reporting requirement. While this move may seem stringent, especially to expats whose status isn't ordinarily resident, one must analyse the move from a wider perspective.


This move is an effort to curb black money and widen the tax net. On the face of it, expats may claim that the rule is hard on them, since they aren't permanent residents of India. However, it must be noted that the US disclosure rules are also similar — one may not be a permanent resident or citizen but if one files a resident tax return, then one falls under the purview of the disclosure rules. In this light, Anubhav will need to show his foreign assets, namely the brokerage account, and he may need to consider taxability of dividends based on the Double Taxation Avoidance Agreement.
The Finance Bill isn't through yet, but another one of its related provisions also states that tax assessments may be reopened for the previous 16 years, in case any concealment is detected. There is ambiguity in this, since the normal statute of limitations requires that income tax records be maintained by taxpayers for a period of six years only. A similar conflict also arose in the US disclosure programme. The statute of limitations in USA is 3 years, so any adjustments to taxes prior to that period need taxpayer concurrence.
The last Offshore Voluntary Disclosure initiative programme in the US covered a period of eight years from 2003 to 2010. The conflict due to the statute of limitations was simply resolved by getting taxpayers to sign an agreement to reopen assessments for the whole 8-year period, in return for a reduced penalty framework. One can only guess that something along similar lines is being contemplated in the Indian scenario as well.
According to the finance ministry, the provisions are aimed at residents whose global income must be taxed in India, but there is still some ambiguity, and the CBDT may need to be very explicit regarding the qualifying conditions and threshold limits which will be used to determine if someone falls under the purview of these rules.
(The author is a Coimbatore-based chartered accountant.)

Sunday, 8 April 2012

Mauritius-based FIIs will be exempt from capital gains tax, but with a rider

Foreign Institutional Investors (FIIs) based in Mauritius will not be required to pay capital gains tax in India if they have “substantial commercial interest” in the island nation, the Finance Ministry has said.
The Ministry also reiterated that it had no intention to levy capital gains tax on participatory notes (PN).
The Ministry's clarification is significant as there was a lot of hue and cry over the proposed amendments to the General Anti Avoidance Rules (GAAR) in this year's Budget.
Foreign brokers were apprehensive about the provisions relating to taxation of indirect transfers of assets as well as GAAR. They felt that the broadly worded proposals could be interpreted as tax on FII investments in the Indian listed equity markets.
However, a senior Finance Ministry official refused to elaborate on what exactly the term ‘substantial or genuine business interest' means.
“It is difficult, at this moment, to set a physical target for substantial or genuine business interest. Our aim is to ensure that an FII does not take advantage of tax benefits if it just has a signboard in a country where it is registered,” he added.
According to the Asia Securities Industry and Financial Markets Association, FIIs have assets under custody of over Rs 10 lakh crore (over $200 billion) or 17 per cent of the capitalisation of India's equity markets. Mauritius-based FIIs have a substantial share in this amount.
Meanwhile, the official claimed that no foreign brokerage or industrial body had given any representation in writing on PNs. There is fear that with the imposition of the new GAAR provisions, capital gains on PNs will be taxed.
Allaying the fear, the official said when a PN is traded between two parties, only the contract note or derivative exchanges hands. There is no transfer of underlying assets or shares. The question of tax on capital gains will arise only when assets get transferred.
With such an assumption, there should not be any fear of tax on capital gains on PNs, he added.

Thursday, 5 April 2012

Tax changes of 2011 to note!

Tax season is nearly over for the 2011 tax year: just about 10 days remain until Tax Day (remember that you have until April 17, 2012, to file your 2011 individual federal income tax return).
If you haven’t yet filed, here’s your chance to get caught up on what was new for the 2011 tax season:
1. There is no Schedule M and no Making Work Pay Credit.                         
    The Making Work Pay Credit which was available for taxpayers in 2009 and 2010 is not available for 2011. That means there is no Schedule M to file and there is no additional credit for the year.
2. There is a payroll tax cut for employees. 
For 2011 (and now, for 2012), employees who receive a form W-2 received a tax break of 2% on FICA contributions during the year: instead of paying in at 6.2% for Social Security taxes, contributions were 4.2% for Social Security taxes. Contributions for Medicare remained the same. The break is automatic (meaning no forms or schedules to fill out) and it will not affect your 2011 federal income tax return since it’s tied to Social Security payroll taxes. The benefit maxed out when you hit the Social Security cap ($106,800 for 2011). Taxpayers who didn’t pay into the Social Security system during the year will not receive a benefit.
3. There is a payroll tax cut equivalent for self-employed taxpayers. 
If you self-employed, you will receive the benefit of the payroll tax cut when you file your federal income tax return in the form of an adjustment to your SE (self employment) tax due. Your SE tax will be reduced by 2%; the SE tax rate of 12.4% is reduced to 10.4%.
4. There’s a new form in town, the federal form 1099-K. The federal form 1099-K, Merchant Card and Third Party Network Payments, is making its debut for the 2011 tax season. Taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider.

5. You might see your health care benefits on your form W-2. 
Employers with more than 250 workers must beginreporting on the value of health care benefits paid on an employee’s behalf on forms W-2 in 2012. Some are already doing this for 2011 so if it pops up on your form W-2, don’t panic. The amount appears in Box 12, using code DD. It does not affect your taxable income.
6. Standard deductions haven’t changed much. 
The standard deduction rates are largely the same for 2011. They are $5,800 for single taxpayers or those married taxpayers filing separately, $11,600 for married taxpayers filing jointly and $8,500 for taxpayers filing as head of household. The additional standard deduction allowed for senior citizens and taxpayers who are legally blind is $1,150 for married taxpayers filing jointly and $1,450 for single taxpayers.
7. Personal exemptions haven’t changed much either. 
The personal exemption amount for 2011 is $3,700, an increase from $3,650 in 2010.
8. Brokers are now reporting your cost basis for certain stocks on your 1099-B. 
The 2011 federal form 1099-B,Proceeds From Broker and Barter Exchange Transactions, has new boxes for the date you bought a stock; your cost or basis (including adjustments for commissions and splits); whether your gain or loss was short or long term; and even if the transaction was a wash sale. The new requirements are only required for stock bought on or after Jan. 1, 2011; mutual funds bought on or after Jan. 1, 2012; and bonds, options and private placements bought on or after Jan. 1, 2013.
9. Yet, again, there’s band-aid relief for Alternative Minimum Tax (AMT).
There’s no real reform for AMT… again. What we do have is a small boost in the AMT exemption for 2011 to $74,450 for taxpayers filing jointly, $48,450 for single taxpayers and those filing as head of households, and $37,225 for married couples filing separately. Remarkably, it’s still not adjusted for inflation.
10.  You must check the box, if applicable, for Report of Foreign Bank and Financial Accounts (FBAR). 
No, this isn’t new but the IRS has made FBAR reporting a compliance issue. While FBAR forms aren’t due until June, you may need to to check the applicable box on Schedule B when you send in your return. And this time, the IRS swears that they really, really mean business.
So, there you have it: those are the most noteworthy changes taxpayers realized in the 2011 tax year. It’s a quick and dirty summary. Your situation may require a bit more detail so if you have any questions, check with your tax professional.

11 things your tax pro would not like to hear from you this April

Tax Day is fast approaching, and tax professionals all over are rushing to get their returns ready to be filed on time. If you are a tax client, then sample a few of the things your tax professional would not want to hear from you until the tax scramble is done with. From the bottom up – here they are:
11. I’m really busy this week so I’ll stop by on the 17th to do my taxes. 
Taxes are due on the 17th. And despite what your calendar looks like, you can rest assured that your tax pro’s calendar is busier. While it’s true that your tax pro needs to be flexible – and you do have until April 17th to file – don’t stress everyone out by cutting it that close.
10. I owe more than I did last year. What did you do wrong?
Even if your situation doesn’t change a bit, the Tax Code is constantly changing. For example, the Making Work Pay Credit expired in 2010 and was replaced in 2011 with the payroll tax cuts. The credit was a flat amount but the cuts are based on a percentage. So depending on your income level, you could see more of a cut – or less – or it might be the same. Ditto for changes in the standard deduction and personal exemptions. Don’t assume your preparer made a mistake. If you don’t understand why you owe more, ask. Nicely.
9. I took my girlfriend to Vegas when I was on business so can we say she was working and claim her, too? 
 Now, why would you ask your tax pro to lie for you? A good tax pro will absolutely make an effort to spot opportunities to help you save on your taxes. But that means looking for honest deductions, not creating bogus ones.
8. My ex and I have a divorce agreement about who gets to claim the kids but a lawyer wrote it and I can’t understand it. Can you figure it out? 
You hire a divorce attorney for a reason: to assist you in a divorce. That attorney ought to be able to explain to you in plain English what your divorce agreement says. It’s not your tax pro’s job to figure out who claims the kids this year (or next year or the year after). That’s like asking a dermatologist to read your X-rays.
7. I had surgery in December but didn’t pay for it until January. But I could really use the deduction now. Can we just say I paid it in December? 
Timing is important when it comes to taxes. And for most taxpayers, deductions and income are based on a calendar year. Your tax pro cannot turn back time any more than Cher can (kudos if you get the reference). Don’t ask him or her to try.
6. I have a really short tax question. 
Tax questions are never short. If it’s really short and relevant – and you’re a client – call and make an appointment. And if it’s about next season, then see #2 below.
5. I can’t find my receipts but I can give you a pretty good guess. 
You’re doing yourself a disservice if you can’t actually produce your receipts since most taxpayers tend to understate – not overstate – their deductions when they guess. Remember, too, that the rules require that you be able to produce your receipts if the IRS asks. If you can’t find them for your tax pro, you’re not going to be able to find them for the IRS. So either find your receipts or suck it up and take the standard deduction this year and then promise yourself that you’ll be more organized next year.
4. I forgot my Schedule K/Form 1099-DIV/fill-in-the-blank. Can I fax or email it over later? 
You should show up at your tax pro’s office with everything you need. If you’ve forgotten something, you should make arrangements to come back at a specific time with the information. Making a mental note to send something “later” (whatever that means) is not the best system. What if you forget? Or the fax machine is out of paper? Or your scanner doesn’t work. There’s just so much room for error. Be organized. And if an accident happens – because they do – then make solid arrangements to fix it.
3. But I don’t want to file an extension.
Tough. Okay, maybe that’s a little harsh. But sometimes events conspire that result in the need to file an extension. Maybe you’re missing a form or you’re just a little too late in the season for your tax pro to get a complete, accurate return out to the IRS in time. It’s almost always better to file a complete, accurate return than to file an incomplete, sloppy return. Trust your tax pro on this one.
2. I want to meet and discuss next year’s taxes. Can we do it on Thursday? 
Your tax pro will absolutely love that you’re being proactive about your taxes. Planning is important. And while we might like surprises on our birthdays and anniversaries, surprises on Tax Day are rarely a good thing. So setting up a meeting to discuss how you can plan for next year is a great thing – just not right now. Your tax pro has been up to his or her eyeballs in tax stuff since January. Give them a chance to breathe, to play a little golf, to hang out with the family… Your planning can wait a few weeks.
1. Wow, my taxes are so steep, I can’t afford to pay you now.
Seriously? I get that nobody wants to pay their taxes. But the person who is preparing them for you is doing you a service. You have to pay for that service. That part is not negotiable. What may be negotiable is the timing of the payment since many tax pros are happy to work out a payment plan but those plans should be worked out in advance. If you haven’t discussed otherwise, your tax pro is going to expect payment at the time that services are rendered. They have bills to pay, too. Oddly enough, someone has to pay to keep the lights on and occasionally your tax pro wants to eat. And a well fed tax pro is a happy tax pro. And everyone loves a happy tax pro.

Contents courtesy: Kelly Phillips Erb

Questions for your tax preparer

Here is that time of the year when you are into deep thinking about taxes, and the right questions you must ask your tax preparer. Take out some quality time to spend with your preparer or chalk out some questions for them while sending them your return.
What kind of tax questions should you ask?
·              Retirement - if this is in the plans during the next year, your preparer can help you understand proposed changes. And don’t forget to ask about Social Security if you will start drawing it during the next year.
·              Divorce or Marriage – either can play with an expected refund.
·              Children - what effect could a new baby have on your taxes? Or, what happens when a child goes to college or starts working.
·              Starting a business – get an overview of what records you will need to keep. You can always get more info later.
·              Making a withdrawal from your 401K or IRA – if you are thinking about doing this, ask about the tax consequences. The same goes for taking a loan against your 401K.
·              Credits and deductions – ask about those credits you’ve heard about on the news. Do you qualify and why/why not?
·              Review your return – ask about items that didn’t come out the way you thought they should.
·              Are you paying a penalty - a big balance due may trigger a penalty. Should you make estimates or change your withholding?
Ask questions so that you can stay on top of your taxes. A good preparer will try telling you about issues they see but even the best ones don’t read minds. So ask questions so that the tax pros can do their job better.

Penalty for under payment of estimated tax

The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. How much you owe or have refunded is the difference between your tax less credits you qualify for and what you have pre-paid through estimates and withholding. A lot many taxpayers end up paying more than their tax because they got caught by the Underpayment of Estimated Tax Penalty.
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, people who have household employees and higher income tax payers.

Generally, the payments should be made in four equal amounts to avoid a penalty. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. The penalty may be waived if:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

You can also get hit with the penalty if you are getting a refund. Let’s say you had a large gambling winning in February but you held off making an estimate payment until the next quarter. Depending on the amount of the winnings and the size of the payment, you could still have to pay the underpayment penalty even if you’re getting a refund.
To avoid paying the Underpayment penalty, you want to make estimates or make sure your withholdings are enough to prevent the penalty. Your tax is your tax but there’s no need to pay more when it’s not hard to pre-pay enough to cover it.

Into farming? Some key tax tips from IRS

You are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.
The IRS has 10 key points for farmers regarding federal income taxes.
1.                              Crop insurance proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.
2.                              Sales caused by weather-related condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals.
3.                              Farm income averaging You may be able to average all or some of your current year’s farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.
4.                              Deductible farm expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business
5.                              Employees and hired help You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees.
6.                              Items purchased for resale You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
7.                              Net operating losses If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
8.                              Repayment of loans You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.
9.                              Fuel and road use You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.