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IRS and burning down your house

Sunday, September 27th, 2009

Here is a tax tale that has been happening for the last few years and been getting people hot under the collar.  In Upper Arlington, Ohio, there was a house that was run down and the fire department there burnt it to the ground.  The local SWAT teams barged through the front door in an exercise on dealing with domestic violence. Rescue crews scattered mannequins around the house and blew smoke through the halls to simulate a meth lab explosion. Firefighters set fires in one room after another and practiced putting them out. Then, in one last drill, they burnt down the whole place.  Interesting but effective training using an entire house.  Here we are though several years later (this happened five years ago) and there is still a dispute that still is burning over the homeowner’s attempt to claim a $287,000 charitable tax deduction for donating the house to the fire department, which has burned down at least 32 such homes in Upper Arlington since 1988.

The Internal Revenue Service is trying to stop homeowners from claiming such deductions.

Lured by the prospect of free demolition, homeowners around the country sometimes offer their houses to the local fire department for training purposes. The department burns down the house, clearing the way for the owner to build a bigger and better home. In court cases in Ohio and Wisconsin, the IRS is arguing that because such houses are already slated for demolition, donating them for fire training isn’t an act of charity.

The dispute adds a new element of controversy to the decades-old debate over whether the risks associated with “live burns” — more than a dozen firefighters have been killed in the past two decades — outweigh the training benefits. Fire chiefs say live burns supply invaluable training for volunteer departments, which make up the bulk of the nation’s firefighters. And some fear that the tax disputes will discourage donors from coming forward.  Hmm, there isn’t a shortage of homes that are getting run downdown and up for donation. Nobody tracks the number of live burns each year, but fire officials say they are increasingly rare because of mounting safety and environmental restrictions and because fewer homes are up for demolition in this slumping economy.  I wonder how people actually try to claim the donation of a home as a tax deduction.  Wonder if any business has tried that with their store.
Churches, corporations and cities with vacant properties also donate buildings for fire training. Sometimes it is a dilapidated old barn, other times a sprawling suburban house. (The Hendrix home, not including the land, was appraised at $287,400).

It’s impossible to know exactly how many people have tried to claim such deductions; the IRS would not comment.

Steven Willis, a professor at the University of Florida who studies income tax law, said a charitable deduction can be no greater than the value of whatever was donated, and a house given to a fire department has negative value, since the owner was going to have to pay somebody to get rid of it.

“The whole idea of a charitable deduction is that you give something to charity and you don’t get anything back, right?” said Paul Caron, a tax scholar at the University of Cincinnati. “When you give $100 to the Catholic Church, you don’t get anything for that $100.”

The IRS maintains in court papers in the Wisconsin case that the homeowners do not qualify for a deduction because they are donating only a “partial interest” in their home, rather than the entire property. The agency also says homeowners are letting firefighters only use the property, not donating it in full.

But a lot of work goes into preparing a house to be burned down, including a detailed inspection by environmental authorities, said Terry Grady, a lawyer representing Hendrix, who wants the IRS to refund him $100,590 in “erroneously collected” taxes. Hendrix built a new house on the property.

“They have to, in fact, pay their mortgage off. They have to make sure there’s no asbestos in the house,” Grady said. “And you know, conversely, the benefits to the fire department are just immense.”

Although the demolition is free, the homeowner is responsible for clearing away the debris.

ESPN commentator Kirk Herbstreit, who also lives in Upper Arlington, let firefighters burn his home in 2004. The former Ohio State football star’s claim of a $330,000 tax deduction was rejected a year later. Herbstreit declined to comment.  So there is a case of being a celebrity didn’t help matters either.

A case similar to the Hendrix dispute has also unfolded in Chenequa, Wis., where Theodore Rolfs filed for a $76,000 tax deduction on his lakefront home that was burned in 1998. The trial concluded in 2006. Rolfs is still waiting for a verdict.

Rolfs, who had been told it was common practice to receive the deduction, was taken aback when the IRS rejected his.

“Their arguments didn’t make any sense,” he said.

At Rolfs’ house, firefighters wheeled a truck down to the shore and practiced pumping lake water onto the flames, a crucial training exercise in Chenequa, which has no fire hydrants, said Rolfs’ attorney, Michael Goller.

Environmental laws in some states ban live burns. In other states, most fire departments adhere to safety guidelines that say windows should be boarded up, floors inspected for sturdiness and shingles and carpets stripped away.

Three firefighters were trapped by flames and perished in a 100-year-old farmhouse in Milford Township, Mich., during a controlled burn in 1987. In February 2007, a fire recruit was killed in a training exercise in a Baltimore rowhouse.

The moral of the story is to please check with a good tax professional before attempting to donate your house to the fire department for blowing up.  You don’t want to get burned later on!

Sep 27 2009

Kim Isac Greenblatt

IRS and burning down your house

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More On Spooky Tax Letters from IRS or FTB

Tuesday, March 24th, 2009

Question from a reader:”I received a letter from the IRS and it is scaring the pants off of me. What should I do? I mean other than respond within 60 days?”

My answer is first to take a deep breath and exhale. Then, take your letter to the person who helped prepare your tax return. If you did it yourself, you may want to either read and re-read slowly and carefully the letter or take it to a tax professional for help.

It may just be a spooky letter that is asking you to substantiate something that was either incorrectly reported, possibly incorrectly reported or maybe the IRS or FTB have made a mistake at their end.

Generally, if you are getting a letter and it has no tax penalties or fees levied or underpayment information, the letter may be just a request for clarification.   If the letter refers to a prior year’s tax return (and most of them do) there may be listings of where the taxing authority differs from what you filed and what they have calculated as the penalty, interest and things like that.

Remember, you are guilty until you prove your innocence.

Read carefully the options that are presented to you and again, go talk to a decent tax professional who can help you draft a response and if need be, the appropriate tax forms.  If an amended return is being asked for, provide it.  If they are looking only for a specific form, just give them what they want and any supporting evidence that they ask for to substantiate your claim.

I have answered a lot of letters for clients and myself and the bottom line is to be thorough and think about what they are asking for and give it to them.

Make the answers and responses as clear as possible and as detailed.  It will go a long way to trying to get their claim reversed.

Please overcome your fear and just wanting to throw the letter out or stash it away.  The response deadlines generally are serious and you want to clear the books as soon as possible.

Good luck and hope that answered your question.

March 24 2009

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Kim Isaac Greenblatt

More On Spooky Tax Letters from IRS or FTB

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More on who gets audited

Friday, December 12th, 2008

As promised to my business and tax readers, here are some more statistics on who gets audits.  The information is courtesy of the IRS:

2007 turned out to have the highest IRS examination rate increase since 1998.  That statistically sounds big and once we see the numbers we will see that it is relatively big.

Seventy-eight percent (that is 78%) of IRS examinations affected individuals with incomes less than $100,000 in 2007.  That means that the IRS goes after everybody and not just the rich. Statistically that makes sense since proportionally to the general public there are less people making more than 100K than less.

Over 1.3 million audits were made on taxpayers earning less than $50,000 annually.  Again, that is an eye opening figure if nothing else to quash the myth that the IRS doesn’t go after smaller potatoes.

WHAT DOES THE IRS DO OR WHAT KIND OF AUDITS AND STUFF COULD YOU BE LOOKING AT?

• Correspondence Audits: Letter from IRS or state authority 1,073,224 in 2007
• Field Examination: In-person review of your tax return 311,339 in 2007
• Change in Tax Liability: Result of examination by the IRS changing what you owe
• Levies: Garnishments (holds) against your wages and/or bank accounts 3,757,190 in 2007
• Liens: Garnishments (holds) against your real property i.e home, land, car etc. – 683,659 in 2007
• Collections: IRS collected $23.5 billion from examinations and $31.8 billion from Levies and Liens in 2007
• Indictments: IRS files criminal charges
• 90% Conviction Rate of People indicted in 2007
• 22 months was the average sentence handed down for the convictions

 

All that means is that you need to watch your filing dates, respond to IRS and state letters in a timely manner and keep great records.  One of the biggest reasons that the IRS collects so much from letters is that a lot of people just don’t bother to respond within the time limit that the IRS asks you to (which is generally 60 days).  I can’t tell you how many times people come to me with a letter that was actually not a problem but because they didn’t respond in a timely manner got nailed with what the IRS decided.

Eesh.

Also please make sure you send in all the forms you need to if you are doing a return by mail especially amended returns.  One of the leading causes for rejections or audit letters is incomplete filing.  A common one is where you are suppose to attach a list of your myriad stock trade transactions and you forget to send them into the IRS.

Also as a heads-up, expect the IRS to do more audits on EITC and Schedule Cs.  They are working hard on cracking down on fraud in both those areas.

 

Pick up a copy of my book, “Bad Tax Idea, Good Tax Idea” if you want some more insight into what you should and shouldn’t be doing in preparation for having your taxes done.  It is a small book and a light read with some key points that will save you thousands of dollars in taxes over the long haul.

Don’t be bashful about getting a copy of my book, Practical Money Making, for ideas for making extra cash during the depression we are in either.  Good luck and may the holidays be happy for you!

  Practical Money Making-Surviving Recession, Layoffs, Credit Problems, Generating Passive Income Streams, Working Full Time or Part Time and Retirement 

 

Kim Isaac Greenblatt

 

As promised, some statistics on who gets an IRS audit.

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How Do I Calculate Taking Ira Distributions From Multiple Iras

Saturday, October 18th, 2008

Question from a client:”Kim, pretty soon I will be hitting 70 1/2 and I want to know, do I need to take money out of all of my IRAs or just one?”

My answer is:  Congratulations and I hope you are enjoying a great retirement!  If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70 1/2. April 1 of the year following the year in which you reach age 70 1/2 is referred to as the required beginning date.

In this particular case, you have multiple IRAS.  So you basically add up what the total value is as of Dec 2008 (if you are planning on taking the distribution in early 2009) and you look then at your age in Publication 590 Table 3 page 104 of the 2007 pdf file.

A rough PARTIAL copy of one is here for your use – please go check out Pub 590 for the complete table but for the purposes of illustration this will do nicely. (And, you are welcome).

Table III (Uniform Lifetime)
(For Use by: • Unmarried Owners, • Married Owners Whose Spouses Are Not More Than 10 Years Younger, and • Married Owners Whose Spouses Are Not the Sole Beneficiaries of Their IRAs)
Age Distribution Period
|
|
|
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22.0
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
90 11.4
91 10.8
92 10.2
93 9.6
So you take the total of all your IRAs, let us say it is $100,000. Then you look for your age, let us say it is 70 1/2. So you go UP in the table to 71 years and use 26.5 as the distribution period that is related to that table number for our calculation. We take $100,000 / 26.5 = $3773.58 and rounding it up to $3774. That amount should be distributed to you by April 1 2009.

Okay, now most IRA custodians SHOULD be calculating what your RMD (required minimum distributions) should be. They should be sending you statements alerting you that you need to have a disbursement before it is too late. If you have multiple IRAS, add up the amounts and you may take them from one IRA. You may want to roll them all into one IRA to make your life easier. If you are comfortable with different investment accounts, just make sure that you keep track of the disbursements.

Penalties are stiff if you don’t start taking the required amounts out so please consult with your tax professional and whoever is the custodian for your IRAs. It will make your retirement more enjoyable and hopefully, more profitable.

Kim Isaac Greenblatt

Kim Isaac Greenblatt saves the day by calculating required minimum disbursements from IRAS.

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What is a Qualifying Relative?

Saturday, September 20th, 2008

To follow up on my previous article as to what a qualifying child was, here are the differences between a qualifying child and a qualifying relative according to the IRS:

Definition of a “qualifying child” and “qualifying relative”
Section 152(c)(1) defines a “qualifying child” of a taxpayer as an individual who: (A) bears a certain relationship to the taxpayer, (B) has the same principal place of abode as the taxpayer for more than one-half of the taxable year, (C) meets certain age requirements, and (D) has not provided over one-half of his or her own support for the calendar year.

Section 152(d)(1) provides, in part, that to be a “qualifying relative” of a taxpayer, an individual must: (A) bear a certain relationship to the taxpayer, (B) have gross income for the calendar year that is less than the exemption amount (as defined in section 151(d)), and (C) derive over one-half of his or her support for the calendar year from the taxpayer. In addition, section 152(d)(1)(D) requires that the individual not be a qualifying child of the taxpayer or of “any other taxpayer” for the taxable year. Section 152(d)(2)(H) provides that a qualifying relative may include an individual who has the same principal place of abode as the taxpayer and who is a member of the taxpayer’s household.

—
What does all that mean to us mere mortals? In order to qualify somebody as a qualifying relative you need to pass the following tests:

To claim a dependency exemption for a qualifying relative, the person must meet
the following tests:
• Dependent Taxpayer Test
• Joint Return Test
• Citizenship Test
• Not a Qualifying Child Test
• Member of Household or Relationship Test
• Gross Income Test
• Support Test

How does all of this breakdown? Check this out:

Qualifying Relative
All of the following tests must be met to claim a dependency exemption under
the rules for a qualifying relative.
Dependent Taxpayer Test — Qualifying Relative
If you could be claimed as a dependent by another person, you cannot claim
anyone else as a dependent. Even if you have a qualifying child or qualifying
relative, you cannot claim that person as a dependent.

Member of Household or Relationship Tests — Qualifying Relative
• Member of household-The person must live with the taxpayer for the
entire year as a member of the taxpayer’s household.
OR
• Relationship-The person must be related to the taxpayer in one of the
allowable ways. Certain relatives do not have to be members of the
taxpayer’s household for the entire year.
Taxpayers will meet this test for persons
• who are relatives, even if the persons are not members of the
taxpayer’s household for the entire year.
• who are not relatives if the persons are members of the taxpayer’s
household for the entire year.

Citizenship Test:
The individual is either a citizen or resident of the United States, or a resident of a country contiguous to the United States (exceptions exist for certain legal adoptions).

Member of Household Test — Qualifying Relative
Taxpayers will meet this test for all persons who live with the taxpayer
as a member of the household if the persons pass the member of
household test.
• The dependent does not have to be related to the taxpayer.
• The dependent must live with the taxpayer all year except for
temporary absences. (Temporary absences include attending school,
taking vacations, and staying in the hospital.)
• The relationship between the taxpayer and the dependent must not
violate local laws

Relationship Test — Qualifying Relative
Taxpayers will meet this test for the following relatives if the relatives meet
the requirements of the relationship test:
• child
• parent
• brother/sister
• stepparent
• stepchild
• stepbrother/stepsister
• half brother/half sister
• grandparent
• grandchild
• son-in-law/daughter-in-law
• mother-in-law/father-in-law
• brother-in-law/sister-in-law
If related by blood, relatives also include
• uncle/aunt and
• niece/nephew.
• Cousins do not meet the relationship test.
• Relatives do not have to be members of the taxpayer’s household.
• Relationships established by marriage are not ended by death or
divorce. For example, a daughter-in-law is a relative to her in-law
parents even after the death of their son (her husband).
There are special rules for children born during the year, adopted
children, and foster children.
Remember: To claim a dependency exemption, all tests must be met, including
either the relationship test or the member of household test.

Gross Income Test — Qualifying Relative
Taxpayers will meet this test for persons whose gross incomes are less
than the exemption amount.
• In 2007, the exemption amount was $3,400.
Gross Income
• is all taxable income in the form of money, property, and services;
• includes unemployment compensation and certain scholarships; and
• does not include welfare benefits and nontaxable Social Security
benefits.
Remember: To claim a dependency exemption, all five tests must be
met.

Support Test — Qualifying Relative
Taxpayers will meet this test if the taxpayer provided more than half of a
person’s total support for the entire year.
Total support items include
• food, clothing, shelter, education, medical and dental care, recreation, and
transportation; and
• welfare, food stamps, and housing provided by the state.
Compare the dollar value of the support provided by the taxpayer with the
total support the person received from all sources.
There are special rules for dependents who receive support
from multiple sources and for children of divorced or separated
parents.
Important Point:The gross income test considers the dependent’s taxable
income. The support test considers all income, taxable and nontaxable.
Remember: To claim a dependency exemption, all five tests must be met.

Hope that helps. For more information, check with the IRS, your state and local tax authorities and your tax pro!

Kim Greenblatt

You are learning what a qualifying relative is with Kim Greenblatt at his blog, profitable.

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What is A Child In Terms of Tax Law?

Tuesday, September 16th, 2008

I received an interesting question from a reader:

“Kim, what is the definition of a child in relation to tax law?”

That is an excellent question.  The correct question though in terms of tax law for the Federal government might be, “What is a qualifying child?”  For that we need to turn to Publication 501 from the IRS where they have a pretty straightforward definition as follows:

Under the “Exemptions for Dependents”  section of the publication, you are allowed one exemption for each person you can claim as a dependent.  You can claim an exemption for a dependent even if your dependent files a return.  (So if your child is making money on his or her own, they can file their own return in their own tax bracket and not drive you or you and your spouse into a higher tax bracket!).

The term “dependent” means either a qualifying child or a qualifying relative.  Today we are going to just talk about a qualifying child.  You can claim an exemption for a qualifying child (or a relative) if you meet the three tests:

1.  Dependency taxpayer test.

2.  Joint Return test.

3.  Citizen or Resident test.

For something like the Child tax credit, you need a qualifying child who was under the age of 17 at the end of the year.  For other child related tax information, please check with the IRS or your favorite tax professional. 

What is the dependency test?

If you could be claimed as a dependent by another person, you cannot claim anyone else as a dependent.  Even if you have a qualifying child or qualifying relative, you cannot claim that person as a dependent.  If you are filing a joint return and your spouse can be claimed as a dependent by someone else, you and your spouse cannot claim any dependents on your joint return.  That is the way it goes, folks.  That means if you married your sweetie and she is still considered somebody else’s dependent (her Mom and Dad’s) you cannot claim your kids (again consult with a local tax pro and talk with Mom and Dad to see what they are actually claiming for more information).

For 2007, the Tests to be a Qualifying Child are as follows:
1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsiser or a descendant of any of them.

2. The child must be under age 19 at the end of the year or under age 24 at year end and attending school full time or any age and permanently and totally disabled.

3. The child must have lived with you for more than half of the year.

4. The child must not have provided more than half of his or her own support for the year.

5. If the child meets the rules to be a qualifying child of more than one person, you must be the person entitled to claim the child as a qualifying child.

I could go on and on for weeks on qualifying child information alone but hopefully this is enough to get you started!

Kim Greenblatt

Kim Greenblatt tells you what a qualifying child is at his blog, profitable.

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Charity Begins At Home

Saturday, September 13th, 2008

The title of the blog today comes from an understanding that people should be donating to charity because it feels good.  They want to help people less fortunate than themselves.  The fact that you can get a deduction on Schedule A of your Federal taxes is a nice encouragement but the act of charity should be done because you feel like giving something to somebody who needs it be it cash, an automobile, clothing or food.

The IRS mandates that any cash contribution to a recognized charity (and you can check this blog or the IRS site for references to what a recognized charity is) must be documented with a cancelled check or a credit card statement showing the payment.  You will also need a letter from the charity thanking you for the donation showing the amount that you gave.

Too many people over the years have donated crappy items to the Salvation Army and they basically burnt the boats for all of us in terms of trying to donate goods to charities.  You still can give, but if you are doing it for tax reasons, I suggest you take the salvage value unless you are donating a Van Gogh or something that can be appraised as an antique.  You will need the letter at tax time and the charity will have to show that it is using or disposing of the gift for the value that you are claiming it for.  If it turns out they sell it at the curb for $23.15, that is what you will get as the amount for your deduction.  Cruel, but generally true. If anybody has experienced anything differently, please let me know.

So remember that when charity is beginning at home, it will end with you collecting whatever receipts you can and keeping good documentation!

Kim Greenblatt

You are reading Kim Greenblatt’s blog, profitable and realizing that at tax time, charity begins at home!

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Injured Spouse

Friday, September 5th, 2008

You are considered an Injured Spouse (not to be confused with an Innocent Spouse), if you are filing a joint tax return with your spouse and all of a sudden instead of getting the refund you were anticipating you find out that your handsome husband (or lovely wife) owes back taxes, child support, student loan payments – you get the idea.

Publication 8379 has the definition and the form is there for you to determine yourself if you can get back YOUR portion of the tax refund that you have calculated. If there is money from your spouse that he or she was suppose to get back, that will go towards whatever it is that they are trying to pay off.

If you are a California resident, sorry, California does not have the Injured Spouse relief provision. Remember my motto, please consult your own tax professional to see how this affects your situation!

I’ve dealt with Injured and Innocent Spouse Relief and some free advice here is that you need to make sure that your paperwork and financial dealings are clear, properly dated and separate. Questions that will be asked are on the reasonableness of the claim.

At the state level, a lot of the claims may not fly because remember, in some states, and California is one of them, property is treated as community property. That means, dear readers, it is split fifty-fifty. The love, the income and the debt!

That can make for some sticky dealings in a marriage so make sure if you are thinking of getting married that you talk money issues out to prevent them from surfacing later.

Kim Greenblatt

You are in Kim Greenblatt’s blog, profitable, in a piece on Injured Spouse Relief.

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Innocent Spouse Relief Fed and State

Thursday, September 4th, 2008

I was emailed a question about Innocent Spouse Relief. This is different from Injured Spouse relief. Information from the IRS can be found in Publication 971. The IRS has the forms and publications you need to research there, or consult with your tax pro. A quick and dirty way to get to the document is here. As I pointed out to my reader, if you are in doubt as to whether you qualify for the Innocent Spouse situation, search and follow the flow chart that is in the document. It is pretty thorough for determining if you are an Innocent Spouse or not.

For those of you living in California, you may want to check out the Franchise Tax Board as well.

They have very clear instructions as to the definition as stated below:

Who is an innocent spouse and how can I get relief of tax?
Who is an Innocent Spouse?
Generally, when a joint tax return is filed, each spouse is equally liable for all the tax, penalties, and interest for the particular joint tax year. This means the entire amount of tax, penalties, and interest may be collected from either spouse, even if only one spouse earned all of the income.

If certain legal requirements are met, a spouse may be fully or partially relieved of the joint tax, penalties, and interest. Six categories of relief are available:

Complete or partial innocent spouse relief.
Relief by separate allocation of liability.
Equitable relief.
Relief from community income.
Relief by court order.
Relief from the tax due amount on return(s) that have been filed.
Please see the following questions and answers for more information.

Under what conditions is innocent spouse relief granted?
To qualify for innocent spouse relief, you must meet all of the following conditions:

You filed a valid, joint tax return.
You are able to prove that when you signed the return, you did not know, or have reason to believe, the liability would not be paid when the tax return was filed, or, at the time you signed the return, you did not have knowledge of the items that resulted in an audit assessment of additional tax.
The liability is attributable to your spouse.
Taking into account all of the facts and circumstances, it would be unfair to hold you liable for the tax.
Under what conditions is relief by separate allocation of liability granted?
Under this type of relief, we determine which spouse is responsible for the tax, penalties, and interest resulting from an audit of a joint return, and assign the liabilities to the responsible spouse. To qualify for this type of relief, you must have filed a joint return and show all of the following:

You were divorced, legally separated, or lived apart for 12 months prior to making your request for relief.
The tax resulting from the audit is attributable to your spouse.
You had no knowledge of the item(s) that resulted in the tax.
You did not receive a direct tax benefit.
You made your request within the applicable statute of limitations, and not later than the date that is two years after the date the Franchise Tax Board has begun collection activities against you.
Under what conditions is equitable relief allowed?
If you filed a joint return, and you do not qualify for traditional innocent spouse or separate allocation of liability relief, you may still be considered for equitable relief from tax that results from an audit or the underpayment of tax on your return. The following are some of the factors considered:

Your current marital status.
Whether you experienced spousal abuse during your marriage.
Whether you had a reasonable belief at the time that you signed the return that the tax was going to be paid; or, in the case of tax resulting from an audit, whether you had knowledge or reason to know of the understatement of tax.
Your current financial situation and your ability to pay the tax liability.
Whose legal obligation it is to pay the tax liability pursuant to a divorce decree or agreement to pay the liability.
Whether the liability is attributable to you or your spouse.
Whether you received a significant benefit from the understatement or erroneous items that gave rise to the liability.
Your compliance with income tax laws in later tax years.
Under what conditions is relief from community income allowed?
You may be entitled to relief from your failure to include community income on your separate return, if all the following conditions are met:

You did not file a joint return.
You did not include an item of community income on your separate return for that taxable year.
You did not know of, and had no reason to know of, that item of community income.
The unreported income was attributable to your spouse.
Under what conditions is relief by court order allowed?
You may qualify for relief by court order if:

You have obtained a divorce from your spouse, and the court issued an order relieving you of the unpaid tax due from a joint liability.
You are in the process of obtaining a divorce and your joint gross income exceeds $150,000 or you owe more then $7,500 for the tax year(s) for which you are seeking relief, send us a letter requesting a Tax Revision Clearance Certificate, which you will provide to the court. After the court issues its order, you will need to provide us with a copy of the court order and we will determine the amount of your relief. In your letter requesting a Tax Revision Clearance Certificate be sure to include your name, address, telephone number, and social security number.
However, please note that the court is limited in the relief that it can provide. The court cannot:

Relieve you of your responsibility to pay tax on your own income.
Provide relief on taxes already paid.
Under what conditions is relief from return tax allowed?
You may be entitled to relief if you filed a joint return and the tax liability is not fully paid, and you show that you had no knowledge, or reason to know, of the non-payment. You must pay the tax on your own income, and you are not entitled to relief on taxes already paid.

Can both spouses request relief?
Yes. To request individual relief, each spouse must file an Innocent Spouse Relief Application (FTB 705).

What will I need to provide with my innocent spouse request?
Generally, we will request that you provide the following documents:

Your statement explaining why you believe you qualify for relief and any documentation that supports your position. Include your name, social security number, and the tax years for which you are requesting relief.
Complete copies of your state and federal tax returns for the years you are requesting relief.
If you have requested relief from the Internal Revenue Service (IRS), please attach a copy of any IRS correspondence responding to your request for relief.
If you are divorced, please attach a complete copy of your divorce decree/marital settlement agreement.
You may request additional documentation based on your specific circumstances.

Am I eligible for innocent spouse relief if I did not sign the joint return?
No. If you did not sign the joint tax return, or we determine the signature on the return is not yours, the joint return is invalid and you are not eligible for innocent spouse relief. You may be held liable for your separate tax liability based on your separate income plus your share of any community income.

My divorce decree states my ex-spouse is responsible for the tax liability. Am I already qualified for innocent spouse relief?
No, the decree is not sufficient to qualify you for innocent spouse relief. But, you may qualify for Court Ordered Relief. To qualify for Court Ordered Relief, the following items must be included in your divorce decree/marital settlement agreement:

A specific reference to California state income tax.
The specific tax years for which you are requesting relief.
The amount or percentage of the total tax liability each taxpayer is responsible for paying.
If you are in the process of obtaining a divorce, please contact this department as soon as possible. We will evaluate your case and advise you regarding the information that needs to be included in your divorce decree or marital settlement agreement. In some cases, you may be required to file a Tax Revision Clearance Certificate with the court. Please note, you will only be relieved of the liability resulting from income that you did not earn, manage, or control. See question 19 for contact information.

Do I have to be divorced to qualify for Innocent Spouse relief?
Not necessarily. For an allocation of liabilities between joint filers, you must be divorced, legally separated from the other party to the joint return, or not living together for the 12-months prior to submitting your request for relief. For Equitable Relief, the fact that a requesting spouse is divorced or legally separated is regarded as a positive factor in determining whether to grant relief.

I received Innocent Spouse Relief from the IRS. Will the Franchise Tax Board automatically grant me relief?
No. You must send us an Innocent Spouse Relief Application (FTB 705), a copy of the IRS determination letter, and a copy of your divorce decree/marital settlement agreement (if applicable). If the IRS granted you relief, we are required to allow similar relief from the state liability, if certain requirements are met.

My refund was applied against my spouse’s liability. Can I file for injured spouse relief?
No. Injured spouse relief is different from innocent spouse relief. An injured spouse situation occurs when a joint tax refund is applied to the separate liability of one of the spouses who filed the joint return, such as past due separate tax liabilities or child support. California law does not have an injured spouse relief provision.

Will the FTB notify my spouse of my request for relief from a joint tax liability?
Yes. We are legally required to notify your spouse (or former spouse) and to allow the non-requesting spouse an opportunity to provide documentation to show why you should or should not be granted relief. We will also notify your spouse of our action on your request and provide the non-requesting spouse with an opportunity to appeal our decision. Upon your request, we will not disclose any of your confidential information, such as your new name and address.

I have a financial hardship and cannot pay my joint tax liability. Do I qualify for innocent spouse relief based on my financial situation?
No. A financial hardship alone does not entitle you to innocent spouse relief. However, your inability to make payment may be a factor considered for granting you equitable relief.

Will the FTB delay collection action if I decide to request relief?
Generally, upon receipt of your written request for relief, all collection activity against you will be suspended. However, interest will continue to accrue while your request is being reviewed.

Will I receive a refund if I am granted relief?
If relief is granted, under certain circumstances, a refund of amounts that you have paid may be allowed.

How do I request Innocent Spouse relief?
File an Innocent Spouse Application and attach a written statement explaining why you feel you qualify for relief. You can download the application from our Website, or we will mail one to you upon request. Call (916) 845-7072 (Monday thru Friday 8 am-5pm), or write to us at:

Franchise Tax Board MS A-452
Innocent Spouse Program
PO Box 2966
Rancho Cordova 95741-2966

Assistance in Spanish is also available.

If you have any additional questions, you can call the Innocent Spouse Program at (916) 845-7072 to discuss your specific case and circumstances.

Will you deny me relief if I do not provide the information you request?
We will base our decision on all of the information available to us. It is very important that you provide us with any information you have that supports your request for relief. We cannot act favorably on your request if we do not have enough information to conclude that you are entitled to relief.

Where can I get more information on the IRS Innocent Spouse Program?
Refer to IRS Tax Information for Innocent Spouses

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Again, this is different than being an Injured Spouse and I will try and blog on that next.
Consult your favorite tax professional and as always, since you are the one signing the tax returns, please do your own due diligence.

Kim Greenblatt

You are in Kim Greenblatt’s profitable blog learning what an Innocent Spouse is.

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Thinking About Filing Statuses for Taxes

Wednesday, September 3rd, 2008

I received an email asking me what filing status should the person file under and I had to explain that without knowing all the background information I can’t make a good determination.  I am starting up teaching basic tax preparation again so I thought I would share some of my information with you, gentle profit oriented readers.

The IRS (google them, you will find them, trust me),  has more detail than you probably are interested in on the subject but let me try and bring the key points home here:

There are five filing statuses:

Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child.

If more than one filing status applies to you, choose the one that will give you the lowest tax.

Marital Status
In general, your filing status depends on whether you are considered unmarried or married. For federal tax purposes, a marriage means only a legal union between a man and a woman as husband and wife.

Unmarried persons.   You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree.

  State law governs whether you are married or legally separated under a divorce or separate maintenance decree.

Divorced persons.    If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year.

Divorce and remarriage.   If you obtain a divorce in one year for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intended to and did remarry each other in the next tax year, you and your spouse must file as married individuals.

Annulled marriages.   If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. You must file amended returns (Form 1040X) claiming single or head of household status for all tax years affected by the annulment that are not closed by the statute of limitations for filing a tax return. The statute of limitations generally does not expire until 3 years after your original return was filed.

Head of household or qualifying widow(er) with dependent child.   If you are considered unmarried, you may be able to file as a head of household or as a qualifying widow(er) with a dependent child. See Head of Household and Qualifying Widow(er) With Dependent Child to see if you qualify.

Married persons.   If you are considered married for the whole year, you and your spouse can file a joint return, or you can file separate returns.

Considered married.   You are considered married for the whole year if on the last day of your tax year you and your spouse meet any one of the following tests.
You are married and living together as husband and wife.

You are living together in a common law marriage that is recognized in the state where you now live or in the state where the common law marriage began.

You are married and living apart, but not legally separated under a decree of divorce or separate maintenance.

You are separated under an interlocutory (not final) decree of divorce. For purposes of filing a joint return, you are not considered divorced.
Spouse died during the year.   If your spouse died during the year, you are considered married for the whole year for filing status purposes.

  If you did not remarry before the end of the tax year, you can file a joint return for yourself and your deceased spouse. For the next 2 years, you may be entitled to the special benefits described later under Qualifying Widow(er) With Dependent Child.

  If you remarried before the end of the tax year, you can file a joint return with your new spouse. Your deceased spouse’s filing status is married filing separately for that year.

Married persons living apart.   If you live apart from your spouse and meet certain tests, you may be considered unmarried. If this applies to you, you can file as head of household even though you are not divorced or legally separated. If you qualify to file as head of household instead of as married filing separately, your standard deduction will be higher. Also, your tax may be lower, and you may be able to claim the earned income credit. See Head of Household, later.

Single
Your filing status is single if, on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, and you do not qualify for another filing status. To determine your marital status on the last day of the year, see Marital Status, earlier.

Widow(er).   Your filing status may be single if you were widowed before January 1, 2007, and did not remarry before the end of 2007. However, you might be able to use another filing status that will give you a lower tax. See Head of Household and Qualifying Widow(er) With Dependent Child, later, to see if you qualify.

How to file.   You can file Form 1040EZ (if you have no dependents, are under 65 and not blind, and meet other requirements), Form 1040A, or Form 1040. If you file Form 1040A or Form 1040, show your filing status as single by checking the box on line 1. Use the Single column of the Tax Table, or Section A of the Tax Computation Worksheet, to figure your tax.

Married Filing Jointly
You can choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.

If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.

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For more information, you can check with the IRS and you may be interested in checking out my book,

“Bad Tax Idea, Good Tax Idea” for some tips that accountants and tax professionals might not give you.  You can find that book on Amazon (you can google to find that too).  All information posted here is for you to review and for more serious study and tax prepatation, kindly due your own research or consult your tax pro!

Good luck with your thoughts on Filing Statuses for Taxes!

Kim Greenblatt

 

You are in Kim Greenblatt’s blog, profitable, trying to figure out what filing status means for tax preparation!

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