From the February 2007 issue of Investment Advisor • Subscribe!

It's That Time Again

Tips from the pros on this year's tax returns

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With filing season upon us, the Tax Talk Today Webcast series has dedicated its recent programs to those issues near and dear to the heart of the tax return preparer. From new forms and legislation to time-saving electronic tools--and applying to small business, corporate, and individual returns--Internal Revenue Service officials and tax professionals from across the country have provided insight and advice to make the 2007 filing season as painless as possible.

Along with caffeinated drinks and power bars, these tidbits and tips from a wide range of Tax Talk Today panelists should help the tax practitioner--and the advisor who interacts with clients' tax preparers--through a successful filing season this year, and can even help with some early preparation for 2008.

Small Businesses: The New Form 944

In 2006, the IRS launched Form 944, Employer's Annual Federal Return, as a tax burden reduction project. This form impacts small businesses with a total employment tax liability of $1,000 or less per year. For these small businesses, the new Form 944 replaces the quarterly Form 941 with a single, annual filing and payment of federal employment tax--a nice burden reduction for qualifying businesses. Businesses with an annual employment tax liability greater than $1,000 will still be required to file quarterly using the existing Form 941.

"It's our intention to try to kind of get out of the way and let the small business person concentrate on their business," said October 2006 Tax Talk Today panelist Kathy Welsh, project manager in the IRS's Office of Taxpayer Burden Reduction.

The first Form 944 returns for 2006 were due on January 31, 2007, but the temporary regulations governing the new form remain in place through December 2008, at which time the IRS will complete its evaluation of the form and finalize the regulations. In the meantime, for clients launching new businesses, the paper application process for the Employer Identification Number (EIN) will identify them as either Form 941 or Form 944 filers as appropriate. For businesses that apply for their EIN online, they will be automatically classified as Form 941 filers; however, a simple phone call to the IRS (800-829-1040) can change that classification for qualified businesses.

Information Returns: Form 1099

Complex rules governing corrections to the Form 1099, an information return, can present a significant challenge, particularly when it comes to correcting mistakes. According to Gilford Queen, a tax law specialist with the IRS's Tax Forms and Publications office, tax practitioners should pay careful attention to the step chart in the general instructions for Form 1099, because the type of mistake dictates the steps required for correction.

The October 2006 Tax Talk Today panel agreed that tax practitioners need to keep clients well-informed regarding the use--and misuse--of Form 1099 as it relates to worker classification issues. However, the power of the practitioner only goes so far. In most cases, the only thing the tax practitioner can do is make sure that his or her clients are aware that, if the individual is classified incorrectly, the repercussions can be very expensive.

At this point in the filing season, perhaps the biggest concern regarding 1099s is possible errors and how to handle them. One common problem for tax practitioners is the client who receives a 1099 and believes that the income should actually have been reported as employee wages, but doesn't notify the tax practitioner until late in the filing season. While the IRS prefers that the taxpayer goes back to the 1099 issuer to correct the problem, there is the option to submit a Form SS-8 to the IRS to request a determination of worker status. Because that determination can take up to 60 days, the client's return may have to be filed with the 1099 as is, which means taxes may be due, with the possibility of an amended return depending upon the outcome of the SS-8 review. The important thing to remember is that when a 1099 indicates that self-employment taxes are due, the IRS will eventually catch up--and when it does, expect to receive a bill.

"Just sticking your head in the sand and ignoring it is not going to work," said Roger Harris, EA, president, and COO of Padgett Business Services based in Athens, Georgia.

Corporations: The Changing E-File Mandate

For 2006, the threshold for corporations required to e-file federal tax returns changed again. Now, corporations that have $10 million or more in assets and file at least 250 information returns must e-file their Forms 1120 for 2006 using the IRS's modernized e-file platform. The IRS recently sent a notification to the chief financial officers of corporations potentially affected by the changing e-filing requirements. The November 2006 Tax Talk Today panel of experts agreed that practitioners new to the corporate e-file mandate are likely to find that the technology aspect impacts them the most, particularly in terms of software and process issues.

"You don't just slap technology on top," said November 2006 Tax Talk Today panelist Mike Dolan, director of the IRS practice and procedure group with KPMG, LLP, in Washington, D.C., and a former IRS deputy commissioner. "Lay your groundwork now."

IRS Notice 2005-88 provides specific information regarding one-time electronic filing waivers, but the IRS cautioned practitioners not to count on waivers as a way to avoid e-filing for their corporate clients.

"If you have a good reason, we will consider it," said panelist Craig Stevens, project manager in the Large and Mid-Size Business (LMSB) Division of the IRS. "But we really are not going to make a practice of giving out waivers."

Rules governing corporate e-filing for 2006 are included on the Tax Talk Today Resource Page for November, which can be found at www.taxtalktoday.tv. The Resource Page also includes links to related information on the IRS Web site, www.irs.gov. While there are fewer rules this year, some changes are significant, such as the acceptance of fewer PDF forms. The IRS will continue to refine the e-filing process as a part of plans for continued expansion of the mandate.

"I'm happy to say that the modernized e-filing platform is the IRS e-file platform of the future," said Paul Mamo, director of the IRS's Development Services Division, Electronic Services Division, Electronic Tax Administration.

A New Refund: Telephone Excise Tax

In December 2006, the Tax Talk Today panel reviewed the new Telephone Excise Tax Refund, a one-time refund of telephone excise taxes paid by individuals on telephone bills for long distance or bundled services. The IRS estimates that over 150 million individuals--those persons who paid the telephone excise tax between February 28, 2003, and July 31, 2006--are affected by this refund. Traditional land lines, as well as cell phones and even Internet phone packages, can qualify for this refund.

"We estimate that individuals paid somewhere north of $8 billion over this time period," said December Tax Talk Today panelist David Williams, the IRS's director of the Earned Income/Health Coverage Tax Credit (EITC/HCTC). "And we probably will refund a little bit more than that back."

As for determining the amount of the Telephone Excise Tax Refund, it can be calculated in one of two ways. The taxpayer with copies of all telephone bills for the time period in question can identify the exact amount of telephone excise tax he or she paid, thus claiming the actual amount and interest (which must then be claimed as income). Or, the taxpayer can use the standard IRS guidelines, which are based on the number of exemptions the taxpayer claims (and which generate no interest to be claimed as income):

$30 for one exemption;

$40 for two exemptions;

$50 for three exemptions; and

$60 for four or more exemptions.

Tax practitioners should look for a newly added line on the federal income tax return, in the payment section, where the Telephone Excise Tax Refund will be entered and added to other payments or withholdings the taxpayer may have had for 2006.

A New Option: The Split Refund

Another area of interest for the December 2006 Tax Talk Today panel was the Split Refund Option, a new offering from the IRS which gives taxpayers the option of dividing their 2006 federal tax refund among up to three separate bank accounts. However, to take advantage of this new option, taxpayers and their practitioners must be diligent in providing the IRS with correct routing and account numbers, which should be submitted to the IRS using Form 8888.

"There is a little checkbox on the appropriate line on the tax return if you're going to split the refund into two or three accounts," said Kevin Coulter, tax law specialist, Tax Forms and Publications Division, IRS. "A person will check the checkbox and then attach the Form 8888."


Tax Talk Today moderator Les Witmer, a communications consultant in Atlanta, served with the IRS for 23 years. For more information, please visit www.IRS.gov, or Tax Talk Today at www.taxtalktoday.tv.

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