Win a Kentucky Derby Bet? Don’t Forget Taxes

Robert W. Wood, Contributor

TAXES

5/05/2012 @ 8:42PM |703 views

ou may be flushed with excitement–and cash–from your Derby Day winnings. There was a 15-1 payoff on I’ll Have Another’s Kentucky Derby win. But if you won, before you spend it all, remember to save some for the tax man. Gambling winnings are fully taxable and must be reported on your tax return just like everything else. Yup, Gambling Winnings Are Always Taxable Income.

What’s included? Gambling income includes winnings from lotteries, raffles, horse and dog races and casinos. What’s more, if you win in kind, you’ll have to pay tax on the fair market value of prizes such as cars, houses, trips or other noncash prizes.  You name it, it’s taxed.

Here are seven tax rules about gambling winnings:

1. Depending on the type and amount of your winnings, the payer mightprovide you with a Form W-2G, a special form for reporting Certain Gambling Winnings. They may even withhold federal income taxes from the payment. But even if they don’t, you still have to report and pay tax. For information on withholding on gambling winnings, refer to IRS Publication 505, Tax Withholding and Estimated Tax.

2. The full amount of your gambling winnings for the year must be reported on line 21 of IRS Form 1040. You like the simpler form? Too bad. You can’t use Form 1040A or 1040EZ. But don’t wait until tax return time. In some cases you may be required to pay an estimated tax on your gambling winnings.

3. If you itemize deductions, you can deduct your gambling losses for the year on line 28 of Schedule A, Form 1040. (OK, this is helpful, but see below for strict recordkeeping rules).

4. You can’t deduct gambling losses that are more than your winnings.

5. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

6. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses. Sadly, this is why most people are not able to claim their losses. See IRS Publication 529, Miscellaneous Deductions.

Bottom Line? Keep Good Records. Recreational gamblers need to keep a diary or other contemporaneous record of how much they bet and lose on each visit. That’s because your occasional big win will be reported to the IRS by the casino. You can use gambling losses to offset your winnings. But if you don’t keep good records you could end up a two-time loser–losing once at the tables and once to Uncle Sam.

For more, see:

IRS Publication 525, Taxable and Nontaxable Income (PDF 266K)

Robert W. Wood, Contributor

TAXES 4/27/2012 @ 5:53AM

No one likes organizing records. If you just finished your tax return filings the last thing you want to do is look at them again. But now is the perfect time and it pays dividends. Here’s why.

If you’ve ever tried to tell the IRS “I lost my receipt” you don’t want to do it a second time. The IRS has heard every excuse in the book. See IRS Publication 552. You’ll find it far easier if you don’t have to go to the additional effort of proving something by another means.

In cases of natural disasters traditional record-keeping can go haywire. The IRS suggests creating a backup set of records stored away from the originals. Another idea is to document valuables by photographs or videos. See IRS Publication 584. For employers using a payroll service, ask your payroll service if it has a fiduciary bond. See IRS Publication 583.

Here are some other IRS resources on this unpleasant but necessary topic: Tax Relief in Disaster Situations and Frequently Asked Questions for Disaster Victims.

If despite such safeguards, you still end up missing receipts, don’t give up. Other evidence is sometimes enough to convince the IRS or the courts. Receipts are best, but if you can’t find one, remember the Cohan Rule.

George M. Cohan was a Broadway pioneer whose hits included “Give My Regards to Broadway” and “Yankee Doodle Boy.”  His statue still commands Times Square. But the IRS disallowed Cohan’s travel and entertainment expenses for lack of receipts.

He took the IRS to the Board of Tax Appeals, predecessor to today’s U.S. Tax Court. When it upheld the IRS, Cohan appealed to the Second Circuit. It rocked the IRS back on its heels with the Cohan Rule. See Cohan v. Commissioner. To this day, it is an exception to stringent IRS recordkeeping requirements, allowing taxpayers to prove by “other credible evidence” they actually incurred deductible expenses.

The Cohan Rule is most classically applied to travel and entertainment, but can apply to virtually any item not specifically subject to heightened substantiation requirements (such as certain travel and meal expenses, passenger automobiles, computers and cell phones). If the IRS is convinced by oral or written statements or other supporting evidence and a reasonable approximation can be made, you may be entitled to the expense despite your lack of documentation.

Even charitable contributions have been allowed under the Cohan Rule, except where special substantiation requirements apply. Those rules require you to have a receipt even for small cash donations, including $20 put in the collection plate on Sunday and (for donations of more than $250) a contemporaneous written acknowledgement from the charity before filing your tax return. For more about the Cohan Rule, see What If A Taxpayer Doesn’t Have Receipts?

By JULIA WERDIGIER

Published: April 25, 2012

Francine McKenna, Contributor

4/23/2012 @ 8:33AM |5,626 views

This story appears in the May 7 edition of Forbes magazine on page 150.

Zynga, Facebook and Groupon all use an independent auditor that is simultaneously inventing the rules for social media accounting.

Somewhere, Arthur Andersen is shuddering.

For 26 million digital farmers working their fields and crops on Zynga’s popular game FarmVille, obtaining a virtual tractor, seeder or harvester can be transformative. A make-believe tractor, for example, allows you to plow four plots at a time. It’s the kind of productivity that laptop-bound farmers dream of.

The problem is that earning enough FarmVille currency to afford heavy farm equipment takes time. But like other social gaming companies, Zynga allows users to speed up the process by converting real dollars from their credit card and PayPal accounts into the FarmVille currency used to buy virtual goods. A hot rod tractor, for example, costs 55 in Farm Cash, which translates into $10 in real U.S. money.

For Zynga, which also owns CityVille, Zynga Poker, Mafia Wars and Words With Friends, virtual tractor sales are big business. The fledgling San Franciscocompany likely sells millions of tractors each year (that compares with 190,000 real tractors sold in 2011 in the U.S. and Canada). Sales of virtual goods, from FarmVille hay to Mafia Wars assault rifles, accounted for nearly all of Zynga’s $1.1 billion in 2011 revenues—and 12% of revenue for Zynga’s distributor, Facebook.

Which makes it very helpful that both have the same friend in the ­accounting business: Ernst & Young, the public auditor for Zynga and Facebook.

Ernst & Young wrote the book on accounting for virtual goods, literally. The third-largest accounting firm ­behind PricewaterhouseCoopers and Deloitte, it leads its rivals in the technology and burgeoning social media space. Neither the Financial Accounting Standards Board nor the Securities & Exchange Commission has issued rules for the likes of livestock love potions and virtual harvesters, so an E&Y document (updated this past March) lays out three revenue-recognition models it deems consistent with Generally Accepted Accounting Principles.

See the sidebar to this story, Groupon: Ernst & Young’s Accounting Challenged Client

Such publications are well worth E&Y’ s effort, since its “Strategic Growth Markets” consulting unit helps companies develop their financial systems, controls and accounting policies well before they are ready to come public. Which is potentially problematic. A firm that consults on byzantine accounting rules for unusual revenue streams and also offers “independent” auditing services for the same companies?

The ghosts of Arthur Andersen and Enron shudder.

Sarbanes-Oxley, of course, was supposed to fix such conflicts. But just as it handcuffed the IPO market, Sarbox blew it here, too. While it wisely bans an accounting firm from simultaneously auditing a public company and selling it most consulting services—the toxic combo that torpedoed Arthur Andersen and thousands of Enron’s innocent shareholders—it doesn’t prevent an accounting firm from first consulting on technical and internal ­accounting issues for a startup and later, when that emerging company is getting ready to go public, segueing into a role as independent auditor, potentially auditing its own work.

So did E&Y consult for Facebook and Zynga before becoming their ­independent auditor? It won’t say. Stephen Blowers, E&Y’s Americas  Vice Chair of Independence, does say that before an audit client goes ­public his team conducts an extensive review of all the work E&Y did for the company during the three years of audited statements in the IPO, as well as an extra year before that, to make sure it has complied with all the SEC’s auditor-independence rules. “We are confident of our independence,’’ he adds.

Facebook, Zynga and Groupon, another E&Y auditing client that was recently scrutinized for its aggressive accounting (see box, p. 154), also wouldn’t say what consulting E&Y did for them before becoming their auditor. And you won’t find it in SEC filings; it doesn’t ever have to be disclosed. “The situation does not instill confidence that a fresh set of eyes have looked at the numbers,” says former SEC chief accountant  Lynn Turner.

There are hints. In its 2011 annual report, Zynga quotes from E&Y’s guide liberally and verbatim in explaining why it recognizes revenue from the sale of virtual “durables” like FarmVille tractors at a slow pace, and dollars from the sale of “consumables” like energy immediately.

The common denominator in Ernst & Young’s new social gaming accounting rules appears to be that significant discretion is left up to management when it comes to the timing of revenue recognition. E&Y basically gets to make up the rules in this brand-new area as it goes along. And those rules drive the stock price.

Here’s how the virtual-goods accounting game is played. If you buy and hold Facebook credits (used to buy virtual goods in games on Facebook) Facebook treats the purchase as deferred revenue—the same way a retailer would book the sale of a gift card—until you spend your credits. When you buy FarmVille’s hot rod tractor, you use your Facebook credits or charge $10 (which, unseen to you, buys 100 Facebook credits that are converted to 55 in Farm Cash). Facebook sends $7 to Zynga and keeps 30%—$3—as a processing fee, moving that $3 from deferred revenue into current revenue.

When does Zynga get to recognize its $7 in revenues? FASB doesn’t have social media standards, but its broader guidelines hold that revenue should not be recognized until it is both realized (or realizable) and earned. In other words, even if a company has cash in hand, it can’t be counted as current revenue until the company has delivered the product or service it’s being paid for.

E&Y has stepped into the void, proposing three different models for social gaming companies to pick from: game-based, in which revenue is recognized very slowly, over the life of the game; user-based, a faster scheme that lasts over the time a typical user sticks with the game; and speedy item-based, rooted on the properties of specific virtual goods. Using the last method, Zynga recognizes revenues from “consumable” virtual items like energy immediately and revenues from “durable” ones like tractors over the time a player is projected to stick with a game­.

When you think about it, this makes sense. But selecting an accounting method is only part of the game here. All these revenue-recognition methods are dependent on management estimates of the life of a game, a customer or a virtual item—that’s wide latitude to interpret consumer behavior in a new and fast-changing business. Tweaking ­estimates can make a big difference to the bottom line.

For example, in its fourth amended registration statement, filed with the SEC in October of 2011, Zynga noted that during the first half of last year it estimated the blended average paying player life for a game as 15 months, down from 19 months a year earlier. The shorter player life increased GAAP revenue for the six months by $27.3 million, turning a loss for the six months ended June 30, 2011 into a net profit of $18.1 million. Well-timed: This change came just before Zynga went public in mid-December at $10 a share.

“From our perspective, the inconsistent application of useful lives and resulting depreciation does more to confuse the economics of the business,” says Rick Summer, senior equity analyst at Morningstar, “and it is also a poor proxy for cash flow.”

Summer prefers an entirely different, non-GAAP metric, “bookings,” which Zynga itself touts in its press releases. It counts all revenue from virtual goods sales at the time the player purchases them, providing investors a read on the pulse of business momentum regardless of the timing of revenue recognition. For 2011 Zynga’s bookings were a record $1.16 billion, up 38% year-over-year—producing a non-GAAP net income of $303 million. Pay no attention to Zynga’s official net loss of $404 million for 2011, as reported to the SEC under GAAP. (Note that Zynga’s non-GAAP-earnings number also excludes depreciation, amortization and Zynga’s considerable stock-based compensation expenses.)

Such flexibility underscores why an independent auditor is critical for shareholders. The Big Four public accounting firms all provide services to growth companies that might one day go public. Besides being profitable, it gives them an inside track to an auditing appointment, which can produce hundreds of millions in revenue over decades. (During the ­Sarbanes-Oxley debate the ac­coun­tants beat down attempts to force a company to switch its auditing firm every five years.)

But E&Y is the most brazen in how it communicates this relationship. PricewaterhouseCoopers’“Roadmap for an IPO” guide, for ­example, stresses the importance of auditor independence, mentioning it five times. By contrast, Ernst & Young’s latest“Guide to Going Public” emphasizes its role as a business advisor and client advocate, while never once mentioning auditor independence. The clear message: Advocate first, auditor second.

It doesn’t hurt that many of the people E&Y is pitching for business once sat on the E&Y side of the table. The firm’s CPAs are often lured by options-wielding clients to work in-house. The chief accounting officers at Facebook and Zynga are both E&Y alums. (Villanova University ­accounting professor Anthony H. Catanach cites such “incestuous” relationships as a key reason E&Y audit client Lehman Bros. saw its balance sheet collapse. The technique Lehman used to hide debt and a growing liquidity crisis was created by a Lehman CFO who was a former E&Y partner—leading E&Y partners to assume it was legit.) Sarbanes-Oxley now bars an auditor from moving to a company he’s directly auditing but not to other companies that are audited by his firm.

Confused yet? Zynga’s investors surely are. And as long as firms like E&Y have wide latitude to judge the accounting rules at companies where they legally may have created such creative structures, rest assured that such confusion will grow as rapidly as FarmVille’s virtual kudzu.

• TAX REPORT
• Updated April 13, 2012, 10:24 p.m. ET

Is a tax sin haunting you?

Maybe you paid a baby sitter under the table, or “forgot” to declare income, or deducted personal expenses as business costs. Perhaps you didn’t know a large tax or a form was due and found out only later. Maybe you never filed at all.

Whatever the misdeed, the approach of Tax Day is calling it to

mind, raising an urgent question: When can you breathe easy? When is your offense so old and cold that the Internal Revenue Service won’t care—or can’t?

As is often true with taxes, the answer is complex and full of traps. So we asked experts how tax statutes of limitations work, both in theory and practice. Here is what they had to say:

For garden-variety civil tax issues, such as overstating an entertainment-expense deduction, the statute of limitations is typically three years. It runs either from the April due date or the actual date the return is filed, whichever is later. So if you filed on Jan. 30, the three-year statute begins with the April due date; if you got a six-month extension and filed on July 20, the statute runs from then.

Many exceptions to this rule give Uncle Sam wide latitude, however. If the tax issue involved income greater than 25% of the gross income on the return, the statute of limitations rises to six years. This applies only to unreported income, says Mark Matthews, a former top IRS official now with Caplin & Drysdale in Washington.

A tax-shelter case involving this six-year limit is before the Supreme Court now. United States v. Home Concrete centers in part on “cost basis,” or the amount paid for an investment, which is the starting point for calculating the capital gain after selling the investment. The question is whether a large overstatement that then lowers taxes is grounds for extending the three-year limit to six years. The justices heard arguments in January; a decision is expected in June.

In cases of civil fraud, there is no statute of limitations at all. But proving fraud presents a high hurdle for the IRS, says tax attorney Bryan Skarlatos of Kostelanetz & Fink in New York: “With tax fraud, the government bears the burden of coming up with clear and convincing evidence the taxpayer had willful intent.”

Other crucial tweaks also favor Uncle Sam. The most important is that the statute of limitations doesn’t begin to run until a return is filed. So an unfiled return from, say, 1990 is still fair game.

That rule applies to certain forms as well, even if the rest of the return is filed. Typically the forms report activities on which Uncle Sam wants to keep close tabs. They include Form 5471 for Controlled Foreign Corporations; Form 3520 for Foreign Trusts and Gifts; Form 8621 for Passive Foreign Investment Companies; and Form 8886 for Reportable Transactions.

The statute of limitations also stops running if a taxpayer declares bankruptcy or leaves the country for more than six months. The latter poses a problem for millions of U.S. taxpayers living abroad who haven’t filed foreign financial-account reports, Caplin’s Mr. Matthews notes. He and others are urging the IRS to devise ways of easing this harsh regime while bringing these people into compliance.

Compared with civil tax disputes, there are relatively few criminal cases—but the statute of limitations is typically six years. A conspiracy charge can keep a case open for far longer.

In practice, says Tom Borders, an attorney with McDermott, Will & Emery in Chicago, the IRS rarely goes back more than six to eight years for civil or criminal tax cases: “Usually there aren’t enough records and it’s too hard to prove.”

When an audit is under way, IRS agents often ask taxpayers to sign a waiver extending the statute of limitations until the issues are resolved in full. Taxpayers usually have little choice but to do so, Mr. Matthews says. But if the IRS misses a deadline altogether, which happens, the taxpayer gets a bye.

There is a dual take-away here. “The common advice is that if your return isn’t picked within two years of filing, it won’t be,” says longtime tax preparer Jay Starkman, a certified public accountant in Atlanta.

On the other hand, big tax sins have long lives. “If you really want to sleep at night, don’t pull an ostrich,” Mr. Matthews says. “The longer people delay, the worse the outcome often is.”

By James O’Toole @CNNMoney April 17, 2012: 11:27 AM ET

NEW YORK (CNNMoney) — American Jim Yong Kim was tapped Monday to be the next president of the World Bank, besting Nigerian finance minister Ngozi Okonjo-Iweala following the first-ever challenge to the U.S. nominee in the institution’s history.

The bank’s board of directors said the multiple candidacies ”enriched the discussion of the role of the President and of the World Bank Group’s future direction.”

Kim’s victory was widely expected, given the voting structure of the bank.

Throughout its more-than-60-year history, the bank has been led by an American, part of a tacit agreement between the United States and its Western European allies. Europe, in turn, has maintained control of the International Monetary Fund.

The United States and Europe together have roughly 50% of voting shares, which are based on money paid into the bank.

But the challenges from Okonjo-Iweala and former Colombian finance head Jose Antonio Ocampo — who withdrew from the race last week and endorsed the Nigerian – raised questions about how much longer the current leadership arrangement will remain tenable.

In 2010, the United States and other World Bank shareholder-countries pledged support for an “open, merit-based and transparent” selection process. Such declarations have been met with cynicism by emerging market nations, however.

In a statement last week withdrawing his candidacy, Ocampo said the selection process was “shifting from a strict merit-based competition … into a more political-oriented exercise.”

Kim drew criticism following his nomination from some observers who said his lack of financial background made him ill-suited to run the bank. The institution, created in 1944, provides billions of dollars worth of financial assistance for projects worldwide ranging from health to education to private-sector development.

In contrast to previous heads of the institution, who have typically come from the economics or business worlds, Kim is a doctor who built his reputation developing public health programs for poor countries.

He’s currently the president of Dartmouth College, having previously worked at the World Health Organization and co-founded the non-profit organization Partners In Health.

Okonjo-Iweala, by contrast, is an economist with degrees from Harvard and MIT who logged more than two decades at the World Bank, eventually rising to the No. 2 position.

Earlier this month, a group of 39 former senior officials at the World Bank endorsed her in an open letter to the bank’s board, saying the American monopoly on the presidency “no longer reflect[s] the world as it is today.”

In an interview with CNN’s Christiane Amanpour that will be broadcast at 5PM EDT, Okonjo-Iweala congratulated Kim and said she was pleased with what she had accomplished in her campaign.

“We’ve been able to push this process along, and we hope that going forward, we’ll get an even more open, transparent and merit-based process,” she said.

“It should not be about the nationality of individuals, but about merit.”

Kim, who was born in South Korea before emigrating to the U.S. at age five, has won support from those who believe the bank should focus its energy on poverty reduction in the world’s poorest countries.

“As President, I will seek a new alignment of the World Bank Group with a rapidly changing world,” Kim said in a statement Monday, pledging to amplify “the voices of developing countries.”

In announcing Kim’s nomination last month, President Obama called the bank “one of the most powerful tools we have to reduce poverty and raise standards of living.”

“It’s time for a development professional to lead the world’s largest development agency,” Obama said.

The presidency became available when Robert Zoellick, a former deputy secretary of state who also served as international vice chairman at Goldman Sachs (GS, Fortune 500), announced that he would depart when his term concludes in June.

Going forward, it appears the world’s emerging economies intend to make competition for the top jobs at the bank and the IMF a regular occurrence.

Following the resignation of IMF managing director Dominique Strauss-Kahn last year, the so-called BRICS countries — Brazil, Russia, India, China and South Africa — issued a joint statement calling Europe’s leadership of the institution an “obsolete, unwritten convention.” Mexican central bank chief Agustin Carstens challenged for the job, but another French leader, Christine Lagarde, ultimately succeeded Strauss-Kahn.  

IR-2012-48, April 16, 2012

WASHINGTON — The Internal Revenue Service today reminded taxpayers to review their tax returns for common errors that could delay the processing of their returns. Here are some ways to avoid common mistakes.

File electronically. Filing electronically, whether through e-file or IRS Free File, vastly reduces tax return errors, as the tax software does the calculations, flags common errors and prompts taxpayers for missing information. And best of all, there is a free option for everyone.

Mail a paper return to the right address. Paper filers should check the appropriate address where to file in IRS.gov or their form instructions to avoid processing delays.

Take a close look at the tax tables. When figuring tax using the tax tables, taxpayers should be sure to use the correct column for the filing status claimed.

Fill in all requested information clearly. When entering information on the tax return, including Social Security numbers, take the time to be sure it is correct and easy to read. Also, check only one filing status and the appropriate exemption boxes.

Review all figures. While software catches and prevents many errors on e-file returns, math errors remain common on paper returns.

Get the right routing and account numbers. Requesting direct deposit of a federal refund into one, two or even three accounts is convenient and allows the taxpayer access to his or her money faster. Make sure the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account.

Sign and date the return. If filing a joint return, both spouses must sign and date the return. E-filers can sign using a self-selected personal identification number (PIN).

Attach all required forms. Paper filers need to attach W-2s and other forms that reflect tax withholding, to the front of their returns. If requesting a payment agreement with the IRS, also attach Form 9465 or Form 9465-FS to the front of the return. Attach all other necessary schedules and forms in sequence number order shown in the upper right-hand corner.

Keep a copy of the return. Once ready to be filed, taxpayers should make a copy of their signed return and all schedules for their records.

Request a Filing Extension. For taxpayers who cannot meet the April 17 deadline, requesting a filing extension is easy and will prevent late filing penalties. Either use Free File or Form 4868. But keep in mind that while an extension grants additional time to file, tax payments are still due April 17.

Owe tax? If so, a number of e-payment options are available. Or send a check or money order payable to the “United States Treasury.”

R-2012-47, April 13, 2012

WASHINGTON — The Internal Revenue Service today reminded taxpayers that 2011 federal income tax returns, extension requests and tax payments are due by April 17, 2012. For people unable to pay their taxes in full by that date, payment agreements and other relief are usually available and can even be requested online.

Taxpayers will avoid late filing penalties if they file either their income tax return or a request for a tax-filing extension by midnight on Tuesday. The late-filing penalty, normally five percent per month based on the unpaid balance, applies to returns filed after the deadline. Taxpayers should file, even if they can’t pay the full amount due.

Any payment made by April 17 will reduce or eliminate interest and late-payment penalties that apply to payments made after that date. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Whether paying tax in full or in part, the fastest and easiest way to do so is by using one of the electronic payment options. E-pay options include:

• Electronic Federal Tax Payment System (EFTPS). This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
• Electronic funds withdrawal. E-file and e-pay in a single step.
• Credit or debit card. Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A Line 23.

Taxpayers who choose to pay by check or money order should make the payment out to the “United States Treasury.” Write “2011 Form 1040,” name, address, daytime phone number and Social Security number on the front of the check or money order. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.

In many cases, those struggling with unpaid taxes qualify for one of several relief programs, including those recently expanded under the IRS “Fresh Start” initiative. These include the following:

• Most people can set up a payment agreement with the IRS on line in a matter of minutes. Those who owe $50,000 or less in combined tax, penalties and interest can use the Online Payment Agreement to set up a monthly payment agreement for up to six years. Taxpayers can choose this option even if they have not yet received a bill or notice from the IRS. Alternatively, taxpayers can request a payment agreement by filing Form 9465-FS. This form can be downloaded from IRS.gov and mailed along with a tax return, bill or notice.
• Most unemployed filers and self-employed individuals whose business income dropped substantially can apply for a six-month extension of time to pay. Eligible taxpayers will not be charged a late-payment penalty if they pay any tax, penalty and interest due by Oct. 15, 2012. Taxpayers qualify if they were unemployed for any 30-day period between Jan. 1, 2011 and April 17, 2012. Self-employed people qualify if their business income declined 25 percent or more in 2011, due to the economy. Income limits and other special rules apply. Apply using Form 1127-A.
• Some struggling taxpayers may qualify for an offer-in-compromise. This is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

Details on all filing and payment options are on IRS.gov.

IR-2012-46, April 11, 2012

WASHINGTON — The Internal Revenue Service today reminded parents and students rushing to meet this year’s April 17 deadline to be sure and check out several college-related tax benefits before filing their 2011 returns.

Two tax credits and a tax deduction are available to taxpayers who paid tuition and other expenses for an eligible student during 2011. Because an eligible student can be the taxpayer, spouse or dependent, these benefits can, for example, help workers taking continuing education courses and people returning to school, as well as parents paying for their children’s college education.

Given the number of different higher education credits and deductions, the IRS reminds taxpayers to carefully review eligibility requirements so they don’t overlook these important college benefits. Tax benefits include the following:

• The American Opportunity Tax Credit helps pay for the first four years of post-secondary education. Tuition, required enrollment fees, books and other required course materials generally qualify, and eligible students must be enrolled at least half time. Qualifying expenses of $4,000 or more in 2011 can earn a taxpayer the maximum credit of $2,500 per student per year. Even taxpayers who owe no tax can get a payment of the credit of up to $1,000 for each eligible student. The credit is claimed on Form 8863. But the IRS warns taxpayers to avoid an often-costly tax scam, currently being promoted widely to senior citizens, low-income families and church members falsely claiming that refunds based on the credit are available, even if they’re not currently enrolled in college and even if they went to school decades ago. In addition, some international students, normally considered nonresident aliens for tax purposes, have been improperly advised that they qualify for the credit.
• The Lifetime Learning Credit, limited to $2,000 per taxpayer per year, can be claimed based on tuition and required enrollment fees paid for any level of post-secondary education. Because of differences between the two credits and the fact that the American Opportunity Tax Credit usually yields greater tax savings at the undergraduate level, the Lifetime Learning Credit may be particularly helpful to graduate students, students taking only one course and those who are not pursuing a degree. The Lifetime Learning Credit is also claimed on Form 8863.
• The tuition and fees deduction is available for both full-time and part-time students at all levels of post-secondary education. The deduction of up to $4,000 is claimed on Form 8917.

Each year, a student normally receives a Form 1098-T from their college showing tuition payments and other information.

Though a taxpayer often qualifies for more than one of these benefits, he or she can only claim one of them for a particular student in 2011. Income limits and other special rules apply to each of these benefits. The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for each of these benefits.

Often, tax credits are more valuable, because they reduce the amount of tax owed, whereas deductions reduce the income on which tax is figured. Tax software can often help parents and students determine which benefit yields the greatest tax savings.

Besides these tax benefits, parents, students and former students who made student loan payments during 2011 can deduct up to $2,500 of student loan interest. Normally, borrowers receive from their financial institution Form 1098-E showing student loan interest paid for the year. This deduction is claimed on Form 1040 Line 33 or Form 1040A Line 18. Income limits and other special rules apply. For example, the student must have been enrolled at least half time in a degree or certificate program. A worksheet in the tax form instructions can help taxpayers figure the deduction correctly.

The student loan interest deduction, the tuition and fees deduction and both tax credits can be claimed by eligible taxpayers, regardless of whether they itemize deductions on Schedule A. These benefits are available to both Form 1040 and 1040A filers. Details on these and other education-related deductions and credits can be found in the Tax Benefits for Education Information Center on IRS.gov.

IR-2012-45, April 10, 2012

WASHINGTON —The Internal Revenue Service today reminded anyone unable to meet next week’s tax deadline that they can easily get an automatic six-month tax-filing extension. And, the easiest and quickest way to get an extension is online through the Free File link on IRS.gov.

In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an automatic extension on Form 4868. Filing this form gives taxpayers until Oct. 15 to file a return. This is an extension of time to file; not an extension of time to pay.

To get the extra time, taxpayers must estimate their tax liability on this form and should also pay any amount due. Taxpayers can e-pay what they owe using the Electronic Federal Tax Payment System (EFTPS), by electronic funds withdrawal or with a credit or debit card. Those who choose to pay by check or money order should make the payment out to the “United States Treasury.”

By properly filing Form 4868, a taxpayer will avoid the late-filing penalty, normally five percent per month based on the unpaid balance, that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Besides Free File, taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. Of the 10.5 million extension forms received by the IRS last year, about 4 million were filed electronically.

Some taxpayers get more time to file without having to ask for it:

• Members of the military on duty outside the U.S., as well as U.S. citizens and resident aliens living and working abroad have untilJune 15 to file and pay, though interest still applies to payments made after April 17.
• Members of the military and others serving in Iraq, Afghanistan or other combat zone localities can typically wait until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.
• People in parts of Indiana, Kentucky, Tennessee and West Virginia, affected by tornadoes, severe storms, floods and other recent natural disasters, have until May 31 to file and pay.

Details on all filing and payment options are on IRS.gov.