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Archive-name: taxes-faq/part1 Posting-Frequency: monthly Last-modified: 1995/04/29 Misc.taxes Frequently Asked Questions (FAQ) General (part 1 of 1) Maintainer: wayner@metronet.net (Wayne Ross) Contents: *Recent changes *1.0 Misc.taxes charter, mailing list and archive sites 1.9 Annoying postings (posters) 2.0 Professional designations of posters 3.0 Framing questions/replies for posting 4.0 US Internal Revenue Service (Sources of Information) 4.1 IRS TeleTax voice recordings service 4.2 IRS Internet information 4.3 IRS publications 5.0 Sources of tax information (other than above) 5.1 Internet sources 6.0 Some basic federal tax notations and concepts 6.1 Notations 6.4 About basis 6.5 Taxable items for individuals 6.6 About inheritances 6.7 About gifts 7.1 Forms 1099 7.3 Forms K-1 8.1 Responding to service center notices *9.0 IRS penalties *9.1 IRS interest on underpayments *9.2 IRS interest on overpayments ----------------------------------------------------------------- Copies of this FAQ as well as those for other newsgroups may be obtained by anonymous ftp from rtfm.mit.edu. For the misc.taxes faq look under /pub/usenet/news.answers/taxes-faq (this is part1). Or, send email to mail-server@rtfm.mit.edu with send usenet/news.answers/taxes-faq/part1 in the body of the message, leaving the subject line empty. ----------------------------------------------------------------- 1.1 Q) What topics are discussed? The news group's broad charter is: Tax laws and advice 1.2 Q) Are digest(s) available? Articles are in digest form on shsu.edu (see below). 1.3 Q) Is the news group available via a mailing list? Yes, see below from shsu.edu. "FedTax-L is a mail-oriented discussion list supported by Sam Houston State University of Huntsville, Texas, to provide a generally unmoderated environment for the discussion of federal taxation issues from both a practical and academic viewpoint. The discussions are intended to include latest trends, regulatory actions, and, of course, a lively exchange of ideas and concerns." "The list is mirrored to and from the USENET newsgroup misc.taxes so that any discussion appearing on that media is forwarded to subscribers of FedTax-L and all posts appearing on FedTax-L are forwarded to all network news sites carrying misc.taxes." "To subscribe to FedTax-L, include the text: SUBSCRIBE FedTax-L "Your Real Name in Quotes" in the body of a mail message to LISTSERV@SHSU.BITNET (LISTSERV@SHSU.edu)." *1.4 Q) Is the news group archived? Yes, indirectly. Sam Houston State archives it's FedTax-L mailing list which contains most postings to the newsgroup. gopher://niord.shsu.edu:70/1 (try the 4th item on main menu, then the 8th) An archive of the last month's postings is also maintained by kentlaw.edu: http://www.kentlaw.edu/lawnet/lawlinks.html, select tax matters on the forms menu. 1.9 Q) What can be done about annoying articles? Ignore them! The misc.taxes news group is unmoderated, which means anyone with access to Usenet may post whatever they wish to this news group, and any other unmoderated news group. If your news reader supports "kill files", type K or k, and the article and all others with the same subject will be skipped in your current and subsequent news reading sessions. Be part of the solution, NOT part of the problem. If you feel you must respond to the poster, please do so using email. Don't add to the noise by castigating or attempting to refute the individual with a posted article. Your colleagues will appreciate your consideration, and the archive sites grateful. 2.1 Q) I see some people sign their articles with titles, e.g. CA, CFP, CPA, EA what do these mean? 2.1.1 CA Chartered Accountants, used principally in the UK and present/former Commonwealth countries to indicate accountants licensed and regulated by the country or province to provide advice on accounting and tax matters to the public. 2.1.2 CFP Chartered Financial Planners, a US designation for those who have been licensed by their state to provide financial advice to the public. Areas of advice include investments, insurance, taxation, etc. 2.1.3 CPA Certified Public Accountant, US equivalent of CA. These individuals like those preceding are licensed and regulated by the states, are required to pass a written proficiency examination, satisfy a one or two year experience requirement and hold a college level degree. 2.1.4 EA Enrolled Agent, a US designation for persons enrolled by the Internal Revenue Service (a US Federal government agency) to provide federal tax advice and services to the public. These individuals are required to pass a written proficiency examination and conform to the IRS rules of practice. -o- DISCLAIMER: The following is for general information only. It is not intended to be tax advice and should not be relied upon. Please contact your tax advisor for specific questions. -o- 3.1 Q) I have a question about (some tax topic) what should I do? You may wish to research the question yourself before posting a question to the net at large. A good place to start your off line research is your public library, the IRS (see TeleTax and IRS Publications below) or your state tax department. You can start your online research by going to the shsu.edu server (see above) and doing a boolean word search of the misc.taxes archives. The server will display a list of all articles in the archive which contain your search word(s). By reading some of these, particularly those with RE: your search word(s) in the header you may find that your question has been answered previously. Even if your exact question is not answered by searching the archive first, you can better frame your question to provide the type of specific information needed for a proper reply. 3.1.1 Q) I prefer to ask my question in the news group, so how do I proceed? Give some thought to your question and be as specific as possible without violating your need for privacy. Often, the question can only be answered, if those replying have some necessary background information for example: 'We sold our house, what taxes will we have to pay?' This is too broad. Instead try: 'My spouse and I sold our former residence for $100,000, and bought a new one for $120,000 two months later. We lived in our old house for five years, and bought it for about $85,000. We are both in our 40's.' 3.1.2 Q) Everyone says you are supposed to brief on Usenet to conserve band width, why do I need four lines instead of one? The tax effect often depends on WHO (you and your spouse are different from you and your father); WHEN (the answer is different if you lived in your house for only 5 months); HOW MUCH (did you make a profit on the sale and was the profit re-invested). In residential sales, the answer may also vary by age of the taxpayer. 3.2 Q) Do you have any suggestions about how to reply to a questions posted to misc.taxes? Whenever possible answer the question by email rather than posting the reply to the news group. Keep in mind many questioners are drop-ins, not regular readers of the group. Once they get an answer they are gone. Why punish regular readers with the 100th answer to 'is whatever deductible'! If you absolutely must post an answer to the news group because you feel it needs input from others to answer properly, then resist the temptation to include in your reply the entire original question. Instead edit out the extraneous information, preserving only the key points of the question. If more than half of the total number of lines in your answer are quoted from the original question, you probably need to do more editing. Please avoid including lengthy article headers and signature lines from the original article. 4.1 Q) How can I get information about a tax topic from the IRS? The IRS Tele-Tax service provides recorded messages for about 140 common tax topics. You can call a local or 800 number and listen to these recorded messages. The numbers and topics are too lengthy to list here. Instead go to the IRS homepage http://www.ustreas.gov/treasury/bureaus/irs/irs.html. Or refer to your current year tax return instructions. 4.2 The IRS home page above also includes a FAQ, toll free and local numbers to contact the IRS for information and downloadable tax forms in Adobe Acrobat format. These form files are large and may require lengthy connect time. The Adobe Acrobat executables (very large) is also available for download. Last year Compuserve also made available the forms and Acrobat reader for download. Other online services may also provide this material. Copies of most tax forms and instructions, in pdf (Adobe Acrobat) format, may be obtained by anonymous ftp from ftp.fedworld.gov. They are in the irs sub directory. 4.3 Q) People often refer to IRS publications about a subject, what are these and how do I get them? You may be able to find some or all of these publications in your public library, post office, or your workplace human resource office. If not you can write to one of the IRS central forms distribution locations listed below. Here is a listing of some of the more common publications. 17 Your Federal Income Tax 334 Tax Guide for Small Business 463 Travel, Entertainment, and Gift Expenses 501 Exemptions, Standard Deduction, and Filing Information 504 Divorced or Separated individuals 505 Tax Withholding and Estimated Tax 521 Moving Expenses 524 Credit for the Elderly or the Disabled 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 530 Tax Information for First-Time Homeowners 533 Self-Employment Tax 534 Depreciation 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 553 Highlights of 1994 Tax Changes 554 Tax Information for Older Americans 559 Survivors, Executors, and Administrators 561 Determining the Value of Donated Property 564 Mutual Fund Distributions 575 Pension and Annuity Income 584 Nonbusiness Disaster, Casualty, and Theft Loss Workbook 587 Business Use of Your Home 590 Individual Retirement Arrangements (IRAs) 596 Earned Income Credit 907 Information for Persons with Disabilities 908 Bankruptcy and Other Debt Collection 909 Alternative Minimum Tax for Individuals 915 Social Security Benefits... 917 Business Use of a Car 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deductions 947 Practice Before the IRS and Power of Attorney -------- To order send to "Forms Distribution Center" for your state: WADC AK, AZ, CA, CO, HI, ID, KS, MT, Rancho Cordova, CA NV, NM, OK, OR, UT, WA, WY 95743-0001 Guam, Marianas, American Samoa CADC AL, AR, IL, IN, IA, KY, LA, MI, PO Box 8903 MN, MS, MO, NE, ND, OH, SD, TN, Bloomington, IL TX, WI 61702-8903 EADC CT, DE, DC, FL, GA, ME, MD, MA, PO Box 85074 NH, NJ, NY, NC, PA, RI, SC, VT, Richmond, VA VA, WV 23261-5074 ------- Many of the publications may also be obtained by anonymous ftp from ftp.fedworld.gov. These are available in ps (postscript), pcl (HP Laser) and sgml formats in the irs sub directory. 4.3.1 Q) What is the best do-it-your self book about US Federal Income Taxes? At tax time the bookshelves in your local stores are filled with them. While not necessarily the best, the cheapest (it's free) is 'Your Federal Income Tax' (IRS Publication 17). This 300+ page book has the bias of its publisher, and there are other points of view. However, its a good place to start (see above). 5.1 Q) What other information about taxes is available on the Internet? 5.1.1 No one knows, the net changes daily. One of the most comprehensive listings of tax information (mostly US) is maintained by Frank McNeil. Frank's listings are available using one of the following methods. World Wide Web hypertext version. The main site is http://www.best.com/~ftmexpat/html/taxsites.html. Note: The tilde ~ is required. Many http servers use the tilde to specify certain site specific file paths. It is mirrored at http://io.com/user/ftmexpat/html/taxsites.html 5.1.2 ANet maintained at Southern Cross University in New South Wales, Australia also has a tax mailing list ATax-L. Their URL is: http://Anet.scu.edu.au/ANetHomePage.html 5.1.3 The can.taxes news group within the Canadian hierarchy discusses Canadian tax issues. If it is not available on your site, you may be able to read the group by telneting to one of the Canadian freenet sites which offer guest privileges. 6.1 Q) I see people refer to section 61 or 1.61-1(a) what does that mean? The tax laws (statutes) the US Congress passes usually become part of the Internal Revenue Code (the code or IRC). The code has sections dealing with certain topics. IRC 61, for example defines gross income. To administer the code, the US Treasury department publishes regulations (regs) which are the Treasury Department's (IRS's) interpretation of how the code should be applied. Regulation section 1.61 is the regulation for gross income. Typically, but not always, the regulations for a given code section are the code section proceeded by a number and a dot. 6.2 Q) What are some other notations? From time to time you may see someone refer to Rev Proc, this is shorthand for Revenue Procedure. Rev Procs are usually numbered with the year of issue and a sequential number and may address specific administrative decisions of the IRS. 6.4 Q) I see people refer to 'basis'. What is basis? Basis is the dollar amount attributed by the tax rules to some item of property. Although similar to cost or carrying value in its usage, it is mainly a tax creation. Most often one sees basis used in connection with some other words, i.e. adjusted basis, depreciable basis, gain or loss basis, substituted basis, etc. Usually a gain on the sale of property is the difference between the proceeds of the sale, and the seller's basis in the property sold. The determination of basis can vary depending upon the character of the property, from whom and under what circumstances it was obtained, etc. You should refer to the tax publications above or consult your tax advisor for specific questions. 6.5 Q) Is what I receive for (pick a topic) taxable? Generally everything you receive is income, except those things which are specifically excluded. The determination then of taxability depends upon finding a specific exclusion or inclusion. Absent a specific exclusion (pick a topic) is gross income and may then become taxable. In arriving at taxable income for individuals one starts with gross income, moves to adjusted gross, deducts personal exemptions and deductions (they are different) and arrives at taxable income. 6.6 Q) I've received (pick an item) as an inheritance. Is it taxable? Property in an estate may be taxable, if the estate is large enough to be subject to estate taxes. Estate taxes, however, are levied against the estate not the beneficiaries of the estate. Of course, if you are the only beneficiary then you will in effect pay the estate tax. Remember an estate tax is based upon the value of estate assets, not the income which may later flow from the assets. Income from an estate asset which was distributed to you will or will not be taxed, based upon the character of that income. For example, if an estate included municipal bonds (exempt as to income), the estate would pay an estate tax on the value of the bonds, but the interest you receive after the bonds are distributed to you will not be taxable. In the above example, since the value of the interest accrued, and not yet paid on the bonds is an estate asset, that accrued interest is part of the value of the bond and is taxed to the estate. 6.7 Q) I received a gift of 'some item' from 'some person' how much gift tax will I have to pay, and when must I pay it? A gift for tax purposes means the transfer of property without adequate and full consideration. If you received 'some item' in exchange for your car or your services to 'some person', it wasn't a gift. For simplicity let's assume you received shares of stock from your mother on your birthday. First, your mother must determine the value of the stock on the date of gift. If the value is $10,000 or less there is no gift tax, because there is an annual exclusion of $10,000 per donee (recipient). Keep in mind, that if your mother also gave you $5,000 in cash then the total gifts within the year exceeds the $10,000 exclusion. If the value of the gift(s) exceed $10,000 there still may be no gift tax, if your father and mother elect so-called "gift-splitting". In gift-splitting one-half of the gift(s) is deemed to be given by each spouse. If the value of the gift(s) is more than $10,000 a gift tax return must be filed by the donor (giver) by April 15th of the year following the year of the gift, and a gift tax may be payable by the donor, NOT the donee. Note: A short Form 709 is required for split gifts over $10,000 even if no tax is due. Estate and gift taxes are unified excise taxes on the transfer of property, and there is a $600,000 lifetime credit per transferor for the total of both, which could reduce any gift tax due. We are getting into deeper water now, and you should consult a professional for further information. 7.1 Q) I received $100 of income in 1994, but the payor did not send me a 1099. Do I need to report the $100 as income? A) Yes. You are required to report income whether or not you receive a 1099. Although information returns may make preparing your return easier that is NOT their primary purpose. The purpose of information returns (Forms 1099, etc.) is to help the IRS collect taxes due. 7.2 Q) The 1099 I received showed a incorrect amount. What should I do? A) You are responsible for reporting the correct income amount on your return. Because the IRS matches the income you report with that shown on the 1099's it receives, you should first contact the payor and request them to send you, and the IRS a corrected information return. If the payor does not comply with your request and the amount is significant, you might send the payor a certified letter setting out the error and attaching copies of any supporting information. The purpose of the letter is to get the payor to issue a corrected information return, and to have written proof for the IRS that you tried to set the matter right. Retain a copy of your letter, so that if, and when challenged by the IRS, you can demonstrate your good faith attempt to correct the situation. You may wish to file a copy of the letter with your return as well, although the computer matching system seems to ignore some return attachments. 7.3 Q) I received a Form K-1 from my aunt's estate. What do I do with it? A) Forms K-1 are specialized information type returns filed by so-called pass through tax entities, i.e. (partnerships, trusts, some estates, and small business corporations). Like a 1099 their purpose is to show the amount of income, deductions, etc. attributable to, and reportable by individuals with an interest in the issuing entity. K-1's are lengthy forms which show information by type, and indicate where on your 1040 each item is to be reported. Some K-1 deductions and credits may not apply to you, if for example you do not itemize your deductions. You should read the applicable instructions, contact the issuer or your tax advisor for specific questions. 8.1 Q) I received what looks to be a computer generated form or letter from the IRS together with some other forms. How should I respond? A) The IRS service centers issue a multitude of these each year some are informational, but most require some action on your part. There are only a few general guidelines since your response must vary depending upon what you receive. 1) Don't panic or procrastinate. Sit down and read the material carefully several times. Usually the top right corner of the form will indicate the tax year involved and a local number to call if you have questions. 2) Typically, the form will be dated and indicate the time period you have to reply and to whom you should address your reply. 3) If large dollar amounts or complex issues are involved seek professional advice. 4) If you choose to reply in writing to the IRS, which is usually best. Do these things: Send a timely response by certified mail Attach to your letter a copy of the IRS query, so the person receiving your response will know how to look up your record, and understand what your letter is about Be courteous, clear and concise Keep in mind that your objective is to provide the person handling your reply with enough information to act easily, quickly and favorably ~~~~~~~~~ Attach copies of information upon which you relied including copies or excerpts from IRS Publications, letters from payors, copies of canceled checks, etc. DO NOT over do this or send unnecessary data If you believe the IRS erred explain why and how, in a factual, reasoned and non-abusive way Keep copies of the original IRS material and your response *9.0 Q) What are some of the penalties for income tax related matters? A) There are several types of penalties which may be imposed on either or both the taxpayer(s) and tax return preparer. Let's look at a few of the civil penalties or fines. We'll leave the criminal penalties to the lawyers. Keep in mind that the IRS may also assess interest on amounts due including penalties assessed. Taxpayer's failure to pay tax when due ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ One-half of 1% per month for each month or part of the month, up to a maximum of 25% This CAN be in addition to the failure to file penalty below. Taxpayer's failure to file a return ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 5% per month or part of the month, up to a maximum of 25% In the case of a fraudulent failure to file the penalty is 15% per month, up to 75%. Taxpayer's frivolous return penalty ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ In addition to any other penalties there is a $500 penalty for filing a frivolous return. Frivolity is defined in IRC 6702. *9.1 Q)What is the interest rate charged for underpayment of tax? A)The rate varies since it depends on the federal short- term rate. For individuals the rate is the federal rate plus three percentage points. For corporations with underpayments in excess of $100,000, five percentage points are added to the federal short- term rate. *9.2 Q)What rate of interest is paid on overpayments? A)The federal short term rate plus two percentage points.