By James Rahmlow
In the Internal Revenue Service Reports of Compliance for fiscal year 2007, it was noted that there was a significant increase in the number of audits from 2006. A high-income individual to the IRS is one who files an individual tax return with greater than $100,000 of Total Positive Income (TPI). TPI is determined by adding up only the positive items of income from specific fields on a tax return. No credit is given for losses. Thus, if a taxpayer's total positive fields were $125,000 and the taxpayer had a $50,000 loss from an S corporation deducted on his/her Form 1040, the IRS would ignore the $50,000 loss and treat the taxpayer as a high-income individual.
For taxpayers who had income in excess of $100,000, there was an increase of 14% in the audits of these returns in 2007 over 2006.
For taxpayers whose income exceeded $200,000, there was a year over year increase of approximately 30%.
For the very wealthiest of taxpayers, those who had income in excess of $1 million, the audit rate increased by over 84% in 2007 from 2006. That translates into approximately 30,000 of these returns being audited in 2007.
February Interest Rates Issued
The IRS has issued the Applicable Federal Rates (AFR) and Adjusted AFRs for February 2008. Below is a summary of those rates.
Short Mid Long
Term Term Term
Applicable Federal Rates 3.11% 3.51% 4.46%
Adjusted AFRs 2.84% 3.36% 4.23%
Postcard Reporting for Small Tax-Exempt Organizations
A new IRS requirement that tax-exempt organizations with annual gross receipts normally $25,000 or less must file a Form 990-N on an annual basis has been made easier by the IRS. Organizations that go to
http://epostcard.form990.org will automatically be taken to the IRS website where the Form may be completed. It is due on the 15th day of the fifth month following the organization’s completion of its year end.
The following information is required on the Form 990-N: federal employer identification number, tax year, mailing address, any other name used by the organization, name and address of a principal officer, the organization's website if it exists, and a statement confirming that the organization has annual gross receipts that are normally $25,000 or less.
Note that an organization that fails to file Form 990-N for three consecutive years will automatically lose its tax exemption.
Revised Form to Report 2007 Mortgage Debt Forgiveness – (IR-2008-17 FED)
In a recent information ruling, the IRS provided a revised version of Form 982, Reduction of Tax Attributes due to Discharge of Indebtedness. The form is to be used by taxpayers who are homeowners and are claiming non taxability for mortgage debt forgiven in 2007. Under legislation enacted in December, 2007, taxpayers are allowed to exclude from income any debt forgiven on their principal residence if the loan balance was less than two million dollars. This form is to be used in connection with the Form 1099-C Cancellation of Debt form that taxpayers receive from the lenders forgiving their debt.
50% Bonus Depreciation on Leasehold Improvements
In connection with the Economic Stimulus Act of 2008 which was signed into law by President Bush n February 13, there exists a provision to take an additional 50% bonus depreciation in 2008 on assets are purchased new and placed in service in 2008. The following types of assets qualify for the bonus depreciation:
Property with a depreciable recovery period of 20 years or less. This category includes most types of tangible personal property used in a business.
Depreciable computer software that is not amortizable over 15 years. Most purchased software qualifies for this 50% first year bonus depreciation.
Qualified leasehold improvement property
Water utility property
For the leasehold improvements (which by itself is a large category for both landlords and tenants), there are additional requirements:
The improvement must be made to the interior portion of the building
The building must be nonresidential real property
The improvement must be made pursuant to a lease by either the landlord or tenant
The improvement must be made more than three years after the date the building was first put in service. Thus, completely brand new construction does not qualify.
2007 Tax Return Required to Receive Refund Check
In accordance with the Economic Stimulus Act of 2008, most taxpayers will be eligible to receive tax refunds of $300 or $600. While there are income limits that preclude certain taxpayers from receiving the refund checks, single taxpayers begin to see their benefits phase out at $75,000 and married taxpayers see their benefits begin to phase out at $150,000. The taxpayers who do qualify are eligible provided that they file a 2007 tax return. Until individuals have filed their 2007 tax returns, they will not be sent rebate checks. For taxpayers not required to file a 2007 tax return for federal income tax purposes, they will nevertheless be eligible for the refund if they file a tax return even if they are not subject to federal income tax. The only requirement is that they have $3,000 of qualifying earned income, social security benefits or veteran’s disability payments. This will affect a lot of older individuals not otherwise required to file a federal income tax return.
James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at jrahmlow@mmb-co.com.
