January 2001

 

It's Tax Time Again!
Jamie H. Thompson, thompsonja@missouri.edu

For the past three years, I have started the New Year with articles about taxes – the Tax Reform Act of 1997 and its impact on 1998 taxes, understanding the four very different IRAs now available to us, and finally, important tax facts for 2000. This year seems to be relatively quiet; no dramatic changes in the tax law. In a way it is almost a relief! So, this might be a good time to discuss two really important issues flagged by the IRS.

Twenty some years ago, my husband and I sat down and completed our first joint tax return. Within a month of mailing the return, I received a letter from the IRS. It was a nice letter telling me that my name did not match my Social Security number which they assumed was because I had just married. The letter explained to me that I needed to inform the Social Security Administration of my marriage. It just never occurred to me!

IRS Advises Spouses to Check Name and
Tax Identification Number on Joint Returns

The IRS sent letters to 2.4 million taxpayers who filed joint 1999 returns, on which the name and identification number for the second spouse did not match IRS records. Taxpayers must provide correct names and identification numbers in order to claim a personal exemption or the earned income credit. In the past, the IRS has not accepted electronic returns with any name/number mismatch. It has also reduced tax benefits claimed for any dependent on joint paper returns when there was a name/number mismatch for the first listed spouse, and plans to do the same for both spouses on a paper-filed return in the coming year.

The IRS has advised taxpayers who changed surnames, for any reason, to get updated identification cards unless they intend to use their former name for legal purpose. Form SS-5, "Application for a Social Security Card," is available from the Social Security Administration website at http://www.ssa.gov, or by calling (800) 772-1213.

Federal Tax Guide Reports, Vol. 83, No. 41, Report 11, October 13, 2000.

We all know the saying that "if it sounds too good to be true, it isn’t". Take heed of this next issue flagged by the IRS!

IRS Warns Individual About Abusive Tax Shelters

In a September 6^th posting to its website, the IRS listed "seven red flags". The posting warns taxpayers of the types of promotional materials presently being circulated that make false claims about a particular program’s ability either to eliminate a taxpayer’s tax liability or to enable the taxpayer to deduct personal expenses. In addition to taking heed of the "seven red flags," the IRS encourages taxpayers to call a tax professional for advice before acting on promotional materials that make claims that "sound too good to be true."

The red flags are:

1. promotional claims that investors will "never pay taxes again;"
2. programs claiming investors can deduct the cost of their personal residence;
3. claims that investors will be able to deduct the cost of their child’s education;
4. programs asserting, "The IRS does not want you to know about this;"
5. promoting materials stating, "This is so new, your certified public accountant does not know about it yet;"
6. the involvement of multiple trusts, partnerships, or other entities; and
7. the involvement of some entities that are foreign.

The IRS warns that taxpayers have an obligation to investigate the legal and tax consequences of any investment before they act. Taxpayers who fail to do so risk imposition of significant penalties, interest, and legal costs. In addition, the IRS warns that taxpayers may not be able to recover fees paid to tax shelter promoters.

Federal Tax Guide Reports, Vol. 83, No. 38, Report 10A, September 22, 2000.

Before starting to prepare your tax returns this year, be sure to check the IRS website, http://www.irs.gov. If you have any questions or concerns, please discuss them with your taxpreparer and/or the IRS.

 

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