Our clients received an IRS notice that they owed around $20,000 in additional taxes. Initially the clients had requested assistance with an IRS 5 year payment plan.

We evaluated the notice tax assessment and after correspondence with the IRS, we determined that only $1,000 of the $20,000 was actually due. As such no installment was necessary and balance was paid in full within a couple of months.

Most people look at an IRS assessment, notice, collection etc. as an unbeatable balance that is due. This simply is not true, as IRS notices often contain errors, miscalculations, or reporting too much income.

Payroll Tax Rate Reduction

Under current law, the Social Security portion of the tax imposed on employees under the Federal Insurance Contributions Act ("FICA") is 6.2%. Employers are also subject to a 6.2% rate for the Social Security portion of the FICA tax, and self-employed persons are subject to a rate of 12.4% for the Social Security portion of the tax imposed on self-employment income under the Self Employment Contributions Act ("SECA"). The maximum amount of compensation or earned income subject to the Social Security tax under FICA and SECA is $106,800 for both 2010 and 2011 (note that the other component of the tax imposed under FICA and SECA, the Medicare tax, is imposed at a total rate of 2.9% and has no ceiling).
Pursuant to the 2010 Act, the employee portion of the Social Security tax under FICA will be reduced from 6.2% to 4.2% for 2011. The 2010 Act also reduces the Social Security tax on self-employment income under SECA to 10.4% for 2011.

Current Provisions Extended Through December 31, 2012

• Marginal income tax rates for individual taxpayers of 10, 15, 25, 28, 33 and 35% remain in effect (if the Bush-era rates had expired, for 2011 the rates would have been 15, 28, 31, 36, and 39.6%)
• Qualified dividends taxed at a maximum rate of 15%
• Qualified long-term capital gains taxed at a rate of 15% (the rate will continue to be zero percent for taxpayers in the 10% or 15% income tax bracket, 25% for certain recaptured real estate gain, and 28% for certain items defined as "collectibles")
• No phase-out of the personal exemption (prior to 2010 the personal exemption was phased out at higher income levels)
• No limitations on itemized deductions (prior to 2010 itemized deductions were limited for higher-income taxpayers)
• Standard deduction for married couples filing joint returns is exactly twice the standard deduction for single individuals
• 15% tax bracket for married couples filing jointly is twice that for single individuals
• Employer-provided childcare credit
• $1,000 child tax credit
• Earned income tax credit
• Dependent care credit
• Adoption credit
• The American Opportunity Tax Credit (formerly called the Hope education credit)
• Exclusion from income for certain employer-provided educational assistance, as well as the related employer deduction for such educational assistance
• Student loan interest deduction and Coverdell education savings accounts

Current Provisions Extended Through December 31, 2011

• 15-year straight-line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements
• Exclusion of 100% of gains from sale of small business stock
• Research and development credit
• Expensing of environmental remediation costs
• Modification of tax treatment of certain payments to controlling exempt organizations
• Basis adjustment to stock of S corporations making charitable deductions of property
• New markets credit (permits up to $3.5 billion in qualified equity investments for each of 2010 and 2011)
• Many energy incentives, including the new energy efficient home credit, the energy efficient appliance credit, the nonbusiness energy property credit, and the alternative fuel vehicle refueling property credit
• GO Zone tax incentives (rehabilitation credit, low-income housing credit, tax-exempt bond financing, and bonus depreciation extensions)
• New York Liberty Zone tax-exempt bond financing
• Empowerment zone tax incentives
• Tax incentives for investment in the District of Columbia
• Qualified zone academy bonds
• Alternative minimum tax ("AMT") patch
• State and local sales tax deduction
• Higher education tuition deduction
• Teacher's classroom expense deduction
• Tax-free distribution of IRA proceeds contributed to charity
• Charitable contribution of appreciated real property for conservation purposes
• The deduction of certain mortgage insurance premiums

Bonus Depreciation

Under prior law, taxpayers were allowed "bonus" depreciation equal to 50% of the cost of certain new depreciable property (e.g., property with a recovery period of less than 20 years, water utility property, computer software and leasehold improvements) acquired and placed in service before Jan. 1, 2011 (before Jan. 1, 2012 for certain longer-lived and transportation property), in addition to the normal first year depreciation allowed under the Internal Revenue Code (the "Code").
The 2010 Act provides for a 100% depreciation deduction for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property). For qualifying property placed in service after December 31, 2011 and before January 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property), the bonus depreciation deduction reverts to 50%. Qualified leasehold improvement property is also eligible for the 100% deduction if placed in service after September 8, 2010 and before January 1, 2012.

Section 179 Expensing

Code Section 179 allows certain taxpayers to elect to deduct immediately the cost of qualifying property placed in service during the taxable year instead of recovering the cost of such property through depreciation or amortization deductions over time. The maximum amount that may be expensed for any year generally is phased out dollar-for-dollar by the amount of Code Section 179 property placed in service during the year in excess of a specified investment ceiling. Current law provides that for tax years beginning in 2010 or 2011, the expense deduction is limited to $500,000 and the phase-out ceiling begins when property placed in service in a tax year exceeds $2,000,000. Qualifying property generally includes tangible personal property used in a trade or business, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property), and canned software. The Section 179 election can be made for new or used property (unlike the bonus depreciation provisions described above, which require that qualifying property be newly purchased).
The 2010 Act provides that for tax years beginning in 2012, the maximum expensing amount under Code Section 179 is $125,000 and the phase-out ceiling is $500,000 (both amounts to be indexed for inflation). The expensing and ceiling amounts were scheduled to be only $25,000 and $200,000, respectively, for tax years beginning in 2012, and those lower amounts will be the applicable limits for tax years beginning after 2012.

The federal estate tax exemption will be $5 million and the estate tax rate for estates valued over this amount will be 35%. The estate tax has also become unified with federal gift and generation-skipping transfer taxes such that the gift tax exemption and generation-skipping transfer tax exemption will be $5 million each and the tax rate for both of these taxes will also be 35%.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A and those claiming the Higher Education Tuition and Fees Deduction paid to a post-secondary institution and those claiming the Educator Expense Deduction.– will need to wait to file.

Currently it appears that in mid February 2011, the IRS will be prepared to accept all returns.
Our office will be preparing all returns as the information is received. We will inform our clients of the anticipated liability or refund as soon as it has been determined. We just may have to wait process the return.