Why didn’t I receive my expected tax refund?

Your refund can be held back for a variety of reasons, and the offset may be due to your tax issues or the tax issues of your spouse.

Your refund could be held back if:

• You claimed a refundable tax credit that the IRS Criminal Investigation Division is examining in more depth. That part of the refund may be delayed by a couple of weeks.
• You owe the IRS money for a prior year.
• You owe money to a state.
• You have unemployment compensation that needs to be repaid.
• You owe money to the Social Security Administration.
• You owe money on a student loan.
• You owe child support or spousal support and a state agency filed a lien against your tax refunds.

There may be other offsets, depending on arrangements between the IRS and contracting agencies.

Your state may also withhold your refund if you have excessive traffic tickets, parking tickets, or other such fines.

How can I get more information?

How do you find out the details of the reduction? You should get a letter from the IRS or your state within a couple of days. If you don’t receive this letter, check the IRS “Where’s my Refund” system. For further assistance, you can also call the IRS at 800-829-1040.

You can find information about your state refund on the website of your state’s tax agency.

Suppose your refund is held back because you owe an IRS or state balance—and you didn’t know about it. Ask for a printout of your records for the year—or years—in question. You can also get a free transcript of your tax return from the IRS using Form 4506-T. Be sure to check every box in question 6.

Check with your state to see if it has a similar request form.

What if it’s not an IRS or state debt that is causing your issues but rather a problem with another party that has put a lien on your refund? Request more detail from the IRS about the source of the debt. Once you know which agency has filed the balance due, go back to that agency to clear it up and prove that your debts are paid off.

What can I do to fix the problem?

If you’re not current on your dues and the debts are legitimate, you have some serious work to do. Keep in mind that it’s unlikely you’ll get your refund money back from the IRS or other agencies that have placed liens on your refund. If you owe money, the agencies you owe will keep the funds. The good news is that refund will reduce the balance you owe to those parties. And you can avoid having future liens placed on your refund by other agencies by contacting those agencies and setting up payment plans.

However, you might get funds back if the debt owed is your spouse’s. File an Injured Spouse form or Innocent Spouse form to get your share of the refund. Expect to appeal the IRS’ decision; it will generally turn you down the first time.

To prevent the IRS from tapping into future refunds, avoid getting refunds altogether. Reduce your withholding so you get your money from your paycheck instead storing it in the Bank of the IRS.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

So I wrote a book about how to prepare your own tax return and offered $10 workshops to the public to teach people how to do it themselves. (This was long before DIY tax software—or even PCs.) A funny thing happened. No matter how much I simplified it, most of the people at those workshops insisted on paying me to prepare their tax returns.

The world is very different now. The IRS and a variety of tax software developers have teamed up to provide free tax software designed to help about 70 percent of taxpayers file their tax returns. Yet while many people will qualify for free filing, there are still some circumstances where you’ll need to enlist the help of a tax pro.

Who should always use a tax pro?

1) People with extensive securities investments, especially when the investments are spread over different accounts, IRAs, and other retirement vehicles.

There are certain overlapping transactions that might take place in these accounts that the IRS would consider “wash sales.” No losses on those transactions would be permitted. A good tax pro would catch something like that.

Working with a qualified tax pro can also help you identify which lots of securities to sell before you sell them. This would give you the most tax-beneficial gain or loss, depending on the holding period and basis (tax cost).

2) Business owners always, always, always (did I say “Always?”) should work with a tax pro in their corner. Frankly, anyone who does not is leaving money on the table and is apt to have the business fail within the first five years. Why? Either the business will fail due to disorganized management, or it will fail due to tax problems that likely will result from messed-up payroll taxes, sales taxes, and income taxes.

Not only can a good tax pro help you with tax issues but most of us also know a lot about business management, operations, and break-even analysis. Plus, we have community contacts to help build your sales and cut your costs. We may even be able to help you get financing when your business needs it—or before.

3) Folks who want enough money on which to live when they retire. This doesn’t just include IRAs and 401(k)s, it also includes all sources of income-producing assets that will allow you to live comfortably for the 30 to 60 years after you stop working. Tax pros can help your family avoid estate and gift taxes when consulted before the transactions take place.

Tax pros are actually pretty useful people. We have knowledge, experience, and contacts. Check out a previous article of mine for more guidance on finding the right tax pro.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

What does this mean for you? It means that you, too, may now e-file with attachments—if your software provider offers this service. Most of the major companies do, but ask to be certain.

What can you attach to an e-filed tax return?

All attachments are related to the checkboxes on Form 8453—the transmittal form that lists the attachments in your tax return.

For the average person, attachments may include vehicle donations and other non-cash charitable contributions over $500, a signed release from an ex-spouse allowing you to claim your child as a dependent, or a long list of securities sales generating your capital gains and losses. If you have anything other than these transactions involved in your tax filing, get a tax pro involved.

In fact, if your securities sales cover several pages, consider asking your tax pro to run your brokerage report through a new product by the folks at NetBasis.com, called the 8949 Verifier. This software will compute the correct gains or losses for your 2012 activity. It’s new and somewhat experimental, so if your tax pro isn’t familiar with it, don’t hesitate to contact NetBasis.com for help.

When should you file on paper?

If anything needs an explanation, especially a detailed explanation, file on paper. For example, imagine that you’ve opened a savings or investment account in your name, but other friends or family members also own it. To split the earnings among your crowd, you will pick up the full income on your tax return, then deduct the others’ shares with a note saying “SEE STATEMENT XYZ ATTACHED.” On that statement, you can explain why some of those earnings are not yours. List all of the owners, including each person’s name, address, and Social Security number. Of course, you also could just issue a 1099-INT, 1099-DIV, or 1099-B, or file a partnership tax return.

Other instances include disclosures, especially when you’re not absolutely certain you’re computing something or doing something correctly. When you make a major error on your tax return that causes the tax or income to be reduced by 25 percent or more, the IRS can audit you for six years. However, if you provide enough detail in your explanation that the IRS should have known to ask questions right away, the courts will prevent the IRS from auditing after three years.

When should you use a tax pro?

Seek out a tax pro:

• When you’re starting a business, setting a rental, or depreciating anything for the first time.
• When you sell property or face cancellation of debt income (foreclosures, short sales, or credit card debt).
• When you do a tax-free exchange.

Any time you’re facing something that you don’t really understand, invest in the advice of a good tax pro (see my previous article, Six Tax Resolutions for the New Year). We’re here to help. Really.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

But don’t finalize your tax return just because the April 15 tax-filing deadline is around the corner. Take a deep breath. Pause. Look everything over. If you’re still missing anything important, don’t file that tax return. Put it on extension.

Why? If you file your tax return now, with mistakes or incomplete information, you’re going to have to amend it. Normally, only a computer sees your return. When you amend, real people look at it. All of it. Not just the part you’re amending. So if you don’t want to deal with an increased chance of an audit, file it correctly in the first place.

When should you file for an extension?

You should file for an extension any time between April 1 and April 15. Use Form 4868 for your personal tax return, and use Form 7004 to extend practically everything else—partnerships, estates and trusts, gift taxes, etc. (Note: Calendar year corporations’ tax returns need to have been extended by March 15, so if you didn’t do that already, you’re late.)

Remember to also file extensions with your state. You can find state tax forms here.

What does the extension get you?

An extension buys you six more months (until October 15) to file your personal, 1041 estate, and gift tax returns. You will only get five extra months to file partnership returns because they’re due on September 15 of each year.

What doesn’t the extension get you?

Technically, these forms give you additional time to file your tax return—but not additional time to pay. The IRS says that you must pay the full amount of tax you expect to owe for 2012 by April 15. But in my experience, folks with businesses, those with large incomes and huge bills, and the chronically disorganized never have enough money by April 15.

What kind of trouble will you be in if you can’t pay?

None, really. Send in whatever you can afford on April 15 with your extension—at least $25. Whatever balance is left will earn a late payment penalty of one half of 1 percent per month (or 6 percent per year) and interest of about 4 percent per year. This is probably cheaper than your credit card or loan rates, so don’t stress over it.

Next, devote the next six months to two things:

1) Finish up your accounting and find all the paperwork you need so you can prepare your tax return(s) properly.

2) Earn money so you can pay off your 2012 tax obligation by October 15. You’ll find some of the savvier Internet entrepreneurs and brick-and-mortar businesses running tax sales during this time. What’s the purpose of these sales? They are purely to generate the funds to pay taxes. It’s a great idea. Just make sure you set aside money to pay the taxes on those profits as well.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

It turned out that there was a major glitch in the commercial tax software I used that year (and never again). Many tax pros’ returns were afflicted with similar mistakes. I didn’t discover this error until we started putting the tax files away after tax season. Then, my heart stopped.

So, what do you do when you learn you made a mistake on your tax return?

There are different levels of errors. The simplest is an omission of a minor income amount from a 1099 of any kind. This generates additional taxes of $50 or less. Do nothing. The IRS will usually send you a letter (typically a CP-2000 notice) proposing additional taxes and a little interest, but no penalties. Pay the balance due and then file an amended return with your state for the additional income.

However, if you have made the same kind of error—an omitted 1099—but for a larger amount, or if you didn’t get a 1099 at all but you realize you omitted a big chunk of income, you may wonder if you should still wait for the IRS to notice. No. The interest will be much higher and penalties might be assessed, depending on the amount or nature of the taxes.

You will want to amend your IRS and state (if applicable) returns—but don’t rush. I have heard from people who received either original or revised 1099s late. They amended after the first one, then they had to amend again after the second, and so on. Wait a bit until you are sure that all the changes are in. Call the various investment houses or clients to make sure no more are coming.

What if the problem is not unreported income? Suppose you didn’t take advantage of expenses or deductions to which you’re entitled? Should you amend? It depends.

Yes: Amend if you have the evidence to prove that you paid those deductible expenses. If they were business or job-related, you also need to have proof that the expenses were ordinary and necessary for your business or job.

No: Don’t bother amending if the amounts are minor. Personally, for an additional refund of $100, less the costs for preparing and filing the amended return, I wouldn’t open up a hornet’s nest. Remember that even if you prepare an amended return yourself using online software, the IRS and state returns will cost you about $25 to $50, and a tax pro will rarely do it for less than $100.

No: If you don’t have all the proof and backup material to support the costs and the reason these costs are deductible, don’t amend. An amended return is handled like a mini-audit. And although the IRS is not meant to look at other parts of the return, sometimes that does happen, and it can generate a full-blown audit.

Oh yes, what happened to our $90,000 error? I immediately gave the client an amended IRS and state return. Did she file it? Honestly, I don’t know. She hasn’t spoken to me since. Can you blame her?

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

Before going forward, set up two permanent files for home improvements—one for big costs and the other for routine maintenance. You may use a drawer (if you’re doing a lot of repairs), an envelope, an accordion file, or a folder on your computer or portable device. It doesn’t matter how; just make sure to file every document (or a copy) related to the improvements. This will help with your taxes (now or when you sell your home). It will also help with warranties and/or further repairs if you ever need to seek a specific part or color.

What can you deduct?

For tax purposes, a house can be used several different ways. It can be used exclusively as your home; it can be used as a home and office (Form 8829); it can be used as a rental property (Schedule E); or it can be used in any combination of these.

In general, when you do repairs around the home (like routine maintenance, gardening, or pool care), none of them will be deductible for tax purposes. However, when you use the home as a business or rental, the business percentage of the expenses can be deducted.

In certain cases, if you are making the improvements for medical purposes, you may be able to claim a medical deduction. Get a letter from a physician and read the rules carefully—they’re a bit complicated.

What kind of repair are you making?

Dealing with larger, more expensive repairs (like roofing, new windows, or landscaping), we always face the argument—is it a repair or a capital improvement? If it’s your home and you want to increase your cost (or tax basis), you want to treat these as improvements to your home.

Flag these types of receipts and add them to the purchase cost. When converting the property to a rental, this will increase your depreciation. When selling the property, it will reduce your profit.

Don’t scoff. Sure, you get to avoid paying taxes on the first $250,000 ($500,000 for couples) of profit. You don’t think you’ll ever have a profit that high? Folks who bought homes for $30,000 in the 1980s certainly never expected those homes to be worth a million dollars today. That could happen to you after 20 or 30 years, too.

Understanding tax credits

For tax credits, the American Taxpayer Relief Act of 2012 (ATRA) brought back the nonbusiness energy credit for residences (Form 5695). It’s retroactive to January 1, 2012. The credit covers costs of things like roofing, insulation, double-paned windows, and so on. Unfortunately, it’s limited to a lifetime credit of $500. If you’ve already used any part of this in the past, you have probably gotten more than a $500 benefit.

The first part of Form 5695 is for the renewable energy credits, like solar power, wind, and thermal energy. That has no ceiling and is worth 30 percent of your qualified expenditures. (Read the rules carefully and make sure you have all the correct paperwork in hand before claiming the credit.)

When using any credits, you must reduce your home’s cost or tax basis by the amount of the credit.

Do some research locally as well. Your city, state, or utility might also offer incentives for energy-saving improvements.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

This leads to more good news: In January’s fiscal cliff legislation, Congress finally took the mystery out of estate taxes. Starting on January 1, 2013, the amount of assets that are excluded from estate taxes is $5.25 million. Over 95 percent of U.S. taxpayers will never have to pay estate or gift taxes. (Read the details, especially about portability, here.)

What do you need to know about the assets you inherit?

First, the bad news.

You must pay taxes when inheriting IRAs, pension plans, annuities, U.S. savings bonds, and other assets that have untaxed earnings. You will have to pay the taxes when selling these assets or cashing them out.

Minimize the impact of this by doing research. How much did the decedent contribute toward the investment? Whatever was paid using after-tax dollars returns to you tax-free. The state amount may be different as it might have allowed a lower IRA contribution in some years, making your state cost basis higher. A good tax pro can help you determine the differences.

With Roth IRAs, the full amount should be tax-free, but only if the money is drawn five years after the account was established. For example, if the decedent opened the account in March 31, 2010, all the earnings will be taxable if you draw out the money before April 1, 2015.

And the good news is…

Aside from the assets above, when someone dies, his or her other assets’ tax cost jumps to the value at date of death. Folks inheriting stocks or other assets, even if bought at the dawn of time, don’t have to reconstruct the cost. Suppose Walmart stock cost $1,000 in 1980. Today, with reinvested dividends and stock splits, the stock would be worth around $400,000. None of that gain would be taxable to the heir. Any gain or loss when the stock is sold after the date of death would generate either a taxable gain or loss—all of it long-term.

Look up each security’s value on a specific date by using www.bigcharts.com or by entering the stock symbol on your favorite search engine and looking up historical prices. If you are going to hold it for a long time after the date of death, get a computation of the reinvestments and splits, which is easy to do at NetBasis.com. Print out the information for each asset.

There are special rules relating to increased basis in community property states. Incidentally, if you’ve got a Green Card and an estate worth over $60,000, get your citizenship immediately.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

Who will be affected? These federal tax changes will affect same-sex couples who are legally married, as well as registered domestic partners (RDPs). It will not affect couples who are simply living together without benefit of paperwork. If the Supreme Court rules that the Defense of Marriage Act (DOMA) is unconstitutional, then all same-sex couples will have the same tax rights as any heterosexual couple–on a federal level. State laws will still apply.

While you’re waiting for a decision, consider filing amended personal or estate tax returns for prior years as a protective claim, in case the Court rules in your favor. What’s a protective claim? I’ve outlined the why and how in a recent MarketWatch.com article.

Meanwhile, back on the farm, what do same-sex couples need to know about existing law?

1) If you are a married same-sex couple or RDP, you can file a joint return with your state (if your state recognizes your status).

2) If your state does not recognize same-sex marriages or RDP, you must each file a separate return with the IRS, with each person only reporting his or her own income and expenses. Your status will be single, or, if there are children, one or both of you may file as head of household (HOH). The HOH option will be based on who provides more than half the cost of the household for each child, so start planning your spending and support early in the year.

3) In community property states, the IRS has special rules requiring that the couple split all income and expenses according to community property laws. Even though the income is split, when it comes to self-employment taxes (SE), the person who actually earned the business income (or profits) pays the SE taxes. This can get complicated, especially if there were pensions or other assets built up before marriage.

4) There will be special bonus for some families—a quadruple-dip on adoption costs. The IRS says that each partner may claim the full amount of the available adoption credit. Each person may only claim the credit for qualified expenses he or she actually pays. Plus, each person’s employer may pay adoption expenses up to the limit. That means that for each year in which adoption expenses were paid, you can pick up a tax credit and employer reimbursement worth up to four times the annual adoption limit. (Sometimes it’s good to be single in the IRS’s eyes.) If you adopted a child within the last four years, check to see if you can amend your tax return and get a big refund. William Perez, EA, summarizes the limits for the last several years here.

Remember to prepare a will or living trust to ensure that your partner or spouse inherits properly for federal and state tax purposes. And be sure to define who will get custody of your children. At present, same-sex couples are in legal limbo, so protect each other.

But often the letter doesn’t come as such a nice surprise, such as when you didn’t know a certain kind of income was taxable. IRS gets 1099-type reports from people about your activities—and it wants you to report the income. What are common sources of surprise when filing taxes?

Unemployment income. This income is always taxable on the IRS level. Most states also tax unemployment. Usually, this income is left off the tax return for two reasons. First because you didn’t know it was taxable. Second, by the time you prepare your return, you may have forgotten you were unemployed during the previous year. So when you sign up for unemployment, remember to have them take out withholding.

Disability income. This is more complicated than it looks—and quite confusing. Please review your situation with a tax professional. There are two kinds of disability: state disability and funds from insurance companies—each with two types of taxability.

State disability:

• This is generally not taxable if you went out on disability in the first place.
• If you were already on unemployment and filed for disability while collecting unemployment benefits, your disability payments are taxable. They are considered unemployment income.
• Workers compensation benefits are not taxable.

Disability insurance:

• If your employer paid the premiums, most likely, your benefits are taxable.
• If you paid the premiums and never took a medical expense deduction, it’s quite likely that this will be a tax-free benefit.

Barter income. Anytime you trade your services or products for someone else’s, you have engaged in barter. As the trade is designed to be a fair exchange, you have to wonder why this should be reportable. The net effect should be zero, right? Not quite. For example, if you have a mobile dog grooming business and trade your services (worth $100) for gardening services for your home (worth $100), your business has a sale, but you don’t have a business deduction. So you have a net profit of $100—and so does the gardener, right? Folks who do a lot of barter tend to join barter clubs, which issue a 1099-B.

Cancellation of debt income. When this 1099-C arrives, it’s usually utterly shocking. You think you’ve dumped your credit card debt or upside-down mortgage, but then along comes this form, and you suddenly find yourself owing taxes on the debt you dumped. There are a number of ways around this kind of taxable income, depending on the source. Read these tips to learn more.

With about 4 million words in the current tax code, it’s easy to make mistakes. But don’t worry. The IRS doesn’t generally issue penalties on the first go-round.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

The good news is that couples earning less than $300,000 ($250,000 singles) won’t face many hits. But folks earning more than this threshold will be hit with substantially higher taxes.

Let’s look at a few of the highlights that might affect your 2012 (and beyond) taxes.

Death and gifts. It’s safe to die again. There is now a permanent amount for the estate and gift tax exclusion (the amount not taxed in your lifetime or upon your death): $5 million per person.

There is also portability. In other words, if a couple’s estate is only worth $2.25 million when the wife dies, the balance of her exclusion is still available. The surviving husband may add that to his $5 million so that when he dies, his estate can exclude up to $7.75 million from estate and gift taxes.

This change is mainly to prevent the breakup of family businesses and family-owned real estate assets. Also, this means a very small percentage of the population will ever be subject to estate and gift taxes.

Two percent withholding increase. You likely already know about this: Aside from seeing it on your paycheck, this increase was covered in a previous blog.

The Pease limitation. About a decade ago, itemized deductions were phased out. EGTRRA, aka the Bush Tax Cuts, repealed the itemized deduction phaseout. But now phaseouts are back for folks whose incomes reach the following: $300,000 for married couples and qualified widows and widowers; $250,000 for singles; $275,000 for heads of households; and $150,000 for couples filing separately.

Expenses not subject to this deduction phaseout include:

• Medical expenses
• Investment interest
• Casualty and theft losses
• Wagering losses (up to wagering income)

The personal exemption phaseout. The personal exemption rises to $3,900, up from the 2012 exemption of $3,800. However, the same income limits now apply as for the Pease exemption. Once your income exceeds these limits by $125,000, you lose your exemptions. (There is a 2 percent reduction for every $2,500 of income.)

Medical deductions. This year, to claim a deduction, medical expenses must be at least 10 percent of adjusted gross income. Seniors over age 65 are exempt from this higher exclusion.

Those with higher incomes. The following income levels are being hit on a variety of tax issues: jointly filed tax returns with income of $450,000 or above; singles with incomes of $400,000 or above; heads of household with incomes of $425,000 or above.

• Regarding capital gains and dividends, the 0 percent and 15 percent rates for certain tax brackets are now permanent. However, a new 20 percent rate has been added for the higher income group.
• Tax brackets have remained the same for most of us, ranging from 0 percent to 35 percent. The higher income group has an added tax bracket of 39.6 percent.

These are some of the key highlights for individuals. There are many, more provisions, especially relating to businesses. The Equifax Blog team will be covering that in depth for you this year.

If you have questions about how the new tax laws might affect your tax filing, consider consulting a tax professional.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.