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Archive for the ‘IRS/Tax Articles’ Category

Ten Tax Topics for Taxpayers with Children

23 November 2010 | Hertsel Shadian

Got Kids? They may have an impact on your tax situation. Listed below are the top 10 things you should consider if you have children.

  1. Dependents. In most cases, a child can be claimed as a dependent in the year in which the child is born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
  2. Child Tax Credit. You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.
  3. Child and Dependent Care Credit. You may be able to claim this credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
  4. Earned Income Tax Credit. The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. The EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
  5. Adoption Credit. You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses (the 2009 version was the most recent available at the time of this writing).
  6. Children with Earned Income. If your child has income earned from working, then your child may be required to file a tax return. For more information see IRS Publication 501.
  7. Children with Investment Income. Under certain circumstances, a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
  8. Coverdell Education Savings Account. This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.
  9. Higher Education Credits. Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.  For more information see IRS Publication 970.
  10. Student Loan Interest. You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.

The forms and publications on these topics can be found by clicking on the embedded links in this article, or on the official IRS website at www.IRS.gov, or by calling 800-TAX-FORM (800-829-3676). (At the time of this writing, most of the publications are the 2009 versions, but should be updated by the IRS closer to tax filing time.)

If you missed taking advantage of any of these topics for the 2009 tax year, there still should be time to amend your return and take advantage of the above deductions and credits. For further information about your specific filing situation and to discuss which of the above topics might apply to you, consult your professional tax advisor or tax preparer. Also, help spread the word about these tax topics by forwarding this article to other people you know who have children.

IRS Seeks to Return $164.6 Million in Undelivered Checks to Taxpayers

17 November 2010 | Hertsel Shadian

The Internal Revenue Service today announced that it is looking to return $164.6 million in undelivered refund checks. A total of 111,893 taxpayers reportedly are due one or more refund checks that could not be delivered because of mailing address errors.

A taxpayer only needs to update his or her address once for the IRS to send out all checks due. Undelivered refund checks reportedly average $1,471 this year, compared to $1,148 last year. Some taxpayers reportedly are due more than one check. The average dollar amount for returned refunds reportedly rose by just over 28 percent this year, possibly due to recent changes in tax law which introduced new credits or expanded existing credits, such as the Earned Income Tax Credit.

If a refund check is returned to the IRS as undelivered, taxpayers generally can update their addresses with the “Where’s My Refund?” tool on www.IRS.gov. The tool also enables taxpayers to check the status of their refunds. A taxpayer must submit his or her Social Security number, filing status and amount of refund shown on their 2009 return. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems. Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Taxpayers can receive refunds directly into their bank, split a tax refund into two or three financial accounts or even buy a savings bond. The IRS also recommends that taxpayers file their tax returns electronically, because e-file generally eliminates the risk of lost paper returns. E-file also generally speeds up refunds.

The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and that such messages are common identity theft scams. As a good policy in general, the IRS warns taxpayers not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that will infect their computers.  The best way for an individual to verify if she or he has a pending refund is going directly to www.IRS.gov and using the “Where’s My Refund?” tool. 

For more information, taxpayers should consult their professional tax advisor or tax preparer.

Five Important Facts about Dependents and Exemptions

15 November 2010 | Hertsel Shadian

When you prepare to file your tax return, there are two important things that will factor into your tax situation: dependents and exemptions. Here are five important facts to know about dependents and exemptions before you file your next tax return.

  1. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether or not you must file a return depends on several factors, including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe, and any advance Earned Income Tax Credit payments you received.
  2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct a set amount on your tax return (this amount generally changes each year). Exemption amounts are reduced for taxpayers whose adjusted gross income is above certain levels, depending on the taxpayer’s filing status.
  3. If you are a dependent, you may not claim an exemption. If someone else—such as your parent—claims you as a dependent, you may not claim your personal exemption on your own tax return.
  4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you are filing a separate return, you may claim the exemption for your spouse only if your spouse had no gross income, is not filing a joint return, and was not the dependent of another taxpayer.
  5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if he or she files a joint return with his or her spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether or not you or your dependent needs to file a tax return, consult your professional tax preparer or tax advisor.  You also can consult IRS Publication 501, which publication is available on the IRS’s web site at www.IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

Eight Facts About Tax Return Filing Status

11 November 2010 | Hertsel Shadian

Everyone who files a Federal tax return must determine which filing status applies to them. It is important you choose your correct filing status since it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you. Here are eight facts about the five filing status options which you should know in order to choose the correct filing status for your situation.

  1. Your marital status on the last day of the year determines your marital status for the entire year.
  2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
  3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law. (Note that under current Federal law, same-sex marriages, state-law civil unions and state-law domestic partnerships do not qualify for married status for tax filing purposes).
  4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
  5. If your spouse died during the year and you did not remarry during the same year, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
  6. A married couple may elect to file their returns separately. Each person’s filing status generally would be Married Filing Separately.
  7. Head of Household generally applies to taxpayers who are unmarried. You also must have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
  8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse recently died, if you have a dependent child, and if you meet certain other conditions.

There is more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 also is available on the IRS web site at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). For further information, consult your professional tax preparer or tax advisor.

Five Tax Filing Tips for Recently Married or Divorced Taxpayers

5 November 2010 | Hertsel Shadian

If you were married or divorced recently, there are a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA).  Listed below are five tips for recently married or divorced taxpayers. Following these steps should help avoid problems when you file your tax return.

  1. If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you do not notify the SSA. When newlyweds file a tax return using their new last names, IRS computers cannot match the new name with their Social Security Number.
  2. If you were recently divorced and changed back to your previous last name, you also will need to notify the SSA of this name change.
  3. Informing the SSA of a name change is fairly easy; you just need to file at your local SSA office a Form SS-5, Application for a Social Security Card (for applicants in the U.S.), Form SS-5-SP, Application for a Social Security Card (for Spanish speaking applicants who have difficulty translating the SS-5), or Form SS-5-FS, Application for a Social Security Card (for applicants applying outside the United States).
  4. The various Forms SS-5 also are available on the SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213, or at local offices. It usually takes about two weeks to have the change verified.
  5. If you adopted your spouse’s children after getting married, you will want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. The W-7A also is available on the IRS’s Web site at www.IRS.gov, or by calling 800-TAX-FORM (800-829-3676).

For additional information about your tax filing requirements, consult your professional tax preparer or tax advisor.

Ten Things Tax-Exempt Organizations Need to Know About the Oct. 15 Due Date

4 October 2010 | Hertsel Shadian

A crucial filing deadline of Oct. 15 is looming for many tax-exempt organizations that are required by federal law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked.  Nonprofit organizations that are at risk can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it mandated that all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS or submit an electronic notice with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also required that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but, even so, many organizations have not filed returns on time.

Here are 10 facts to know for nonprofit organizations that seek to maintain their tax-exempt status.

  1. Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010.
  2. Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.
  3. A list of the organizations that were at-risk as of the end of July 2010 is posted at IRS.gov along with instructions on how to comply with the new law.
  4. Two types of relief are available for small exempt organizations—a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice, and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
  5. Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N also known as the e-Postcard. To file the e-Postcard go to the link herein for IRS website and supply the eight information items called for on the form.
  6. Under the voluntary compliance program, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.
  7. The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
  8. Organizations that have not filed the required information return by the extended Oct. 15 due date will have their tax-exempt status revoked.
  9. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status and any income received between the revocation date and renewed exemption might be taxable.
  10. Donors who contribute to at-risk organizations are protected until the final revocation list is published by the IRS. 

Employee vs. Independent Contractor: Seven Tips for Business Owners

20 September 2010 | Hertsel Shadian

Business owners may hire people as independent contractors or as employees. There are rules that will help owners determine how to classify the people they hire for Federal tax purposes. This will affect how much owners pay in taxes, whether they need to withhold from their workers’ paychecks and what tax documents they need to file.

Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees. (Note:  these rules apply for Federal tax purposes—different rules might apply for State tax law purposes. Business owners should consult their tax professional or tax preparer for more information.)

1. The IRS uses three characteristics to determine the relationship between businesses and workers:

  • Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
  • Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  • Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

2. If a business owner has the right to control or direct not only what is to be done, but also how it is to be done, then the worker is more likely to be treated as an employee by the IRS. 

3. If a business owner can direct or control only the result of the work done—and not the means and methods of accomplishing the result—then the worker is more likely to be treated as an independent contractor by the IRS. 

4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

5. Workers can avoid higher tax bills and lost benefits if they know their proper status.
6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

7. Business owners can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at www.IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530?  These publications and Form SS-8 also are available on the IRS website or by calling the IRS at 800-829-3676 (800-TAX-FORM).

For more information, consult your tax professional or tax preparer.

Does the IRS Owe You Money?

5 August 2010 | Hertsel Shadian

The Internal Revenue Service may have money for you. Each year, money owed to taxpayers (as much as several million dollars all told) goes unclaimed.  Some of that money is from relatively small refunds due to taxpayers or which arise from allowable credits that can be claimed by taxpayers.  Due to the often relatively small amount of many of these refunds, much of this money goes unclaimed.  Sometimes no return was filed because the taxpayer was below the minimum income filing threshold, but nevertheless still may have withheld taxes due back.  Other times people have filed returns but have moved before their refund check reached them and the post office did not or could not forward the check. 

Was your income below the limit that requires you to file a tax return? If so, you may still be due a refund.  If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should contact the IRS to check the status of your refund and confirm your current address.

Unclaimed Refunds

Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

  • To collect this money, a Federal income tax return (1040, 1040A, 1040-EZ) must be filed with the IRS generally no later than three years from the due date of the return (there are some very limited exceptions to this rule).
  • Generally, if no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
  • There is no penalty assessed by the IRS for filing a late return which qualifies for a refund.
  • Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling 800-TAX-FORM (800-829-3676), or can be prepared by a qualified professional tax return preparer.
  • Information about the Earned Income Tax Credit and how to claim it can be obtained from your professional tax adviser or qualified tax return preparer; information also is available on the official IRS website at IRS.gov.

Undeliverable Refunds

Were you expecting a refund check but didn’t get it?

  • Refund checks are mailed to a taxpayer’s last known address. Checks are returned to the IRS if a taxpayer moves without notifying the IRS or the U.S. Postal Service of the taxpayer’s new address.
  • You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.
  • You can also ensure the IRS has your correct address by filing IRS Form 8822, Change of Address (also available on IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676)).

If you have any questions about obtaining your refund, or need any other assistance with a tax matter, please call Hertsel Shadian, Attorney at Law, LLC in Portland at (503) 352-6985.

Business Barter Transactions: Record Keeping & Tax Implications

26 July 2010 | Hertsel Shadian

In today’s economy, small-business owners sometimes look to the oldest form of commerce—the exchange of goods and services, or bartering. The Internal Revenue Service recently issued a reminder to small-business owners that bartering transactions generally have associated tax reporting, accounting and record-keeping responsibilities.

Bartering is the trading of one product or service for another. Usually there is no swap of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor, and employees, or it can take place on a third party basis through a modern Internet barter exchange. Bartering is an exchange of one taxpayer’s property or services for another taxpayer’s property or services. The fair market value of property or services received through barter is taxable income.

Record-keeping Tip:  Once you have agreed to barter transactions with a vendor or customer, you must enter the transaction accurately in your accounting and tax records. Whether you maintain your books and records manually or use one of the many accounting and tax software packages on the market today, you need to keep and record some basic information about your barter transactions.

Clearly mark or file all barter income and expense documents as “bartering,” and retain all original source documents pertaining to your barter transactions:

  • Sales receipts and invoices
  • Barter exchange statements and Forms 1099-B, Proceeds From Broker and Barter Exchange Transactions

Bartering Products or Services. The most important barter tax accounting concept is that the IRS treats bartering as income received, whether you use accrual-basis or cash-basis accounting.

Direct Barter Transactions

If you engage in the direct barter of products or services with an individual or a business you will generally not receive a Form 1099-B, but the transaction must be accounted for in your books and records just the same. Think of a barter transaction as just another sales transaction of your business goods or services which you must include in your income at the time received. Accurate accounting and record keeping can help you manage barter transactions.

For example, if a doctor agrees to give an accountant a personal medical exam in exchange for personal tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor. For simplicity sake, assume the fair market value of both services is equal to $200. Note that all pieces of the transaction should be clearly marked as a bartering transaction in the books and records of both the doctor and the accountant. With the fair market value of both services being equal, both the doctor and the accountant must include $200 in their income as a result of the bartering transaction.

Record-keeping Tip: You may need to configure your accounting software to accept bartering transactions.

Barter Exchange Transactions

Exchanges occurring through a barter exchange are reported to the IRS on Form 1099-B and show the value of cash, property, services, credits or scrip added to your account by the barter exchange. Record keeping and accounting for barter exchange transactions is basically the same as for direct barter transactions except that the parties are taxed on the value of the credit units added to their account even though they may not actually receive goods or services from other exchange members until a later year. The parties generally will have additional help in determining the taxable bartering amount by information reporting from the barter exchange.

Barter exchanges record all transactions and report them to the IRS on Forms 1099-B. The value of trade dollars received for the exchanger’s products or services must be included in gross income for the tax year in which they are credited to the exchanger’s account. If a barter exchanger’s business is a corporation, the exchanger should receive just one aggregate Form 1099-B annually. If the exchanger is a partnership, an individual or a sole proprietor, the exchanger should receive a Form 1099-B from the exchange for each barter transaction with a value of $1 or more.

Bartering as Compensation

Barter can be used as compensation, too. A business can pay bartered goods or services as a bonus or as part of a compensation package to employees, partners and contractors. For example, a business may use barter bonus or sales incentive programs, with compensation including such items as vehicles, restaurant certificates or resort trips.

Record-keeping Tip: Just as cash business expenses associated with bartering are deductible, barter used as compensation is deductible and subject to employment taxes and information reporting. Barter used as a bonus or compensation for an independent contractor must be included on the contractor’s Form 1099-MISC, Miscellaneous Income, as non-employee compensation, and all barter compensation for employees must be taken into account on their Forms W-2. Barter compensation is subject to FICA, FUTA, and federal income tax withholding.

Other Examples of Bartering Transactions

Small businesses and self-employed taxpayers greatly benefit by accurately recording and reporting all income. Insufficient record keeping could cause income to be over-reported and too much tax paid or too little income reported and too little tax paid (which could result in additional penalties and interest if later discovered in a tax audit). You need good records to prepare your tax returns. The IRS of course stresses that these records must support the income and expenses you report.

Example 1.  You are a self-employed financial planner who performs services for a client, a small business corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares of stock in your income on Schedule C or Schedule C-EZ of Form 1040. The expenses you pay in the performance of the financial planning services are also deductible.

Example 2.  You own a small apartment building. An artist trades you a painting in return for six months’ rent-free use of an apartment. You must report the fair market value of the artwork as rental income on Schedule E Supplemental Income and Loss on Form 1040. Generally, this would be the fair rental value of the apartment for six months. You can claim your normal rental expenses associated with the barter of the apartment. The artist must report the fair rental value of the apartment in income on Schedule C, Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ, Net Profit from Business, of Form 1040 as the artist would for any other sale of a painting. The artist can claim the normal cash business expenses associated with the bartered work of art such as canvas, paint, brushes, supplies and materials.

Example 3.  You are a self-employed house painter. In return for painting his personal residence, your attorney agrees to perform personal legal services. If you would normally paint such a residence for $3,000 you would report the $3,000 in your gross receipts and you would be able to deduct the ordinary and necessary business expenses associated with painting the residence (such as paint, brushes and equipment rentals) on Schedule C or Schedule C-EZ of Form 1040. The attorney must also report the fair market value of the services in gross income on Schedule C or Schedule C-EZ of Form 1040, and deduct his ordinary and necessary business expenses associated with the legal services.

Example 4.  You are a self-employed owner of an online retail Web site that sells bowling shirts, shoes, balls and supplies. In return for fully equipping a self-employed owner of an online retail fishing shop with bowling equipment with a fair market value of $1,000, you receive fishing rods and clothing also valued at $1,000. You must include the fair market value of the equipment you receive in your income on Schedule C or Schedule C-EZ of Form 1040. You will also increase your cost of goods sold by decreasing your inventory for the cost or other basis of the bowling equipment given up. The fishing shop owner will handle record keeping the same way if both maintain inventories. Both you and the fishing shop owner will report the income of $1,000.

Record-keeping Tip:  Be sure to use a reasonable fair market value for the property or services received in a barter transaction to include in your income. The transaction is not a “wash” if you report the fair market value of the property received that is greater than your cost or basis in the property given up. In Example 4, if the bowling equipment given up has a cost or other basis of $500 to you, there is a $500 gross profit on the transaction since the fair market value of the fishing equipment received is $1,000. Simply put, you should identify the transaction in your records and report the income and any related business deductions and cost of goods sold on Schedule C or Schedule C-EZ of Form 1040.

If you have any questions about the record-keeping requirements or tax implications of barter transactions, you should consult your professional tax preparer or tax advisor, or see the additional information and resources available from the IRS using the links below.

References/Related Topics:

IRS Publication 334, Tax Guide for Small Business

IRS Publication 583, Starting a Business and Keeping Records

IRS Bartering Tax Center

IRS’s Food Industry Tip Reporting Program Extended 2 Years

19 July 2010 | Hertsel Shadian

The Internal Revenue Service in late 2009 extended for an additional two years its program that simplifies the record-keeping burden for reporting tip income in the food and beverage industry.  The Attributed Tip Income Program (ATIP) was first announced in 2006 in Revenue Procedure 2006-30. The program, which was originally set to expire Dec. 31, 2009, was extended to Dec. 31, 2011, under Revenue Procedure 2009-53.

Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally allocated among employees based on the practices of the restaurant. From the perspective of the IRS, both employees and employers benefit from participation in the ATIP program. The IRS agrees not to initiate a tip examination during the period the employer and employee participate in ATIP, and participating employees do not have to keep a daily tip log or other tip records.

Enrollment in the ATIP program is simple. Employers elect participation by checking the designated box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Employees who work for a participating employer can easily elect to participate in ATIP by signing an agreement with their employer to have their tip income computed under the program and reported as wages.

Form 8027 is available on www.IRS.gov, by clicking on the following link Form 8027 (and Form 8027 instructions), or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).