The Tax Attic

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Answers to two more frequently asked questions

I had some good comments on last week’s article concerning the most common questions that tax professionals ask of the research company I deal with the National Association of Tax Professionals (NATP). It doesn’t matter how experienced the tax professional is, how long he or she has been preparing tax returns, or how many tax returns he or she completes. Our tax system is just too darned complicated for any one person to know all of the answers. NATP has several retired and currently practicing tax professionals manning the telephones when guys like me call with questions.

The reasons I call come from two different types of scenarios. In the first situation, I am pretty sure I have the correct answer but want an independent third party, such as NATP, to back me up. They can provide me with that warm fuzzy feeling that my thought process was correct.

In the second type of situation, I need help with a scenario that has me stumped. I usually have a potential answer, but am unwilling to prepare a return based on a potential answer. In these second situations, I am just slightly disappointed when I call and the researcher knows the answer without having to look anything up. That usually means I called with a question that the answer was right in front of me in one of my reference books and I just didn’t recognize the answer or look hard enough. Of course, sometimes the researcher shares with me that a recent caller had asked that same question and that is the reason the answer flowed so smoothly.

The comments I received on last week’s article encouraged me to bring up another common situation that tax professionals are asked about. I will also add a Michigan situation that I am commonly asked to explain.

Since we are closing in on April 15, a common question that is asked concerns extensions or the lack thereof. An extension is granted automatically by filing Form 4868 and simply asking for the extension. That delays the filing of the return until October 15 with no questions asked. The catch 22 in the system is that there are still penalties and interest that are accruing as of April 15 if there is tax due. The Internal Revenue Service does not ever waive accrued interest, but I have seen them waive penalties for “reasonable cause.”

The frequent question we are asked is: What constitutes “reasonable cause?” According to NATP, there is no common definition to reasonable cause. The IRS tells us that each case must stand on its own, based on the facts and circumstances of that case. Some of the factors that can cause the IRS to waive a penalty due to reasonable cause would be serious illness, unavoidable absence from home, natural disasters, or an inability to obtain proper records to prepare a return. Since there is no one definition of reasonable cause, it really behooves a taxpayer to ask for the penalty to be waived and not just automatically pay that penalty.

Next, a frequent state of Michigan question concerns the homestead property tax credit. The homestead credit is based on the actual taxes that are billed during 2008. Michigan does not care when these taxes are paid. They base the calculation on the summer and winter taxes that are billed. Unfortunately, the federal return is based totally on the amount of taxes that are paid. The IRS couldn’t care less when the taxes are billed. They only care and allow a deduction when the taxes are paid.

The question that we answer frequently is: Why do we want to know how much tax was paid in February 2009 when we are filing the 2008 tax return? The answer is that when the state of Michigan created the homestead property tax deduction, they decided to count property taxes that were billed and not paid. For 2008’s homestead property tax credit, the only taxes that count are the 2008 summer and 2008 winter taxes, and they count whether they were paid in August 2008 or February 2009. I’ve had lots of practice answering that question!

As our tax system gets more complicated-and who would dare say that our tax system isn’t getting more complicated-the questions will always be there. I’m just hoping that I will know the majority of the answers and, for those I don’t know, fortunately I know where to get the answers. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns

Action Tax Service on Northland Drive in Rockford.

His e-mail address is jcoon@actiontaxservice.com.

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