A special diet prescribed by a doctor can qualify as a medical expense as long as it costs more than your normal diet.  A private letter ruling says you can deduct the difference.  Fees paid to alternative medicine practitioners such as chiropractors, acupuncturists and Christian Science practitioners are deductible.

If your payroll firm didn’t forward your payroll taxes to the IRS, you were out of luck.  But a new IRS memo to field agents says they will assess the trust fund recovery penalty of 100% on payroll firms and employee leasing companies.  This is good news for employers as long as the payroll firm hasn’t absconded with the funds.

Starting this year, credit and debit card companies (and Paypal) will issue the new form 1099-K showing payments made to merchants.  These amounts will be reported separately on business’ tax returns, whether they are Schedule C, corporations, or partnerships.  The IRS expects this to reduce underreporting of income.

If you are one of the randomly selected recipients, don’t panic. The IRS is sending out surveys to revise its estimates of how much time is spent on recordkeeping and tax preparation.  They are also sending 24,000 surveys to business filers.

The IRS has eliminated the two-year deadline for innocent spouses to file claims for relief on back tax collections.  The Taxpayer Advocate Service and some members of Congress pushed for this, since many innocent spouses did not know about the back taxes in the first place and would miss the two-year deadline.

For those fortunate enough to report a profit on real estate sales, a new 3.8% Medicare surtax will apply.  Most gains on the sale of primary residences will be exempt as they are covered by the $250,000 or $500,000 exclusions.  But taxpayers with adjusted gross income over $200,000 (single) or $250,000 (married filing jointly) will be hit with the new tax after the year 2012.

The Government Accountability Office (GAO) determined last year that the IRS’s financial management systems do not meet the standards of “accurate, reliable and timely” financial information.  GAO found that the IRS doesn’t post tax-related transactions properly and that its records are not adequately traceable for taxes receivable.  The IRS also has material weaknesses in its internal controls over both information security and unpaid assessments.

(No comment….)

IRS Raises Standard Mileage Allowance

Starting July 1, the business vehicle usage rate goes up to 55.5 cents per mile.  The mileage rates for medical and moving expenses also go up to 23.5 cents per mile.  The rate used for driving for charitable purposes remains the same at 14 cents per mile.

Beware of Phishing Scams

Once again, we are getting reports of fake emails going out to taxpayers purporting to be from the IRS.  The emails ask for bank account information, social security numbers etc.  The IRS does NOT communicate to taxpayers via email so don’t be fooled.

Fortunately for small businesses and rental property owners, President Obama signed legislation repealing the proposed requirement for issuing 1099-MISC forms to corporations, and to providers of goods or services on rental properties.  Had this become law, virtually every transaction undertaken by a small business would have been reported to the federal government.

Court Cases

The Tax Court ruled that a student loan settlement is the same as a credit card settlement, giving the taxpayer cancellation of debt income.   (Martin, TC Summ. Op. 2011-62)

Recipients receive a 1099-C and must report the income on line 21 of their 1040 tax return.  Exceptions may apply, such as insolvency, but they must also be reported to avoid getting an audit letter from the IRS.

Sometimes the IRS is not first in line for liens.  An Appeals Court says a bank’s interest in future rents can take priority over an IRS tax lien.  In this case the mortgage was secured by both the borrower’s real estate and all rents derived from the property.  It also preceded the IRS’ lien.

(Bloomfield State Bank, 7^th Cir.)