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The Last To Know (Revised
6/11/00)
Those of you who have been with me for the past few years know that it has been a continuing frustration for me in having to spend my valuable time teaching IRS agents their own rules and procedures. While it is only a mere annoyance to me, for others who encounter this kind of ignorance, it can be very expensive. The specific example this time has to do with the qualification for the Federal Earned Income Tax Credit
(EIC). In previous issues I have explained how it is possible to go lightly on deductions in order to fine tune the numbers on a tax return to receive a pure refund of thousands of dollars. My definition of a "pure refund" is getting money that was never paid in; as opposed to the normal refund, which is just getting back overpaid estimated or withheld taxes. The EIC is really a welfare program that uses a complicated formula to take money from the producers and give it to some lower income individuals. As with almost every part of the tax code, this break is not intended for the evil rich. Each penalty on evil rich folks in the tax code has its own definition of exactly who is so defined. For EIC purposes, an evil rich person or couple is anyone who received more than $2,300 in investment income during 1998 ($2,350 during 1999). For most folks, investment income consists of interest, dividends and capital gains. Last year in KL 98-4 I explained that IRS had issued a ruling declaring that any gains from the sales of business assets would not count as investment income for this EIC limit. IRS even encouraged people who had been disqualified to file amended returns and obtain their refunds. In a classic case of the right hand not knowing what the left hand is doing, the IRS service centers have been sending notices out to people disallowing their EIC because of too much capital gain income. It has already happened to two of my clients. Again, this is just an annoyance for me because after I write to the service center and explain their own rules to them, the clients eventually receive their money. What's really frightening is how many people, including some professional tax practitioners, accept the IRS disallowance as valid and forfeit their EIC. One of my clients was all set to forfeit over $1,800 based on an IRS letter saying that their capital gain income made them ineligible. Since the gain was from the sale of a rental property, I wrote to IRS and explained that they were wrong to disallow the EIC. There are too many people, including professional tax practitioners, who labor under the major misconception that IRS will look out for them and ensure that they get every tax break to which they are entitled. That is so wrong as to be laughable. To be fair to IRS, there is one area in which they do often save taxpayers money. As I've mentioned on many occasions, one of the biggest reasons people pay too much in taxes is just from lousy bookkeeping. Legitimate deductions slip through their fingers. I have also found that many people are not very good about keeping accurate records of the estimated taxes they have paid in to IRS and the State. Every year, at least a dozen of my clients receive checks from the IRS & State for taxes that had been accidentally overpaid because they forgot to tell me about one or more estimated tax payments. I hope this doesn't give them any ideas; but these moneys wouldn't have been missed if IRS & the State hadn't been honest enough to disclose them. Now to wrap up this general discussion. Following are some of the other areas on which I frequently have to educate IRS agents, as well as many other tax practitioners who seemed to have learned the rules from the IRS.
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Kerry M. Kerstetter
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