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Free file federal and state taxes online 2. Free file federal and state taxes online   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. Free file federal and state taxes online ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. Free file federal and state taxes online In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. Free file federal and state taxes online Those cases are called “abusive tax shelters. Free file federal and state taxes online ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. Free file federal and state taxes online Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . Free file federal and state taxes online Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free file federal and state taxes online Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. Free file federal and state taxes online They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. Free file federal and state taxes online Despite appearances to the contrary, the taxpayer generally risks little. Free file federal and state taxes online Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. Free file federal and state taxes online Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. Free file federal and state taxes online (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. Free file federal and state taxes online ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. Free file federal and state taxes online This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. Free file federal and state taxes online Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. Free file federal and state taxes online However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. Free file federal and state taxes online Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. Free file federal and state taxes online These provisions include the following. Free file federal and state taxes online Disclosure of reportable transactions. Free file federal and state taxes online   You must disclose information for each reportable transaction in which you participate. Free file federal and state taxes online See Reportable Transaction Disclosure Statement , later. Free file federal and state taxes online   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. Free file federal and state taxes online To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. Free file federal and state taxes online   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. Free file federal and state taxes online They must provide this number to all persons to whom they acted as a material advisor. Free file federal and state taxes online They must provide the number at the time the transaction is entered into. Free file federal and state taxes online If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. Free file federal and state taxes online For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. Free file federal and state taxes online Requirement to maintain list. Free file federal and state taxes online   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. Free file federal and state taxes online The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. Free file federal and state taxes online See Regulations section 301. Free file federal and state taxes online 6112-1 for more information (including what information is required to be included on the list). Free file federal and state taxes online Confidentiality privilege. Free file federal and state taxes online   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. Free file federal and state taxes online Appraisal requirement for donated property. Free file federal and state taxes online   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. Free file federal and state taxes online If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. Free file federal and state taxes online If you file electronically, see Form 8453, U. Free file federal and state taxes online S. Free file federal and state taxes online Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. Free file federal and state taxes online For more information about appraisals, including exceptions, see Publication 561. Free file federal and state taxes online Passive activity loss and credit limits. Free file federal and state taxes online   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. Free file federal and state taxes online For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. Free file federal and state taxes online Interest on penalties. Free file federal and state taxes online   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. Free file federal and state taxes online Accounting method restriction. Free file federal and state taxes online   Tax shelters generally cannot use the cash method of accounting. Free file federal and state taxes online Uniform capitalization rules. Free file federal and state taxes online   The uniform capitalization rules generally apply to producing property or acquiring it for resale. Free file federal and state taxes online Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. Free file federal and state taxes online For more information, see Publication 538. Free file federal and state taxes online Denial of deduction for interest on an underpayment due to a reportable transaction. Free file federal and state taxes online   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. Free file federal and state taxes online This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. Free file federal and state taxes online Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. Free file federal and state taxes online The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. Free file federal and state taxes online Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. Free file federal and state taxes online So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. Free file federal and state taxes online In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. Free file federal and state taxes online The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. Free file federal and state taxes online Investor Reporting You may be required to file a reportable transaction disclosure statement. Free file federal and state taxes online Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. Free file federal and state taxes online Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. Free file federal and state taxes online Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). Free file federal and state taxes online In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. Free file federal and state taxes online  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. Free file federal and state taxes online If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. Free file federal and state taxes online If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. Free file federal and state taxes online See Penalty for failure to disclose a reportable transaction , later under Penalties. Free file federal and state taxes online The following discussion briefly describes reportable transactions. Free file federal and state taxes online For more details, see the Instructions for Form 8886. Free file federal and state taxes online Reportable transaction. Free file federal and state taxes online   A reportable transaction is any of the following. Free file federal and state taxes online A listed transaction. Free file federal and state taxes online A confidential transaction. Free file federal and state taxes online A transaction with contractual protection. Free file federal and state taxes online A loss transaction. Free file federal and state taxes online A transaction of interest entered into after November 1, 2006. Free file federal and state taxes online Note. Free file federal and state taxes online Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. Free file federal and state taxes online Listed transaction. Free file federal and state taxes online   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. Free file federal and state taxes online These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. Free file federal and state taxes online For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2009-31_IRB/ar07. Free file federal and state taxes online html. Free file federal and state taxes online Confidential transaction. Free file federal and state taxes online   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. Free file federal and state taxes online A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. Free file federal and state taxes online The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. Free file federal and state taxes online Transaction with contractual protection. Free file federal and state taxes online   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. Free file federal and state taxes online For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2007-07_IRB/ar15. Free file federal and state taxes online html. Free file federal and state taxes online Loss transaction. Free file federal and state taxes online   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. Free file federal and state taxes online A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. Free file federal and state taxes online   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. Free file federal and state taxes online For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2004-50_IRB/ar11. Free file federal and state taxes online html. Free file federal and state taxes online Transaction of interest. Free file federal and state taxes online   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. Free file federal and state taxes online The IRS has identified the following transactions of interest. Free file federal and state taxes online “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. Free file federal and state taxes online R. Free file federal and state taxes online B. Free file federal and state taxes online 545, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2007-36_IRB/ar20. Free file federal and state taxes online html. Free file federal and state taxes online Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. Free file federal and state taxes online R. Free file federal and state taxes online B. Free file federal and state taxes online 544, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2007-36_IRB/ar19. Free file federal and state taxes online html. Free file federal and state taxes online Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. Free file federal and state taxes online R. Free file federal and state taxes online B. Free file federal and state taxes online 1194, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2008-47_IRB/ar11. Free file federal and state taxes online html. Free file federal and state taxes online Certain transactions involving a U. Free file federal and state taxes online S. Free file federal and state taxes online taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. Free file federal and state taxes online R. Free file federal and state taxes online B. Free file federal and state taxes online 312, available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2009-03_IRB/ar10. Free file federal and state taxes online html. Free file federal and state taxes online   For updates to this list, go to www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. Free file federal and state taxes online Penalties Investing in an abusive tax shelter may lead to substantial expenses. Free file federal and state taxes online First, the promoter generally charges a substantial fee. Free file federal and state taxes online If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. Free file federal and state taxes online You may also be subject to the penalty for failure to pay tax. Free file federal and state taxes online These penalties are explained in the following paragraphs. Free file federal and state taxes online Accuracy-related penalties. Free file federal and state taxes online   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). Free file federal and state taxes online Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Free file federal and state taxes online Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. Free file federal and state taxes online   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. Free file federal and state taxes online   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). Free file federal and state taxes online Negligence or disregard of rules or regulations. Free file federal and state taxes online   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. Free file federal and state taxes online The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. Free file federal and state taxes online    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Free file federal and state taxes online It also includes any failure to keep adequate books and records. Free file federal and state taxes online A return position that has a reasonable basis is not negligence. Free file federal and state taxes online   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. Free file federal and state taxes online   The penalty for disregard of rules and regulations can be avoided if all the following are true. Free file federal and state taxes online You keep adequate books and records. Free file federal and state taxes online You have a reasonable basis for your position on the tax issue. Free file federal and state taxes online You make an adequate disclosure of your position. Free file federal and state taxes online Use Form 8275 to make your disclosure and attach it to your return. Free file federal and state taxes online To disclose a position contrary to a regulation, use Form 8275-R. Free file federal and state taxes online Use Form 8886 to disclose a reportable transaction (discussed earlier). Free file federal and state taxes online Substantial understatement of tax. Free file federal and state taxes online   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. Free file federal and state taxes online An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. Free file federal and state taxes online The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. Free file federal and state taxes online   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. Free file federal and state taxes online In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. Free file federal and state taxes online Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. Free file federal and state taxes online   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. Free file federal and state taxes online An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. Free file federal and state taxes online Substantial valuation misstatement. Free file federal and state taxes online   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. Free file federal and state taxes online The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. Free file federal and state taxes online You underpaid your tax by more than $5,000 because of the misstatement. Free file federal and state taxes online You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. Free file federal and state taxes online   You may be assessed a penalty of 40% for a gross valuation misstatement. Free file federal and state taxes online If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. Free file federal and state taxes online The penalty rate is also 40% if the property's correct value or adjusted basis is zero. Free file federal and state taxes online Transaction lacking economic substance. Free file federal and state taxes online   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. Free file federal and state taxes online For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. Free file federal and state taxes online   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Free file federal and state taxes online   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. Free file federal and state taxes online   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. Free file federal and state taxes online Relevant facts include any facts affecting the tax treatment of the transaction. Free file federal and state taxes online    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. Free file federal and state taxes online Undisclosed foreign financial asset understatement. Free file federal and state taxes online   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. Free file federal and state taxes online An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. Free file federal and state taxes online The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. Free file federal and state taxes online Any foreign business you control, reportable on Form 5471, Information Return of U. Free file federal and state taxes online S. Free file federal and state taxes online Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. Free file federal and state taxes online S. Free file federal and state taxes online Persons With Respect to Certain Foreign Partnerships. Free file federal and state taxes online Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. Free file federal and state taxes online S. Free file federal and state taxes online Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. Free file federal and state taxes online Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. Free file federal and state taxes online    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. Free file federal and state taxes online See the Instructions for Form 8938 for details. Free file federal and state taxes online    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. Free file federal and state taxes online Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Free file federal and state taxes online Penalty for incorrect appraisals. Free file federal and state taxes online   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. Free file federal and state taxes online For details on the penalty amount and exceptions, see Publication 561. Free file federal and state taxes online Penalty for failure to disclose a reportable transaction. Free file federal and state taxes online   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). Free file federal and state taxes online For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). Free file federal and state taxes online This penalty is in addition to any other penalty that may be imposed. Free file federal and state taxes online   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. Free file federal and state taxes online For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. Free file federal and state taxes online irs. Free file federal and state taxes online gov/irb/2007-09_IRB/ar12. Free file federal and state taxes online html. Free file federal and state taxes online Accuracy-related penalty for a reportable transaction understatement. Free file federal and state taxes online   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. Free file federal and state taxes online This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. Free file federal and state taxes online The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. Free file federal and state taxes online You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. Free file federal and state taxes online The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. Free file federal and state taxes online   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. Free file federal and state taxes online Civil fraud penalty. Free file federal and state taxes online   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. Free file federal and state taxes online Joint return. Free file federal and state taxes online   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. Free file federal and state taxes online Failure to pay tax. Free file federal and state taxes online   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. Free file federal and state taxes online Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. Free file federal and state taxes online Prev  Up  Next   Home   More Online Publications
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Phishing Scams

“Phishing” is the use of fraudulent e-mail designed to steal identities as well as vital personal information such as credit card numbers, bank account PINs, and passwords. Phishing e-mails often ask you to verify this type of information.

Scammers also go “SMishing,” or phishing using text messages, by asking you to verify or confirm sensitive information. Legitimate companies never ask for your password or account number via e-mail. Protect yourself:

  • Call the company directly to determine if the email is trustworthy
  • Forward the email to the Federal Trade Commission at spam@uce.gov.
  • Do not reveal personal or financial information in emails
  • Contact the company directly. Do not use contact information provided on a web site connected to the request; instead, use contact information from account statements that you already have.
  • Don’t reply to the email, even if it threatens to disable your account.

Beware: Cash Top-Up Scams

Cash top-up cards can be a convenient way to transfer money to other accounts. They are not designed to be used directly with retailers or online merchants; rather they are used to reload money on accounts that you control, such as your debit card.
Unfortunately, scammers know the ease and convenience of using these cards. They persuade you to share your top-up card number directly with them instead of using a wire or escrow service. However, if you send the top-up number you’ll be left without the merchandise you were promised or your money. To protect yourself from these scams:

  • Guard your top-up card like it is cash.
  • Be wary of advertisements where you are asked to pay with a cash top-up card.
  • Don’t share your top-up card number with someone you don’t know, even if a merchant asks you to e-mail it to them.
  • Never use these cards to pay taxes or fees on lottery or sweepstakes winnings. It’s likely that you haven’t won anything.

Protect Your PIN

Beware of “shoulder surfers.” Be suspicious of anyone lurking around an ATM or watching over your shoulder while you use your card. Some thieves even put a device over the card slot of an ATM to read the magnetic strip and record your PIN; this is known as “skimming”. If you suspect criminal activity, walk away and use a different ATM.

The Free File Federal And State Taxes Online

Free file federal and state taxes online Tax Changes for Businesses Table of Contents 2001 ChangesNew 5-Year Carryback Rule for Net Operating Losses (NOLs) Electronic Form 1099 Tax Incentives for New York Liberty Zone Other 2001 Changes 2002 ChangesNonaccrual-Experience Method Issuance of Qualified Zone Academy Bonds Depletion Work Opportunity Credit Expanded in New York Liberty Zone Credit For Pension Plan Startup Costs Welfare-to-Work Credit Extended Work Opportunity Credit Extended Electric and Clean-Fuel Vehicles Renewable Electricity Production Credit Later ChangesSpecial Depreciation Allowance Extension of Placed in Service Date Special Liberty Zone Depreciation Allowance for New and Used Property Depreciation of Property Used on Indian Reservations Indian Employment Credit Extended 2001 Changes New 5-Year Carryback Rule for Net Operating Losses (NOLs) If you have an NOL from a tax year ending during 2001 or 2002, you must generally carry back the entire amount of the NOL to the 5 tax years before the NOL year (the carryback period). Free file federal and state taxes online However, you can still choose to use the previous carryback period. Free file federal and state taxes online You also can choose not to carry back an NOL and only carry it forward. Free file federal and state taxes online Individuals, estates, and trusts can file Form 1045, Application for Tentative Refund. Free file federal and state taxes online Corporations can file Form 1139, Corporation Application for Tentative Refund. Free file federal and state taxes online The instructions for these forms will be revised to reflect the new law. Free file federal and state taxes online Electronic Form 1099 For tax years ending after March 9, 2002, most Forms 1099 can be furnished electronically if the recipient consents, according to IRS regulations, to receive it that way. Free file federal and state taxes online Tax Incentives for New York Liberty Zone New tax benefits are provided for the parts of New York City damaged in the terrorist attacks on September 11, 2001. Free file federal and state taxes online These benefits apply to the newly created New York Liberty Zone, which is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway), in the Borough of Manhattan. Free file federal and state taxes online Tax benefits for the New York Liberty Zone include the following. Free file federal and state taxes online A special depreciation allowance equal to 30% of the adjusted basis of qualified Liberty Zone property. Free file federal and state taxes online It is allowed for the year the property is placed in service. Free file federal and state taxes online No alternative minimum tax depreciation adjustment for qualified Liberty Zone property. Free file federal and state taxes online Classification of Liberty Zone leasehold improvement property as 5-year property. Free file federal and state taxes online Authorization of the issuance of tax-exempt New York Liberty bonds to finance the acquisition, construction, reconstruction, and renovation of nonresidential real property, residential rental property, and public utility property in the Liberty Zone. Free file federal and state taxes online An increased section 179 deduction for certain Liberty Zone property. Free file federal and state taxes online Extension of the replacement period from 2 years to 5 years for certain property involuntarily converted as a result of the terrorist attacks on September 11, 2001, but only if substantially all of the use of the replacement property is in New York City. Free file federal and state taxes online For more information about involuntary conversions, see Postponement of Gain in Publication 547, Casualties, Disasters, and Thefts. Free file federal and state taxes online In addition, for 2002 and 2003, the work opportunity credit is expanded by creating a new targeted group, consisting generally of employees who work in the Liberty Zone or, in certain cases, in New York City outside the Liberty Zone. Free file federal and state taxes online For more information, see Work Opportunity Credit Expanded in New York Liberty Zone under 2002 Changes, later. Free file federal and state taxes online For more information about the 30% special depreciation allowance, Liberty Zone leasehold improvement property, or increased section 179 deduction, see New York Liberty Zone Benefits, in chapter 5. Free file federal and state taxes online In addition, the tax benefits for the Liberty Zone will be covered in a new edition of Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, available later in 2002. Free file federal and state taxes online Other 2001 Changes Other changes are discussed in the following chapters. Free file federal and state taxes online Chapter 4 Car Expenses Chapter 5 Depreciation 2002 Changes Nonaccrual-Experience Method Under current law, if you perform services and use an accrual method of accounting, you do not accrue income which, based on experience, you expect to be uncollectible. Free file federal and state taxes online Beginning in 2002, this rule only applies if you perform services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting, or your average annual gross receipts for the 3 prior tax years does not exceed $5,000,000. Free file federal and state taxes online As under current law, the nonaccrual-experience method will not apply to amounts on which you charge interest or a late payment penalty. Free file federal and state taxes online For more information, see Nonaccrual-Experience Method in chapter 11 of Publication 535, Business Expenses. Free file federal and state taxes online Issuance of Qualified Zone Academy Bonds State and local governments issue qualified zone academy bonds to raise funds for the use of qualified zone academies. Free file federal and state taxes online The amount of bonds that may be issued was limited to $400 million each year for 1998, 1999, 2000, and 2001. Free file federal and state taxes online This provision has been extended to provide for an additional $400 million of bonds to be issued each year for 2002 and 2003. Free file federal and state taxes online For more information about qualified zone academy bonds, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. Free file federal and state taxes online Depletion The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas that was scheduled to expire for tax years beginning after 2001 has been extended to tax years beginning before 2004. Free file federal and state taxes online For more information on marginal production, see section 613A(c) of the Internal Revenue Code. Free file federal and state taxes online Work Opportunity Credit Expanded in New York Liberty Zone The work opportunity credit is expanded to include a new targeted group consisting generally of employees who perform substantially all their services: In the New York Liberty Zone (defined earlier under Tax Incentives for New York Liberty Zone, under 2001 Changes), or Elsewhere in New York City for a business that relocated from the Liberty Zone due to the destruction or damage of its place of business by the September 11, 2001, terrorist attack. Free file federal and state taxes online The credit is available to employers for wages paid to new employees and existing employees for work performed during 2002 or 2003. Free file federal and state taxes online Certain limits apply. Free file federal and state taxes online For more information about the work opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. Free file federal and state taxes online Credit For Pension Plan Startup Costs The credit for pension plan startup costs is now allowed for plans that become effective after December 31, 2001. Free file federal and state taxes online Previously, the credit was only allowed for plans established after December 31, 2001. Free file federal and state taxes online For more information on the credit, see Important Changes for 2002 in Publication 560, Retirement Plans for Small Business. Free file federal and state taxes online Welfare-to-Work Credit Extended The welfare-to-work credit that was scheduled to expire for wages paid to individuals who began working for you after 2001 has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. Free file federal and state taxes online For more information on the welfare-to-work credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. Free file federal and state taxes online Work Opportunity Credit Extended The work opportunity credit that was scheduled to expire for wages paid to individuals who began working for you after 2001 has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. Free file federal and state taxes online For more information about the work opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. Free file federal and state taxes online Electric and Clean-Fuel Vehicles The maximum clean-fuel vehicle deduction and qualified electric vehicle credit were scheduled to be 25% lower for 2002 and both were scheduled to be phased out completely by 2005. Free file federal and state taxes online The full deduction and credit are now allowed for qualified property placed in service in 2002 and 2003. Free file federal and state taxes online The phaseout of the deduction and the credit will begin in 2004, and no deduction or credit will be allowed for property placed in service after 2006. Free file federal and state taxes online For more information about electric and clean-fuel vehicles, see chapter 12 in Publication 535, Business Expenses. Free file federal and state taxes online Renewable Electricity Production Credit The renewable electricity production credit is extended to include electricity produced by facilities placed in service after 2001 and before 2004. Free file federal and state taxes online Later Changes Special Depreciation Allowance You can claim the special depreciation allowance (an additional 30% depreciation deduction) for new property that you acquire before September 11, 2004, and place in service for your business generally before January 1, 2005, if you meet the other requirements for qualified property covered in chapter 5. Free file federal and state taxes online Accordingly, you will generally no longer be able to claim the special depreciation allowance for the qualified property if you acquire it after September 10, 2004, or place it in service for your business after December 31, 2004. Free file federal and state taxes online However, you will be able to claim the special Liberty Zone depreciation allowance (an additional 30% depreciation deduction) for most qualified property if you place it in service in the Liberty Zone after December 31, 2004, and generally before January 1, 2007, provided you meet the other requirements for qualified Liberty Zone property covered in chapter 5. Free file federal and state taxes online Extension of Placed in Service Date To qualify for the special depreciation allowance, your property must meet certain tests, including the placed in service date test, as well as the other requirements covered in chapter 5 of this publication. Free file federal and state taxes online To meet the placed in service date test, your property must generally be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Free file federal and state taxes online However, certain property placed in service before January 1, 2006, may meet this test. Free file federal and state taxes online Transportation property and property with a recovery period of 10 years or longer meet the test if one of the following applies. Free file federal and state taxes online The property has an estimated production period of more than 2 years. Free file federal and state taxes online The property has an estimated production period of more than 1 year and it costs more than $1 million. Free file federal and state taxes online Transportation property is any tangible personal property used in the trade or business of transporting persons or property. Free file federal and state taxes online For property that qualifies for the special depreciation allowance solely because of the one-year extension of the placed in service date, only the part of the basis attributable to manufacture, construction, or production before September 11, 2004, is eligible for the special depreciation allowance. Free file federal and state taxes online Special Liberty Zone Depreciation Allowance for New and Used Property You can claim the special Liberty Zone depreciation allowance (an additional 30% depreciation deduction) for used property that you acquire after September 10, 2001, if the property meets the requirements listed under Qualified Liberty Zone Property in chapter 5 of this publication. Free file federal and state taxes online You will be able to claim the allowance for both new and used property that you acquire after September 10, 2004, provided the property meets the other requirements for qualified Liberty Zone property. Free file federal and state taxes online Depreciation of Property Used on Indian Reservations The special depreciation rules that apply to qualified property used on an Indian reservation were scheduled to expire for property placed in service after 2003. Free file federal and state taxes online These special rules have been extended to include property placed in service in 2004. Free file federal and state taxes online For more information about these rules, see Publication 946, How To Depreciate Property. Free file federal and state taxes online Indian Employment Credit Extended The Indian employment credit that was scheduled to expire for tax years beginning after 2003 has been extended to include a tax year beginning in 2004. Free file federal and state taxes online For more information about this credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities. 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