Frequently Asked Tax Questions and Answers

Short answers on pressing tax matters.

Has the exclusion from income of up to $5,250 of employer-provided educational assistance under a qualified plan been extended?

Yes. It now applies to benefits you receive for courses that begin before June 1, 2000. However, the exclusion does not apply to graduate-level courses that begin after June 30, 1996. For more information, get Publication 508, Educational Expenses.

What can I do to avoid any errors on my tax return in order to receive my refund as quickly as possible?

Refer to Tax Topic 303, Checklist of Common Errors When Preparing Your Tax Return, to assist you in double checking your arithmetic and your entire return to help eliminate any delays in receiving your refund.

If I won't be able to finish my return by April 15, can I get an extension?

Yes. You can get an extension by filing Form 4868, Extension of Time To File U.S. Individual Income Tax Return, by April 15. By filing the extension, you avoid the late filing penalty. However, Form 4868 does not extend the time to pay your income tax. For more details, refer to Tax Topic 304, Extensions of Time to File Your Tax Return. Special rules apply to U.S. citizens and residents who are not in the United States on April 15. For more information, refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

I will be vacationing overseas on April 15. Since I will be out of the country, do I qualify for the automatic 2-month extension?

You are allowed an automatic 2-month extension (until June 15, if you use a calendar year) to file your return and pay any federal income tax that is due if you are a U.S. Citizen or resident and on the regular due date (April 15, if you use a calendar year):

• You are living outside of the United States and Puerto Rico, and your main place of business or post of duty is outside the United States and Puerto Rico, or

• You are in the military or naval service on duty outside the United States and Puerto Rico.

Vacationing is a temporary status that does not meet the criteria for the automatic 2-month extension.

How long do I need to keep certain records?

Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to prove the amount of gain or loss if the property is sold. For more details, refer to Publication 552, Recordkeeping for Individuals.

If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Tax Topic 305, Recordkeeping. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication 463, Travel, Entertainment, Gift and Car Expenses.

I was a student in 1997 and had no income. In 1998, I started working and did not have enough tax withheld. Will I owe a penalty because I did not make estimated tax payments?

You will not have to pay a penalty for 1998 if you did not owe tax for 1997. For additional information on the penalty for underpayment of estimated tax, see Topic 306. For information on how to increase the amount of tax withheld by your employer, see Topic 753, Form W-4, Employee's Withholding Allowance Certificate. For information on estimated tax requirements, see Topic 355 or Publication 505, Tax Withholding and Estimated Tax.

I recently opened up a new account at the bank, and they asked me to complete a Form W-9. Is this necessary?

Your investment income is generally not subject to regular withholding, however, it may be subject to backup withholding to ensure that income tax is collected on this income.

Under backup withholding, when you open up a new account you must certify under penalties of perjury that your social security number is correct and that you are not subject to backup withholding. Form W-9, Request for Taxpayer Identification Number and Certification, is used to make this certification. If you fail to make this certification on a Form W-9, or similar statement, backup withholding may begin immediately on your new account, and 31% of the interest paid on your account will be withheld. For additional information on who is subject to backup withholding, refer to Tax Topic 307.

I have already filed my return and now I have received another Form W-2. What can I do?

If you find that you did not report some income, you claimed deductions or credits you should not have claimed, you failed to claim some deductions or credits you are entitled to, or you should have used a different filing status, you should file an amended return. The form you use to correct the Form 1040, 1040A, or 1040EZ you already have filed is Form 1040X, Amended U.S. Individual Income Tax Return. Refer to Tax Topic 308, Amended Returns, for additional information. For additional information on when, where, and how to file, refer to Tax Topic 301.

Who should I call to report someone who is not filing tax returns?

If you believe someone is violating federal tax laws, you should contact the IRS at 1-800-829-1040 for the Criminal Investigation Hotline in your area. If you prefer, you may provide your information in writing to your local IRS office, or the Criminal Investigation Branch at the service center where you file your return. Refer to your tax package for the address of your service center. Although you are not required to identify yourself, it is helpful to do so. Your identity will be kept confidential. You may also be entitled to a reward.

What is the difference between Form 8821 and Form 2848?

Form 8821, Tax Information Authorization, is used to authorize someone to receive confidential tax information. Form 8821 cannot be used to name an individual to represent you before the IRS. Form 2848, Power of Attorney and Declaration of Representative, is used to authorize the individual or individuals named to receive confidential tax information and to represent you before the IRS.

Does a power of attorney stay in effect for more than one year?

When you complete the Form 2848, Power of Attorney and Declaration of Representative, you must show the type of tax, the tax form number, and the year or period(s) for which the power is granted. You can list returns for any number of specified years or periods that have already ended and returns for years or periods that will end no later than three years from the date the form is signed. A general reference to "all years," "all periods," or "all taxes" is not acceptable. The Form 2848 will be returned to you for correction if you use such general references.

I forgot to mail my Form W-2, schedules or forms with my tax return. What should I do?

Wait until the Internal Revenue Service requests the Form W-2, schedules or forms. The request will be made in writing within six weeks from the date you mailed the return.

I just received my tax package in the mail. Why are there so many forms and schedules in it?

The IRS prints several packages that include different forms and schedules that may be filed with Form 1040. The IRS mails you the package that includes the items you may need based on what you filed last year. The Service uses packages instead of mailing forms and schedules separately as a cost-saving measure for the IRS and a convenience for you.

Do I have to file all the forms and schedules that are in my tax package?

No. Complete and attach to your return only the forms and schedules you need to report your income, deductions, and credits.

I'm concerned about the public debt. Can I make a payment to reduce it?

Yes. If you wish to do so, enclose a separate check with your income tax return. Make it payable to "Bureau of the Public Debt." You can also send the check separately to:

You may be able to deduct this gift on your next tax return if you itemize your deductions. Do not add your gift to any tax you may owe. If you owe tax, make a separate check for that amount payable to "Internal Revenue Service."

How do I obtain copies of Revenue Rulings, Revenue Procedures, Notices, Announcements, and Chief Counsel Advice (Private Letter Rulings and Tax Advice Memoranda)?

Copies of individual revenue rulings, revenue procedures, notices, and announcements, published in an Internal Revenue Bulletin (IRB), can be obtained by writing the IRS Freedom of Information Reading Room (FOIA) at the following address:

You can also fax your request to FOIA at the following number (202) 622-5165.

Procedures, announcements, and rulings, issued since January 1996, can be obtained by downloading them from the individual Internal Revenue Bulletin from the Digital Daily website.

Copies may also be available in one of the local Federal Depositary Libraries in your community. To find the library nearest you, visit the website.

In addition, you can also download most Chief Counsel Advice and some determinations (Private Letter Rulings and Tax Advice Memorandum) issued after October 1998.

New items are added to the website within 60-90 days of their issuance. Chief Counsel Advice and determinations issued before October 1998, however, are not available on the IRS website. You can obtain them by either faxing or writing the IRS Freedom of Information Reading Room at the address given above.

How would I obtain a private letter ruling?

If you are under examination, your request for a letter ruling should be submitted under section 4.02 of Revenue Procedure 97-1 (including the applicable user fee) to the examining or appeals officer. The examining officer must then forward the request to national office. If you are not under examination, submit the letter ruling request (with applicable user fee) to:

See Tax Regs In English where you can download Internal Revenue Bulletin 98-01 which includes Revenue Procedure 98-1.

I had a large amount of income this year compared to last year. Can I average the two years together?

Income averaging is no longer available. It was repealed by the Tax Reform Act of 1986.

For IRS purposes, how do I classify a limited liability corporation? Is it a partnership or a corporation?

A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes either as a partnership or a corporation, depending on the specifics of your state's organizational requirements.

What are the limits for 1998 for a 401K plan? What are the 1998 limits for other types of pension plans?

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost-of-living increases. Effective January 1, 1997, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $120,000 to $125,000. For participants who separated from service before January 1, 1997, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 1996, by 1.0294. The limitation for defined contribution plans under section 415(c)(1)(A) remains unchanged at $30,000.

Elective deferrals into a section 401(k) plan are limited to $10,000 in both calendar year 1998 and 1999.

Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.

What is a Pure Trust?

The family estate trust, also known as the pure trust, involves the transfer of an individual's personal, investment, and business assets, and the assignment of the individual's lifetime services, to the trust. The Service has ruled in Revenue Ruling 75-257, and the Tax Court and other courts have held, that the income from these trusts is taxable to the transferor under assignment of income principles, for salary and other compensation paid to the trust attributable to the services of the transferor, and the revocable trust rules, if the transferor has the power to revoke the trust, including the right to terminate the trust pursuant to his role as trustee or majority interest holder in the trust.

The grantors may also be taxed on the income from a family trust because of their power to distribute income to themselves or their dependents without consent of an adverse party. Negligence penalties are imposed on taxpayers who attempt to avoid tax through the use of a family estate trust.