Getting Ready

Even tax practitioners operating well outside the areas affected by Hurricane Katrina will want to pay close attention to the hurricane-related provisions now in place. One far-reaching provision comes in the form of a new deduction: Form 8914, the Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina. This new deduction is available for any taxpayer that housed individuals who were displaced by the hurricane. This $500 exemption amount can cover up to four individuals, for a maximum total of $2,000. The displaced person(s) must have lived in the main home of the individual claiming the exemption for at least 60 consecutive days, with no rent charged. The deduction is available in both 2005 and 2006, but can only be claimed one time per individual–and that $2,000 maximum is for both years combined. Additional deduction criteria can be found in instructions on the new Form 8914.

Charitable mileage is also affected by new Hurricane Katrina provisions. Depending on the date of the charitable driving, the per-mile amounts allowed can change for Katrina-related travel as follows:

• January 1, 2005 through August 24, 2005: $0.14 per mile;
• August 25, 2005 through August 31, 2005: $0.29 per mile;
• September 1, 2005 through December 31, 2005: $0.34 per mile;
• After December 31, 2005: $0.32 per mile.

"We struggled just trying to get mileage numbers out to the clients," said Morley. "Now, we're going to be giving them a set of dates and saying we really need to know how many miles you drove in each one of these time periods."

Vehicle Donations

Effective January 1, 2005, new rules govern the charitable donation of a motor vehicle and require written acknowledgement of the donation via the new Form 1098C or the charity's own formal document. This is required within 30 days of either the donation of the vehicle or the sale of the vehicle, and must be attached to the taxpayer's return. If the deduction claimed exceeds $500, the taxpayer may have to rely on gross proceeds instead of fair market value to determine the amount of the deduction.

Three exceptions exist to the gross proceeds requirement for the charitable donation of a vehicle:

• If the charity made a material improvement to the vehicle before selling it, such as a complete engine overhaul;
• If the charity had significant intervening use of the vehicle;
• If the charity gave the vehicle away, or sold it for an amount substantially below the fair market value of the vehicle.

Tax practitioners should advise clients of the importance of understanding exactly what a charity intends to do with the vehicle if it is donated.

"This could be a lot of pressure on charities to really get a good price for the vehicle," said Erickson. "Have a little communication there whenever you make that gift," advised Morley.

E-Filing Changes

On the e-filing front, the IRS examined common e-filing reject codes in an effort to encourage more e-filing participation. Two of the more common reject codes, 501 and 504, relate to the matching of Social Security numbers for dependents. Beginning with the 2006 tax-filing season, the IRS will accept individual tax returns that e-file with a 501 or 504 reject code–as long as the tax practitioner follows through with the following procedure.

When such a return is initially e-filed, it will come back with the applicable reject code. At that time, the tax practitioner has the option to indicate that all corrections possible have been made, and can request that the IRS accept the return. The IRS will then accept the return conditionally, and the tax practitioner will receive an acknowledgement code E, which means "exceptional processing." From there, the IRS will handle the return just as if it were a paper return and will make the appropriate determination to disallow the dependent or the credit as circumstances dictate.

"It's important that the practitioners understand that that doesn't mean that we are accepting it exactly the way it is," said Pamela Walker, chief of IMF

Policy & Procedures Branch of Wage and Investment, Submission Processing, IRS. "It's an exception processing."

The steady increase in the number of e-filed returns has also meant address changes for filing paper returns, as the IRS closes and/or consolidates processing centers. In addition, tele-file has been eliminated and will not be available for the 2006 filing season.

EFTPS and Other Changes

The IRS's electronic payment system, available through EFTPS, has a few improvements for the 2006 filing season. As usual, electronic payment is available for any return filed, and the system allows the taxpayer to file early and pay later by scheduling the deduction of the amount due from the taxpayer's bank account on the due date of the return. Now, the IRS has expanded the credit card option of the electronic payment system to cover balances due on any 1040 return–even delinquent balances–up to five years in arrears. Credit card payments are also accepted for installment agreement payments as well as for any payment due on the 1040ES or an amended return.

Other changes affecting the 2006 filing season include the implementation of an automatic six-month extension to file using only Form 4868; significant changes to elective salary deferrals; and energy tax incentives, including alternative motor vehicle credits for hybrid cars and the 2006 energy tax incentives for home improvements. Additional changes for 2006 taxes are expected as well. Tax practitioners will need to address immediately those changes that will impact 2005 returns and save the rest for examination after the filing season is past.

Raymond McClellan, Enrolled Agent, is co-owner of Mr. Tax of America, Inc., of West Des Moines, Iowa, and can be reached at [email protected]. More information on the December 2005 Tax Talk Today Webcast can be found at www.taxtalktoday.tv.